Debt offset to hurt small shareholders
Debt offset to hurt small shareholders
Issuing shares to offset debts has become one of the solutions employed by many businesses nowadays.
However, many investors are urging authorities to closely monitor such activities to protect the rights of smaller shareholders.
Tan Tao Investment Industry JSC (ITA) recently announced the issuance of almost 127 million shares to the five organisations that have helped the corporation ease its debt burden. Specifically, these investors are the Tan Tao Group with 51 million shares, ITA Rice with 17 million shares, Tan Tao University with 7.3 million shares, Tan Tao Infrastructure Development JSC with 34.5 million shares, and Southern Delta JSC with 16.4 million shares.
In order to guarantee that a fair price will be provided for the companies that have helped the ITA bailout, a price tracking mechanism has been employed.
Previously, Quoc Cuong Gia Lai JSC (QCGL) had also announced a private transfer of over 145 million shares to VOF PE Holding 5 Limited (VOF) with the explicit purpose of converting bonds and clearing its debts. The converted bond price for VOF was VND8,000 per share and the offsetting debt price was VND10,000 per share.
Current stock market regulations pose little administrative and procedural burden on share issuance to clear debts, making it rather convenient and easy. While the paperwork and the procedures are similar to a normal public offering, businesses need to provide a proof of a contract to settle debts with their creditors, as well as a creditors’ agreement to receive issued shares in return for offsetting debts. In many cases, share prices issued to creditors are lower than the market price, depending on their prior agreement.
In order to protect shareholders in case of a share issuance driving prices down, the Securities Law regulates that parties with intentions to issue shares must seek approval at the general shareholder meeting. However, creditors often have a relationship with the businesses’ larger shareholders, leaving smaller shareholders unable to prevent share issuance, due to their minimal allowed voting percentage.
Regarding the ITA share issuance, in accordance with the provisions of the Annual General Meeting Decree 2014 on share issuance, ITA is legally obligated to exclude the voting rights of shareholders who are related to the five said companies and attain an approval percentage of at least 75 per cent.
Likewise, QCGL sought the approval of shareholders to issue 150 million shares to clear debts, 17 million of which were issued to VOF for bond conversion, while 133 million shares were issued to 100 investors which were QCGL’s creditors.
With the price of the 133 million shares being set at VND10,000 per share, the value of debts that QCGL can offset came to VND1.33 trillion ($600 million).
Being one of QCGL’s largest shareholders, in accordance with the regulation, VOF was excluded from the vote on share issuance, along with other related investors.
In addition, share issuances that involve a large number of shares need to be closely monitored, especially when the number of shares issued exceeds the value of the businesses’ chartered capital. For instance, the number of additional shares that QCGL issued was 15 million shares greater than the shares currently in circulation. As such, by share volume being largely diluted, shareholders’ rights will be affected.
