Introduction
Nigeria's business environment is under significant strain from challenges such as a foreign exchange crisis, rising inflation, and increasing operational costs. These pressures have contributed to a wave of delistings from the Nigerian Exchange Limited (NGX). Like other markets, Nigeria's stock market is influenced by broader economic trends, with these delistings reflecting a global pattern.
In periods of economic growth, like the global market boom between 2004 and 2007, companies are more inclined to list on the stock market. Conversely, during economic downturns like the American recession between 2001 - 2003 and during the global financial crisis of 2008 - 2009, delistings often outnumber new listings as companies find it difficult to justify the costs and regulatory burdens of remaining on the exchange amid declining investor confidence and economic uncertainty.1
This trend raises serious concerns for investors, regulators and market participants. Beyond the immediate market reactions, delisting has far-reaching implications for corporate governance, investor confidence, and the overall health of Nigeria's capital markets.
What is Delisting?
Delisting is the removal of a company's shares from a public stock exchange, rendering them no longer available for public trading.2 This process can be voluntary or involuntary, and it is important to differentiate between these categories. Voluntary delisting typically happens when a company decides it is no longer beneficial to remain publicly traded, often due to the high costs of compliance, sustained undervaluation of its stock, or the need for corporate restructuring. Involuntary delisting, on the other hand, is enforced by regulators such as the Securities and Exchange Commission (SEC) or the NGX, usually when a company fails to meet listing standards or engages in misconduct.3 Sometimes, companies deliberately violate listing standards to expedite their delisting process. This form of exit is still considered voluntary as it is a calculated move to leave the exchange.
The Decision to Voluntarily Delist
The decision to voluntarily delist from the stock exchange is typically driven by both economic realities and corporate strategy. It is usually an indication of larger systemic issues where the cost of remaining on the stock exchange outweighs the benefits.
For example, 11 Plc (formerly Mobil Oil Nigeria), voluntarily delisted in 2021 after 42 years on the Nigerian Stock Exchange (now the NGX). The company's management cited the need for greater operational flexibility and a reduction in regulatory burdens. The choice to delist was made easier by an economic climate that made compliance very costly.4 Despite delisting from the NGX, 11 Plc stated it would continue to operate as an unlisted public company, raising the possibility of its shares being traded on the NASD OTC Securities Exchange.
Continuing Operations After Delisting
The 11 Plc decision highlights an important point: delisting does not necessarily mark the end of a company's public life, as there are different forms of delisting with varying implications for the company, its investors, and the broader market. A company's delisting from the NGX does not necessarily mean that its shares stop trading altogether. Many companies that delist may continue to have their shares traded on Over-The-Counter (OTC) markets. These decentralized markets, such as the NASD OTC Securities Exchange, allow companies to remain accessible to investors without the regulatory burden of a full public listing— a process often referred to as "going dark."
In 2019, First Aluminium Nigeria voluntarily delisted from the NGX, citing the continuous undervaluation of its stock as the primary reason. By exiting the exchange, the company sought to consolidate its operations away from public scrutiny and continued exploring OTC trading venues as a strategic move towards operational flexibility, rather than a complete withdrawal from investor engagement.
Some companies may choose to switch from one market to another, driven by factors like lower listing fees, reduced disclosure requirements, or preference for a less regulated market. For instance, companies might move from Main Markets —where larger, more established companies are listed and face stricter regulations—to Second Markets—which are designed for smaller or emerging companies with lighter regulatory requirements, or even a shift from the stock exchange of one country to another that offers more favorable conditions.6
Public-to-Private (PTP) Transactions
A delisting decision can also lead to a company going private through a transaction referred to as a public-to-private (PTP) transaction or minority freeze-out. The European Private Equity and Venture Capital Association in its definition of such transactions, highlights the elements: In a PTP transaction, a new entity (NewCo), acquires the entire share capital of a listed company. The shareholders of NewCo usually consist of the target company's management team and private equity providers, with debt financing often coming from external lenders. After the transaction, the target company is re-registered as a private entity, and public ownership of its shares is entirely replaced by private control.7
Key Elements of PTP Transactions include:
- Identity of the acquiring investor: A company can be taken private by its existing management team in a Management Buyout (MBO), or by an external team in a Management Buy-in (MBI). Both forms often involve private equity investors sharing ownership.
- Financing structure: Many PTP transactions are financed through debt, known as Leveraged Buyouts (LBOs), where a Special Purpose Vehicle (SPV) borrows against the assets of the target company (the listed company) to fund the buyout.
PTP transactions can be executed through various legal arrangements, including:
- Mergers: The listed company is merged into an SPV owned by management or private equity investors, with the public shareholders being bought out.
- Asset Sales: The SPV acquires all the listed company's assets in exchange for cash, leading to liquidation and compensation for shareholders.
- Tender Offers: Public shareholders can sell their shares without the need for a vote or approval, unless a significant number of shares are tendered. This method helps avoid the complexity of mergers or asset sales.
- Reverse Stock Splits: This strategy involves consolidating existing shares into fewer, more valuable ones to reduce the total number of shareholders. Small shareholders often receive cash instead of fractional shares, effectively buying them out. This reduction in reporting obligations, effectively forcing a delisting.8
The rise of private equity institutions since 2000 has also led to an increase in Institutional Buyouts (IBOs), where private equity investors acquire a significant equity interest, sometimes sharing ownership with existing management or replacing them entirely.9
Impact on Investor Confidence and the Investment Climate
The delisting trend has significant implications for investor confidence. Frequent delistings create uncertainty in the market, discouraging both local and foreign investors from engaging with Nigerian equities.
In 2023, the NGX was projected to lose over N205 billion in capitalization due to delistings alone. This loss of capital is not just about immediate market fluctuations—it signals a long-term erosion of confidence in Nigeria's investment environment. Investors need the reassurance that listed companies will remain publicly traded and that the market will provide liquidity.10 The delisting of 11 Plc, for instance, led to a N82 billion reduction in market capitalization, demonstrating how high-profile exits can significantly undermine market stability and investor trust.11
Regulatory Responses and Investor Protection
Nigeria's delisting framework, however, offers varying levels of investor protection depending on whether the delisting is voluntary or involuntary.
For voluntary delistings, Rule 21.4 of the Rulebook of the NGX lays out specific requirements, as well as protections for shareholders:
- The company's shares must have been listed for a minimum of three years, with audited financial statements filed for those years. The company must also file audited financial statements covering a period of six months before the delisting and pay the required
- Shareholder approval must be obtained through a special resolution passed at a duly convened meeting.
- Shareholders must be given at least three months' notice of the proposed delisting, including details on how to transfer their shares.
- Shareholders who do not wish to remain in the unlisted company must be given an exit opportunity before the delisting, with majority or core investors required to buy out their shares at a price not lower than the highest price in the last six months.12
In contrast, for involuntary delistings, there is no requirement for a mandatory buyback, often leaving shareholders with illiquid or worthless stock. For example, in 2012, Fortis Microfinance Bank was involuntarily delisted from the NGX due to governance failures and non-compliance with post-listing requirements. Many investors, attracted by the bank's growth potential, were left holding virtually worthless shares. By 2018, the Central Bank of Nigeria revoked Fortis' license after discovering serious management issues and capital inadequacies, leading to the bank's collapse. 13
Conclusion
The wave of delistings from the NGX reflects both economic pressures and strategic decisions that require careful consideration from investors and companies alike. Voluntary delisting, if well-managed, can offer companies the freedom to restructure, but they must also consider alternative trading arrangements and prioritize shareholder protection. On the other hand, the risks of involuntary delisting can severely damage a company's reputation and erode investor trust.
For both companies and investors, understanding the broader implications of delisting and taking proactive steps to adapt is essential for maintaining confidence in Nigeria's capital markets. For expert insights on managing delistings, developing legally sound corporate restructuring
Footnotes
1 Acharya, V. V., & Pedersen, L. H. (2005). Asset pricing with liquidity risk. Journal of Financial Economics, 77(2), 375–410.
2 Kotak Securities, "What is Delisting – Meaning, Types and Impact on Investors" https://www.kotaksecurities.com/share-market/what-is-delisting/
3 Rule 13.25, Nigerian Stock Exchange, Rulebook of the Nigerian Stock Exchange, Part A3 – The Alternative Securities Market (ASeM) Board (Nigerian Exchange Group, 2015) https://ngxgroup.com/?wpdmdl=26399&ind=1605119440735
4 Greenwich Registrars, 'Delisting of 11 PLC from NSE' (2021) https://greenwichregistrars.com/wp-content/uploads/2021/06/DELISTING-OF-11PLC-FROM-NSE.pdf
5 First Aluminium Nigeria Plc, Explanatory Statement to Shareholders on the Voluntary Delisting from the Nigerian Stock Exchange (Apel Capital & Trust Limited, 2019) 1-4 https://registrars.apel.com.ng/wp-content/uploads/sites/4/2019/04/FIRST-ALUMINIUM-PLC-EXPLANATORY-STATEMENT-TO-SHAREHOLDERS.pdf
6 Fidanza, B., Morresi, O. and Pezzi, A. (2018) The Decision to Delist from the Stock Market. [edition unavailable]. Palgrave Macmillan. Available at: https://www.perlego.com/book/3491684.
7 Peter Roosenboom and Jana P Fidrmuc, 'Public-to-Private Transactions' in Douglas Cumming and Benjamin Hammer (eds), The Palgrave Encyclopedia of Private Equity (Palgrave Macmillan 2023) https://doi.org/10.1007/978-3-030-38738-9_113-1
8 Akhilesh Ganti, 'Reverse Stock Split: What It Is, How It Works, and Examples' (Investopedia, 25 September 2023) https://www.investopedia.com/terms/r/reversesplit.asp
9 Acharya, V. V., Franks, J., & Servaes, H. (2007). Private equity: Boom and bust? Journal of Applied Corporate Finance, 19(4), 1–10.
10 Delisting of Major Companies to Reduce NGX Capitalization by Over N205 Billion" (Market News Nigeria, 2023) https://marketnewsng.com/2023/09/21/delisting-of-major-companies-to-reduce-ngx-capitalization-by-over-n205-billion/
11 African Markets, '11 PLC Delists Shares from the Nigerian Exchange after 42 Years' (2024) https://www.african-markets.com/en/stock-markets/ngse/11-plc-delists-shares-from-the-nigerian-exchange-after-42-years
12 Rule 21.4, Nigerian Stock Exchange, Rulebook of the Nigerian Stock Exchange, Part A3 – The Alternative Securities Market (ASeM) Board (Nigerian Exchange Group, 2015) https://ngxgroup.com/?wpdmdl=26399&ind=1605119440735
13 Rate Captain, 'Nigerian Stock Exchange Delists Skye Bank, Fortis Microfinance Bank' (Rate Captain, 6 April 2021) https://ratecaptain.com/nigerian-stock-exchange-delists-skye-bank-fortis-microfinance-bank/
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