FSA issues suspension warning

When listed companies are in financial trouble it is often necessary to ask for trading in their shares to be suspended, pending an announcement as to the state of affairs. However, recent events highlight that such requests are not just rubber stamped by the regulator.

At the end of November 2008, troubled retailer Woolworths, now in administration, had its shares suspended – but just days later, on 1 December, New Star Asset Management, the fund manager, was told its request for suspension was denied.

In the case of Woolworths, shares were suspended for just 18 minutes on 19 November, before they were restored, but trading was suspended again a week later shortly before the company sought court protection.

On the other hand, trading in New Star was suspended five minutes after the market opened, with the shares down 7.1% at 13p (they topped 480p in June 2008) before the shares were forced to re-open, whereby they dropped by nearly 50%.

New Star’s management had been in talks with its brokers, UBS, and banks including HBOS, Lloyds TSB, Royal Bank of Scotland, HSBC and National Australia Bank about a debt-for-equity swap. The troubled group has more than £230m of debt on its balance sheet after paying a huge special dividend to shareholders (including its founder John Duffield) in 2007. Falling markets and a wave of redemptions by nervous investors had seen its assets under management tumble from £19.8bn at the end of June, to around £13bn.

Investors say suspending shares is a drastic tool. By halting all trade, it allows companies some breathing time, but denies investors the right to vote with their feet. The Association of British Insurers, which represents many leading UK institutional investors, says that having no active share price is the biggest pet hate of its members.

Companies do not have to disclose when they have made a request to the UK Listing Authority (part of the Financial Services Authority) for their shares t o be suspended if it has been turned down, which is what made New Star’s announcement so unusual. Neither is there any data available to show how many failed requests have been made to the UKLA.

Rare disclosure
Andrew Caunt, a partner in the capital markets practice at international law firm White & Case, says that suspending a company’s shares is very rare. “It is even rarer for a company to reveal that it has applied for its shares to be suspended and even rarer for it then to publicly disclose that its request was turned down.”

Caunt says “no one is really sure why New Star made the announcement – it is such an unusual step. Investors always want a company’s shares to be traded, even if they hold stock in a rapidly falling share price. To suspend shares just adds to market uncertainty and is not a remedy the FSA wants to promote.”
The FSA said the fund manager had, in effect, jumped the gun and announced it had made the request before submitting the paperwork. The episode is all the more embarrassing for New Star given that former FSA chief executive John Tiner is a non-executive director.

Announcing bad news
Typical examples for requests might include cases where a company has bad news to announce, but expects in another day or two that it will have some mitigating news such as a new funding arrangement – largely what appears to have been New Star’s grounds for a suspension request.

Requests would be likely to claim that producing only half the news was, in effect, creating a false market. But this can be a hard argument to make and not one the regulator has often agreed with, preferring that companies inform the market of all news as soon as possible – good or bad.

In the Marconi case several years ago, for instance, the FSA made clear that suspending the shares did not suspend the board’s obligation to release price-sensitive information in a timely fashion.

Caunt says there are only a few circumstances where the FSA will suspend a company’s shares. These are mainly:
• When a company is in administration or receivership;
• If a company breaches the UK Listing Authority’s rules;
• If companies are involved in a merger or acquisition and there is a leak of “insider information” which may affect the share price and/or the deal going ahead; and
• If a company cannot determine properly its financial position and cannot provide investors with accurate information about the state of its finances.

“It is abundantly clear, therefore,” says Caunt, “that the FSA will not merely suspend a company’s shares that are in freefall simply because the company wants it to. The reasoning needs to satisfy the FSA that it is in the interests of investors – not directors.”

Caunt believes that the FSA’s action is a warning shot to all companies that they cannot simply request a suspension in harsh trading conditions. “The regulator is reminding companies that it is not going to step in and pull the plug on trading if their share prices are tumbling. The FSA is there to preserve market integrity, and so long as companies can meet the criteria of keeping investors informed with up-to-date financial data, trading is going to continue.

“Just because you’re going through a difficult time and are negotiating with bankers, it doesn’t mean you should have your shares suspended,” he added. “The FSA is very clear it won’t suspend shares just to help a company fix its share price. There needs to be a reason that shows the smooth operating of the market is being jeopardised.”