INADEQUACIES OF THE CURRENT REGULATIONS ON STOCK DELISTING

The shocking news released by the press in early 2022 that Hoang Anh Gia Lai's HAG stock was on the verge of delisting due to its losses for 3 consecutive years (2017, 2018 and 2019)[1] sparked a great deal of anxiety to investors and shareholders owning shares of Hoang Anh Gia Lai, and also negatively impacted the Vietnamese stock market at that time.

Vietnam’s current law has specified cases where stock of listed companies can be delisted, but in general, there are still shortcomings and loopholes that need to be addressed. This article highlights inadequacies of Vietnamese law regarding the procedures and regulations on removal of a listed security from domestic stock exchanges and its impacts on the delisted company.

Regulations on stock delisting

The Stock Exchange is seen as an effective capital mobilization channel for listed companies. Accordingly, when a company satisfies the statutory requirements and succeeds in having its securities listed on a domestic or overseas stock exchange, it would bring in many development opportunities for such company thanks to its easier access to capital sources from investors, thereby enhancing the value of the company after a successful initial public offering (IPO) and increasing the liquidity of the company's stocks. However, when the company fails to meet the required listing criteria or the listing is no longer beneficial to that company, delisting concern will arise.

The current regulations on stock delisting are directly governed by Decree 155/2020/ND-CP on elaboration of some articles of the Law on Securities (“Decree 155”) and the corresponding Regulations on listing of securities of Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX). Accordingly, delisting is the removal of securities of a listed company from the Stock Exchange. There are many reasons for delisting which are classified into two (02) main categories, i.e. (i) voluntary delisting; and (ii) compulsory delisting. In which, voluntary delisting means that a listed company proactively requests its stock to be delisted out of the Stock Exchange when such company satisfies the conditions prescribed in Article 121.1 of Decree 155. For instance, such application must be approved by the General Meeting of Shareholders of that company according to the provisions of the Law on Enterprises (in case of delisting of stocks), and only after at least 02 years as from the issuance date of the Resolution of the Stock Exchange approving the security of that company to be listed on the Stock Exchange.

Compulsory delisting takes place when the stocks and issuing companies (issuers) do not fully comply with required listing criteria in accordance with the law and regulations of the Stock Exchange. Cases of compulsory delisting are specified in Article 120.1 of Decree 155, among other, including (i) The issuers have their Enterprise Registration Certificate or License to operate in a specialized field revoked; (ii) The issuers will no longer be public companies as notified by the State Securities Commission; (iii) The issuer’s business results have suffered a loss for three consecutive years or the total accumulated loss exceeds the amount of charter capital actually contributed or the owner's capital is negative in the issuers’ audited financial statements of the latest year prior to the date of review; or (iv) The issuers cease to exist due to reorganization, dissolution or bankruptcy.

In reality, there have been a number of companies whose stocks are forced to be delisted. One example is the case of 60 million PXS stocks issued by Petroleum Equipment Assembly & Metal Structure Joint Stock Company has been officially delisted from HOSE since 24 June 2022[2]. The reason for the delisting is that the auditing organization had qualified opinions, which did not completely agree with the PXS’s financial statements of 2019, 2020 and 2021, being a compulsory delisting ground as prescribed in Article 120.1(h) Decree 155. Another recent case is 28,708,169 RIC stocks of the Royal International Corporation (RIC) which have been delisted from HOSE since 16 May 2022[3]. In this case, RIC suffered a loss in business for three consecutive years (2019, 2020 and 2021), which is a compulsory delisting case as prescribed in Article 120.1(e) of Decree 155.

Inadequacies of the current legal framework

As mentioned above, Decree 155 has stipulated the cases where stocks of listed companies shall be delisted. However, currently the relevant laws only set out cases of delisting without clear regulations on the procedures and delisting process. In particular, there is lacking of regulations on the statute of limitations for processing, the timelines and a mechanism for disclosing information by State Securities Commission (SSC) of Vietnam. The scandal concerning HAG stocks is a typical illustration. In this case, HAG stocks were at risk of being delisted due to its losses for three consecutive years from 2017 to 2019 pursuance to Article 120.1(e) Decree 155. However, it should be considered that information about Hoang Anh Gia Lai's losses have been published since March 2021 and until early 2022, the competent authorities did not have any alerts or warnings for investors of the possibility of delisting HAG stocks. In 2021, Hoang Anh Gia Lai gradually recovered and made?profitable?again, thus it is reasonable for investors to continue purchasing HAG stocks afterwards. The main cause for the State authorities' confusion and delay in resolving the arising problem is attributed to the lack of a standard handling process that affects the interests of investors and related parties. If the authority only bases on the Hoang Anh Gia Lai’s financial statements for 2017, 2018 and 2019 to delist its stock, this would not only cause ?severe consequence on Hoang Anh Gia Lai, its investors, but also negatively affect Vietnam security market, which is a situation unforeseeable under by the current law.

Additionally, there is a shortage of safeguards or protection mechanism for small and minority shareholders in the current laws when it comes to delisting of stocks. They are often in a weak and inactive position in the case of voluntary delisting. Therefore, timely notices by the relevant Stock Exchanges and the authority shall be crucial for investors to make proper decisions to secure their legitimate interests. In the other hand, there is no mechanism for dialogue between the investors, the issuers and the Stock Exchanges prior to making official judgments regarding a delisting decision.

Pros and cons of delisting

From the perspective of corporate governance and investment, compulsory delisting is more likely a bad signal for the delisted companies, especially in terms of financial health and management. A company would struggle against the following typical challenges and problems when its stocks are delisted:

• ?When the notice of stock delisting is released to the public, the stock price often drops dramatically, losing liquidity even though it still being traded on Upcom platform[4];
• ?It would be more difficult for the delisted companies to access to the capital market through the stock exchange. There will be less options for reasonable capital mobilization costs to serve their long-term development. Companies needing capital may have to loan from banks with cumbersome procedures requiring collaterals, and pay interest;
• ?The delisted companies may lose the brand image as well as the reputation that has been built with clients and partners when the delisting information is published by social media;
• ?They may also lose transparency, standards, and efficiency in governance as well as not guarantee the soundness of financial and investment activities as a result of not being subject to strict management, inspection, and supervision by the State Securities Commission, the Vietnam Securities Depository Centre and the public shareholders; and
• ?There is little chance to increase the company's asset value through increasing market price of stocks. When the company is listed on the stock exchange, the stock price of the company with good governance capacity and reputation may be higher than its book price. This could raise the company's asset value.

?However, in some circumstances, the delisting of stocks may also benefit issuers to some extent, among others, including the followings:

• ?The delisted companies are not required to strictly comply with regulations on corporate governance, file reports and information disclosure, as well as being closely monitored and questioned by regulatory bodies, shareholders, and investors. This would be beneficial for them in term of protecting trade secrets and/or confidential information from competitors;
• ?Maintaining the structural stability and improving the security of the corporate internal data as well as empowering shareholders with more authority over the operation of the company. The effect of the delisting may also protect the issuers against the possibility of acquisition by major outside shareholders; and
• ?The General Meeting of Shareholders and the Board of Directors of the delisted companies may be organized quickly, and there are no lengthy processes to make relevant decisions.

In conclusion, Vietnam should learn from the experience of developed countries to improve the legal framework on the procedure for addressing the delisting of securities so as to create a transparent and healthy stock market that would benefit stakeholders. Nevertheless, Vietnam's stock market is predicted to be an attractive investment channel with great potential of growth in the coming time. Therefore, besides the experience and market knowledge, investors and concerned parties should pay more attention to the applicable laws and consult legal experts, where necessary, to secure their legal rights and benefits.

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[1] https://tuoitre.vn/co-phieu-hag-cua-bau-duc-co-bi-huy-niem-yet-20220216143526875.htm

[2] https://vneconomy.vn/60-trieu-co-phieu-pxs-chinh-thuc-bi-huy-niem-yet-tu-ngay-24-6.htm

[3] https://s.cafef.vn/ric-478466/co-phieu-cua-doanh-nghiep-kinh-doanh-casino-duy-nhat-tren-san-chinh-thuc-nhan-an-huy-niem-yet-se-roi-san-tu-1652022.chn

[4] Article 120.2 Decree 155/2020/ND-CP