Tesco Legal Action – or should we just “put our hands up”?

Law firm Stewarts Law has announced that it is preparing a case against Tesco based on the losses of investors in the company from the overstatement of profits. To quote from their announcement: “The Claim will allege that directors and senior management knew or were reckless as to whether Tesco’s statements to the market were untrue or misleading and/or dishonestly concealed the true position, in breach of the Financial Services and Markets Act“. They don’t intend to await the results of the investigation by the Serious Fraud Office (SFO) which may take some years, but hope to file the case in court within six months. It is understood that the case may be financed by litigation funders Bentham Ventures.

It seems likely that the case is being backed by a number of institutional investors and it is not yet clear whether smaller investors will be able to join the action. Other legal actions are also being pursued in the USA based on similar claims.

The Editor of Investors Chronicle, John Hughman, jumped in with an editorial on Friday (28/11/2014) with a headline of “Don’t play the blame game”. He attacked these legal cases against Tesco with comments such as “I suggest shareholders grasping for money they’ve willingly put at risk is an unwarranted distraction Tesco’s new bosses could do without“. He also attacked the case against RBS which Stewarts Law is also involved in, along with a number of other law firms. He says “shareholders had plenty of reason to be wary already, and cannot blame RBS alone for the subsequent financial crisis that hit their investments so hard“. Finally he says “Sometimes we, the investors, should just put our hands up and accept that we have made a bad investment, rather than attempting to transfer the blame for our loss“.

Comment: This writer totally disagrees. There is a big difference between making a bad investment decision based on our own misapprehension of the facts, and being duped into doing so. When companies publish false information, then it is not our fault – it is that of the company and its directors. In the cases mentioned above (and the LloydsTSB/HBOS one also), the essence is that there was a breach of the Financial Services and Markets Act. In the RBS and Lloyds/HBOS cases, the claim is in respect of a false prospectus , with significant and relevant facts being omitted and being generally misleading. Is Mr Hughman seriously suggesting that we should walk away and ignore such transgressions of the law?

If investors cannot rely on published accounts (probably audited ones in the case of Tesco) or on the contents of a prospectus, then it turns investment into a pure speculation. It would undermine the whole financial system and the basis of company law if directors can publish anything without recourse if they can be shown to have misled investors.

Indeed I would suggest that the development of a system to enable such legal cases to be financed in the UK is a positive one. It would certainly ensure that in future the directors of public companies take a lot more care about what is issued in their name.

Whining about our losses is one thing. Pursuing a claim based on the law of the country is altogether another.

Roger Lawson

BG Group EGM on pay award to new CEO

BG Group – A personal view by ShareSoc director, Mark Bentley

BG Group will be holding an EGM on 15th December to consider a resolution to approve a “Conditional Share Award” for newly appointed CEO Helge Lund. Details can be found here: http://www.bg-group.com/assets/files/cms/2014Meeting_ShareholderCircular.pdf

Mr Lund’s appointment was announced on 15 October 2014, taking effect from 2 March 2015. He has served as CEO of Statoil, the Norwegian oil and gas company, since August 2004. Prior to Statoil, Mr Lund was the CEO of Aker Kvaerner for 2 years, following the merger of Aker RGI and Kvaerner in 2002, where he served in various executive roles including Chief Operating Officer of Aker RGI between 1999-2002. BG are now proposing the following remuneration package: A base salary of £1.5 million, fixed for the first five years of employment; A 30% cash payment in lieu of pension; A short term annual cash incentive target performance with a maximum payment of 200% of base salary; An annual LTIP grant with a face value on award of 6 times salary; A one-off relocation allowance up to a maximum net value of £480,000; and A buy-out of unvested variable pay (otherwise due to him under his previous contract with Statoil) in BG shares up to a maximum of £3 million. Mr Lund’s contract will provide for a 12-month notice period, with a right for the Company to make a payment in lieu of notice equal to 130% of base salary on termination of the contract (being 12 months’ salary and 30% pension payment).

On top of this already generous pay package, shareholders are now being asked to approve an additional conditional award of shares with a face value of £12 million at date of grant, the vesting of which would be based upon personal performance criteria. The shares would vest in three equal tranches on the 3rd, 4th and 5th anniversary of the date of award. On vesting, 50% of each tranche (net of such number of shares as may need to be sold to cover any tax arising on vesting) would be capable of being sold, with the 50% balance being capable of being sold half on the 6th anniversary of the date of award and half on the 7th anniversary.

The conditional allocation of shares is outside the Company’s remuneration policy approved by shareholders at its Annual General Meeting in 2014 – but which I voted against, as I already consider that excessive. The Company states that it has consulted extensively with shareholders about Mr Lund joining BG Group and the proposed remuneration package. Shareholders have ‘overwhelmingly’ welcomed the appointment, supporting the view that Mr Lund has the necessary skills and experience to lead BG Group.

Is such a massive remuneration package really justified? Firstly, Mr Lund’s 2013 total taxable compensation at Statoil is shown as NOK13.8m = £1.27m – hence it appears that the package offered by BG Group represents a huge increase on his current remuneration, at a company that is substantially larger than BG Group itself. Was it really necessary to offer such a generous package to secure his services?

It is long overdue that shareholders put their foot down in the face of such excessive awards – and pay schemes that are so complex that a PhD in mathematics is required to fully understand them. Unless we take such a stand, the trend of massive rises in top executive pay will continue, with those executives taking an ever great share of corporate profits, leaving less for shareholders and for other employees. There is no evidence that massive executive pay leads to better performance – on the contrary, the lessons of the banking crisis show that a focus on high remuneration, linked to short-term performance, leads to decision making that is not in the long term interests of shareholders. The study referenced here: http://highpaycentre.org/blog/cambridge-study-shows-that-excessive-ceo-pay-packages-harm-company-performa shows that high pay is negatively correlated with company performance.

I expressed my disquiet in person over the already overgenerous pay to BG Group Remuneration Committee chairman, John Hood at the last two AGMs – but he seems impervious to that disquiet. Perhaps that is not too surprising, when we learn that Mr Hood also chairs the remuneration committee of WPP Group, which offers the highest pay of any FTSE100 company to its Chief Executive, Sir Martin Sorrell.

I urge any BG Shareholders to vote against this “conditional share award” and, at the earliest opportunity, to vote against the re-election of John Hood as a director of the company. We cannot succumb to the blackmail implicit in the statement included in the circular that: “Mr Lund is not obliged to join BG Group if the Conditional Share Award is not approved by shareholders.”

British Empire – moving the goalposts?

Last year ShareSoc published an extensive report on the Annual General Meeting of British Empire Securities and General Trust. This is a long established investment trust which in the long term has achieved good performance figures, but in recent years has not been doing so well. Indeed our report suggested shareholders were becoming restless bearing in mind the comments of some investors at the AGM.

For example, in the year to the 30th September 2013, the Trust achieved a total return of 13.1% compared to an 18.9% increase in the Morningstar Investment Trust Global Growth Index. The Chairman noted however in the 2013 Annual Report that it was difficult to find an index that closely correlates with the Investment Manager’s investment style, so they were changing to the MSCI All Country ex-US Index.

This year the company narrowly managed to beat the new chosen index – 6.8% total return versus 5.1% for the index. The change was a good choice because the index used previously went up by 9.2%!    But they have not completely dropped use of the older index, because they still give the figures for that and another index in the latest Annual Report.  But it seems unlikely that investors in this trust will consider a 6.8% total return as particularly good when many major markets had a relatively good year.  It also seems odd to be using an “ex-US” index when investments in the USA don’t seem to be ruled out by the Trust’s investment policy, although they do seem to have few US investments at present.

Is this a case of the company and its fund manager “gaming” the indices? In addition it’s worth pointing out that the company switched from a management fee with a performance element to one without, partly on the basis that they could not find a good benchmark.

One question shareholders might like to put at the AGM on the 17th December is could the company not devise a composite benchmark that fitted their needs and stick with it?

Another unfortunate aspect is that the AGM is scheduled for 12.00 noon as last year. That means that after the fund manager has given a presentation there may be limited time left before lunch for shareholders to ask questions and debate how the performance of this company can be improved. Last year the meeting did not finish until 1.30 pm when shareholders were getting restive for lunch.

Roger Lawson

Alpha Pyrenees Trust

Two years Alpha Pyrenees Trust Ltd, a property company registered in Guernsey but listed on the London Stock Exchange, appeared to be an attractive investment. It seemed a good opportunity to invest in a European commercial property company that could take advantage of the commercial property sector upturn within Europe. The company has a portfolio of industrial properties mainly in France and with a small percentage being located in Spain.

In December 2012 the share price was 16p and the Net Asset Value was declared at 34p so in essence there appeared to be a good investment opportunity in spite of the high gearing i.e. loan to value ratio of approximately 90%.

Other aspects were a) ongoing low interest rate climate (particularly in Europe) b) the healthier commercial property market (as confirmed by a number of large agents) and c) the potential to sell some assets and reduce gearing and hence borrowing costs.

Today the share price is approximately 1p giving a market cap of £1.5m with the main influence on this being the current banking loan agreement which expires in Feb 2015. Clearly any news regarding the renewal will have a major impact on the share price given the current low level.

The company’s latest accounts for the 6 months to the 30th June declare a Net Asset Value of 12p (22.8p on Dec 2013) and an adjusted loss of £1.6M.

Some shareholders consider that the directors should have acted more vigorously and more wisely in respect of:

a) Disposing of properties in order to realise cash and reduce borrowings.

b) Managing currency hedging and loan arrangements.

c) In forecasting future market conditions to enable commercial decisions to be made that are in the best interest of the shareholders.

Shareholder Charles Jarvis is proposing that a Shareholders Action Group be formed to enable solid representation to be made at future meetings and propose board changes with a view to improving the performance of this Trust in future.

For more information or to support such a Group please contact him on charles.jarvis@gmail.com

Roger Lawson

Optimal Payments, Quindell and equity loans

A major controversy has arisen over the use by directors of loans from companies such as Equities First Holdings (EFH) which are secured against their equity stakes. The latest company to be affected is Optimal Payments (OPAY) who presented at a recent ShareSoc seminar. The share price fell substantially after comments from a well known blogger, and declined as much as 22% on the 14th November after the comments were widely circulated on bulletin boards.

A number of other public company directors have been using such loans, including Quindell (QPP). Anything associated with Quindell is viewed with suspicion by many investors and it is alleged that the loans and associated transactions in that case were presented in RNS announcements as if they were purchases of stock by the directors when in reality they were sales. Indeed today (18/11/2014) Rob Terry, the Executive Chairman of Quindell, and two other directors announced their resignations as a consequence no doubt of adverse public comment. There was also a rather devastating analysis of the past business career of Rob Terry published in  the Financial Times today. Perhaps that contributed to his resignation. It would certainly seem wise if the FCA were to conduct an investigation into the affairs of Quindell.

In the case of Optimal Payments, the original announcement was back in April when CEO Joel Leonoff declared he had “pledged” 1.5 million shares in the company as collateral for a loan. No change in his interests in the company’s shares was declared, which was reported as over 4 million. Indeed in a separate announcement on the same date it was reported that he had increased his stake by purchasing another 80,000 shares.

The key complaint though is that such loan agreements may give EFH the right to sell the shares or otherwise trade in them as title in the shares is transferred – some of this is supposition because the actual contract in the case of Optimal has not been disclosed so these allegations are based partly on other known EFH contracts.  It is common of course for lenders to take security if they lend against an equity holding, and may also therefore have the right to trade the shares to protect their interest (to effectively protect their security margin). But the suggestion is that EFH actively trade the shares transferred to them, which can move the share price and which they exploit to their profit. In addition it is suggested that the recipient of these loans can walk away at the end of the 3 year term, i.e. they don’t need to redeem them and get title to the shares back so it is disguised sale.

After the share price movement of Optimal on the 14th November, the company made a further announcement giving a few more details of the arrangement. They also issued a positive trading statement on the following Monday, plus Mr Leonoff also had this to say: “In relation to the loan and pledge agreement I entered into with Equities First Holdings, LLC, I can confirm that I entered into the agreement outside of a close period, the loan was taken for the purposes of liquidity and it is my absolute intention to repay the loan when it falls due.

Comment: whether such loans technically change the directors declared interest in a company I will not attempt to answer as this is not as simple a question as it might first appear, but if they have the ability to redeem the loan and hence have the shares revert to them, then obviously they do have some interest in them. It is also not unreasonable to allow directors to take loans secured against their equity holdings. But it is does seem that the way these loans are disclosed and the activities that may be pursued by EFH leaves something to be desired. This is surely a matter for regulators to examine, and the directors of public companies should possibly be more wary about entering into such contracts.

Roger Lawson

Progress on the Kay Review

Back in 2011 the Government commissioned Prof. John Kay to review the operation of UK stock markets. There were concerns about “short-termism” by investors, poor corporate governance in companies, excessive executive pay, lack of engagement by investors with companies, high investment charges and excessive intermediation in the investment chain. The resulting report was a very good analysis of the defects in the way the market operated and the recommendations in the report for change were generally accepted by the Government.

The Government (namely the BIS Department) has now published a review of the progress on implementation. Here’s a summary of the key points:

– The FRC have published an updated “Stewardship Code” and the Government claims there has been encouraging progress on stewardship and engagement. In addition institutional investors have created an “Investor Forum” (see  http://www.investorforum.org.uk ), although this writer suggests it’s been slow in getting into operation and having any impact. The Government promises to continue support of this initiative.

– A report of independent research into metrics and models used to assess company and investment performance by long-term investors has been published. The Government is to convene roundtables to agree some practical outcomes from this research.

– The report claims that the reforms to the governance of company directors’ remuneration (such as binding votes on pay) is having an impact, that engagement on this matter has improved and there are “signs of restraint in the terms of levels of remuneration and moves towards longer-term pay structures“. Further monitoring of this is to take place.

– There has been the development of various industry good practice and regulatory measures to improve transparency of costs and charges in the investment chain.

– There have also been improvements to the FRC’s UK Corporate Governance Code (and to the codes published by the AIC and QCA).

– The Kay Review said “The Government should explore the most cost effective means for individual investors to hold shares directly on an electronic register” and there is a commitment to continue this work bearing in mind the CSDR regulations and the requirement to abolish paper share certificates by 2025. It promises consideration of whether the system for holding dematerialised securities (namely mostly the nominee system at present in the UK) works effectively and efficiently for both investors and issuers. ShareSoc’s view is of course that it does not. It mentions the BIS Department are commissioning research to improve their understanding of how both institutional and individual investors hold their shares and whether reform would be desirable – you can guess ShareSoc’s stance on that!

One important aspect of the CSDR regulations that it highlights (see pages 31/32 of the report) is that “CSDR also mandates for the first time that direct participants in Central Securities Depositories, such as CREST, must offer their clients a choice of both individually segregated (‘designated’) and omnibus (‘pooled’) accounts on reasonable commercial terms and disclose the protections afforded and costs of each level of segregation they offer. This is intended to provide greater choice and transparency in the system of intermediated shareholdings“. That would certainly improve the lot of nominee shareholders if no better solution can be agreed, although the details of how this is implemented will be key.

In summary this is a useful review of progress and covers a wide range of areas (more than can be mentioned in this brief note), so it’s well worth reading if you have an interest in these matters.

Roger Lawson

Why should nominee operators have rights?

Following a meeting at the BIS Department where I discussed the issues associated with Part 9 of the Companies Act, and our suggestion that all shareholders (including those in nominee accounts) be on the share register of companies, I had some further thoughts on this subject.

On reflection it seems very odd to me that nominee operators (i.e. your stockbroker) have the rights endowed by the Companies Act on shareholders. Investors in nominee accounts have no such rights (voting rights, information rights, rights such as the ability to requisition meetings and other rights) because only the nominee operator has their name on the register as a “Member” of the company.   The only variation of this position that was introduced by the revised Companies Act in 2006 was the ability of the Member (i.e. the nominee operator in the case of nominee accounts) to pass on certain of those rights, if they cared to do so to their clients.

Most investors are now reliant on the goodwill, and indeed administrative efficiency, of their stockbroker to obtain even the meagre rights available. This seems most peculiar if you think about it.

Now many years ago when the Companies Act was being developed it made sense because there was an alignment between the owners of the shares who had a financial interest in the company and those on the register. In general, everyone who purchased an interest in a public company was issued with a share certificate and was listed on the register. It was obviously sensible that those who had purchased an interest got the rights mentioned above. He who pays the piper should call the tune might be a way of putting it.

But now we have the situation where the nominee operator, who is simply providing an administrative service as an intermediary in the investment chain, gets those rights instead of the beneficial owner. This is surely nonsense.  Why should the clerks be getting the rights that an investor is paying for?

In the current topsy-turvy world of stock market trading, the rights an investor should obtain have been diverted and subverted by the stockbrokers in their role as intermediaries. This is surely the key problem that needs to be tackled.  It should be the exact reverse where investors only grant nominee operators the rights arising from investment if they wish to do so (for example if they wish a “wealth manager” to act on their behalf). I would extend that to the rights to receive dividends also.

The best solution to this is of course to have all beneficial owners on the share register of a company as we have already advocated, using the designated nominee system or other arrangement and with a clear record of any assignment of rights.

That way the investors who have paid for the rights would get them, not some interloper in the investment process.

Roger Lawson