Wonderings

Co A, Co B and Co C are each listed on a notable stock exchange in a developed market. The companies share offices and administrative services. Intercompany obligations are settled via shares, warrants and cash. Co A and Co B have eight directors each, six are the same individuals for both companies. Two of these individuals link the three companies, Mr M and Mr D. Mr M is the executive co-chairman and CEO of Co A, executive chairman of Co B and until 2021 was a director of Co C. Mr D is the co-chairman of Co A (non-executive), the lead independent director of Co B and CEO of Co C. Both are material shareholders. Co A Mr M and Mr D and friends set up a SPAC in 2020 and reverse listed Co A. They were significant shareholders in Co A prior to listing. Co B Co B bought a stake in a project and funds the development cost. In addition to numerous private placements, Co B issued a convertible debenture (interest plus warrants) secured on a portion of the Co A shares held by Mr M, Mr D and two more Co A investors. In return, the four pledgors, including Mr D, were given Co B’s investment in the project as security as well as warrants. Mr D remains the lead independent director of Co B. Co C Co C succeeded in receiving a sizable amount of cash as result of a business venture. This was spent on legal fees, a debenture kicker payment to Mr D, Mr M, friends and family, salaries, bonuses, a co-investment with Mr D where both ended up as victims of fraud, and finally assisting Co A with a private funding round prior to its listing. To improve Co C’s balance sheet, Mr M resigned from the board of Co C in 2021, thus allowing Co C to classify its Co A investment as FVTPL* to accrue the mark to market gains in its p&l, restoring its insolvent balance sheet. No dividends have been declared; profits are rare. Minority dilution is constant. Insiders benefit from related party transactions, salaries, bonuses, share schemes and debentures/loans bearing high interest rates and kickers. Each private placement/debenture quantum is limited to just below the threshold for minority approval. Executive share incentive schemes allow multiple discretionary allocations of warrants, restricted share units and stock options. Warrants awarded to outsiders can be akin to the set of blunt steak knives thrown in when you buy that barbeque. For every broker/advisor/investor/finder warrant granted to an outsider, insiders soon catch up. Advisors are often “paid” in warrants, worthless in a diluting and falling market capitalisation. It seems these proprietors favour a listing as, apart from taking cash off minority investors and reducing fees by “paying” via warrants, the resultant liquidity available to sell their shares (replaced via a steady stream of stock options) may alone be worth the regulatory paperwork brimming with complex deal explanations, regulation references, Black Scholes valuations, director responsibilities and competencies, and compensation schemes. One cannot imagine regulators pouring over share scheme rules to make sure they are compliant. Auditors play a limited role where “no rules are broken”. Mr D is on the audit committee of all three companies. Some can identify the risk upfront. For those who survived the resultant losses, we are more alert and certainly acquired a dose of cynicism. Occasionally there are friends who, after the initial shock ask: “Explain to me again how exactly they do it.” * Financial asset recorded at fair value through profit and loss