Boardroom shenanigans and capital structuring changes are headline news for large companies, but the impact can be even more drastic for small-caps. Radical shifts in strategy require big calls to be made and in cases where there is disagreement, that can lead to drama.
Directors must act in the interests of all their stakeholders and if the owners of a company’s shares aren’t happy and have a significant slice of the equity, they have recourse to action. The extraordinary general meeting (EGM) can be the high-noon showdown between management and activist shareholders.
July saw a number of EGMs although perhaps the most caustic was averted when a truce of sorts was reached between Hurricane Energy (HUR) and 25 per cent shareholder Crystal Amber Fund. The activist fund was appalled by an offer management made to bondholders that would have left the lenders owning 95 per cent of the company.
The High Court ruled against the company, agreeing with Crystal Amber that the board had been way too pessimistic and premature in trying to push through a deal with holders of $230m of bonds which are due for payment in July 2022. What then put a stop to the EGM motions was the resignation of non-executive directors and the election of Crystal Amber nominees.
Now, with the oil price back around $74 a barrel, there is some credence to Crystal Amber’s argument that Hurricane’s $145m unrestricted cash position will improve over the next 12 months before the redemption of bonds falls due. The market seems to agree, Hurricane’s market capitalisation is back up to £58m.
Huge challenges remain in the era of decarbonisation, but the episode does suggest the newsflow around EGMs may be worth following for real contrarian value investors.
Extraordinary meetings don't always signal a bad emergency
The use of an extraordinary meeting can signal positive developments, too. At FastForward’s EGM on 9 July, the £17.5m investment company agreed to change its name to Seed Innovations Limited (SEED), highlighting its purpose of buying into opportunities in the cannabinoid sector.
Given the growing curiosity towards potential medical and food uses of cannabis derivatives, and enthusiasm for exposure to unlisted investments in general, the name change is a good marketing ploy. It’s certainly desirable to try to narrow a wide 30 per cent discount to net asset value (NAV) that has opened since the fund’s holdings were assigned greater worth.
The size of that discount is itself a reason for caution, however. In an illiquid asset class especially, it’s a sign that investors could struggle to exit holdings in such a small investment company at close to the stated NAV. Still, while a name change isn’t transformative in itself, it does at least demonstrate a determination by the company to be proactive and this could be one to keep tentatively on the radar.
Companies, including investment trusts, should be assessed on the basis of how well they are run operationally and financially, not just on the addressable market size implied by a trend they are assumed to benefit from. The actions requested by an EGM highlight the challenges faced by some of the pioneers in exciting growing industries.
Solar energy has been a business of the future ever since Roger Moore’s 007 was battling Scaramanga in 1974’s Man with The Golden Gun, so investors are entitled to be nervous about equity capital raises in this space. The EGM by Bluefield Solar Income Fund (BSIF) was overwhelmingly supportive of its management requesting the opportunity to go after more finance.
As it is valued at a slight premium, the company can get new funding for a price per share that’s worth more than the value of its assets, which is a good deal for existing shareholders. It also adds liquidity to the holding. Still, the acid test is whether fresh capital can find useful investments.
Take private activity likely to trigger more EGMs in the future
Another obvious reason that an EGM would be necessary is when a company is subject to a takeover bid. In July, the EGM of UDG Healthcare (UDG), which had been adjourned, passed motions voting in favour of Schemes to sell to private equity firm Nenelite Ltd, an affiliate of Clayton, Dubilier and Rice.
Ordinary shareholders have been given clear guidance on a bid for their property and 85 per cent voted for the improved 1,080p-per-share offer. It’s worth noting such processes when they run relatively smoothly, especially for investors who own stakes in the sort of small companies that could be snapped up in take private bids. Following EGMs could become an interesting pastime.
