By Ben Turney | Monday 29 June 2015
Disclosure: I own shares in one or more of the stocks mentioned. 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.
In one week New World Oil & Gas’ (NEW) highly controversial placing and open offer closes. The company expects to announce the result the following day. It then hopes that the London Stock Exchange will admit the new shares to trading on 10 July. This will present an acid test for AIM’s integrity and credibility. Few seem to appreciate the dilemma now facing the London Stock Exchange.
When it issued Notice N11/15, which confirmed the entitlement of holders of unsettled New World stock to participate in the open offer, the London Stock Exchange effectively announced that New World’s planned fundraising could have increased the naked short position in the company’s stock by 5.534 times. This was an incredibly reckless gamble by New World.
Just consider what would have happened if all the holders of settled New World stock and all the holders of unsettled stock had taken up their full entitlements to participate in the open offer. The holders of settled New World stock would have subscribed for the allocation of 3,888,873,028 shares, as specified in the company’s circular. This would have left no additional open offer shares to satisfy the open offer entitlements of holders of unsettled New World stock, who had exercised their rights to participate.
The naked short would have grown by 5.534 times.
Now, there will be some who say how unlikely it is that this scenario would ever have played out this way.
While I agree that a full take up of open offer entitlements wasn’t ever a realistic outcome, this argument contains the same flawed logic at the heart of the original forward selling fiasco.
When I co-founded NWOGaction, very few believed I would have been able to mobilise enough shareholders to vote down the original proposed placement. Despite serious questions concerning selective settlement of trades made in New World post 29 April, the “no” campaign was highly effective. Resolutions 1 (the placement) and 2 (the warrants) were soundly beaten at the company’s EGM, which led to New World’s directors proposing the highly controversial placing and open offer.
Had there been a similar campaign to encourage people to take up their full entitlements of open offer shares, who knows the further chaos this could have caused?
We don’t know how large the naked short position is in New World’s stock, but the fact that Cornhill secured placing commitments for the full allocation of 3,888,873,028 shares strongly suggests it could be much larger than the conservative estimates.
This could have meant that as soon as a quarter of those eligible to participate in New World’s open offer had taken their full allocation, the total naked short position in the company’s stock could have started growing after that point.
Of course, such a campaign would have been unacceptably risky. New World’s board made itself clear in its circular that if the current fundraising did not resolve the settlement issues in the company’s stock it would resort to further measures to get the regulated market participants, exposed to the naked short, off the hook, including a cash box placement. The sole practical purpose of a cash box placement is to circumvent pre-emption rights.
Faced with such intransigence and wilful determination to act on behalf of the company’s advisors, the efforts of New World’s holders of settled and unsettled stock to seek restitution were better served elsewhere.
Which brings us to the serious dilemma now facing the London Stock Exchange.
Having rejected the original steeply discounted placement, it seems highly unlikely that New World’s shareholders, and by extension the holders of unsettled stock, are going to accept an even deeper discounted open offer. The 0.09p price of the placing and open offer is 65.4% lower than the close on 18 May, when New World first went into suspension. That New World has also decided to pay Cornhill an even more generous package of warrants and fees than the one originally rejected by shareholders in Resolution 2 at the EGM, provides even less incentive for shareholders to participate.
The likelihood is that the placing and open offer will go through, that it will not receive much support from eligible holders and will provide the regulated market participants behind the forward selling fiasco with the stock they desperately need to satisfy their settlement commitments.
The question is, will the London Stock Exchange sanction this?
If the London Stock Exchange admits the placing and open offer shares to trading, under these circumstances, it will effectively be saying that is acceptable for regulated market firms to engage in uncovered forward selling and naked shorting of unconfirmed placements, which are subject to shareholder approval, so long as the listed companies involved ignore their fiduciary and legal responsibilities to shareholders and issue deeply discounted stock, to cover settlement commitments.
Even by the rotten standards of AIM it is impossible to believe the London Stock Exchange will complicity stand by and allow this to happen.
Never miss a story.
This area of the ShareProphets.com site is for independent financial commentary. These blogs are provided by independent authors via a common carrier platform and do not represent the opinions of ShareProphets.com. ShareProphets.com does not monitor, approve, endorse or exert editorial control over these articles and does not therefore accept responsibility for or make any warranties in connection with or recommend that you or any third party rely on such information. The information available at ShareProphets.com is for your general information and use and is not intended to address your particular requirements. In particular, the information does not constitute any form of advice or recommendation by ShareProphets.com and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.
Search ShareProphets |
Stock market news |
Recent Comments |