There was an interesting discussion last night at the Mello meeting on the recent announcement of a delisting from AIM of iEnergizer (IBPO). IBPO is controlled by 83% shareholder EICR (Cyprus) Ltd whose major shareholder is Anil Agarwal. So he will have no difficulty passing the required 75% votes for delisting.
Unlike common practice, there is no offer to take out the smaller shareholders at a fair price. The share price dropped precipitately on the announcement but has bounced back this morning. This seems to be on the hope that the dividends will be maintained and just one year’s dividends might pay for the shares.
I personally would not bet on that because there are many ways a controlling shareholder can take out value from a delisted company.
I have been a holder of delisted AIM shares in the past and one such case did end happily after a few years but others did not. The key is to avoid investing in companies that could put you into such difficult positions. Prevention is better than cure (the company is registered in Guernsey so should be subject to the Takeover Panel Code which might help but trying to block a dominant shareholder from doing what they want to do is very difficult).
I covered some of the warning signs in my book Business Perspective Investing. These are a couple of extracts from it:
Large or Small Director Share Stakes
Common abuses of corporate governance codes happen when one or more directors have a controlling stake in the business, i.e. own more than 50% of the equity. Even owning 40% usually means they can win any vote and effectively have control.
One danger of such large stakes is that they might be tempted to take a company private if they think the shares are undervalued or they are simply fed up with sticking to the rules required of public companies.
On the other hand, it is important for directors to have a significant interest in a company’s shares so as to align their interests with that of other shareholders. Having a substantial interest provides a powerful incentive to promote the success of the company. This particularly applies to executive directors but even non-executive directors should have a non-trivial shareholding. It’s even better if the directors acquired their share stakes by purchasing shares in the market rather than simply being a beneficiary of nil-price share option scheme awards.
Share stakes of directors should be big enough to be meaningful and to provide good incentives but not so large that they can dominate the board and other shareholders.
Company Domicile
Where a company is registered is definitely worth checking because it affects the laws under which the company operates. Even in those more developed countries with stronger traditions of protecting investors, e.g. the USA, you may find that there are differences between states. Delaware is generally viewed as more friendly to companies and their management than to their investors.
UK listed companies whose operating base is overseas may not be subject to the Takeover Panel Code (an important protection for minority shareholders), and can often create legal difficulties when wrong-doing needs to be pursued.
It is unfortunately a fact of life that some countries are viewed as protecting investors better than others. For example, when problems with Chinese AIM companies arose in recent years, many investors found it was difficult to enforce their rights in law or take action against errant directors.
In general, for UK listed companies, any domicile outside the UK adds to the risk of investing in a company. Domicile in the Channel Islands or Isle of Man is also not ideal [because company law is different and any shareholder meetings are likely to be held there thus discouraging attendance].
You might ask yourself why did this company register in the Channel Islands? There may be tax reasons why property companies/trusts do so but IBPO is not one such.
Another big question to ask is “do you trust the directors to act in the interests of all shareholders rather than just their own interests?”. Their recent actions clearly answer that question.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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Hi Roger, thanks for the write up.
I assumed there was tax benefits for IBPO to be domiciled in Guernsey so I’m surprised to hear there wasn’t.
Can you share anymore on the companies you had delist (even just the company names so I can research myself)?
Is a company sale in the future another way of potentially realizing value when holding through a delisting?
I should of heeded the warning signs with this one. Ive only been investing for 3y now and this is my first run-in with a delisting. Unfortunately not something I have seen warned of in any books or articles I have read yet either. I guess I should have read more regarding fraudulent/exploitative behaviour!
You are dead right ! I wasnt a shareholder in IBPO but watched the debacle unfold. There are a couple of large II’s with a stake (Prem Miton & AXA Framlington) who are inthere and I would have thought they would be shouting about this too. I am amazed that stockmarket rules could allow this, its the equivalent of buying a house and then finding out its down a lane that you dont have right of access to !