Merkado Barkada
September 6, 2024 | 8:20am
Trading suspensions are a semi-regular occurrence on the PSE, as they are the “stick” that the rules give to the PSE to brute-force corporations into compliance for a wide range of non-compliant behaviors. Most of the PSE’s suspensions are for companies that have failed to submit their Annual or Quarterly Report (sometimes both), but there have been an increasing number of suspensions handed out for public float violations, which is a more serious problem (as we’ll get into). This post is all about suspensions, what they are, what they do, and why they’re trouble for investors.
Major disclaimer: I suspect this post is of most interest to medium- and long-term investors (like me) who hold positions in the market for years at a time. However, even if you’re a short-term trader with no interest in organizational competency, you might like to learn a little bit about suspensions and how they work!
> What is a suspension? A trading suspension just means that the company’s shares cannot be traded on the PSE while the company is suspended. A suspension has no immediate or direct impact on the operation of the company itself, nor does it have any immediate or direct impact on the actual shares owned by the majority and minority shareholders. The company is still free to operate, and shareholders are still free to buy and sell their shares – just not using the PSE’s infrastructure.
> How long does it last? For as long as the company is in violation of the rules. Suspensions are more like inducements to good behavior than they are actual punishments. If a company is suspended for non-filing of a Quarterly Report, they remain suspended until they file that report. But as soon as they do file, the suspension will be lifted.
> What happens at the end of the suspension period? The rules do not technically permit the PSE to allow a company to remain in permanent suspension (there may be some exceptions for companies going through rehabilitation and similar processes). The rules call for companies suspended for reporting failures to be involuntarily delisted after three months if they have not cured the reporting failure. Involuntary delisting is required for companies that have been suspended for six months without curing a public float violation.
> What does it mean? The reality of a trading suspension is very different between the wealthy owners and the retail investors who hold shares in the public float. Since suspended shares are still legally fine, just ineligible for trade on the PSE’s system, people are still able to buy and sell shares privately. This is an expensive and cumbersome process for retail investors, but for companies and institutional inventors with in-house legal resources, capital advisors, and a deep network of connections, this is not at all as daunting a task as it would be for someone living in Cebu trying to offload ?125,000 worth of shares in a company he or she doesn’t control. For retail investors, a suspension is basically a complete loss of the ability to buy and sell. You’re stuck, and you have no influence over any of the machinery involved in bringing the company back into compliance to cure the suspension. The owners hold all the cards.
> Why is this a big deal? Money tied up in suspended shares is money that you might never see again. While the rules call for the PSE to initiate an involuntary delisting after a certain number of months, and the new delisting rules are more advantageous for retail investors to at least get something back, there is still no guarantee that the PSE will execute the rules as they’re written. Some companies have been permitted to sit in a suspended state for literally decades. While the shares are suspended, the money that you used to buy those shares is essentially dead. It’s not earning interest. You can’t access it. You have no idea when you might get it back, and if you do, what it will be worth.
> Administrative red flag: You know that “Waiter Rule” that says, “The way a person treats a waiter (or someone they don’t need to be nice to) reveals that person’s character”? Well, I think that a management team’s comfort with allowing its shares to be suspended for these avoidable problems is the PSE’s version of that rule. The “Suspension Rule”, to me, reveals the company’s stance toward its minority shareholders. Is your participation in the business respected, or is it taken for granted?
> Should this matter to everyone? No! It matters to me, and I suspect it matters a great deal to other long-term investors, but it probably doesn’t matter at all to investors who trade using short-term strategies tied to price action, momentum, or other metrics. If you’re a short-term trader who lives and dies on 1-minute candles, you probably wouldn’t care at all about the character and competence of the management team.
MB bottom-line: I’m not a Sith so I try not to deal in absolutes. I could envision a scenario where I would not consider a suspension to be a deal-breaker. A good recent example would be SPNEC, which was suspended to the brink of delisting under Leandro Leviste’s leadership but is currently in the process of being snatched up by the MVP Group and placed under new management. No doubt there are still some aspects of the previous management team still working within SPNEC, but things have changed. Suspension is almost always a problem with management. Business is difficult for everyone (except maybe for PLUS, who just print and count money), but companies do not get suspended for losing money or for sucking at doing business. They get suspended for “meta” failures associated with the very nature of being a public company, such as the performance of basic administrative duties and public float management. This is why (in my opinion) the Suspension Rule is so effective; it ignores the business performance and focuses only on how the owners/managers act toward retail investors like me. Good financial times come and go, but I’m willing to ride that ride with a team that demonstrates the character to respect my time and investment.
—
Merkado Barkada is a free daily newsletter on the PSE, investing and business in the Philippines. You can subscribe to the newsletter or follow on Twitter to receive the full daily updates.
Be the first to comment