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.”