By Ben Turney | Wednesday 22 July 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.
The New World Oil & Gas (NEW) forward selling fiasco took yet another bizarre twist this morning, as the company announced that Alliance Trust Savings had taken a 13.25% stake. There was widespread speculation that this announcement was a cunning ploy from market abuser Chris Oil, as this involves his broker, but I didn’t believe that for one second. Chris Oil has proven beyond all doubt that he doesn’t have the gumption for cunning ploys, so this transaction looked like something different. The question was what?
I contacted Alliance Trust Savings directly to find out what was happening. It turns out that Alliance Trust Savings is staffed by extremely helpful and forthcoming people. Dealing with as many large financial services firms as I have over the last few months, wading through the chaos caused by the forward selling of New World’s unconfirmed placement, this was a hugely refreshing change.
I quickly established that this morning’s RNS from New World was accurate. Alliance Trust Savings was the direct owner of 13.25% of New World’s stock, as of yesterday. This might sound strange, but the explanation is quite simple.
As ShareProphets repeatedly warned, New World’s open offer documentation was confusing and contradictory. Under the terms of the open offer and placement, described by the company, existing shareholders had actively to request participation in the placement through the so-called “clawback” mechanism. If shareholders did not wish to take up their entitlement they simply needed to do nothing.
The problem for Alliance Trust Savings was the London Stock Exchange’s Notice N11/15, which confirmed that all trades enacted after 29 April, when the forward selling fiasco began, were “cum” entitlement. In other words holders of unsettled shares had the right to participate in the open offer through CREST. Again, as ShareProphets warned, this was incredibly dangerous and had there been a large take-up of the open offer from settled and unsettled holders then this could have dramatically increased the overall naked short position in the company. As far as “solutions” go this was extremely reckless and the London Stock Exchange is extremely fortunate the situation has resolved itself in as orderly a manner as it has.
Unfortunately for Alliance Trust Savings it has now been left holding the baby. It overlooked the London Stock Exchange’s Rule 5630 “Obligations for the seller where application form not delivered”. This requires that a broker issue a lapsing instruction on behalf of its clients who hold CREST entitlements and do not wish to participate in an open offer.
Alliance Trust did not issue a lapsing instruction and so its clients’ CREST entitlements were automatically delivered to it on 13 July, once the open offer had completed. Given that Chris Oil’s mum had at least 103.3million unsettled shares at the point, if we factor in the CREST entitlements of Alliance Trust Savings’ other clients, this explains why it found itself in possession of 608,599,944 New World shares.
New World’s open offer was conducted on a 5.534 to 1 basis. If we divide Alliance Trust Savings’ holding yesterday by 5.534, this means it held 109,974,691 unsettled shares on 12 July.
It will be interesting to see what Alliance Trust Savings now does with its unexpected holding. Over the last few days there has been a large seller of New World stock, offloading at 0.07p. Perhaps Alliance Trust Savings has decided to correct its error as quickly as possibly and take a 25% hit. From a risk management point of view this would make sense, but in the position it now finds itself in there could be an unexpected opportunity for it to do very well. The reformed shareholder action group continues to gather momentum and if it can work productively with New World, with all the attention this company has had, with necessary fundamental changes this company could be primed for a brighter future.
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