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New World Oil & Gas; the open offer that causes the London Stock Exchange an almighty dilemma

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. 


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Comments

1 comments


  1. drunken sailor

    Ben,

    I am glad you have not agitated for people to take up the open offer as that would have been totally irresponsible as:

    It could have led to the shares delisting and PIs losing everything,

    The shares are not worth the OO price.

    The motivation would have been to continue the chaos rather than to resolve it.

    The term naked short is highly emotive and whilst I agree those who took the placing and sold are now technically in a naked short position, the only reason why they are is because the placing was blocked by shareholders.

    On the plus side the company will have more money raised at a better price than had the placing gone ahead. The fact that the BoD remains for the time being means that that money will get pissed away. The level of fees involved in all of this is disgusting.

    I think that take up of the open offer will be greater than you think. Having monitored the BBs, quite a few are taking it up, some in the mistaken belief that the short squeeze will still be on and others in the belief that it represents a good way to average down and that once trading recommences they will be able to sell above the OO price – I think they are mistaken in this and will lose even more money as a result.

    It will be interesting to see what Chris Oil does. He has sold a large number of his shares, but still retains a large number. I would expect he will take his full entitlement and look to do a deal with Cornhill – he needs the settlement situation to resolve so he can make a massive profit. Whatever his true intention was when he bought those shares in the first place (was he tipped the wink? – I can’t believe he thought he could scoop up all those shares without significantly affecting the price, unless placees were selling prior to the shares being admitted to trading, which was itself reliant on shareholder approval).

    There cannot be many people with some sort of interest in the markets who are not aware of what is going on – MP’s have been contacted, so has the Bank of England as has the Financial Ombudsman. Brokers who provide nominee accounts have been bombarded with questions regarding settlement and demands for settled shares to be converted to certificated form to support your campaign. I have no doubt that action will be taken once the whole thing calms down. Whether the right lessons get learned and the right culprits get punished is another matter, I also have no doubt that the action taken will not be made public.

    If the Open Offer is oversubscribed, it will be scaled back as they are already issuing the maximum they can without prospectus. As soon as the LSE said unsettled shares had the same entitlement, the sensible thing to do, given that the underlying intent is for the OO to be well undersubscribed so the rest can go to Cornhill to cover what has become a technical naked short, would have been to scale back the entitlement. That this has not happened, I believe, indicates that nobody in authority wants the true scale of the non admitted shares that have been traded to be revealed and scaling back the entitlement would have done that – I do not believe that the LSE does not know the scale of it.

    Hopefully the lesson that will be learned is that shares that have not at the very least been approved for admission on a future date cannot be traded in the open market. Hopefully this will also put a stop to the forward selling in the market of placing shares when the placing has not been announced.

    Hopefully also those in authority are beginning to realise that PIs do have the ability to make life very uncomfortable, and therefore should not be viewed and powerless cannon fodder.

    Hopefully once all this is sorted the BoD will get kicked out and somebody who is capable of making good use of the money raised, less the horrendous fees, will take over, though I have a nasty feeling it might be a BoD linked to Chris Oil and BMD and the abuse of shareholders and the syphoning off of company money into activities that do not benefit shareholders will continue, just under new management!


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