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ShareSoc Chairman's Blog

Sunday, Sep 02 2012 by
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ShareSoc, the UK Individual Shareholders Society, publishes a blog on its website, here: http://www.sharesoc.org/blog.html 

For the convenience of readers, we are now copying blog entries here. Any comments most welcome!

If you like what you read and want to support us, please join, which you can do free here: http://www.sharesoc.org/membership.html

Follow us on Twitter: https://twitter.com/ShareSocUK 

 


Filed Under: Regulation, Investing,

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ShareSoc Informer

The ShareSoc Informer is the monthly newsletter of the UK Individual Shareholder Society.  There is a real need to encourage direct investment in the UK stock market, but individual investors will be discouraged if their rights and needs are ignored.  One reason why ShareSoc was formed was to ensure that… ...read more or visit website »


Disclaimer:  

 

No warranty is given by ShareSoc as to the reliability, accuracy or completeness of the information contained within this publication. Any information provided is accurate and up to date so far as ShareSoc is aware, but any errors herein should be referred to ShareSoc for correction. The information contained herein is intended for general information only and should not be construed as advice under the UK’s Financial Services Acts or other applicable laws. ShareSoc is not authorised to give investment advice, and is not regulated by any Regulatory Authority, and nor does it seek to give such advice. Any actions you may take as a result of any
information or advice contained within this publication or otherwise supplied to you by ShareSoc should be verified with third parties such as legal or other professional advisors and is used solely at your own risk. You are reminded that investment in the stock market carries substantial risks and share prices can go down as well as up. Past performance is not necessarily an indication of future performance. The Editor of this publication and other contributors may hold one or more stocks mentioned herein.

 


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ShareSoc 16th Sep '12 132 of 431
2

Posted by ShareSoc at 09:33, September 15 2012.

2ergo – the kind of placing that horrifies AIM investors

On Friday 2Ergo (LON:RGO)  announced a placing and subscription to raise £2.2 million (22m shares at 10p). Not only is this significantly dilutive, but the placing price was at a discount of 74% to the pre-existing market share price of 38.5p. In addition the company’s broker, Numis, has an option to place up to an additional 4.8m shares at the same price. The placing is of course to institutional investors, and to three directors, who are taking up 7 million of the 22 million to be issued.

If you hold shares in 2ergo, can you participate? Probably not, unless you have a good relationship with your stockbroker and he is able to acquire some of the additional shares available from Numis. So in summary this is a good example of how AIM companies prejudice private investors, and how insiders take advantage of their position in such companies. This kind of thing would not be acceptable in fully listed companies, but anything goes on AIM where there are no significant restrictions on such share issues so long as they can get a vote passed. ShareSoc would like to see an “open offer” in all such cases.

The share price fell 36% on the day of the announcement, but it’s also worth looking at the share price and volumes earlier in the week. Overall the share price fell 42% over the previous week with significant falls and trading volumes in the two days prior to the announcement. Indeed the share price had been falling for the last month. It would appear to be a good example of news leaking out of the pending placing. No doubt the company’s broker has been hawking around the fund raising in the City in the last few weeks, so one can see how a lot of people knew about it, except of course the typical private investor. Shareholders might wish to ask the FSA to investigate this “insider dealing”.

Why was the placing at such a large discount? Undoubtedly because it was a very unattractive proposition in the eyes of many. For example, the reason given for the placing is that it “will be used by the Company to provide the Group with access to additional working capital” and the capital resources required to roll out new contactless mobile technology platforms. This follows a prior placing only 18 months ago when they raised £3m and the recent sale of a US business for £1.7m. It looks like the company is consuming cash at a great rate and is betting on the new products to return to profitability (they have lost money in the last two years). In addition the placing document warns about a legal action in the USA which might threaten US$750,000 held in escrow from the US sale.

The writer has to admit to holding shares in this company in the past (I sold in early 2010). Why did I sell? Because the statements from the directors seemed to be consistently over-optimistic about future prospects. I was also never impressed by the fact that they held their AGM early in the morning in Manchester, which discouraged most people from attending. And when I lose trust in the management of an AIM company, I always sell. One can perhaps see why the reception for a further placing might have been less than enthusiastic.

Should shareholders vote in favour of the placing? Make your own mind up I suggest, but if I was still holding shares in this company, I would vote against.

 

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ShareSoc 16th Sep '12 133 of 431

Posted by ShareSoc at 10:08, September 16 2012.

BAE/EADS Merger – What’s in it for private investors?

One of the biggest items of news last week was the announcement of a possible merger between BAE Systems and EADS (or European Aeronautic Defence and Space Company, to give its full name). Both companies operate in similar areas although EADS has a heaver concentration on civilian aerospace than BAE. As a result it has grown more quickly than BAE of late, which has been heavily impacted by defence cuts in the UK and USA.

You can see this to some extent on the current valuations – BAE on a p/e ratio of 7.6 and EADS on 13.6, with yields of 5.5% and 1.8% respectively. BAE has traditionally paid a high dividend and hence is a favourite long term holding of private investors who desire the income.

Relative market caps are £11bn and £17bn at the time of writing (that’s after the share price of BAE rose after the announcement, and EADS fell significantly, effectively adjusting the market caps to the proposed merger proportions – see below). Both companies have complex past histories being formed from mergers of other companies, and with significant national Government stakes or influence.

The proposal is for a “dual listed” company to be formed, with a unified management structure with BAE Systems shareholders ending up owning 40% of the company and EADS shareholders owning 60%. As with all “mergers” therefore, this looks more like a takeover of BAE by EADS in reality.

There are of course enormous practical difficulties likely to be faced because of objections from Governments such as the USA, the UK, France, Germany, Spain, Saudi Arabia, and others who wish to protect their national interests and security (IP leaking out is of major concern). They may also be “competition” issues in some market sectors and countries. However you look at it, this merger could consume an enormous amount of management time over the next year.

What might be the benefits of the merger? Obviously BAE shareholders might end up owning shares in a more diversified business, with less reliance on the defence market. It might also enable the resulting larger company to compete more effectively with large US companies such as Boeing. Whether there would be any cost savings from combining operations is not at all clear (both companies are already quite large in size). An advantage for EADS shareholders is that it might enable them to escape from the political influence they suffer from as it looks like there would need to be some concessions from the France, German and Spanish Governments if the deal is to go through. But there may remain a risk of political interference in future.

But do private shareholders in BAE get any benefit from the diversification? The answer is simply no. If they want diversification, they could simply buy some EADS shares now (or any other aerospace company less exposed to defence applications).

There is also undoubtedly a major risk to future dividends, although the announcement promises no immediate change (and some improvement to EADS shareholders), but longer term the position is much more uncertain.

Let us not prejudge the proposition before we see full details, but it may be more attractive to institutional shareholders (who may hold both companies) than UK based private shareholders. Like all such empire building though, it may be of more benefit to the management than to shareholders.

 

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ShareSoc 17th Sep '12 134 of 431

Posted by ShareSoc at 15:24, September 17 2012.

Another way to disenfranchise shareholders – Diageo AGM voting

Today my wife received a card containing an Annual Report and proxy voting form (pre-paid reply card), for the forthcoming Diageo (LON:DGE) AGM. I am also a shareholder in the company but only received a card notifying me that that the annual report is available on-line and pointing me to an “Electronic Voting” option – but this requires one to register first with their “share portal” and hence is not quickly done (this is not nearly as simple as the system used by other registrars). In other words, there was no voting card supplied!

When the new electronic voting options were introduced with the new Companies Act in 2006, it was presumed that those who opted for electronic communications would continue to receive voting cards (and I did not opt in for paper in respect of my personal holding in this case as we did not want to receive two copies of the hefty Diageo Annual Report as we are both on the share register in Personal Crest Accounts). Indeed this is what the ICSA guidelines on this subject say: “it is recommended best practice that any notification of website availability for general meeting material should not only give the website link, but where sent in hard copy should include a hard copy personalised proxy card”.

It would appear that Diageo or Capita (who are the registrars) are trying to save money, but the end result will be that many more people won’t bother to vote.

This is yet another creeping disenfranchisement of individual shareholders which needs to be stopped by a proper electronic share registration and proxy voting system. In the meantime I will complain the company, to the registrars, and at the AGM, plus also request all communications be in paper in future to ensure that I get a voting card sent.

I would encourage other shareholders to do the same. 

 

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emptyend 18th Sep '12 135 of 431
2

In reply to ShareSoc, post #134

When the new electronic voting options were introduced with the new Companies Act in 2006, it was presumed that those who opted for electronic communications would continue to receive voting cards

May I ask who presumed this and on what basis?

this is what the ICSA guidelines on this subject say: “it is recommended best practice that any notification of website availability for general meeting material should not only give the website link, but where sent in hard copy should include a hard copy personalised proxy card”......

In the meantime I will complain the company, to the registrars, and at the AGM, plus also request all communications be in paper in future to ensure that I get a voting card sent.

I've emboldened another bit. There seems to be no obligation to send a hard copy notification at all....so, that being the case, the next logical (cost-reducing) step following aggressive complaints about lack of personalised proxy cards may well be to stop sending hard copy notifications to anyone who has opted for electronic communications? Looking for all communications in paper when you expect to put the spare AR straight in the bin simply raised the company's costs further. Are these outcomes you want to encourage?

I must say that there is a tendency in this thread to:

a) focus only on complaints and give no credit  at all (or even a mention) to any companies out there who happen to be "doing the right thing" ....... if there are any, in ShareSoc's opinion

b) assume that shareholders all need to be wet-nursed into exercising their rights, irrespective of the costs or difficulties that imposes on the company (and, by extension, the rest of the shareholders who are more self-starting!). Very much "nanny knows best", IMO......

ShareSoc most certainly have a very valid case over shareholder voting in the area of trying to find better ways to facilitate the voting of shares held by private investors via nominees (voting levels are almost universally extremely low in such situations). This is far and away the dominant issue for private shareholders in relation to exercising their votes - and IMO everything else smacks of self-indulgent distraction!

ee

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Roger Lawson 18th Sep '12 136 of 431
2

As regards to the first question, there was extensive discussion about how the provisions in the new Companies Act would operate in 2006 as regards shareholder voting. Clearly it was important that if a "default for electronic communication" was adopted, that shareholders did not become disenfranchised as a result. This was of particular concern with regard to elderly shareholders (of which there are very many on share registers). I was involved in the discussions on the new Bill/Act and was assured that shareholders would continue to receive postal notifications (which was of course sent, but no voting card). The extra cost to include a voting card would have been trivial. That is why the Institute of Chartered Secretaries and Administrators (ICSA) who advise Company Secretaries on how voting should operate came up with guidelines to ensure this did not happen. Diageo, and Capita their registrars, have changed the arrangements that were adopted by them and other companies without consulting anyone so far as I am aware.

As regards your other comments, it is part of ShareSoc's mandate from our members to promote the interests of shareholders. That includes bringing to public attention those examples where their interests are prejudiced. However we do congratulate those companies, and their directors, where they do the right thing without being prompted.

Website: ShareSoc - UK Individual Shareholders' Society
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emptyend 18th Sep '12 137 of 431
1

In reply to Roger Lawson, post #136

This was of particular concern with regard to elderly shareholders (of which there are very many on share registers). I was involved in the discussions on the new Bill/Act and was assured that shareholders would continue to receive postal notifications (which was of course sent, but no voting card). The extra cost to include a voting card would have been trivial.

Fair comment - and thanks for the clarification re the origin of the presumption. I assume that a requirement for a voting card in such circumstances didn't make it into the actual legislation though - otherwise you would be on extremely firm ground in complaining. I stick by my comments though that the main focus should be the facilitation of voting for shares held via nominees.

we do congratulate those companies, and their directors, where they do the right thing without being prompted.

Excellent. I look forward to such comments when warranted in due course. It is important to keep a balance and not only use a stick.

Perhaps Sharesoc might consider some sort of annual "awards" (without the usual hooplah) for good practice along the lines of the ICSA Hermes Transparency in Governance Awards, just as an incentive for companies to look to best practice in their dealings with smaller shareholders?

ee

 

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Roger Lawson 18th Sep '12 138 of 431
1

We have considered running such an award scheme, but have not found the volunteers to run or sponsor it as yet. In the meantime there are others already being run. Indeed one for smaller companies sponsored by Grant Thornton is about to close and are still looking for more nominations, so you can always submit one - see www.quotedcompanyawards.com/GTQCA/nominate/nominate.thtml

Website: ShareSoc - UK Individual Shareholders' Society
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ShareSoc 19th Sep '12 139 of 431
1

Posted by ShareSoc at 00:00, September 19 2012.

RPI due for a makeover? Threats to savers and investors interests.

The Office of National Statistics (ONS) announced yesterday that they are going to undertake a consultation on changing the basis of calculation for the Retail Price Index (RPI). This is potentially a major threat to savers and investors. For example, many wise investors will have been loading up on National Savings Index Linked Savings Certificates in the past because with low market interest rates but high inflation, this was one of the few ways to protect one’s wealth in real terms. With interest (admittedly not much, and reduced further recently) and the capital appreciation both tax free this has been one of the best investments for higher rate tax payers in recent years. Many pension schemes also have their payments to pensioners indexed by RPI, and annuity rates are also quite heavily correlated to RPI because the providers are often heavily invested in index-linked gilts.

The suggestion is being made that RPI over-estimates real inflation for two reasons: 1) the statistical calculation is defective, and 2) the basket of goods is wrong. Indeed on the latter point the Government has been promoting the alternative CPI index for some time as it is typically significantly lower (or has been of late). The CPI index does of course exclude some housing costs, but why that should be excluded from any general measure of the cost of living is difficult to understand. People have to live in houses, repay mortgages (with interest) and pay council taxes do they not?

One senses some political motivation here to change the basis of calculation of RPI (the ONS is of course an arm of the Government), particularly when one bears in mind that it might save £3bn a year in interest payments on their debt in the gilts market alone according to one newspaper.

One might support the argument that RPI should reflect real cost inflation as experienced by consumers and it should be corrected for future contracts if it can be shown that an improvement to more closely align it to reality can be designed. But rewriting existing contracts for gilts, indexed linked savings certificates or pension obligations (by the Government or others), is another question altogether. If investors have taken up an investment on a certain basis, they should not be faced with a retrospective rewriting of the contract.

In the meantime, ShareSoc will review the consultation document and the arguments it puts forward for change, before responding further on this subject. But let us know if you have a view on it.

 

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ShareSoc 24th Sep '12 140 of 431
3

Posted by ShareSoc at 09:17, September 22 2012.

Blinkx AGM Summary Report – generally a badly run meeting

Yesterday I attended the AGM of Blinkx (LON:BLNX) in Cambridge – a 3 hour meeting starting at 9.0 a.m. Unlike many long AGM meetings, this was not because there were any contentious issues, just lots of presentations, demonstrations and questions. There is a full 3-page report on the ShareSoc Members Network here: http://sharesoc.ning.com/forum/topics/the-agm-forum (you need to register/log-in if you are not a member but it’s free to do so). Here’s a very brief summary:

There were about 20 shareholders present, with the meeting chaired by the company Chairman, Anthony Bettancourt – not particularly competently to my mind and he was generally quite unimpressive, unlike the other directors who spoke. Brian Mukherjee, who took over as CEO recently, first gave a brief overview of the company’s performance. He mentioned positive growth and particularly the acquisitions of Burst Media and PVMG in the last year. Those acquisitions have given them access to a huge ecosystem of networks and content providers. Brian was excited about future opportunities.

The Chairman then declared that all resolutions would be voted on via a poll, but I complained that this was inappropriate for this size company and was unnecessary. Definitely not the best way to do it because we would not get the poll results until later (indeed I never did get the voting details). It also proved to be a bit of a time waster later (about 10 minutes delay while people filled out poll cards) – totally unnecessary here as there were no contentious resolutions as it turned out, as would have been known from the proxy counts - which were not shown either. It was obvious that Capita had recommended this approach, and being an American, the Chairman perhaps knew no better. Let us hope they reconsider in future and do a “show of hands” vote as is still normal practice in most UK companies.

The Chairman then read out the first Resolution (to receive the Report & Accounts) and invited questions. I attempted to ask a question about the Autonomy license deal but was told that general questions would be taken later (odd bearing in mind that it is referred to in the Report & Accounts). Another shareholder was also rebuffed when he attempted to ask a question. Again poor AGM practice – questions should be taken before voting on resolutions.

However, as the next resolution was to re-elect Mr Bettancourt himself, I asked him to clarify whether he was in fact “independent”. This question was prompted by the fact that his profile shows that he had past connections with Autonomy (was CEO of their subsidiaries so likely knew Mr Lynch for example). He assured me he was independent. But it’s worth mentioning that another non-executive, Mark Opzoomer, was also a director of Autonomy, and of course Mike Lynch was also. It hardly looks like there are any really independent non-executives at this company! The Chairman later mentioned to me that some institutions did question Mr Lynch’s independence.

When it came to resolution 8 (on share buy-backs), a shareholder mentioned that with the share price once at 150p, but later falling to 30p (yes it has been a rather roller-coaster ride), why didn’t the company take the opportunity to buy back some shares when they were cheaper? Surunga Chandratillake, former CEO and now “President and Chief Strategy Officer” said it was a “standard resolution” but the board considered it was best to use cash to reinvest in the business. I said I agreed with that stance.

After wasting time on filling out polls cards, Surunga gave a presentation (I understand it is available on their web site). He then covered the Autonomy licensing arrangement. Surunga is a fast talking and impressive communicator. Brian (another fast talker) then covered the financial model and monetisation. He said there is a big opportunity to sell advertising on the back of video search.

We then had a demonstration of the new version of the Blinkx web site which had just been released as a public beta (i.e. you can try it). They can now show a stream of videos that might interest you (you can put in a profile of your interests, or Blinkx can extract that information from your Facebook or Twitter accounts). They have de-emphasised clutter on the new site – hence it is more minimalist like Apple products. There was also a presentation by Julia, Marketing Manager and a demonstration of how they are linking to “internet TV” suppliers. The demonstrations contained a number of technical hitches – not very impressive for a technology company, but to be expected!

We then went into more general questions (which had been collected in writing previously) – see the full report for details. No obviously new news came out but quite a lot of additional background that may not have been obvious to all shareholders.

The meeting then concluded with the Chairman declaring all resolutions passed on the poll. I asked the Chairman for the voting figures but he did not have them (the registrars had by then long since gone). But he said they were over 96% on all resolutions and over 99% on many.

Summary: impressive technology, impressive executive management, but poor corporate governance and AGM processes. The debacle of the high share price placing and subsequent fall in forecasts, and hence share price, cannot have impressed institutional investors. The AGM was certainly well worth attending and I appreciated the time and effort the management put into it.

 

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emptyend 24th Sep '12 141 of 431
2

Very good report for those with an interest in the company!

Just one small point:

However, as the next resolution was to re-elect Mr Bettancourt himself, I asked him to clarify whether he was in fact “independent”. This question was prompted by the fact that his profile shows that he had past connections with Autonomy (was CEO of their subsidiaries so likely knew Mr Lynch for example). He assured me he was independent. But it’s worth mentioning that another non-executive, Mark Opzoomer, was also a director of Autonomy, and of course Mike Lynch was also. It hardly looks like there are any really independent non-executives at this company!

Whether or not a director is considered "independent" under the Code is a matter which is usually considered in some detail in the formal annual report. It will therefore be clearly stated as a matter of fact in the AR whether or not a particular director is considered to be "independent" under the tests in the Code.

I would observe, however, that such tests of independence should be regarded by shareholders as only a guide. It is possible for a director to be challenging and demonstrably independent without managing to qualify as "independent" by ticking all the boxes of the code. Conversely, a director being deemed to be independent under the code is no guarantee that he provides any challenge or useful input whatsoever

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ShareSoc 25th Sep '12 142 of 431
2

Posted by ShareSoc at 10:29, September 25 2012.

JJB Sports – the latest pre-pack administration

JJB Sports (LON:JJB) shares have been suspended and it is obvious from the announcement made by the company that it is about to be put through a pre-pack administration. It is clear that the business has been put up for sale, and “final offers” have been received, but that “no value will be attributable to the Company’s ordinary shares” and they do “not now expect to receive an offer for the shares of JJB”.

Pre-pack administrations are where a deal is done to sell the assets of a company, before an administrator is formally appointed. When the administrator is appointed, he condones the deal that has been arranged (and completes it immediately), typically to the prejudice of the unsecured creditors of the company and often to the prejudice of shareholders. Not that in the case of JJB Sports was there likely to be any value for shareholders due to its excessive level of debt.

ShareSoc has always argued that pre-packs are unethical, and should be banned, but bankers like them as do insolvency practitioners – it simplifies their jobs enormously. Indeed this is what the ShareSoc manifesto says on the subject:

 

“Insolvency law should be reformed. Insolvency law should be changed to prohibit “pre-pack” administrations which often prejudice minority shareholders, and competitors of the company which is in difficulties while enabling “phoenix” companies to arise with the same former directors and controlling owners. Administration should provide more means for a company to trade out of their difficulties and avoid a sale or insolvency process, leaving nothing for shareholders while large fees are paid to the administrators or liquidators, as happens at present.”

 

Pre-packs are the cause of many abuses, particularly in smaller companies but sometimes even in listed public companies. We have written to Government Ministers in the past on the subject of pre-packs and you can see more on the main ShareSoc web site about this issue. But if you were a shareholder in JJB Sports, our condolences, because there is little that can be done about it until the law is changed.

 

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JakNife 25th Sep '12 143 of 431
7

I'm unsure what exactly is unethical about a potential pre-pack at JJB? Or to that mind why pre-packs should be banned given the particular example of JJB? Or even why a shareholders group should care about this particular case given that the group that most likely would have a complaint (*IF* a valid complaint existed) would be the unsecured creditors rather than shareholders?

It's as clear as day that JJB is bust. It should also be clear that JJB has been in the company equivalent of the hospital ER with the defibrillator held over its chest (and applied twice) for a number of years now.

From a shareholders perspective JJB has been a complete punt for at least two years and it shouldn’t be a shock that the company has gone under. From a corporate perspective any pre-pack (and there’s no actual evidence that there is one) will help to dispose of JJB’s various individual shops as going concerns thus (a) preserving maximum value for secured and unsecured creditors, and (b) preserving jobs where possible, which is sadly probably limited to “where financially viable”.

There is nothing unethical about JJB’s pre-pack; on the contrary it would be unethical for shareholders, who no longer have any genuine economic interest in JJB, to be able to interfere with a sales process where those with the real interest are secured/unsecured creditors and employees.

JakNife

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emptyend 25th Sep '12 144 of 431
5

In reply to ShareSoc, post #142

It isn't so much the shareholders that I worry about with pre-packs. At least they have usually had plenty of warning and an opportunity to salvage something.

The people I think it really damages are the unsecured creditors - typically suppliers of goods and services - who end up going unpaid whilst the phoenix company rises from the ashes and continues trading.  Often these are small local businesses too and they may be fatally damaged by the bad debt.

There was a pre-pack with one of the local shop chains some years ago and lots of local businesses were "done over" in the process (especially as the "new" company looked very similar to the old one, with common directors etc). I've never bought from them again, on principle.

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Roger Lawson 25th Sep '12 145 of 431
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Absolutely right, endless abuses go on in the haulage, printing, retail, property and other sectors dominated by SMEs. The excuse the Government gives for doing nothing is that they have a "moratorium" on changes to legislation that affect small businesses. I fear the bankers and accountants have the ear of the Government way too much.

Website: ShareSoc - UK Individual Shareholders' Society
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marben100 27th Sep '12 146 of 431

In reply to Roger Lawson, post #145

...and here's another example: http://blogs.mirror.co.uk/investigations/2012/09/pre-pack-king-mcmurray-made-ba.html

Clearly, prepacks make these fraudsters lives easy. A more transparent and independent insolvency process is required.

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JakNife 28th Sep '12 147 of 431
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But Marben:

1. No shareholder appears to have been affected by this so whilst you may have highlighted an abuse of the system it's doesn't actually justify ShareSoc's position, who represent the shareholders. Just because there's a problem doesn't automatically mean that shareholders have been screwed over - the opposite is what's happen in the case that you've highlighted.

2. This particular fraudster has been caught so even if you are correct, in this instance the system would appear to work because he's been caught.

As I'm quite sure I've written at least once before: ShareSoc's position on this topic is nothing more than a "It's not fair, we've lost our money whinge"

There is nothing unethical about JJB’s pre-pack; on the contrary it would be unethical for shareholders, who no longer have any genuine economic interest in JJB, to be able to interfere with a sales process where those with the real interest are secured/unsecured creditors and employees.

JakNife

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ShareSoc 1st Oct '12 148 of 431

Posted by ShareSoc at 12:59, October 1 2012.

Direct Line – should one participate?

Direct Line, the personal insurance operation of RBS, is being partly sold via an IPO. Individual shareholders can participate via their brokers. Having studied the prospectus (all 350 pages of it, with of course endless warnings about the risks associated with the shares), it is worth making a few comments.

Like all insurance companies, the accounts are complex, so I’ll just pick out a few highlights. Only the last three years of revenue and profits are supplied. Revenue in that period was effectively static, and profits variable. Operating profit ranged from £166m in 2009, thru a loss of £206m in 2010 to a profit of £422m in 2011. Averaging those out, you can see that net margins as a percentage are quite low and hence are vulnerable to market swings.

If one looks back into the history of this company, it obviously grew rapidly historically when the old “broker” sales channel model to retail customers was superseded by phone and internet direct operations (as pioneered to a certain extent by Direct Line itself). But now price comparison sites are taking more of the business and eroding insurers control over their sales channels.

56% of revenue comes from motor insurance (if one includes the German and Italian operations), which is a notoriously cyclical insurance sector. In the UK it is now subject to a Government inquiry and fraud is an increasing problem (false “whiplash” claims, and fake accidents). The activities of claims management companies have also increased costs rapidly.

The overall Combined Ratio shows that the company actually makes a small loss on insurance underwriting and the profits therefore only arise from other activities (such as the return on investment activity of the retained premiums). It is a particular problem in the motor insurance area.

Return on equity, one of the key performance ratios for any business, only reached 10% in the good year of 2011.

So in summary, it looks like an ex-growth business with some strategic and market challenges. But there is a price for everything, and analysts are suggesting that the anticipated price range of between 160p and 195p may make it look quite cheap on a multiple of net assets basis in comparison with other insurers. It is also expected to pay a relatively high dividend.

But RBS is only selling a part of the business initially with the rest to be placed later (as it needs to dispose of it completely by the end of 2014).

For private investors, you may want to stand on the sidelines until any “share overhang” arising from the large stake yet to be disposed of by RBS is out of the way. It is always tricky when there is one dominant and major shareholder in a public company. Or if you want a stake in this kind of business, simply compare it to other general insurers such as Aviva or RSA, which are both on high dividend yields, before deciding.

 

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emptyend 1st Oct '12 149 of 431
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In reply to ShareSoc, post #148

Just out of interest, is ShareSoc authorised to provide investment advice?

If not, then surely comments like these (welcome and detailed though they are) would be better made in a way that makes clear it is an individual's own opinion, not actually advice from ShareSoc?

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ShareSoc 3rd Oct '12 150 of 431
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Victoria General Meeting – A decisive victory for the concert party
Posted by ShareSoc at 00:00, October 3 2012.

Victoria – A decisive victory for the concert party

The Victoria (LON:VCP) General Meeting today in Birmingham would have been livelier but for the fact that the votes received before the meeting were displayed on a screen before the meeting commenced (not best practice of course). This made it clear that the outcome was a foregone conclusion as I expected. After 30 minutes of questions, a poll was called and the result was about 66% in favour of all the resolutions (i.e. to remove the existing directors and install Alexander Anton, Geoff Wilding and Andrew Harrison).

I’ll simply give a few impressions of the meeting and give a full report later on the ShareSoc Members Network. About 50 shareholders attended, including some of the Anton family, but the speakers and most attendees were apparently supportive of the board. So it looked like the “populist” rearguard (supported by employees, fearful of their jobs) against the revolutionaries. The issues have been covered to a great extent in past ShareSoc press releases (available on our web site), but as the basic corporate strategy of the two opposing groups did not differ greatly, one simply had to choose who you thought was best fitted to lead the company and improve its rather poor historic performance. That was our final recommendation to shareholders – that they make up their own minds. All I can say is that I personally voted for the resolutions with the few shares I had acquired to enable me to attend the recent meetings as I was not impressed by Mr Bullock or Ms Innes Ker in relation to their past comments and statements. I also did meet with Geoff Wilding a few weeks ago, and he seemed to have a lot of sensible things to say about the business and where it needed improving.

I asked a couple of simple questions in the meeting. Firstly why did Innes Ker reappoint Mr Garman after the AGM vote had removed him? She said it was necessary to appoint another director so that they remained listed. I was aware of this excuse, but why not appoint anyone else? Was there nobody else in the company willing to serve as a director? I did not get an answer to that. It’s a good example of bad corporate governance to ignore the wishes of shareholders. Mr Garman was of course removed for a second time today.

Secondly, Why did the board spend several hundreds of thousands of pounds on this battle (probably in excess of £300,000 when the final bill is in), and in particular persevere with it when it was clear to any intelligent observer some weeks ago that the board was very unlikely to win the vote? A “cat in hells chance” as I said to more than one person, from my experience of proxy battles and the difficulty of getting through to nominee shareholders. I did not get a clear answer to that question, particularly the latter part. For example, a considerable amount was spent apparently on national press advertising (including advertising in the Daily Telegraph which I read each morning but did not even notice), plus on canvassing shareholders via phone.

Now I am all in favour of ensuring all shareholders are informed and given the opportunity to consider the issues and vote. And I am all in favour of a good fight, but this was a fight the board were very unlikely to win because the Anton family (apart from one obvious member) and large holder New Fortress seemed united in wanting a change of management. In reality a considerable amount of shareholders funds have been wasted on this emotionally charged dispute which should have been resolved a lot sooner and more cheaply.

Needless to say that my questions did not apparently find favour with many members of the audience who had no doubt formed a conclusion about who were the bad guys and who were the good guys before the meeting even started, so I was lumped in with the former for challenging the Chairperson on these issues. Trying to uphold reasonable standards of behaviour by directors is never an easy task.

Now that the crucial vote is out of the way, let us hope that the company can now get on with the business of making some profits for shareholders. The majority of shareholders clearly wanted change, and they got it – that’s shareholder democracy in action. With an 80% turnout (much higher than is usually achieved) the result almost certainly reflected the stance of the majority of shareholders.

Geoff Wilding refused to be drawn on any public comments both during the meeting, and after, but did offer to speak to anyone who wished afterwards. I asked Mr Bullock (the CEO removed at the previous AGM as a director but still in the management role) whether he now intended to resign as his position was now surely untenable, but he refused to say. I guess he may want to consult his lawyers first to try and get a big pay-off. I hope the shareholders are not expected to pay that also.

 

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Posted by ShareSoc at 08:47, October 4 2012.

Halfords Trading and New CEO (at some cost!)

This morning Halfords (LON:HFD) issued a trading update and the news was good. Like-for-like revenue was up 5.6% overall in the second quarter, with a particularly strong showing in cycling driven by better weather and Olympic/Tour de France successes. This compares with a very poor first quarter. So the share price climbed 15% in early trading.

The company also announced the appointment of a new CEO – Matt Davies whose past experience was running Pets At Home, and is currently a non-executive director of Dunelm (from whom Halfords could certainly learn some tricks – their sales grew substantially in the rainy weather).

Mr Davies is a keen cyclist according to Chairman Denis Millard in the analysts conference call this morning. But a concern might be his remuneration package which is similar to the previous CEOs. It consists of the usual good base (£500k per year), a maximum bonus of 150% of base (only a third of which is in deferred shares), participation in the Company’s Performance Share Plan (PSP) which might be another 150% of salary with vesting on undefined “stretching performance targets”. He can also participate in a Co-Investment Plan where he puts in £500k and gets up to 3.5 times his investment in matching shares – he only has to get the share price up to 400p by November 2015 to get the first element of the award in full (the share price was about 300p after this mornings rise and it was above 400p as recently as February 2011).

Mark Bentley, one of ShareSoc’s directors, asked Mr Millard in the conference call whether there had been any consultation with shareholders about the appointment of Mr Davies. He said no, it was purely a board decision. He may be the right man for the job, but ShareSoc will be writing to Mr Millard about the remuneration package. We question whether such an arrangement was necessary in this case and it’s a typical example of the aggressive mix of performance related elements which has been so widely criticised. 

 

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