ShareSoc Chairman's Blog

Posted by ShareSoc at 13:33, November 26 2012.

ShareSoc Launches AIM Company Rating System (Scorecard)

ShareSoc has been concerned with the quality of companies on AIM for a long time. It is difficult for investors to tell good companies from bad, particularly in the AIM market which is full of dross. ShareSoc has invented a simple way for you to differentiate between good and bad and we have now made this publicly available. It's a "Scorecard" that anyone can use to rate companies, with a particular focus on the point of view of individual investors.

Go to this page of the ShareSoc web site for more information and a copy of the Scorecard: www.sharesoc.org/scorecard.html

Posted by ShareSoc at 15:43, November 28 2012.

ShareSoc Opposes Major Changes to the Retail Price Index

ShareSoc has submitted a response to the public consultation on “improving the Retail Prices Index (RPI)” in which we oppose major changes. In reality a large change to the index would threaten the returns obtained by investors on index-linked gilts and savings certificates, plus also the income of pensioners which are often indexed by RPI. We are opposed to completely changing the basis of the index or making it the same as CPI because this would also reduce technical comparability with previous time periods. Consistency is one of the key foundations of any index. However we accept that changes made a couple of years ago undermined the basis of the index and therefore have accepted that some minor revision to remove that bias be made.

See www.sharesoc.org/ShareSoc_RPI_Consultation_Response.pdf for our full response.

In reply to ShareSoc, post #206

We are opposed to completely changing the basis of the index or making it the same as CPI because this would also reduce technical comparability with previous time periods.

...err....why is that relevant at all?

In reality a large change to the index would threaten the returns obtained by investors on index-linked gilts and savings certificates, plus also the income of pensioners which are often indexed by RPI.

Actually that remains to be proven. If housing costs (mortgages, insurance, council tax etc) and other things In the RPI basket but not CPI  (such as TV licences and vehicle licence costs) should happen to see less inflation than the CPI basket, then it wouldn't be impossible for RPI to be less than the CPI. Clearly that hasn't been the case in the recent past - but it might be in the future.

The main reason that the RPI should go is that it is statistically flawed due to the "formula effect" which creates an upward bias to the index.

There may, however, be matters of contracts based on the RPI - and those would be more difficult to deal with and there may be valid grounds for complaint.

In reply to emptyend, post #207

ee,

If you read our response, you'll see that we acknowledge the "formula effect" and recommend one of the ONS's suggestions for dealing with it - which still leaves a degree of continuity/comparability with past index values, and does not throw out the baby with the bathwater.

Investors are entitled to expect that the basis of their RPI-linked contracts with the government will not be fundamentally altered.

Regards,

Mark

Investors are entitled to expect that the basis of their RPI-linked contracts with the government will not be fundamentally altered.

This is an interesting point - and the precise reason why I said ".....matters of contracts based on the RPI - and those would be more difficult to deal with and there may be valid grounds for complaint."

The reason I say it is interesting is because past RPI-linked returns have included the statistical flaw from the formula effect, which can never have been anticipated by owners of such assets (including me, incidentally). Accordingly taxpayers have paid more than they should have and investors have received more than they should have....albeit that the index was calculated in good faith. If the Government then decides there is a better way to calculate the movement in retail prices, then why should investors be allowed to keep their past erroneous gains? There is a case for saying that "the RPI is the RPI"....ie....as published - and NOT for claiming that the formula itself is somehow sacrosanct.

If one takes the view that RPI indexed contracts should not be altered (as you suggest) then where will that leave ShareSoc's position when it comes to the vastly larger market in LIBOR-linked contracts? The method for setting LIBOR in these was quite clear - and was specified as "BBA LIBOR" in most cases, which had a clearly defined process under which it was set.......

....yes of course it now seems that attempts were made (over quite short periods of extreme market turmoil when prices and rates were intrinsically uncertain to an unprecedented degree) to "fiddle the inputs" but, because of the controls inherent in the BBA process, it is probable that these "attempts to fiddle" had no actual impact on the LIBOR setting in most cases (due to outliers being discarded) - and a very minor 0.01% or so impact in the worst cases.  And yet it now seems likely that the process by which LIBOR will be set will be fundamentally changed as a result of that malpractice during a few high-stress weeks in what is clearly fast becoming a bygone era in terms of banking culture. Is that going to be "fair" on all of those who hold the trillions of pounds/dollars/euros/yen etc based on LIBOR rates to arbitrarily change the way that LIBOR is set?

ee

In reply to emptyend, post #185

Not sure why this has just come to my attention, but a share buy-back is obviously not a case of the company investing in itself. Cash is being taken out of the company and given to shareholders who sell the shares in the market (which are bought by the company). There is therefore dis-investment by the company in its own operations!

Posted by ShareSoc at 09:41, November 29 2012.

SIPP operators’ capital requirement – far too low!

Did you realise that the operator of your SIPP might only need a minimum regulatory capital of £5,000? Yes that is the current level imposed by the FSA on small operators. Obviously this would be a grossly inadequate requirement to cover the cost of recovering clients’ assets if a SIPP operator got into financial difficulties (as we know from what happens when brokers and other financial institutions fail such as Lehmans, MF-Global, Pacific Continental, etc). The FSA is proposing to introduce new rules which impose a much higher requirement – a £20,000 minimum with a graduation upwards for larger funds. For example assets under management of £10m would require capital of £63,000 and for £100m it would be £200,000 under the proposed rules. In addition if any of the assets were “non-standard” (in effect unlisted securities or other illiquid investments), then an additional capital requirement would be imposed.

ShareSoc fully supports the proposals and has submitted a response to the public consultation on this matter which can be read here: www.sharesoc.org/ShareSoc_SIPP_Capital_Regime_Consultation_Response.pdf

Posted by ShareSoc at 00:00, November 30 2012.

Self Regulation – it never works (and not on AIM either)

You are probably already bored stiff with the media reporting of the Leveson inquiry, unless you happen to work in the media – but just a few comments on an analogous situation. Previously the press has been “self regulated” by the Press Complaints Commission. One conclusion of the Leveson Inquiry is that self regulation has not worked. Abuses have continued despite attempts to improve its operation, with those who suffered as a result finding it difficult to get their complaints considered or to obtain recompense without resorting to expensive and often ineffective legal processes. Those who are likely to be subject to a tougher regime in future are already fighting back saying the freedom of the press is sacrosanct, that self regulation can be improved to make it effective, etc, etc (I won’t bore you with more of it because you will be hearing all their excuses over the next few months).

Of course the same situation used to apply to the UK stock market before the FSA took over where it was a “gentleman’s club” approach and where folks were presumed innocent until malfeasance was so blindingly obvious that they had to resign (other penalties were usually minimal). In reality self regulation of the market was not effective in curbing abuses because if the judges are composed of people from the same background (or “club”) as those being accused, the result is always to give them the benefit of the doubt. I also have personal experience of another "self-regulated" body which likewise is very ineffective for the same reason. I regret to say that self regulation ultimately never works.

But in the AIM market we still have self regulation of course. It is regulated solely by the LSE, the market operator, and “hands-on” responsibility for enforcement of good behaviour by companies and directors is delegated to “Nomads”. These are often the same people who are the company’s brokers, so you can imagine the horrible conflicts of interest inherent in that arrangement.

In reality regulation of AIM is atrocious. Even if penalties are imposed for misdemeanours, they are not normally disclosed so there is little incentive for companies or their Nomads to improve. There is no enforcement of reasonable corporate governance standards as there is for main market companies and effectively AIM company directors can do what they want and pay themselves as much as they want within the loose constraints of company law, with no effective control from shareholders (for reasons I won’t go into here).

Of course we don’t want politicians or Government officials interfering with the press on a day to day basis, or imposing needless censorship, but there is surely a half-way house which could improve matters, as Leveson has proposed. But I do wish we could have some examination of the AIM market regulation at the same time.

Postscript: An article in the latest PIRC newsletter also pointed out that voluntary self-regulation has not been effective in the listed company sector as regards improving “stewardship”. For example under the “Institutional Shareholders Committee (ISC)” – subsequently reformed under the name of the “Institutional Investor Council (IIC)” – there was an obligation to disclose voting by institutional fund managers but the response was very patchy. The article now suggests this organisation is effectively dead as the Investment Management Association is forming a new body with similar functions and the article ends with this comment: “When it comes to illusory self-regulation to stave off reform, the asset management lobby needs no lessons from the press”.

Posted by ShareSoc at 10:52, December 2 2012.

AIM company pay – Inland, Conygar and Solo Oil

Remuneration of the directors of AIM companies is a perennial subject for complaint. Three examples where events happened last week were Inland Homes (LON:INL) , Conygar Investment Co (LON:CIC) and Solo Oil (LON:SOLO) .

Inland held an AGM which a number of unhappy shareholders attended. Many shareholders simply think the remuneration of the directors is excessive. In summary, revenue and profits at Inland Homes have been variable to say the least since it listed in 2007, with net profits last year of only £0.76m, but the directors paid themselves over £1.3m for the year. Market cap is only £33m. But the directors did not agree. Many shareholders apparently do not wish to sell their holdings because they perceive there is value in the assets of the company not reflected in the share price. My advice: shareholders need to get organised so as to bring more concerted pressure to bear. ShareSoc is willing to help to form Shareholder Action Groups and support them, but one or more shareholders do need to take the initiative on this.

Conygar (another property company) is a similar case, with an AGM last January where similar views were expressed, particularly at the bonuses that were paid last year (a full report of that meeting is on the ShareSoc Members Network). There was a commitment to review remuneration policy at that meeting. Last week the preliminary results for the year to end September were published and it included some notes on changes to the remuneration arrangements. There is an increase to the post-tax hurdle rate on the Profit Sharing Plan and in addition a share price condition is added. In future bonuses will not be paid unless the market share price is at least 65% of audited net asset value per shares. However the latter is not very onerous. The current share price is 91p and the net asset value per share is 166p, so the share price only needs to move from 91p to 108p to meet that condition. Conclusion: it’s a gesture in response to shareholder complaints, but not a very satisfying one.

Solo issued an announcement concerning share options on the 23^rd November (their AGM is coming up on the 16^th December). The announcement covered some new share options granted to the executive directors (totaling 28m shares) , but it also stated that options totaling 125 million shares held by three directors which were due to expire on 21^st December 2012 had been extended to December 2020.

Share options are like bets. The recipient is rewarded if they meet the targets set by the deadline, and can then collect a bonus prize. If not they lose the bet. In this case they took the bet and lost, as it timed out. So what did they do? They simply extended the expiry date and effectively reran the bet again! Rewriting share options by extending expiry dates, changing exercise prices or performance conditions is anathema to most investors and undermines any control or discipline over pay. But that clearly did not worry the directors of this company. I hope shareholders will attend the AGM and make their feelings on this matter plain.

Perhaps needless to remind readers that pay (and corporate governance generally) is a common problem in both property companies and natural resource companies. Because the company may be sitting on valuable assets, and the directors are used to taking large bets, they seem to think that pay should not be connected to either profits generated or the effort or expertise they bring to their jobs. They need disillusioning, but only shareholders can do that.

In reply to ShareSoc, post #184

Hi ShareSoc,

I don't own Vodafone (LON:VOD), but have followed the company from time to time. It doesn't appear to be a growth company any longer so it probably lacks a sufficient number of value-enhancing projects worthy of reinvestment; however, VOD does generate a lot of free cash flow that it can use for dividends, buybacks, and acquisitions.

As you know, VOD pays out a substantial dividend, so the board may have felt that income-minded investors were already being served by the regular payouts, leaving buybacks and acquisitions as the remaining options for the extra funds. (Vodafone has a solid investment-grade credit rating, so there isn't an obvious need to reduce debt.)

Given its size, Vodafone would need to make a major acquisition to move the needle and an M&A strategy could open the door to additional risks for long-term shareholders. By process of elimination, then, we're left with buybacks as a means of returning sharheolder cash. As long as VOD is buying back shares at a discount to its fair value, the buybacks should enhance long-term shareholder value. 

Don't get me wrong -- I would have liked to see VOD pay a special dividend, too, but I can also see why the board ended up choosing buybacks given its options.

Best,

Todd

Posted by ShareSoc at 09:37, December 6 2012.

AIM companies in ISAs. Is it a good idea?

One of the brighter aspects of the Chancellors Autumn Statement yesterday was the mention that investors may be allowed to put AIM companies into ISAs. The rest was mostly doom and gloom - higher taxes and depressing economic forecasts.

Many people have complained about the fact that there are few AIM companies that one can hold in an ISA. This is not only anomalous in many ways, as I explain below, but also creates problems when companies move from the main market to AIM as investors have to move them out of their ISAs, as is about to happen to Victoria Plc. Stopping AIM companies from being held in ISAs also prevents investors from investing in the small, rapidly-growing companies that are more common on AIM than the main market.

There are some AIM companies that one can hold in ISAs - namely those that are “dual-listed”, i.e. also listed on a recognised foreign exchange. So that is one anomaly. Indeed one of the arguments for restricting stopping AIM companies being held in ISAs is that it prevents unsophisticated investors, who often commence by investing via ISAs, from holding risky stocks. But many of these “dual-listed” stocks are actual small and speculative natural resource companies so that compounds the anomaly.

The other anomaly is that there is no such restriction on SIPPs (Self Invested Personal Pensions). So you can invest your life savings and what you might need to live on in retirement into all manner of flaky AIM companies (and there are quite a few) in a SIPP, along with other risky investments.

The other question to examine is whether it is possible to protect investors from their own folly anyway, whether it is a sound policy to do so, or even whether practically it can be achieved. Although there are many speculative AIM stocks, there are also a lot of speculative main market stocks. A simple division between AIM companies and others does not tackle the company “quality” question in a sensible way. Trying to do so by other means (for example, ruling them in or out based on net assets, profits, duration of operations, or whatever, is fraught with difficulties which you can see if you ponder it for a moment). In any case, those who wish to speculate can always take their money out of an ISA and go down to the local betting shop, or open an on-line spread-betting account.

But one differentiator of course is that AIM companies have more relaxed corporate governance rules (not covered by the main market UK Corporate Governance Code to begin with) and the AIM market is “self-regulated” by the LSE and by the Nomad system. The Leveson inquiry spells out exactly what is wrong with self-regulation. This creates quite regular cases of abuse, and problems of company directors paying themselves simply what they want (AIM companies do not have to have Remuneration Resolutions and won’t be covered by the new “binding votes”).

On first sight it does seem to me to be a sensible move to take, as it might encourage investment in AIM companies, improve fund raising for them and provide more diversification of their shareholder base. But only if the rules and regulations concerning AIM companies are brought more into line with main market conditions (without making them as onerous or costly).

ShareSoc will be responding to the consultation on the question of allowing AIM companies within ISAs in due course so if you have any views on this matter, please let us know.

Posted by ShareSoc at 16:50, December 7 2012.

Tesco – Fresh maybe, but not Easy in the USA

Quite a few public comments were generated about the announcements by Tesco earlier this week of a “strategic review” of its “Fresh & Easy” chain in the USA. As someone who set up a business on the West coast of the USA some years back, and regularly shopped in local supermarkets, I feel capable of contributing to the debate. I am also a Tesco shareholder.

Apparently Tesco has invested £1bn in this business, but I consider it a wasteful diversion of both management time and financial resources. Indeed I said back in April that “in essence it is sub-scale and inherently unprofitable”. Apart from apparently requiring Tesco CEO Philip Clarke to visit the operation 10 times in the last 18 months, when he has enough problems with the UK operations, Tesco seem to have made a number of classic mistakes.

As with many European companies, they underestimated the competitiveness of the US markets and the fact that even though we speak the same English language (at least a form of it), the culture is different. Now there may have been a perceived gap in the supermarket sector, but was it a space perhaps that nobody wanted to occupy or had tried and found it unprofitable? The level of service in US supermarkets was always higher than the UK (lots of low cost immigrants in California) but Tesco pushed self-service check-outs – that’s just one of the several operational mistakes reported in the media.

So who did they appoint to run this business? One of their key UK executives of course (Tim Mason with 30 years service whose departure has also been announced) who had no apparent knowledge of the US market or social scene other than that obtained by company research. A recipe for disaster if there ever was one.

Why Tesco wanted to try and enter a market in the USA which is not exactly growing rapidly when there are lots of more quickly developing countries with bigger market gaps astonishes me. Alternatively they could invest in improved on-line offerings which are surely a growing segment. But the former CEO was keen on the idea and nobody wants to admit defeat or scrap his legacy it seems – at least up to now.

But my view is the sooner reality is faced up to, the better. Tesco: please stop wasting management time on a dead duck. It is counterproductive. Better to accept one’s mistakes in business and move on unless there is clear daylight ahead, and apparently there is not. Even Mr Clarke has conceded that “The business has failed” so let’s bury the corpse before it goes rotten.

Posted by ShareSoc at 20:34, December 13 2012.

Missed the Queen and the 1 million pound note, but met the British Empire

I missed the Queen today when she signed a million pound note at the Bank of England, even though I was across the road at the AGM of British Empire Securities and General Trust (founded originally in 1889 and what a great name to attract those traditional investment trust fans).

One investor was particularly concerned about what such notes portended for inflation, and probably quite rightly as it looked laser printed on plain paper on the TV news.

Lots of good questions were put to the board at this Annual General Meeting, although shareholder John Hunter spoke against share buy-backs as he usually does in my experience, and at some length, which ends up boring some audiences – I have suffered from this at other company AGMs where we both hold shares. He said he wanted the company to hang on to the cash so as to reinvest. By inflating the share prices this actually means his heirs might end up paying more tax. The initial response he got was that the company had not bought back any shares from 2002 (until last year) but there were significant discounts at some points (when Caledonian sold their holding) – the board does review this but it does not promote the company much and hence the discounts can arise. There was about a further 5 minutes debate on this subject with Mr Hunter saying he liked to pick up shares cheaply when the discount rose, but ultimately the Chairman said the board thought it was a good investment decision, and so do I. Although I usually vote against share buy-backs in trading companies, I make an exception for investment trusts as I consider having a discount control policy of some importance. Other shareholders agreed as they normally do, and voted in favour of the resolution (and all others in fact) by more than 97% - a pretty overwhelming outcome. But a bit of healthy debate on this issue cannot do any harm.

There is a full report of this meeting on the ShareSoc Members’ Network where many AGM reports are posted.

In reply to ShareSoc, post #215

Good post. It isn't a straightforward issue, because there are a raft of practical factors to be taken into account.

And there is also one that you haven't mentioned which is that I believe quite a few hold AIM stocks because they are outside one's IHT estate (I think - though don't know the details!).

Some comments:

But one differentiator of course is that AIM companies have more relaxed corporate governance rules (not covered by the main market UK Corporate Governance Code to begin with) and the AIM market is “self-regulated” by the LSE and by the Nomad system. The Leveson inquiry spells out exactly what is wrong with self-regulation. This creates quite regular cases of abuse, and problems of company directors paying themselves simply what they want (AIM companies do not have to have Remuneration Resolutions and won’t be covered by the new “binding votes”).

I don't think the Leveson reference is helpful. There is nothing wrong with self-regulation per se, except that in many systems there is the question of Quis custodiet ipsos custodes? I'm not sure that is the case with stock markets, where there are various interest groups putting their 2p in.

Incidentally, it is also the case that many companies that have their primary listing (and legal jurisdiction) outside the UK are not obliged to have to have Remuneration Resolutions.

On first sight it does seem to me to be a sensible move to take, as it might encourage investment in AIM companies, improve fund raising for them and provide more diversification of their shareholder base. But only if the rules and regulations concerning AIM companies are brought more into line with main market conditions (without making them as onerous or costly).

I'd agree with the first point, at least in principle - though I'm not sure that it would make very much difference in practical terms to either the shareholder base or the companies' ability to raise funds. I do think that your last comment, though, is 95% wishful thinking - because AIM would barely exist if there wasn't an element of regulatory relief. In general my view would be very much in favour of governance by dint of active stakeholders (such as shareholders and shareholder groups) rather than by dint of regulation. Excessive regulation is a quick route to putting many companies out of business - and it is purely and simply a burden - and one that never, ever, comes cheaply!

ShareSoc will be responding to the consultation on the question of allowing AIM companies within ISAs in due course so if you have any views on this matter, please let us know.

I suspect that you may find a greater range of views on this one than anything else you have yet consulted on. It will be interesting to see where the balance is struck.

ee

In reply to emptyend, post #218

And there is also one that you haven't mentioned which is that I believe quite a few hold AIM stocks because they are outside one's IHT estate (I think - though don't know the details!).

I think this is a very important issue. I have no idea of the numbers who do this, but I believe it''s quite a popular use of AIM stocks (I'm only beginning to approach an age where I would consider this in my investments - but perhaps in the not too distant future...!). I would also be surprise if a review of the inclusion of AIM stocks in ISAs did not include a close consideration of continuing the "business asset" treatment. It's always seemed a bit of an anomaly to me. I've seen the argument that some family owned businesses are held by many involved in the company through shares traded on AIM. That may be true in some cases, but these are publicly listed companies and there is no doubt that the vast majority of AIM listed stocks are not held in this way. Which really seems to leave the argument that it is in effect largely a tax perk for those investing in AIM stocks - and must raise the question, should they retain one while gaining another. I would be surprised if the answer to that is yes! And there would be many who would not be happy with that result.

In reply to peterg, post #219

I would be surprised if the answer to that is yes! And there would be many who would not be happy with that result.

Though of course it must also be said that ANY fiddling around with taxation leaves "many" unhappy.

I rather hope that the final solution reflects:

a) what is best for the economy overall and

b) what is fairest for shareholders and taxpayers as a whole.

I'm not persuaded that a "loophole" that allows "the rich" to shelter chunks of capital from IHT is a good thing to preserve. If they want to keep funds out of their taxable estate then they should simply give them away early and benefit from the 7 year rule. This is one area where the tax code could be considerably shorter than it is, I think.

Posted by ShareSoc at 09:37, December 17 2012.

Ideagen Placing at a Premium

Placings in AIM companies often annoy private investors who usually cannot participate in them. A placing dilutes your existing interest in the business and most shareholders would prefer to stump up the money themselves if cash is required rather than have some new carpetbaggers come in and take a major stake. Regrettably AIM companies often have to follow this route on the grounds of cost and speed (the Prospectus Directive makes rights issues very onerous to implement). What really annoys investors though is when the placing is made at a discount to the recently prevailing market price which happens much too frequently. This enables the new investors to pay less for shares than other people have paid recently in the market, and surely the market price is a fair determinant of the value of any company?

Ideagen (LON:IDEA) , a company selling compliance application software which we have covered in our past newsletters, announced a placing this morning. But in this case it was at a slight premium to the last mid-market closing price. In addition, the placing is being made primarily to pay for an acquisition which looks to be both complementary to their existing businesses and not expensive (at about 5 x EBITDA and 1 times revenue). However it will result in the newly placed shares taking 33% of the issued share capital after the placing, i.e. 33% dilution.

Private shareholders may wish to consider whether they wish to maintain their interest in the business by buying more shares in the market as even though the acquisition may generate more earnings for the new combined group, there is often a temporary weight of possible sellers as those acquiring shares in the placing may choose to sell some if the share price moves rapidly up or down. One never knows whether they are long term holders or not.

ShareSoc would of course prefer to see the whole process simplified so that all shareholders can participate – why should existing shareholders who have simply bought shares in the market with possibly limited information available to them, require more information to an exhaustive degree when being issued with new shares? It surely does not make sense.

Posted by ShareSoc at 15:32, December 17 2012.

Orchid Developments Group wind-up petition generates opposition

Orchid Developments (LON:OCH)  is a Bulgarian focussed property company, listed in the UK on AIM, but registered in the Cayman Islands. The company was running out of cash and in September the shares were suspended because they had failed to file interim accounts, the explanation being that a fundraising was pending. Subsequently they did make an open offer to shareholders to refinance the business by raising £2.1m and capitalising £0.67m of fees payable to Bellport – a management services company to which fees for the services of the two principle executive directors, Guy Meyohas and Ofer Miretzky, are paid. Those two directors and Bellport are seen as a “concert party” and because of the terms of the open offer and their proposed take-up of shares, that group would have ended up owning 64% of the shares, effectively giving them control.

As with Inland Homes, and Conygar, two other small property companies we have commented on in the past, the amounts payable to the executive directors seem questionable given the historic trends and financial position of the company.

On the 14^th December shareholders voted down the proposed placing at an Extraordinary General Meeting – only 16% of votes were voted in favour of Resolution 1 which was the waiver on the requirement under the Articles for such a group of shareholders to make an offer for the company. As a result Shore Capital (the company’s Nomad and Broker) resigned with immediate effect and it was advised that Bellport would be filing a winding-up order immediately. Incidentally Shore Capital seems to come to our attention quite regularly as the Nomad/Broker of companies where shareholders are unhappy (Lees Foods, Lighthouse Group, Solo Oil recently for example).

Of course the Bellport connection also suggests that the two principal directors are a party to pursuing this winding-up, but they have not apparently yet resigned as directors, despite there being an obvious conflict of interest.

On the last published financial figures (at mid-2012), the company had a substantial surplus of assets over liabilities with shareholders’ funds (net assets) of €71m but with a loss of €3m for the half year (profitable in the previous year). This company is far from worthless if you believe the accounts, but the market cap when last traded was only £3.5 million. But any administration or wind-up is usually very prejudicial to the interests of shareholders, and often results in someone acquiring the assets quite cheaply. So although shareholders might not oppose an orderly disposal of the assets, surely it would be wiser if the company (and the shareholders) looked for a buyer of the assets of the business and opposed the wind-up.

Shareholders who wish to be put in touch with a “shareholder action group” that is being formed by concerned shareholders should contact ShareSoc. Likewise anyone who might have an interest in acquiring property assets in Bulgaria.

Posted by ShareSoc at 15:40, December 18 2012.

Reinvigorating AGMs, because they surely need it.

Not many people personally attend AGMs, and institutions very rarely do so. In addition the English are often too shy to pose questions or to tackle the board on contentious matters. As a result, many people consider them a moribund institution even though there is an enormous amount one can learn from them. Also of course, the directors can gain a lot from talking to their shareholders if enough turn up.

But today was a good example of the problem. For the second year running, I appeared to be the only ordinary shareholder present at the AGM of dotDigital (LON:DOTD) (a full report is present on the ShareSoc Members Network as we consider it a service to members to report on such meetings).

The Corporations and Markets Advisory Committee (CAMAC) of the Australian Government have recently produced a Discussion Paper on “The AGM and Shareholder Engagement”. The Australian market arrangements and company law are very similar to the UK. See the Publications section of this web site: www.camac.gov.au/camac/camac.nsf for a copy. Section 6 entitled the “Future of the AGM” is particularly interesting.

For example, they discuss whether votes should be delayed after an AGM so that discussion and debate at it could be known to shareholders not attending, before they vote. An interesting thought, although it might discourage actual attendance and not improve appropriate voting unless some reporting of the meeting takes place.

They also discuss options for change such as web-casting AGMs, and allowing on-line voting while they take place. At the extreme, this might support scrapping a physical meeting and having a solely virtual meeting, or a hybrid of the two. The key surely would be to maintain the spontaneity and debate that happens at good General Meetings (such as at Victoria recently where there were contentious issues), while improving those that are rather boring at present.

Another issue that CAMAC raises is why not support direct voting? An oddity at present is that if you are unable to physically attend a meeting, you have to appoint a proxy to vote for you. Why not permit direct postal or electronic voting? The proxy system is surely an anachronism which is a hangover from the days when there were relatively few shareholders in public companies, most shareholders attended AGMs, and it was expected your proxy would also attend. This is of course an example of how company law simply no longer reflects the reality of the real world, and even less so with nominee systems obstructing direct representation.

I hope to write some more on this topic for the next ShareSoc newsletter because it is surely an important subject for debate among investors and it would be good to get this on the political and government agendas in the UK. If you have any views on the matter, please let me know.

Posted by ShareSoc at 13:27, December 21 2012.

Insolvency law – is it fit for purpose?

There has been quite a lot of public comment on the events at Comet, the retail electrical chain, and the Government has announced an inquiry into events at the company. Comet went into administration after a rather odd sequence of events. OpCapita, a private equity firm, bought the Comet business from Kesa for a nominal £2 and a dowry of £50m after the company had been consistently loss-making. A vehicle used to make the purchase is called Hailey Acquisitions Ltd who then proceeded to charge the business significant amounts for arrangement fees, monitoring fees and interest. In addition as they are secured creditors, they may receive a substantial proportion of the assets remaining after liquidation (the business has been closed down), whereas other creditors such as property landlords and HMRC (for unpaid taxes) are unsecured creditors. There are suggestions that the business never looked like it was being revived by the new owners, although whether anyone could have made a go of a primarily shop-based retail operation when most people are buying electrical items on the internet these days is not clear.

There have of course been past examples where the “rescue” of a well known business in difficulties by a group of “white knight” investors using complex arrangements turned out to be more in their apparent interests than that of the business, and while it ultimately failed, they came out ahead. Rover was such a case where it took years to unravel what had happened. We will have to wait and see what actually happened at Comet, but it may be a long time, if we ever do.

In response to a question on the subject of Comet in the House of Commons, Vince Cable suggested we have one of the best insolvency regimes internationally but admitted “there may well be better ways of handling insolvency”. He suggested the American Chapter 11 system may be worth looking at.

Unfortunately the Government has steered clear of reforming insolvency law in the past even though such processes as “pre-pack administrations” have been the subject of numerous complaints (see previous ShareSoc blog posts on that topic). One surely has to ask if insolvency law, which is exceedingly complex, is designed more in the interests of insolvency practitioners, banks and smart investors rather than the employees and ordinary trade creditors (many of them smaller businesses or individuals) of businesses in difficulty.

Certainly the Chapter 11 system seems to have many advantages in maintaining viable businesses and hence protecting jobs without the abusive practices inherent in the pre-pack system which is claimed to do the same.

It would surely be wise to consider this whole area again.