‘Red alerts’ for troubled public firms eyed

The Philippine Stock Exchange is proposing an overhaul of guidelines governing companies in financial distress or under corporate rehabilitation to include “red alerts” prior to actual bankruptcy, aiming to better protect minority investors who might otherwise get stuck with illiquid or insolvent investments.

The PSE issued on Thursday a concept paper through which the regulatory framework for companies undergoing corporate rehabilitation or those which are about to undergo rehabilitation could be improved, drawing from best practices in other jurisdictions.

Under the existing rehabilitation guidelines, the PSE—upon receipt of a disclosure or any planned or actual filing of a petition for rehabilitation—will immediately impose a trading suspension on the shares of a company that is actually or potentially the subject of rehabilitation proceedings.

But the PSE noted that under the existing guidelines, there is no exit mechanism for the minority stockholders of distressed companies in view of the immediate suspension of the trading of shares. Although the guidelines provide for the lifting of the trading suspension under certain conditions, the PSE said a freefall of the share prices was expected once rehabilitation starts, leaving the stockholders with no option but to sell shares at a large discount or stay invested in a financially unstable company.

“In order to warn investors of the financial state of the investee company and afford them a timely opportunity to dispose of their shares, the proposed pre-rehabilitation rules identify red alerts that indicate a possible bankruptcy and require listed companies to immediately report the existence of these circumstances to the exchange,” the paper said.

In order to give the minority shareholders sufficient warning and a timely opportunity to exit a company experiencing financial distress, the PSE proposes to adopt pre-rehabilitation rules that will require an issuer to disclose the following:

Disposal by the issuer of its major business;

Suspension of the business operations for at least six months for any reason;

Negative stockholders’ equity for three consecutive years;

Any delay in the payment of loans amounting to 10 percent of the total assets of the issuer; and

Issuance by its external auditor of a qualified or adverse opinion on the financial statements of the company for three consecutive years.

Upon the receipt of the disclosure, the PSE plans to designate the issuer as a “company under financial distress” and issue a public notice to this effect. Within five days from the classification, the issuer will be required to submit a business plan to address the situation, together with the timetable of implementation.

The PSE also proposed that trading on the shares of a company under distress would continue without prejudice to the imposition of a trading suspension on other grounds provided for in other rules of the local bourse.

During the period by which a company has been classified to be under distress, the issuer will be required to submit within 15 days after the close of each month a report on the progress of its business plan.