Bellway AGM for Early Risers Only

Should Annual General Meetings of companies be held at reasonably convenient locations and on convenient dates and times so that as many shareholders as possible can attend? Most private shareholders certainly think so. But Bellway (BWY) seem to be taking the opposite approach.

Their 2016 AGM was at the very sensible and easily achievable time of 2pm in the afternoon so all shareholders hoping to attend could actually meet the directors and ask questions. They could travel from all over the country and even have time for lunch!

But this year’s AGM kicks off at 8.30 am on Wednesday 12 December 2018 at Jesmond Dene House Hotel, Jesmond Dene, Newcastle upon Tyne NE2 2EY.

So what changed….Do directors at Bellway not want shareholders any more….maybe the huge remuneration at housebuilders and recent furore at Persimmon has made directors devise cunning plans to avoid awkward questions and attention from the media.

This anti-shareholder mindset seemed to set in last year with an early morning start at 9.30 am in Newcastle but still six shareholders made it through the doors. That must have been too many for the directors because this year they have moved it even earlier. They have moved it closer to breakfast for those who like to vote whilst eating their cornflakes.

Here’s hoping that the 2019 AGM is not held at 7.30am and that at least one shareholder will make it through the early morning fog on the Tyne !!

But it is simply not acceptable for boards to take this approach. There are too few shareholders attend AGMs already without deliberately making it difficult for them. I suggest that perhaps the UK Corporate Governance Code should be modified to include coverage of when and where AGMs should be held and other aspects of how they are run (such as the answering of questions which I covered in a previous article).

Thanks to David Stredder for notes on the above events.

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

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Autonomy, FRC Meeting, Retailers and Brexit Legal Advice

The big news last Friday (30/11/2018) was that former CEO Mike Lynch has been charged with fraud in the USA over the accounts of Autonomy. That company was purchased by Hewlett Packard who promptly proceeded to write off most of the cost – see this blog post for more information: https://roliscon.blog/2018/06/02/belated-action-by-frc-re-autonomy/. As this was a UK company, are we anywhere nearer a hearing in the UK over the alleged “creative accounting” that took place at the company and the failure of the auditors to identify anything amiss? That’s after 8 years since the events.

As I was attending a meeting held by the Financial Reporting Council (FRC) for ShareSoc and UKSA members yesterday, I thought to review the past actions by the FRC on this matter. In February 2013 they announced an investigation but it took until May 2018 to formally announce a complaint against auditors Deloitte and the former CFO of Autonomy Sushovan Hussain who has already been convicted of fraud in the USA. On the 27th November, the action against Hussain was suspended pending his appeal against that conviction, but other complaints were not. But why the delay on pursuing the auditors?

The FRC event was useful in many ways in that it gave a good overview of the role of the FRC – what they cover and what they do not cover which is not easy for the layman to understand. They also covered the progress on past and current enforcement actions which do seem to have been improving after previous complaints of ineffectiveness and excessive delays. For example PWC/BHS was resolved in two years and fines imposed are rising rapidly. But they still only have 10 case officers so are hoping the Kingman review of the FRC will argue for more resources.

It was clear though that audit quality is still a major problem with only 73% of FTSE-350 companies being rated as 1 or 2A in the annual reviews when the target is 90%. The FRC agreed they “might be falling short” on pursuing enforcement over poor quality audits. So at least they recognise the problems.

One useful titbit of information after the usual complaints about the problems of nominee accounts and shareholder rights were made (not really an FRC responsibility) was that a white paper on the “plumbing” of share ownership and transactions will be published on the 30th January.

There were lots of interesting stories on retailing companies yesterday. McColl’s Retail Group (MCLS) published a very negative trading update which caused the shares to fall 30% on the day. Supply chain issues after the collapse of Palmer & Harvey are the cause. Ted Baker (TED) fell 15% after a complaint of excessive hugging of staff by CEO Ray Kelvin. This may not have a sexual connotation as it seems he treats male and female staff similarly. Just one of the odd personal habits one sees in some CEOs it seems. Retail tycoon Mike Ashley appeared before a Commons Select Committee and said the High Street would be dead in a few years unless internet retailers were taxed more fairly. He alleged the internet was killing the High Street. But there was one bright spark among retailers in that Dunelm (DNLM) rose 14% after a Peel Hunt upgraded the company to a “buy” and suggested that they might be able to pay a special dividend next year. There was also some director buying of their shares.

Before the FRC meeting yesterday I dropped in on the demonstrations outside Parliament on College Green. It seemed to consist of three fairly equally balanced groups of “Leave Means Leave” campaigners, supporters of Brexit and those wishing to stay in the EU – that probably reflects the composition of the Members in the House across the road. You can guess which group I supported but I did not stay long as it was absolutely pelting down with rain. There is a limit to the sacrifices one can make for one’s country.

But in the evening I did read the legal advice given to Parliament by the attorney-general (see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/761153/EU_Exit_-_Legal_position_on_the_Withdrawal_Agreement.pdf

Everyone is looking very carefully at the terms of the Withdrawal Agreement that cover the Northern Ireland backstop arrangements. The attorney-general makes it clear that the deal does bind the UK to the risk of those arrangements continuing, although there is a clear commitment to them only lasting 2 years when they should be replaced by others. There is also an arbitration process if there is no agreement on what happens subsequently. However, he also makes it clear that the Withdrawal Agreement is a “treaty” between two sovereign powers – the UK and the EU.

Treaties between nations only stick so long as both parties are happy to abide by them, just like agreements between companies. But they often renege on them. For example, the German-Soviet non-aggression pact in 1939 was a notorious example – Hitler ignored it 2 years later and invaded Russia. Donald Trump has reneged on treaties, for example the intermediate nuclear weapons treaty last month. Similarly nations and companies can ignore arbitration decisions if they choose to do so.

What happens after 2 years if no agreement is reached and the UK insists on new proposals re Northern Ireland? Is the EU going to declare war on the UK? We have an army but they do not yet have one. Are they going to impose sanctions, close their borders or refuse a trade deal? I suspect they would not for sound commercial reasons.

Therefore my conclusion is that the deal that Theresa May has negotiated is not as bad as many make out. Yes it could be improved in some regards so as to ensure an amicable future agreement but I am warming to it just like the Editor of the Financial Times recently. He did publish a couple of letters criticising his volte-face when previously he has clearly opposed Brexit altogether, but changing one’s mind when one learns more is just being sensible.

Note: I have held or do hold some of the companies mentioned above, but never Autonomy. Never did like the look of their accounts.

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

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Persimmon Departure, Abcam AGM and Over-boarding

Persimmon (PSN) issued an announcement this morning saying that CEO Jeff Fairburn was stepping down at the request of the company because “the Board believes that the distraction around his remuneration from the 2012 LTIP scheme continues to have a negative impact on the reputation of the business and consequently on Jeff’s ability to continue in his role”. They are undoubtedly right there.

To remind readers, their misconceived and uncapped LTIP potentially would have meant bonus shares being awarded to Mr Fairburn worth well over £100 million, and similar large sums to other managers. Part of the potential award was later given up but even so it was the most disgraceful example of how pay has been ramped up by LTIPs in recent years. Another example at Abcam (ABC) is covered below.

Persimmon also issued a third quarter trading statement today which was generally positive. They clearly have a good forward committed sales pipeline and the extension of the help-to-buy scheme was positive news in the budget. But I am still somewhat nervous that the housebuilding market may suffer as interest rates rise. New houses are becoming unaffordable for many people despite the demand for accommodation and growing population.

Yesterday I attended the Annual General Meeting (AGM) of Abcam. This is a company that sells antibodies and other life science products/services. It is operating in a high growth sector. I first invested in the shares of the company in 2006 and it has delivered a compound total return of over 32% per annum to me since based on Sharescope figures. I am therefore happy with the financial performance of the business as I said to the board at the AGM. That’s even allowing for recent declines in the share price as analyst forecasts were reduced and general market malaise affected high-flying technology stocks. But I am very unhappy about two aspects: 1) failure to answer simple questions at the AGM, which is the second time in a week where this problem has arisen (the previous being Patisserie); and 2) the remuneration scheme and revised LTIP.

What follows is a report on the meeting, summarised and paraphrased for brevity. The meeting was held at the company’s Cambridge offices at 2.00 pm, but not even a cup of tea was offered.

The recently appointed new Chairman, Peter Allen, introduced the board and there was then a very brief presentation from CEO Alan Hirzel. He said there were between £5 billion and £8 billion of opportunities for the company to grow which they were focused on. They had doubled revenue in the last 5 years, at 11.5% CAGR. There were lots of opportunities to continue to grow the business. They are now focused on 4 areas: 1) RUO Antibodies which are still growing; 2) Immunoassays where growth was 25% last year; 3) China for RUO tools (China could be as big a market as the USA in a few years and they now have 300 people there and are putting more investment in); and 4) CP&L (Abcam Inside). He said the company needs to invest in technology and IT to achieve their growth goals.

Questions were then invited. I commented on the absolutely massive expenditure on new IT systems. They have spent at least £33 million on the Oracle implementation with another £16 million to go and the project is clearly way behind schedule. This level of costs has even caused analysts to downgrade future profit forecasts. As the former IT manager of a large public company, this seemed disproportionate to me in relation to the size of the business. However much one recognises that IT is the key to the business, this looks like a typical project that is way out of control. Who is responsible for this, are they still with the company, who are the outside contractors and what is the current state of this project?

The Chairman first responded that any answers to shareholder questions could only relate to information already in the public domain. This is simply legally wrong and I will be writing to him on this subject and the other issues below.

However Alan Hirzel did respond and accepted the IT project was over budget and covered the history of the project. It was essential to replace some of the legacy systems which were unmaintainable. Many had been built in-house (even an email system apparently) and they had multiple different HR systems in different countries. HR was the first project completed (partner Hitachi as systems integrator) followed by a communication system (part CRM perhaps – it was not clear) but finance and supply chain (manufacturing) projects were yet to be done. He said the CIO had been replaced and a new system integration partner appointed. He assured me that the project was under control now.

I asked who the new IT contractor was, at which point the Chairman refused to answer as that was not in the public domain. I complained that this was a breach of company law as questions must be answered unless there are good reasons to do otherwise. For example, answers can be refused if it is confidential information, not in the company’s interests to do so or may affect the good order of the meeting. The relevant Regulation is here: http://www.legislation.gov.uk/uksi/2009/1632/pdfs/uksi_20091632_en.pdf (see Section 12).

I can see no reason why my question could not be answered as I said to the Chairman and to their lawyer, neither of whom seemed to be aware of the Regulations or the common law principle about answering questions at general meetings. The Chairman also suggested that they could not disclose some information because they would have to issue an RNS announcement to cover it. This of course only applies to “price sensitive” information and I don’t see how knowing who their IT contractor is would be price sensitive. Very annoying and feeble excuses were being given in essence from someone who is supposed to be a very experienced company Chairman. This is the second time in a week (the other was at Patisserie) where the law on answering questions was ignored which is exceedingly annoying.

After that debate, which I will be following up including with a complaint to the FCA as it is not acceptable for companies to ignore the law, we moved on to the Remuneration Resolutions.

I said the following: “Remuneration also seems to be out of control. Although the CEO seems to be generally doing a good job, his pay last year was £1.8 million. This is also out of proportion to the revenue and profitability of the business. Not only that but his basic pay has been increased by 22%, and the maximum award under the LTIP increased from 150% to 400% of base salary. This is obscene and totally unnecessary. Such highly geared schemes promote risky behaviour as we saw with bankers in the financial crash of 2008. I always vote against remuneration policies where the maximum award under LTIPs is more than 100% of base salary and I will be doing the same here. I encourage my fellow shareholders to do likewise”.

There was a response from Louise Patten, chair of the Remuneration Committee to the effect that they could be “traduced” for underpaying rather than overpaying (“criticised” I think she meant). A review had shown that the CEO was underpaid in comparison with market rates in the sector. The LTIP was only a temporary measure as a new policy would be adopted in 3 years’ time.

I also asked whether they had received representations on the subject of remuneration from proxy advisory services and fund managers. She indicated there had been but mainly focused on other issues than the LTIP (in fact they got only 67.1% FOR the Remuneration Report, and 86.7% for the Remuneration Policy which are very low numbers). I said I had no objection to an increase in base pay if justified, but the LTIP was an example of how pay is ratcheting up and it sets a very bad precedent that other companies will follow to have a 400% bonus maximum. I have of course argued with Ms Patten before on the remuneration schemes at this company to no effect, so I chose to vote against her and her two colleagues on the Remuneration Committee but she still collected most of the proxy votes. No other shareholders in the meeting, other than my son Alex who holds the shares also, voted against the remuneration resolutions or the directors which rather demonstrates that when shareholders are happy with a company’s financial performance, they will vote for anything.

There were few other questions from shareholders at the meeting, but after the formal part had finished I asked the Chairman why he only managed to achieve 79.6% of votes in support of his appointment. He said this was because of complaints of “over-boarding”, i.e. that he had too many roles. In fact he has 4 other Chairman roles and one other non-executive directorship which I certainly think is too many and is contrary to ShareSoc’s guidelines. He argued that it was no problem and he did not agree with the current attitude of some proxy advisory services. I disagreed. The duties of directors are more onerous than ever, particularly if the job is to be done properly. Even small difficulties at a company can create a lot of extra work. One of course only has to look at Patisserie Holdings and their recent difficulties where Luke Johnson had lots of other commitments and failed to pick up what appears to be a massive fraud executed by the finance director. Peter Allen seems to think that all he has to do is turn up for a few board meetings each year, let the executive directors get on with business and do not much else. But Abcam is becoming a large company where the Chairman’s role is much more significant than that.

I voted against the Chairman anyway because I think Chairman should be familiar with company law and how to handle questions at meetings. Good ones do of course know how to answer questions without giving out sensitive information or avoiding direct answers but it is certainly not good for the Chairmen to start an argument with a shareholder in a meeting on any subject. Some Chairmen need to take a lesson in how to handle awkward folks like me who are not easily ignored.

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

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Arron Banks on Leave.EU, Smithson and Patisserie

The Andrew Marr interview of Arron Banks was all good knock-about stuff but there was no knock-out blow inflicted. Andrew Marr was interviewing Arron Banks about his £8 million funding of the Leave.EU campaign. The Electoral Commission have recently asked the National Crime Agency (NCA) to investigate the matter as they apparently do not believe his story about the source of the funding. The suggestion has been made that the funding came from Russian sources or from a company registered in the Isle of Man (Rock Holdings) which would not have been permitted under electoral law.

You can watch the full interview here: https://order-order.com/2018/11/04/arron-banks-marr-interview-full/

Mr Banks made it clear that the money came from Rock Services Ltd and strenuously denied it came from other sources. Andrew Marr suggested Rock Services was a “shell” company and that neither that company nor Mr Banks had sufficient financial resources to cover the £8 million in funding.

It is of course a simple matter to look at the accounts of Rock Services Ltd at Companies House (it’s free to do so – go here: https://beta.companieshouse.gov.uk/search?q=rock+services+ltd ).

Rock Services Ltd hardly looks like a “shell” company which is normally used to describe a company with no revenue and no assets apart from possibly some cash. Rock Services had Turnover of £50 million for the year ending December 2017 but little in the way of profits or net assets. But it did have fixed assets of over £1 million. This is hardly a “shell” company in the normal usage of the word. The “Strategic Report” says the company’s “principal business activity is that of performing a recharge function for services for the Group and other related parties”. The profit of the company is generated from service charges added to costs and salary recharges.

Aaron Banks has been running motor insurance companies for many years and is involved in a group of companies which includes Rock Services, Rock Holdings and UK registered Eldon Insurance. I vaguely recall he was involved in a company called Brightside I held shares in from 2012/2014 which was publicly listed before being taken over. The accounts of Eldon Insurance can also be read at Companies House and indicate revenue of £77 million and profits of £1.8 million in 2017. Another substantial company in the Group is Southern Rock Insurance which is based in Gibraltar. You can see a complete list of group companies and their transactions through Rock Services Ltd on page 15 of their accounts.

In summary the allegation that Mr Banks or his UK companies did not have the financial resources to make the donation to Leave.EU is not reasonable, and Andrew Marr and his researchers should have looked into the background more before making the allegations he made.

As Mr Banks said in the interview, other donations were made to the remain campaign from subsidiaries of foreign companies. Why were they not being investigated? It certainly looks like a witch-hunt to me. It would seem to be more about politics than election regulation.

Note that Companies House is an invaluable source of information on companies and their directors. All investors should be familiar with it. It can be useful in other ways – for example I recently obtained a bid from a company to provide web site development work. That was done from the email address of a company that was different to that from which they suggested would do the billing. When I looked the former company up at Companies House it had actually changed name a couple of years ago and under its latest name had got appallingly bad references on the internet. Needless to say I decided not to do business with them.

Smithson Investment Trust (SSON) is now trading at a remarkable premium to net asset value of 7.4% according to the AIC after its recent IPO. Bearing in the mind the state of the market and the fact that it can hardly have yet invested the money raised (one might call it a “shell” company), it would seem investors are putting a high premium on the name of Terry Smith and his involvement in this trust. There must be investors out there who are purchasing shares at that premium to maintain this “discount” but that seems very unwise to me when most investment trusts have historically traded at a discount. The reason for this is quite simple – investment trusts incur costs in management and administration which reduces the yield and returns on the underlying shares they hold. Investors can always buy the underlying shares directly to avoid those costs. In the recent bull market and recognition of late of the merits of investment trusts, some have been trading at small premiums but a premium of 7.4% when the company has no track record and will be mainly holding cash seems somewhat unreasonable.

As I said when reviewing the IPO, it may be best to wait and see what transpires for this trust.

Patisserie (CAKE) and the recent General Meeting have been covered in several previous blog posts. I have previously mentioned that I was not happy that Luke Johnson did not answer my questions – he ruled them out along with a lot of others. When can a Chairman refuse to answer questions in a General Meeting? It was always judged to be matter of common law that questions should be answered but that has now actually been put into a Regulation.

I have written to Mr Johnson and my letter includes these paragraphs:

  1. As regards the conduct of the General Meeting, I suggest you not only handled it badly as Chairman but that refusing to answer my questions was a breach of The Companies (Shareholders’ Rights) Regulations 2009. There are valid grounds on which you can refuse to answer questions at General Meetings but the reason you gave for not answering mine (refusal to answer any questions that might prejudice the investigations) was not a valid one.
  2. Holding a meeting a 9.00 am is also not good practice. This note published by ShareSoc (and partly written by me) gives guidance on how to run general meetings, and includes references to the law on the subject: https://www.sharesoc.org/How_To_Run_General_Meetings.pdf

If you study the aforementioned regulations, you will see that the directors can refuse to answer questions that would require disclosure of confidential information or “if it is undesirable in the interests of the company or the good order of the meeting that the question be answered”. That may be quite broad but it hardly covers the questions I posed and the answers to my questions would certainly not have prejudiced any investigations.

I have therefore asked him to answer the questions in my letter. He may have other things on his mind, but all company directors should be aware of the law, or take legal advice when required.

Shareholders should not allow directors to ignore their responsibility to answer reasonable questions.

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

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Meeting with Link Asset Services

I recently attended a meeting with Link Asset Services who claim to be the largest UK share registrar. In addition to me there were two senior managers from Link and two ShareSoc directors (Mark Northway and Mark Bentley). ShareSoc and I do of course have a long-standing interest in ensuring shareholders can and do vote their shares at General Meetings. Other matters discussed were the problems created by nominee accounts, in the Shareholder Rights Directive (SRD), in the Central Securities Deposit Regulation (CSDR), in dematerialisation, and many other issues related to shareholder’s rights. I hope that rather technical, long-winded sentence does not put you off reading this note because there were many important issues discussed.

We first discussed one of the personal issues I had raised with Link – namely the issue of paper proxy voting forms not being issued by many companies. See previous blog post on that subject at one company here: https://roliscon.blog/2018/09/20/worldwide-healthcare-trust-agm-but-no-proxy-voting-form/ . One of the reasons we are getting poor corporate governance and wildly excessive director pay in some companies is because private shareholders generally do not vote at General Meetings.

It was explained that one reason for this change is that it does actually increase the percentage of shareholders who vote. It seems if investors receive a paper proxy card, they often put it aside to deal with later but never do, or perhaps can’t be bothered to go to a post box. Link’s experience is that investors are more likely to vote when prompted to do so by email (even more so, if SMS can be used).

Link gave us some figures on proxy voting which as we already knew are astonishingly low. For shareholders on the register only 5.5% actually voted in the last year, out of 5.6 million holders. The percentage of shares that were voted was much higher at 63% but that is probably because institutional investors do vote more reliably.

The low turnout of individual shareholders I would guess is for a number of reasons. Some think they have no influence on the outcome which will be determined mainly by institutional shareholders so don’t vote except on critical events, those on the register may be long-standing holders of one or two paper share certificates, but the big problem by far now is the number holding their shares in nominee accounts where the broker does not provide an easy to use proxy appointment system. More on this issue later.

I did express an aversion to using the Link app (SignalShares) to vote but was assured it was easy to use and I would still get paper annual reports if requested. However, I have since tried to register for the app and as a Personal Crest member it’s damn difficult. It asks several questions which were difficult to answer. It not just requires your Investor Code (which will be on dividend payments, IF the company pays a dividend). But it also asks for your Crest Id, which no Personal Crest member normally ever needs to know and I could not easily find, and your Crest Member Account Number and I have no idea what that is at all. So I gave up. I still feel that paper proxy voting forms should therefore be sent to shareholders, particularly Personal Crest Members. If a Notice of a General Meeting is being posted, as is legally required, it’s not much more cost to include a proxy voting form.

I have had problems with registering for voting services with other registrars so I still feel it is unsatisfactory to remove paper proxy voting forms. Suggesting you can phone up to get one if necessary is not a satisfactory solution. Just time wasting. Even if I could manage to register for their app, that would still leave the problem of having multiple accounts and multiple log-ins for different holdings. It’s just too complicated. I might have to use my own form as I have previously suggested if Link and the companies that employ them persist with this approach – see https://www.roliscon.com/proxy-voting.html . Link stated that they were perfectly happy with this (as they are legally required to do), as long as the form was filled in clearly.

If all the registrars could get together and provide a common electronic voting system for all share holdings that was easy to use, and register for, then I would welcome it. But at present it’s a dog’s breakfast of a system.

Other matters discussed with Link were:

Impact of Brexit. One issue here is that companies listed on the Irish stock exchange are currently registered within the Crest system but that would no longer be approved if the UK exits, particularly on a “hard” Brexit. There may need to be an alternative clearance system put in place for Irish listed companies.

Dematerialisation: Nothing is happening, as usual no progress it seems. It would be required if we had stayed within the EU or agree regulatory compliance of financial services with them, but the Government has other things on its mind at present.

Ensuring all shareholders in nominee accounts are enabled to vote via their nominee operator. This requires a simple change to the Companies Act which again is not likely to happen in the near future. Note that some brokers do provide an easy to use service in this regard – e.g. the Share Centre with their own system and others via Broadridge. But investors still have difficulties with AIM companies and knowing when a vote is due. It was suggested it would be helpful if registrars or nominee operators could advise shareholders when a vote was due via email. Even those nominee operators who don’t offer a voting service legally have to do so for ISA accounts under the ISA regulations. It was agreed that it was key to getting people to vote that they be notified by email or text message when a vote was due, although personally I would not be keen on text messages.

An alternative is for all nominee accounts to be uploaded to the share register before a vote takes place and then registrars could solicit votes from everyone. But there are potential timing issues here.

Improving voting turn-out. Another reason why many shareholders do not vote, in addition to the reasons given above, is because they do not understand the resolutions on AGM agendas, or cannot easily decide how to vote. For example, Remuneration Reports can now run to many pages. Will private shareholders spend the time to read that part of the Annual Report and understand it? Unlikely particularly as many will not even see the Annual Report. ShareSoc is working on an initiative to tackle this problem which is for them to provide a proxy advisory and voting service that will actually vote an investor’s shares based on ShareSoc recommendations if they register for the service.

The impact of the CSDR. This is being implemented in UK law. The problems at Beaufort were discussed and the fact that nominee holdings are generally “pooled”, i.e. undesignated and hence there are no individual holdings recognised in the Crest system. This means there can be problems when a broker collapses because the shares held by clients may not have been recognised in the pooled share registrations. In fact this did not seem to be a significant problem at Beaufort whose records were generally accurate but has been at other failed brokers. There needs to be some regular reconciliation of client holdings to pooled Crest holdings it was suggested. Needless to say this would not be a problem if designated (i.e. personal named) accounts were used, which are supported by Crest already. One aspect that might help is that one of the new CSDR regulations (38.5 was mentioned) requires an account to be designated if the client requests it. But will the brokers even tell their clients about this?

The trend in share registration was discussed. The numbers of individual shareholders on share registers is not falling apparently, which contradicts what I was told by one broker a few years ago when he said that dematerialisation will not become a problem as soon all paper share certificates will disappear. That appears not to be the case. We do need dematerialisation, i.e. a new electronic share registration system. But Personal Crest members are declining rapidly as brokers are now actively discouraging the use of that system and withdrawing it.

Attendance at General Meetings. Not only are the number of proxy votes submitted by shareholders low but attendance at AGMs is also low. In small cap companies there are often no ordinary shareholders present – and that’s not just companies who hold their AGMs at inconvenient times or inconvenient locations. It was generally agreed that “hybrid” AGMs were the way to go, i.e. having both a physical meeting and on-line interactive web-cast where you can ask questions. In the short-term just web-casting an AGM can be helpful to some investors.

Regulation of share registrars was discussed. This is something I have advocated recently. Registrars are a key component in the UK financial system so it is odd that they are not regulated. I suggested that possibly some informal code of practice could be developed – perhaps sponsored by ICSA – as a step in the right direction.

In summary it was a useful meeting and no doubt some of these issues will be discussed in future meetings.

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

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IPOs, Platforms, Growth Stocks and Shareholder Rights

I agreed with FT writer Neil Collins in a previous article when discussing the prospective IPO of Aston Martin (AML) – “never buy a share in an initial public offering” he suggested because those who are selling know more about the stock than you do. We were certainly right about that company because the share price is now 24% below the IPO price.

Smithson Investment Trust (SSON) did rather better on its first day of trading on Friday, moving to a 2% premium. That’s barely enough to have made it worth stagging the issue though. But I think it will be unlikely to outperform its benchmark in the first year simply because as the largest ever investment trust launch it might have great difficulty investing all the cash quickly enough. On the other hand, if the market continues to decline, holding mainly cash might be an advantage.

One company that is lining up for a prospective IPO is AJ Bell who operate the Youinvest investment platform. They reported positive numbers for the year ending September recently but I suspect the IPO may be delayed given recent stock market conditions. One symptom of this is perhaps their rather surprising recent missive to their clients that discouraged some people from investing in the stock market. This is what it said: “In this year’s annual survey we had a small number of customers who identified themselves as ‘security seekers’, which means, ‘I am an inexperienced investor and I do not like the idea of risking my money and would prefer to invest in cash deposits’. If this description sounds like you, please consider whether an AJ Bell Youinvest account is right for you. If in doubt, you should consult a suitably qualified financial adviser”. It rather suggests that a number of people have moved into stock market investment after a long bull run and have not considered the risks of short-term declines in the market.

An interesting article was published on another platform operator, Hargreaves Lansdown (HL.), in this week’s Investors Chronicle. Phil Oakley took apart the business and showed where it was generating most of its profits – and it is undoubtedly highly profitable. Apart from the competitive advantage of scale and good IT systems it enjoys, it also benefits from promoting investment in funds, and running its own funds in addition. The charging structure of funds that it offers means it makes large amounts of money from clients who invest mainly in funds – for example £3,000 per annum on a £1 million SIPP portfolio. Other platforms have similar charging structures, but on Youinvest Mr Oakley suggested the charges on such a portfolio might be half.

His very revealing comment was this: “It is not difficult to see how this is not a particularly good deal for customers. It’s the main reason why I don’t own funds at all”. That goes for me also in terms of investing in open-ended funds via platforms.

Hargreaves Lansdown has been one of those typical growth stocks that do well in bull markets. But with the recent market malaise it has fallen 20% in the past month. Even so it is still on a prospective p/e of over 30. I have never invested in the stock because I was not convinced that it had real barriers to competition and always seemed rather expensive. Stockbroking platforms don’t seem greatly differentiated to me and most give a competent and reliable service from my experience. Price competition should be a lot fiercer in this market than it currently appears to be.

Almost all growth stocks in my portfolio have suffered in the last few weeks as investors have moved into cash, or more defensive stocks such as property. One favourite of private investors has been Renishaw (RSW) but that has fallen 35% since July with another jerk down last week. The company issued a trading statement last week that reported revenue growth of 8% but a decline in profits for the first quarter due to heavy short-term investment in “people and infrastructure”. According to a report in the FT Stifel downgraded the company to a “sell” based on signs that demand from Asian electronics and robotics makers has weakened. But has the growth story at this company really changed? On a prospective p/e now of about 20, it’s not looking nearly as expensive as it has done of late. The same applies to many other growth companies I hold and I still think investing in companies with growing revenues and profits in growing markets makes a lot more sense than investing in old economy businesses.

Shareholder rights have been a long-standing interest of mine. It is good to see that the Daily Mail has launched a campaign on that subject – see https://www.dailymail.co.uk/money/markets/article-6295877/We-launch-campaign-savers-shares-online-fair-say-company-votes.html .

They are concentrating on the issue of giving shareholders in nominee accounts a vote after the recent furore over the vote at Unilever. But nominee account users lose other rights as well because they are not “members” of the company and on the share register. In reality “shareholders” in nominee accounts are not legally shareholders and that is a very dubious position to be in – for example if your stockbroker goes out of business. In addition it means other shareholders cannot communicate with you to express their concerns about the activities of the company which you own. The only proper solution is to reform the whole system of share registration so all shareholders are on the share register of the company. Nominee accounts only became widespread when it was necessary to support on-line broking platforms. But there are many better ways to do that. We just need a modern, electronic (i.e. dematerialised) share registration system.

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

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Tesla, Unilever, EasyJet IT Write-Offs and Cash Holdings

The big news today is that the US Securities and Exchange Commission (SEC) have charged Tesla CEO Elon Musk with securities fraud. This charge relates to his comments on Twitter that he would likely be taking Tesla private. To quote from the SEC complaint: “Musk’s statements, disseminated via Twitter, falsely indicated that, should he so choose, it was virtually certain that he could take Tesla private at a purchase price that reflected a substantial premium over Tesla stock’s then current share price, that funding for this multi-billion dollar transaction had been secured, and that the only contingency was a shareholder vote. In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source”. Mr Musk vigorously rejected the charges, as did the company.

The full SEC complaint is here: https://www.sec.gov/litigation/complaints/2018/comp-pr2018-219.pdf

Comment: it is of course the oldest trick in the book if you are unhappy with the share price of your company to announce a potential bid from yourself or a third party. Making such an announcement via Twitter, if that was the motivation which has yet to be proven, would certainly be something new though. Making any announcements via Twitter is exceedingly risky and Tesla’s advisors must be tearing their hair out over this sequence of events. Who else if anyone reviewed the tweets before they were sent? Probably nobody I suspect. And anyone who uses Twitter will know it’s very easy to let typos, grammar errors and Spoonerisms creep in. Such important announcements should only be issued by the proper regulatory news channels. Elon Musk should have known better.

But if Elon Musk was forced to step down from Tesla, which might be the outcome, would it matter? I suspect not. The merit of Tesla as a company is in the technology in the cars which is still ahead of most potential electric car competitors. I have driven a Tesla Model S and it is a very good car indeed. But unfortunately my wife thinks I don’t need to buy expensive, flash cars to impress people any more so I’ll have to wait for the cheaper Model 3 to become available in the UK.

Unilever and Shareholder Voting

Unilever is planning to consolidate the two arms of the business in Holland, and drop the dual listing. UK shareholders would end up holding shares listed only in Holland, and as a result the dividends would be subject to Dutch withholding tax which is currently at the rate of 15%. Such taxes always cause problems although sometimes they can be refunded by submitting claims to do so. There is also the possibility that the withholding tax will be dropped. Another difficulty is that as Unilever is in the FTSE100, any funds running a FTSE-100 tracker would have to sell the shares. The Investors Chronicle ran a longish article on this subject and suggested it was a “no-brainer” for UK shareholders to vote against it.

But it seems that might be easier said than done. According to a report on Citywire, any shareholders in nominee accounts (i.e. in ISAs, SIPPs or other broker accounts – which means most UK shareholders now) will have to “rematerialize” their shares if they want to vote them, i.e. convert them to a paper share certificate. The company is not accepting votes submitted by nominee operators. Dematerialising shares is typically a costly and time-consuming process and is actually impossible to do if the shares are in an ISA or SIPP which have to be held in nominee form. This is truly outrageous news and any shareholders holding Unilever shares who wishes to oppose the move by the company should complain to the FCA, your Member of Parliament, the Company Chairman Marijn Dekkers, and anyone else you can think of.

[Postscript: the issue here seems to be the votes for the Court Hearing where the number of individual voters is taken into account. But for the shares held by a nominee operator, which may represent many thousands of underlying beneficial owners, only one vote would be counted even if it was submitted as there is only one holding on the register. ]

It has been reported that a number of institutions might oppose the unification of the company but it would certainly help to get retail shareholders voting.

Incidentally I attended a meeting today with Link Asset Services (one of the largest registrars) where the problem of retail shareholders not voting was discussed. I’ll write a separate blog post on that later.

EasyJet

If you recall, I mentioned previously the large expenditure on a “big-bang” IT project at Abcam which is clearly over-budget and over-time. That might have contributed to the 35% share price drop immediately after their recent preliminary results announcement. Now EasyJet have made a similar announcement today in their trading update. To quote: “…easyJet has now made the decision to change its approach to technology development through better utilisation and development of existing systems on a modular basis, rather than working towards a full replacement of our core commercial platform.  As a result of this change in approach, we are recognising a non-headline charge of around £65 million relating to IT investments and associated commitments we will no longer require. EasyJet will continue to invest in its digital and eCommerce layers that will enable it to continue to offer a leading innovative, revenue enhancing and customer friendly platform.”

That £65 million is no small sum and just shows you how IT is so critical to how businesses are managed in the modern world. Similar problems arose at TSB where they attempted to replace their old Lloyds systems with completely new software which was allegedly not adequately tested. But any IT professional will tell you that you cannot test and anticipate all the problems in a diverse customer environment ahead of going live with new technology. The NHS was another prime example of a “big-bang” approach to IT system development that ended up costing the Government, and us as taxpayers, at least £10 billion (that’s not a typo – it was ten billion and more). Evolution rather than revolution is the way to develop IT systems as EasyJet and Abcam seem to be learning, the hard way.

Cash Holdings

I suggested in a previous blog post that a newly available easy-access deposit account might be a suitable place to move cash from your stockbroking account to get a decent rate of interest rather than none. The problem of course is that most retail investors have most of their money in ISAs and SIPPs and taking cash out is problematic.

For ISAs, you may not realise that you can actually take cash out of a “flexible” ISA (which most ISAs are such as Stock & Share ISAs or Cash ISAs) and put it back in later. This was a recent change to the ISA regulations. However you can only do that within the same tax year without affecting your ISA allowance.

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

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