UAE Securities and Commodities Authority issues a new regulation concerning public joint stock companies in financial distress
1. What’s new?
The United Arab Emirates Securities and Commodities Authority (“SCA”) has issued new rules under the Chairman of SCA Board Decision No. (13 R.M) of 2020 on the Procedures of Dealing with Listed Public Joint-Stock Companies in Financial Distress (“New Rules”). The main objective of the New Rules, among others, is to provide additional classification criteria for local or foreign public joint-stock companies listed on either the Dubai Financial Market or the Abu Dhabi Securities Exchange (“PJSCs”) so as to highlight to investors those PJSCs which are in financial distress.
2. When do the New Rules come into force?
The New Rules were published on 26 April 2020 and will come into force on 1 July 2020. They complement the classification rules for PJSCs in Article 6 of Cabinet Resolution No.(12) of 2000 Concerning the Regulations as to the Listing of Securities and Commodities (“Listing Rules”).
3. In detail
In accordance with Article 6 of the Listing Rules, each listed PJSC is categorised as a Category One or Category Two company, depending on its compliance (or otherwise) with the listing conditions set out in Article 6. The New Rules stipulate that, after 1 July 2020, the categorisation of each PJSC must be assessed against the additional criteria set out below.
Each PJSC’s classification will be assessed by the relevant market upon which the PJSC is listed, based on the additional criteria set out in the New Rules using the PJSC’s 2019 year end audited accounts.
The relevant market may reassign a PJSC’s classification once a year following the publication of its year end accounts except that if a Category One PJSC’s listing has been suspended for a period of six (6) months or more, then it will be immediately reassigned as a Category Two PJSC.
In addition, transfers of PJSCs between the two categories must be announced on the relevant market’s website and the relevant market (with SCA’s approval) reserves the right to refuse a reclassification to Category One if the PJSC has incurred penalties in its previous financial year for non-compliance with any law or regulation applicable to SCA or the relevant market.
Category One PJSCs
To remain classified as a Category One PJSC, it must comply with the following:
- the conditions set out in Article 6 of the Listing Rules;
- the listing of the PJSC’s shares must not have been suspended for a period of six (6) months or more; and
- the PJSC has not incurred accumulated losses amounting to 50% or more of its capital, based on its last audited financial statements.
Conditions (2) and (3) above are the new conditions set out in the New Rules.
Category Two PJSCs
Essentially, any PJSC that fails to meet the Category One conditions will most likely be classified by the relevant market as a Category Two PJSC.
If a Category One PJSC becomes a Category Two PJSC by virtue of having its shares suspended for six or more months, its shares will no longer be suspended.
If a PJSC is, or becomes, a Category Two PJSC:
- its shares will be traded on a designated trading screen developed by the relevant market for Category Two PJSCs, clearly denoting that it is a Category Two PJSC with a further distinguishing mark if the PJSC has accumulated losses amounting to 20% or more of its capital in accordance with SCA Board of Directors Decision No. (32/R.M) of 2019;
- the relevant market must make an announcement of the categorisation, the requirements of the Watch List (“Watch List”, as described below), the PJSC’s status and financial position and the risks of investment therein;
- it will be on the Watch List to be created and monitored by a new monitoring committee (see below); and
- it must create an action plan for adjusting its affairs (approved by its board and a financial expert) with a quarterly report (or on request) as to progress thereon to the committee monitoring the Watch List.
4. Monitoring Committee
To monitor Category Two PJSCs a committee comprised of SCA members, members of the relevant markets and regulatory authorities will be established in due course. The committee is tasked with monitoring Category Two PJSCs who make up the Watch List (being the list comprised of those PJSCs who are transferred from Category One to Category Two due to failing to satisfy either of the new conditions referred to above). Category Two PJSCs have one year (extendable by a further three years) to adjust their affairs so as to be reclassified as a Category One PJSC.
If satisfactory adjustments have not been made by an applicable PJSC, the committee may recommend that such PJSC remains as a Category Two PJSC or is de-listed. If SCA decides, after consultation with the relevant market, that a PJSC is to be de-listed, SCA must, within thirty (30) days of such decision, notify the PJSC of the decision. The relevant market must announce the decision on its website within thirty (30) days of the decision, detailing how the delisted PJSC’s shares will be transferred in the future given that they will no longer be traded on-market.
5. What does this mean?
If a PJSC has a concern about its categorisation, given the new conditions, then they are advised to raise this promptly with SCA and the relevant market upon which it is listed. It is advisable to manage expectations so that there are no surprises for the PJSC or its stakeholders.