FRC Seminars, Lookers Results, Caparo Judgement and Autonomy Case

I attended two seminars organised by ShareSoc and UKSA with the Financial Reporting Council (FRC) yesterday (24/11/2020) and the day before. The first session was about the “ARGA transformation”, i.e. the steps being taken to improve the audits of companies and the reporting of accounts following the Kingman review two years ago. ARGA stands for Audit, Reporting and Governance Authority which will be the new name for the FRC.

Before reporting on the meeting, it’s worth noting the latest example of how audits have failed to disclose substantial errors in accounts, including fraud, in the case of Lookers (LOOK). In their announcement on Tuesday they made it clear that profits had been wildly overstated for some years and the balance sheet was likewise overstated. To quote from the announcement: “A total of £25.5m of non-cash adjustments are necessary to correct misstatements in PBT over a number of years” and “Adjustments reduce  PBT by £10.9m in 2019 and £7.2m in 2018 with the balance cumulatively decreasing PBT by £7.4m in 2017 and earlier”. Auditors Deloitte have resigned.

It is a regular occurrence that the published accounts of public companies are subsequently shown to be wrong and that fraud goes undetected. The audit process which investors rely on to enable them to have confidence in the accounts on which they are basing investment decisions is clearly regularly failing.

The FRC seminar was presented by Sir Jon Thompson, their new CEO following a wholesale shake-up of management, and Miranda Craig, Director of Strategy and Change. They reported on the progress to implement the required changes, many of which require changes to legislation. They hope to get those implemented in the second half of 2021 with ARGA becoming live in 2022. But none of this is certain as it depends on Government co-operation and priorities. There will also need to be another consultation round on the details of the proposals.

The Kingman review proposed joint audits be introduced but the Government has decided against that but managed shared audits are being considered so as to give smaller audit firms some involvement in bigger audits.

ShareSoc Director Cliff Weight asked a question about the Caparo legal judgement and the problem of people holding shares in nominee accounts not being “members” of a company.  I followed up with some points on Caparo, which Sir John Thompson did not appear to know much about and assigned a response to someone else.

Let me explain why this issue is so important and how the Caparo legal judgement undermined the duties of auditors.

Investors in the stock market purchase shares on the basis of the published accounts of companies being a fair view of their financial position. Before the Caparo legal judgement in 1990 it was widely assumed that auditors had a duty of care to shareholders – after all what was the purpose of the audit other than to provide reassurance to shareholders? Historically that was why audits were introduced. See this ShareSoc blog for more information https://www.sharesoc.org/blog/regulations-and-law/audit-quality-caparo-judgement and there are more details of the legal case on Wikipedia.

This judgement effectively meant that no shareholder in a company could sue the auditors for incompetence or breach of duty, only the company could. But that rarely happens, when it is the shareholders that have typically lost money as a result. In fact some auditors have claimed that even the company does not have a claim if the reported accounts were false because it might not necessarily have affected what actions the company took. Sometimes when a company goes into administration the liquidators might sue, as in the recent example of Patisserie (CAKE) but there is no certainty of success or any pay-out to shareholders.

The failure to make auditors responsible financially to investors relieves them of a big financial incentive to do their work properly and to identify false or fraudulent accounts.

I put it to Miranda Craig that all that was required to fix this problem was a simple Act of Parliament to overturn the Caparo judgement. She suggested they did not have the powers to implement this but that is a weak excuse.  They could surely suggest to the Government that such an Act be introduced as it’s perfectly practical. It just needs to reinstate the duty of auditors to shareholders and overturn the somewhat perverse decision in the Caparo judgement.

Another attendee at the seminar raised the issue of the auditors being able to limit liability to the company by contractual means which is another issue that needs tackling.

The second seminar was about “Enforcement”, presented by Claudia Mortimore and Jamie Symington. There has been growth in the enforcement team – from 9 staff in 2012 to 54 now. Certainly enforcement has been more active but they are still hampered in some cases by limitations on their powers – for example they only have powers over members of regulatory bodies whereas many company directors are not such members (even finance directors or chairs of audit committees). There are plans to change this.

They have identified two main issues from past audits: 1) A failure to plan and perform audits with professional scepticism; and 2) Failure to obtain sufficient audit evidence.

Enforcement does seem to be improving, but there are still some issues as Robin Goodfellow pointed out (a failure to communicate with complainants over FRC findings or during investigations).

There is also an issue that fines on audit firms or partners are still not enough to discourage poor behaviour or match the losses incurred by shareholders due to incompetence or inadequacy. For example, one of the cases mentioned in the seminar was that of Autonomy. Deloitte was fined £15 million in September over their audit work for the company. But Hewlett-Packard (now HPE) claimed for £3.8 billion over their losses resulting from the acquisition of Autonomy, i.e. 250 times what Deloitte were fined!

Altogether these were somewhat disappointing seminars for those of us looking for vigorous action and speedy revolutions in the FRC. I am not convinced the culture of the FRC has yet changed, with progress being slow and decisive actions to improve audit standards not being implemented, although others do think there is progress being made. Improvements are being implemented but not nearly as quickly as I would like and auditors are still being protected from the worst impacts of incompetent audits. The fines that are issued are still too low – for example Deloitte registered a profit of £518m for the year ended May 2020 so they probably won’t worry too much about a £15 million fine.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Preventing Fraud in Accounts – FRC Tightens Audit Rules

There have been repeated examples of the accounts of public companies being fraudulent in recent years. Wirecard was probably the latest and biggest example. I have seen examples of such misdeeds twice in my investment career in my own holdings although losses have been minimal in both cases, the last example being Patisserie (£95 million missing from their accounts). But I have avoided a lot of others where the losses to some investors have been enormous. There have simply been too many such cases for investors to avoid them all however careful you are in analysing the accounts of companies. There can often be hints that something is wrong, but in many cases the fraud is so well concealed it is very difficult to detect. In both the examples I mention, the cash that was claimed to be on the balance sheet was not there, which should be a simple thing for auditors to verify.

The Financial Reporting Council (FRC)) have announced that they are tightening up the rules followed by auditors to impose more responsibility on them for detecting fraud. In the past it was unclear that auditors had any responsibility to detect fraud and some have even denied it.

The FRC claim they are making the auditor’s obligations clearer – specifically to try and identify fraud. The FRC is running a public consultation on the proposed new audit standard which you can read about here: https://www.frc.org.uk/news/october-2020/consultation-on-revised-auditing-standard-for-the

It makes for interesting reading and it actually spells out the kind of problems that auditors should be looking for. In general the proposed changes to the audit standard make sense.

Will it solve the problem of too many frauds altogether? No for three reasons:

  1. Because audit work is bid for by audit firms, while companies pay their fees, there is a strong incentive by both parties to keep the cost of the audit as low as possible. This brings pressure to bear to not do more work than is absolutely necessary.
  2. Auditors cannot challenge management too much if they are going to retain the audit brief, and there is a tendency to build a cosy trusting relationship.
  3. Auditors are protected from being sued by shareholders for incompetence by the Caparo legal judgement, and their liability even to the company can be undermined by the contracts they require signing. In other words, the legal framework under which they operate enables them to escape responsibility for incompetence.

How might these problems be solved? It has been suggested that auditors be appointed by an independent body rather than by the directors of a company. Perhaps another solution might be to set up an independent fund that rewards auditors when they identify and report fraud, with big bonuses for the individuals that do so. That would give them a strong financial incentive to discover it.

That would provide a carrot. But the stick needs to be change in the regulatory framework and the law so that auditors cannot escape financial penalties when they do not do a competent job. A simple change would be to require audit contracts to be based on a standard set by an independent body such as the FRC and not written by auditors as at present.

I hope readers will respond positively to the consultation because I can see many objections from audit firms to the imposition of new obligations, however reasonable they appear to investors.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Regulating Consumer Investments and Company Register Reform

 The Financial Conduct Authority (FCA) have launched a consultation on the Consumer Investment Market. They consider it a priority to reduce the harm that many consumers suffer from fraud in this sector. The FCA has this to say:

“We have made significant improvements to this market to protect consumers. But there are over 5,000 financial adviser firms and more than 27,000 individual advisers acting as intermediaries between the consumer and their investment. Dominated by small firms, these complex chains of interdependent products and services – some of which are beyond our regulatory remit – make it easy for bad actors to ‘hide’ and challenging for us to oversee. The consumer investment market is not working as well as it should. Too often consumers receive lower returns than they should because of unsuitable products with high fees. Too often there have been scams and scandals in this market leading to consumer loss. Too often consumers leave their savings in cash because they don’t have confidence in the alternatives. That’s why we have made Consumer Investments a priority in our current Business Plan”. They also say:

“Some of the most serious harms we see relate to investments outside our regulatory perimeter and online scams, many based overseas. We have limited powers and capabilities in this space, in particular in our ability to deal with online promotions”. This is now a major problem that the FCA has been particularly poor at dealing with as Mark Taber regularly points out.

The “Call for Input” document only has 38 complex questions so I suspect they are unlikely to get many responses from real consumers, but those interested in financial markets may care to read it. See here:  https://www.fca.org.uk/publications/calls-input/consumer-investments

The Government BEIS Department consulted previously on modernising Companies House who maintain the register of companies. The Government’s response to the consultation has now been published. You can read it here: https://www.gov.uk/government/consultations/corporate-transparency-and-register-reform

Company registration, and the identification of company directors is clearly a very essential element in preventing frauds of all kinds, but has been woefully inadequate in the past. The identify of directors is not checked and Companies House even has very limited abilities to query new applications. So you could probably set up a company called Mickey Mouse Ltd with the sole director named as Mickey Mouse. Indeed I did check to see if there was such a company registration. Yes there is a company of that name, although the sole director’s name is different.  

The report even says: “There are benefits to the UK’s fight against crime: these reforms will increase the accountability of those few that transgress. As noted, the volume of economic crime in the UK is immense and growing. It accounts for almost one third of all crime experienced by individuals. The Home Office estimates that the social and economic cost of fraud to individuals in England and Wales is £4.7 billion per year and the social and economic cost of organised fraud against businesses and the public sector in the UK is £5.9 billion.

We will be able to trace and challenge those who misuse companies through the improved information on those who set up, own, manage and control companies. In partnership with others, our improved analytical capacity will use this information to detect suspicious activity earlier and hold those responsible to account”.

The recommendation to tighten up on the identities of directors has been generally supported so that is likely to be progressed. The ability to suppress some personal information will also be enhanced to improve security over that.

In general I suggest company directors and shareholders should welcome the proposals as a step forward in modernising Companies House, but you may care to review the details.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

FCA Seminar and Property Funds Rule Change

The Financial Conduct Authority (FCA) is consulting on a rule change for open-ended property funds. The problem of such funds holding illiquid investments in direct property are well known. If investors want to sell when property goes out of favour, the funds simply cannot sell their underlying holdings fast enough. It can take months to do so when investors in the funds expect their cash immediately. Or as the FCA puts in, there is a mismatch between the liquidity offered to investors in the funds, and the liquidity of the fund’s holdings.

This problem has resulted in the funds having to be “suspended” or “gated” to stop redemptions, and many still are after the March crash this year.

The FCA’s solution is to require investors to give notice before they can get their cash – potentially up to 180 days. But this would probably mean that investors would not be able to hold such funds in ISAs, unless their rules are changed. Needless to say, investors who currently do so are not going to be best pleased as they would have to sell them.

This is a very simplistic solution to a long-standing problem, and to my mind may not solve the problem as disposing of property can take longer than 180 days if you want to obtain a fair value for it. Permitting illiquid investments of any kind to be held in open-ended funds is simply wrong.

Such funds should be wound up, or converted to investment trusts which is surely not impossible. Meanwhile I won’t personally be responding to this consultation as I am not so daft to hold such funds, only property investment trusts.

See the FCA press release here for details: https://www.fca.org.uk/news/press-releases/fca-consults-new-rules-improve-open-ended-property-fund-structures  and for how to respond to the consultation.

Yesterday the FCA presented at a seminar hosted by ShareSoc and UKSA as a webinar. Mark Seward was the speaker from the FCA but he did not cover the above issue at all (he is responsible for “Enforcement and Market Oversight”).

He did cover the outcome of the Redcentric case where grossly misleading accounts were published. He said the investors had “purchased a lemon”. They did not fine the company, but the company is compensating the shareholders affected and 3 former executives are awaiting trial. He explained the reasons for the FCA’s actions which seemed reasonable to me (I never held the shares though – those more familiar with the case might have a different view). He also mentioned the Burford case and the legal decision re disclosure of trading data and made some uncalled for derogatory remarks about the comments made on it by some ShareSoc members.

He covered the emergency measures introduced by the FCA for the Covid-19 epidemic which he said enabled the UK markets to raise 3 times more capital than any other European market in the first half of the year. But Mark Northway raised the issue of the problems of private investors participating in these fund raisings. I would also have liked to see the issue raised of companies not providing access to AGMs nor any other means for shareholders to talk to the directors while the epidemic rages.  

Another issue discussed was the outright refusal of the FCA to provide any information on the progress of an investigation. This is exceedingly frustrating for investors as it means after a complaint is made, there is no apparent action for many months if not years. When many of the facts are reasonably well known and in the public domain already (as in the Redcentric case, or in other cases such as those of Globo or Patisserie) this can appear quite unreasonable.

Mark Seward suggested that no regulatory body (for example, the Police) discloses anything about their investigations, partly because the evidence might disappear if they did. But this is simply not true. The Police often inform victims of crimes about the progress of a case, sometimes albeit on a confidential basis. Victims and the police are also entitled to follow the “Code of Practice for Victims of Crime” published by the Government which the police have to adhere to (but not the FCA who are specifically excluded for no good reason).

The seminar was not altogether a waste of time, but could have had a much sharper agenda.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Learning Technologies and Ten Entertainment AGMs

I “attended” the on-line Annual General Meeting of Learning Technologies Group (LTG) today. This was run using the GoToWebinar software. There did not appear to be many people on the call as only one shareholder asked a question. Perhaps this was because you had to register for the event in advance using your Investor Code – which only those on the register would have, not those in nominee accounts. This is deeply unsatisfactory.

The meeting was initially chaired by Andrew Brode who spoke some platitudes before handing over to the CFO Neil Elton. Brode’s comments were the same as published in an RNS announcement this morning I believe but he did thank shareholders for their support of the recent share placing.

Mr Elton reviewed the financial results from last year and said that the company had achieved compound annual growth of 61% per annum since listing. Net debt at the end of May was £4.5 million, and there was strong operating cash flow. The return on capital employed increased to 16.4% last year. But the final dividend payment had been delayed.

CEO Jonathan Satchell then covered the progress on corporate governance. He mentioned the “measures taken to shore up the balance sheet” which is what I suggested the placing was really for in a previous blog post. He suggested that was because the economic crisis could get much worse later this year.

On governance he said they go further than the AIM regulation requirements. All directors are up for re-election and there is a vote on remuneration. [Comment: these are certainly good points]. He also discussed diversity in the workforce and new initiatives in this area will be announced.

The company has increased the number of products sold per client. They have only 10-11% exposure to Covid affected sectors. They are currently bidding for a “gargantuan” contract for the Royal Navy. They expect a result before the year end.

He then discussed the recent LMS acquisition – they have great hopes for the future of this business which they hope to make a market leader by adding other similar acquisitions.

He discussed the recent share placing. The reason for it was that they did not feel they could use surplus funds for acquisitions as there may be a liquidity crisis later this year.  He expected the core business to return to growth next year.

Questions were then invited but as none had been received at this point, we went to the formal business with votes on a poll. The poll counts were then read out, as all proxy votes has previously been received. All resolutions were passed but I noted that two directors received relatively low votes in favour. That include Andrew Brode with only 90.8% FOR.

Questions were then invited and one shareholder suggested that private shareholders could be included in placings by using such organisations as Primary Bid. Andrew Brode responded that the way it was done was based on advice from their joint brokers. Shareholders could buy shares in the market afterwards at a tiny premium, he suggested.

[Comment: Primary Bid is one solution but it is far from ideal with shareholders being given minimal time to take up any offer and possibly being downsized as well. It is also only fortuitous that the shares could be picked up for near the placing price in the market later. There did not appear to be any real urgency to get the placing done so an open offer alongside should have been done. Regrettably there are too many such placings of late].

This “virtual” AGM worked reasonably well, but you could not see who else was attending and there was no real interaction with shareholders present. Also Andrew Brode’s speech was difficult to hear at times. This was not a good alternative to a physical AGM.

Note: the above report may be inaccurate because it’s even more difficult to make notes of a virtual meeting than it is in a physical one. Sometimes it was not even clear which director was speaking for example.

Another recent AGM of an AIM company was that of bowling alley operator Ten Entertainment (TEG) for which I hold all of 50 shares. I sold almost all my holding before they had to close all their venues. This was another company that did a placing recently but it is hardly surprising in this case that it was required to keep the business afloat until they can get back into operation.

I don’t think this company even offered virtual attendance at their AGM so only the poll results were subsequently announced. They collected over 20% of votes against both the Remuneration Policy and Remuneration Report and two directors including the Chairman also collected substantial votes Against. The company is to review its remuneration policy which I certainly did not like when I looked at it.

Virtual and Hybrid AGMs, and a solution

I have been discussing with other ShareSoc members how virtual and hybrid AGMs should operate – indeed how AGMs should generally function in future as it is quite possible that virtual or hybrid options may become the norm even after the epidemic has passed. For instance companies such as TEG are changing their articles to permit them in the long term even after the temporary authorisation to permit them has lapsed.

But it is clear that there are good and bad practices while attendance at a physical AGM is still clearly advantageous so it would be a shame if that is excluded in future. For example it gives you the opportunity to have informal discussions with directors before and after the meeting as well as with other shareholders which you can never do at virtual AGMs. It also gives some of us the rare opportunity to get out of our home offices – we are all suffering from cabin fever at present!

One somewhat archaic practice that is likely to disappear is the “show of hands” vote. This was always useful and appreciated by shareholders because it firstly allowed AGMs to be concluded rapidly if there was no significant opposition to resolutions, and secondly it allowed you to easily see the overall opinion of shareholders at the meeting. If there was any doubt of shareholders views, a poll can be called by the Chairman, or by shareholders. A poll often means that the vote outcome is not declared until much later – too late to ask about any opposition. If that tactic is used I always ask the question in the meeting of “were there any significant proxy votes against any of the resolutions” as the proxy votes are known well before the meeting.

But with hybrid meetings (those where a physical meeting is combined with a virtual one), I can see a number of practical difficulties with allowing a show of hands vote (and checking who is voting), so I think that will go the way of the dinosaurs.

I suggest also that presentations to shareholders, and discussion thereon, should preferably be separated out into a previous virtual event – sometime after the Annual report is issued and Notice of the AGM has been issued but before the proxy vote deadline. This would enable shareholders (and others as such as non-shareholders and nominee holders) to become informed before they vote. The formal AGM with voting on a poll could then be held later (as a hybrid meeting).

Does this idea make any sense to readers?

But it is clear that it would help to standardise the actual process for virtual meetings and the software that might be used for them – or at least to those that can support the facilities that are needed.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Why the FCA Did Nothing About the Lloyds TSB Abuse

Those who were Lloyds TSB shareholders back in 2009 when they merged with HBOS to form Lloyds Banking Group (LLOY) thought it was bad deal at the time and it certainly turned out to be so. HBOS had many dubious loans to property companies and when the banking crisis arose they were in deep financial difficulty. There seemed very little benefit in the merger for Lloyds shareholders

Subsequently a legal action was launched by the disgruntled Lloyds TSB shareholders which was lost in the High Court in late 2019. I wrote the following to the Financial Conduct Authority (FCA) soon after:

“I refer to the recent judgement in the High Court in the case of SHARP and Others v BLANK and Others (the case concerning the takeover of HBOS by Lloyds TSB). Although the judge in the case rejected the claim by shareholders in Lloyds, he made it clear in his judgement that there were significant omissions from the prospectus that was issued at the time.

Specifically he says in his Executive Summary: “But I consider that the Circular should have disclosed the existence of the ELA facility, not in terms such as would excite damaging speculation but in terms which indicated its existence”; and “Likewise, I consider that the board ought to have disclosed the Lloyds Repo. The board assumed that because at the time of its grant it had been treated by the authorities as “ordinary course” business that provided an answer to all subsequent questions. But whether it should be disclosed in the Circular as material to an informed decision was a separate question. The Court must answer that question on an objective basis. The size of the facility, the fact that it was extended in tight markets, the fact that it was linked to the Acquisition and was part of a systemic rescue package showed that this was a special contract which ought to have been disclosed”  (see paragraphs 46/47 of the Executive Summary which can be obtained from here:  https://www.judiciary.uk/judgments/sharp-others-v-blank-others-hbos-judgment/

There were also possible other omissions from the disclosures which the judge did not consider but the above does provide prima facie evidence of a breach of the Prospectus Rules.  The directors of the company (Sir Victor Blank and others) would certainly have been aware of this funding and failing to disclose it was negligent.

Investors in Lloyds TSB (I was one of them) were misled by these omissions and the subsequent outcome was financially very damaging to those investors.

I suggest your organisation needs to look into these matters as a breach of the Prospectus Rules surely is a matter that makes the culprits liable to sanctions under the Rules and there is no statute of limitation in regard to these matters.”

Their response after 5 months delay can be summarised as follows:

  1. The Lloyds Circular was subject to the Listing Rules, not the Prospectus Rules. The FSA approved the Lloyds Circular under those rules.
  2. In the Judgement by Sir Alastair Norris he did not consider whether they breached the FSA rules.
  3. We will not be opening an investigation into these allegations as we are time barred from taking enforcement action (there is a 2-year limit for enforcement action).

In summary therefore, the shareholders were unable to obtain redress by civil action and the FCA proved to be toothless to deal with this matter also. It is very regrettable that the protection that shareholders believed they had against the abuse of directors not acting in their interests proved to be imaginary.

Shareholders were not given all the information to which they were entitled and that fact alone merited action by the FCA. But they have declined to pursue it. Considering the similar case of the Royal Bank of Scotland Rights Issue in 2008, it is very clear that shareholders should not rely on what is said in prospectuses or circulars.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

The New Corporate Insolvency and Governance Bill

The Government has introduced the Corporate Insolvency and Governance Bill into Parliament. This is quite an important piece of legislation for share investors and for property investors. Insolvency practitioners will also be interested as it makes substantial changes to that area. It’s had very little media coverage though as the news channels are swamped by coronavirus news, debate over Dominic Cummings breaking the lock-down (or not depending on your point of view) and Brexit news.

The Bill is being “fast tracked” through Parliament as it is considered urgent. Some of the measures in the Bill cover practical problems arising from the epidemic crisis. Some are temporary but others are permanent.

As regards insolvency, the Bill introduces greater flexibility into the insolvency regime. For example, it provides greater powers to ward off creditors and enable directors to escape personal responsibility if they continue trading. It provides a “moratorium” to facilitate a rescue of a business via a company voluntary arrangement (CVA), or a restructuring or fund raising as opposed to it going into administration. The directors can remain in charge of the business while a restructuring plan is put in place, or a scheme of arrangement decided upon. A “monitor” (a licensed insolvency practitioner) has to oversee the process however and give consent to various matters.

It will provide more flexibility for companies in difficulties, while complicating insolvency law, which is complicated enough already. It also includes provisions for companies to ward off winding up petitions during the epidemic crisis which have apparently been used lately by landlords to get rent paid after a “statutory demand” has been issued. In addition while in a moratorium, the company is protected from termination of supply agreements.

In summary this new “moratorium” facility should be a big advantage to companies that are in financial difficulties, and may better protect the interest of shareholders than the existing provisions in insolvency law. Companies in difficulties are too often forced into administration where ordinary shareholders typically receive nothing when a temporary “stay of execution” might enable them to survive and subsequently prosper.

General Meetings

Another aspect of the new Bill are provisions to allow companies to hold General Meetings electronically. Investors will already have seen companies only permitting two shareholders to attend their Annual General Meetings because of the restrictions imposed on public meetings by the Government. The Articles of most companies do not provide for electronic meetings at present.

The new Bill enables any company to use an electronic general meeting, or a hybrid meeting (i.e. some people physically present and some accessing it electronically). Companies can also delay their AGMs. These provisions are only temporary. Companies can also delay their account filings.

The Bill gives companies the right to run meetings as they see fit. For example it says: “The meeting need not be held at any particular place; The meeting may be held, and any votes may be permitted to be cast, by electronic means or any other means; The meeting may be held without any number of those participating in the meeting being together at the same place; A member of the qualifying body does not have a right— (a) to attend the meeting in person, (b) to participate in the meeting other than by voting, or (c) to vote by particular means.”.

This may be acceptable in the short term, during the epidemic crisis, but I have suggested to the ShareSoc directors that the organisation should draw up some recommendations for how “virtual” or “hybrid” meetings should be held in future. The experience to date of such meetings is very unsatisfactory, with answers to questions not being given at the meeting for example. Not having the interactivity of a physical meeting with at least some members present is also a severe disadvantage.

Some bigger companies have already updated their Articles to permit such meetings but a recommended set of Articles should also be published that do not simply give the directors the power to run such meetings as they see fit.

For more details of the Bill’s provisions, see https://services.parliament.uk/bills/2019-21/corporateinsolvencyandgovernance.html.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 © Copyright. Disclaimer: Read the About page before relying on any information in this post.

Burford Capital Share Trading and Why No Transparency?

Burford Capital (BUR) was affected by a shorting attack from Muddy Waters (Carson Black) who have published several dossiers attacking their accounts. As I have said before, I have never had any interest, long or short, in the shares of that company but I have publicly questioned the business model, their corporate governance and the prudency of their accounts. But other investors take a different view of the company.

Burford have alleged that there was some manipulation of their share price taking place at the time of the shorting attack, i.e. market abuse by such methods as “spoofing and layering”. They went to court to force the LSE to disclose the share trades so that they could determine whether this was in fact the case and to identify who might have been doing it. The application was supported by a joint letter from ShareSoc and UKSA.

The High Court rejected the application on a number of grounds. For example because the FCA and LSE had already reviewed the matter and could not confirm the allegations.

ShareSoc director Paul de Gruchy has now published a blog article which covers the judgement. See: https://www.sharesoc.org/blog/regulations-and-law/slave-to-the-algorithm-burford-and-the-importance-of-maintaining-confidence-in-a-broken-system/

It is very good analysis of the problem of identifying market manipulation when the market is dominated by high frequency trading. For example it says: “An ordinary investor may wonder what strategies could be revealed by releasing the trading data in relation to a single company on two days. It appears that there is a genuine fear that “algorithmic” trading companies would have their secrets exposed by this information”; and: “This may look like market manipulation, but the LSE, who have a commercial interest in maintaining the income stream provided by high frequency, algorithmic trading, say it is “legitimate”. Indeed, it is a noticeable feature of the judgment that the judge appeared unconcerned by the clear conflict that the LSE has in being a commercial business seeking to maximise revenues with its role in identifying market manipulation. A cynic might say that the difference between “legitimate” and “illegitimate” market manipulation depends on the level of fees you pay to the gatekeeper”.

The share trading all took place some weeks ago. What damage could have been done by disclosure of the trades? The Court could have imposed confidentiality conditions to avoid wider public distribution if they had a mind to do so. The fact that the FCA have given it a whitewash hardly inspires confidence either as they have been notoriously inefficient in pursuing wrong-doing in financial markets.

We do not know whether there was any market manipulation taking place and we will never know as Burford is not going to appeal the judgement. That is a shame because transparency is all important in financial markets.

Investors do want to know when market manipulation is taking place and who is doing it. As Mr de Gruchy says: “It was hard to imagine how confidence in the markets could be further eroded. This judgment has managed to do so”. I completely support ShareSoc’s stance on this issue.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

SFO Difficulties and Barclays Case

This morning the Financial Times ran a full-page article over the problems with prosecuting fraud under the headline “The legal fight over a company’s controlling mind”. This covered the difficulty that the Serious Fraud Office (SFO) has in prosecuting fraud with particular reference to the Barclays case. That arose from the escape by Barclays from involvement with Government funding after the financial crisis in 2008. They simply borrowed a pile of money from Qatari investors instead. But it was alleged that they had paid additional consultancy fees as a sweetener for the deal which were not disclosed to investors at the time.

As a Barclays shareholder at the time, I thought that it was a very wise move to avoid Government involvement as the Government seemed to be intent on taking control of the banking sector by forcing recapitalisation on the major UK banks, i.e. forcing them to issue equity or take loans on onerous terms which they certainly did with RBS and Lloyds, much to shareholders disadvantage.  It has always seemed to me that the legal case against Barclays was politically motivated from the very beginning with the objective of teaching Barclays a lesson.

Last week, the last of three Barclays defendants were acquitted. The former CEO John Varley had been previously discharged by the judge on the grounds that there was insufficient evidence and no corporate charges were brought. The deal had been approved by the board of Barclays after legal advice had been taken so the latest acquittal is hardly surprising.

But the FT article explains well why it is difficult for the SFO to obtain convictions in fraud and bribery cases even when the evidence is better because it is very difficult to identity a “directing” or “controlling” mind in large companies. The current law might have worked with small companies in times gone by but the complexities of modern corporations make it difficult to apply. As a result the SFO has tended to rely on Deferred Prosecution Agreements (DPAs) where the company pays a fine to avoid prosecution but without conceding anything. However, the individuals involved have often then been declared not guilty in subsequent trials (e.g. in the Tesco case).

It’s worth reading the FT article to see how the legal framework is such a mess in the UK. It’s also not helped by the FCA and FRC also being involved with overlapping and confusing responsibilities for corporate financial affairs.

It’s certainly makes a good case for reform. It’s worth pointing out also that the Barclays case stemmed from 2008 (i.e. 13 years ago) and it is surely unjust to have the defendants under the stress of a major prosecution, incurring very large legal costs and probably making them unemployable for that length of time when the legal case seemed to be very weak.

However much some sections of the public would like bankers who were around in 2008 put in prison, this is not justice.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Brexit – Over and Out – and Why Shareholder Votes Matter

Last night Brexit got done. We exited the EU after 47 years. Our last words to the EU bureaucrats were surely “over and out”. But we will need to resume the conversation to secure a trade deal. That still leaves room for many more arguments within the UK and with the EU.

Some people seem to think that there is a hope we might rejoin the EU some time in the future. But while the EU is dominated by bureaucrats and real democracy is so lacking in the EU institutions that seems exceedingly unlikely to me. Hope of any reform to the EU is surely forlorn.

It might be preferable to have some alignment on product and financial regulations but in the latter area the EU either follows well behind the UK anyway, or creates regulations like MIFID II that are over complex or simply incomprehensible.

One area that the EU could have been a leader in was to improve financial regulation such as on shareholder rights. They have produced a Shareholder Rights Directive but it is so badly written that it can and is being effectively ignored in the UK. Just take the area of shareholder voting and the problem of nominee accounts.

The Investors Chronicle (IC) have published an article by Mary McDougall this week entitled “Why Shareholder Votes Matter”. It shows how the nominee account system has disenfranchised most individual shareholders as they either cannot vote their shares, or it is made so difficult to do that they don’t bother.

I contributed to the IC article because I have a lot of knowledge of this area having pioneered the ShareSoc campaign on the issue and having experience of using multiple platforms over many years (see https://www.sharesoc.org/campaigns/shareholder-rights-campaign/ ).

The article mentions Sirius Minerals (SXX) which is currently subject to a takeover bid via a scheme of arrangement. A very large proportion of the shares are held by individual investors in nominee accounts but because of the voting rules on Court hearings all of them will only get one vote by the nominee operator who might not even vote at all. That’s because nominee accounts are generally “pooled” with only one name on the share register as a “Member” of the company – and that name is that of the nominee operator (i.e. the platform).

Another example that shows where votes are important is that of the forthcoming AGM scheduled for the 12th February at RWS Holdings (RWS), an AIM company. You might think that this will be a routine matter with just the standard resolutions. But not so. There is actually a resolution to waive the need for a Concert Party that might acquire more than 30% of the shares to make an offer for the company under the City Takeover Code. The Concert Party comprises Chairman Andrew Brode, Diane Brode and a Trust they control. They already hold 32.8% of the shares but as there is also a share buyback resolution that might increase their holdings, and hence trigger the need for an offer, a waiver is required. I voted against both resolutions – I always vote against share buy-backs unless there are very good reasons, and I don’t like public companies to have shareholders with more than 30%.

You can see that just a few private shareholders in nominee accounts might affect the outcome as the Concert Party cannot vote on the waiver. But will they?

Regardless I encourage shareholders in RWS to vote their shares – if you hold shares in an ISA your platform operator has a legal obligation to cast your votes.

The IC article mentions that the Law Commission is currently looking at the problems and legal uncertainties created by nominee accounts, but it also discloses that they only expect a “scoping study” on intermediated securities to be published in Autumn 2020. No great urgency there then!

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.