By Nigel Somerville, The Deputy Sheriff of AIM | Monday 15 June 2015
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Back at the start of May I asked who was regulating the omnishambles that is New World Oil and Gas (NEW) on the back of what appeared to me to be quite obviously a disorderly market. It looked as though there had been rampant forward selling of a conditional Placing which was, in the event, scuppered by shareholders. I was not the only one making noises about a disorderly market – see HERE and HERE from my more esteemed colleagues, yet the LSE allowed trading to continue for another couple of weeks before the stock was suspended due to a deteriorating settlement situation - ie a disorderly market. Now we have a monster of an open offer, backed by a placing which effectively underwrites the offer. Will it cure the settlement problem? And what other issues are thrown up by the new proposals?
Last week saw New World announce an open offer: eligible shareholders can apply for about 5.5 offer shares at 0.09p a pop for each existing share held. Meanwhile the arranging Broker, Cornhill, seems to have placed out any offer shares not taken up – up to the entire share issue – at the same price. The total size of the issue is set to raise £3.5m gross – critically, just short of the 5m Euro threshold, above which a prospectus would be required. We are told that 3.89bn shares will be issued, to add to the existing 702m shares.
Now given the already admitted settlement issues which saw the LSE suspend the shares from trading, one might wonder who is entitled to apply for the offer shares. New World tells us, on P3 of the Offer Document, that:
Applications under the Open Offer may only be made by the Eligible Shareholder originally entitled or by a person entitled by virtue of a bona fide market claim arising out of a sale or transfer of Existing Ordinary Shares prior to the date on which the Existing Ordinary Shares were marked “ex” the entitlement by the London Stock Exchange
In the definitions on P60, Eligible Shareholders are described as ‘holders of Existing Ordinary Shares on the register of members of the Company at the Record Date.’
One might imagine that an unsettled shareholder claims the offer shares via the seller of the unsettled stock who, in turn, claims the offer shares on the buyer’s behalf or hands over the entitlement. That seller of unsettled stock may him/herself not have settled the trade because they themselves had sold stock onwards that it turns out also had not been settled. And so the obligation to pass on the offer entitlement passes back through a chain of trades until it lands with whoever is at the end of the chain. But what happens then?
I think it is beyond question that there are naked shorts, which is why the settlement crisis reached the point where the LSE stepped in directly and suspended the shares from trading. That the LSE took more than two weeks longer than we did on ShareProphets to realise this is very odd indeed.
It seems to me, in my unregulated and unqualified little world, that if the entitlement obligation lands upon a person/body in a naked short position then they cannot apply for offer shares. They would then have to make good by buying in the market once trading resumes, or engaging in some kind of off-market deal ahead of a resumption of trading. But that would, in effect, mean that the unsettled holder at the other end of the chain is not getting offer shares directly from the offer. It also opens up the possibility that the naked shorter might still not be able to settle, if the offer is fully taken up and tightly held. That seems to me to be unlikely, as the history of open offers by AIM tiddlers does not suggest much of a take-up to be likely. In that case, the slack will be taken up by a Placing to clients of Cornhill, the arranging broker. One could imagine a way in which those shares found their way into the hands of the naked shorts so as to allow them to close out and allow settlement of the chain of trades, as well as make good the offer entitlement (even though the shares had to be bought in the market, rather than come directly from the offer). That appears to be what should happen, according to what the company has suggested in the offer document. But it is not without risk, as the offer document makes clear: there is an open admission that the settlement situation may not be resolved and that the company and its advisers may have to resort to more extreme measures (such as the uber-disgrace of a cash box placing) – and it is implied that even that may not work.
And so the apparent proposals in the Offer Document, as I understand them, could result in a massive deterioration in the already appalling settlement situation, since naked shorts would have to make good not only the outstanding stock, but the 5.5 offer shares per original share on top. In what way does that cure the settlement crisis which led to the suspension of the shares in the first place? That is quite some risk to be running – however unlikely this scenario may appear.
But almost as soon as the RNS announcing the Open Offer hit the screens on Thursday of last week, a London Stock Exchange Notice was issued which stated that all pre-suspension trading in New World was done ‘cum’ entitlement to open offer shares. If that really is saying what it appears to say, then even unsettled purchasers of stock which was sold naked into the market are entitled to offer shares, as far as the LSE is concerned.
If the LSE really has ruled that ALL trades have the offer entitlement, then there will be a good few unsettled holders of stock which is illegitimate stock as far as New World is concerned, and who could, in theory, apply for their offer shares. Is the LSE going to force New World to honour their claims? If so, then I think it is plain to see that it is possible that New World could end up in the position of receiving valid claims for open offer stock which exceeds the stated maximum size of the share issue.
This is an important point, because the implications are that therefore the valid claims could exceed the 5m Euro limit, above which FCA rules say that a prospectus must have been produced by the company – which it is not doing because, New World tells us, that is ‘impractical’. For that, I read ‘unaffordable’.
So as I read the LSE ruling, New World potentially has to issue more shares than it says it will, and this could lead to the issue breaching the 5m Euro limit, as well as the stated maximum size of the offer. That looks to be a big problem as it would surely undermine the validity of the offer.
Now in all likelihood, the offer will attract some claims but not a full take-up. In my view, the chances are that there will be enough slack to provide everyone with the correct amount of legitimate stock to clear out the settlement issues. I have some pretty strong views as to the morality of all of that, but I’ll leave to one side for now.
But I will say this: it looks to me as though the Board of New World and its advisers at Cornhill are playing a very high stakes game. I would imagine that they think the whole mess is all but fixed because there is no likelihood that all the offer shares will be claimed by shareholders. But then, they assumed that shareholder approvals allowing the failed Placing were a dead certainty.
And so we return to the question at the start: just who is regulating this omnishambles? The Open Offer document carries disclaimers on behalf of the LSE, the Nomad (Beaumont Cornish) and the Broker involved (Cornhill). The FCA classes AIM as an unregulated market, yet the LSE has a department called AIM Regulation. So who is going to step up to the plate here? Anyone?
The LSE still has to allow admission of the stock issued as a result of the open offer/clawback Placing. AIM Rule 32 states:
Ongoing eligibility requirements
Transferability of shares
32. An AIM company must ensure that its AIM securities are freely transferable except
¨ in any jurisdiction, statute or regulation places restrictions upon transferability; or
¨ the AIM company is seeking to limit the number of shareholders domiciled in a
particular country to ensure that it does not become subject to statute or regulation
Just pause on that for a moment: New World has to ensure that its AIM securities are freely transferable. How, I wonder, does that apply to a purchaser whose trade has not been settled? That purchaser does not have freely transferable stock as it has proved (thus far) undeliverable. So the shares are not freely transferable, then, are they?
On that basis, I would have thought that the LSE could refuse admission of the offer shares to trading until the settlement situation has been rectified – itself apparently (according to New World) contingent on the offer going ahead and being completed. And the Offer Document is clear that this whole ludicrous charade is conditional on the offer shares being admitted to trading. Chicken and egg, then: it could be back to square one.
There are so many ways in which this could play out, but one thing is certain: the Board of New World couldn’t arrange a champagne piss-up in Mayfair. That the Board simply HAS to be forced out is beyond question. It remains to be seen what twists and turns lie around the corner in the ongoing farce of New World, in what is becoming an ever more dangerous situation.
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