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Tern – More on That Acquisition of Cryptosoft, More Questions and what of Nomad WH Ireland’s Role?

By Nigel Somerville, The Deputy Sheriff of AIM | Saturday 3 January 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.


On Friday I highlighted a number of inconsistencies in two RNS released by Tern plc (TERN)regarding the acquisition of Cryptosoft and issues of shares which you can read HERE. It gets worse.

The point was that because of inconsistencies in those releases compared to Companies House filings, Tern’s shareholders are currently unable to determine the issued share capital in Tern, and therefore what their shareholding represents. Then there is the small matter of what prices were they issued at? And since filings to Companies House imply three - or is it two - or is it just one - classes of ordinary share, what is the capital structure of Tern? Further, it is also unclear as to what Tern itself actually owns of Cryptosoft since the RNS implies 95% and the filing on Companies House says 100%. Just to be helpful, I’ve been digging….

Tern’s RNS of 15 Sept 2014 announced the acquisition of Cryptosoft (you can read it HERE). Investors were told:

Tern will own 95 per cent. of the issued ordinary share capital of Cryptosoft;

And…

Jon Penney and other employees will retain a minority 5 per cent. interest in Cryptosoft which entitles them to 25 per cent of the net proceeds of sale as and when Cryptosoft is sold.

All this would have, of course, been signed off, checked and verified by Nomad WH Ireland. I have already pointed out that Tern’s filing to Companies House regarding this transaction stated Acquisition of entire share capital of Cryptosoft Limited” which contradicts the RNS. But I wondered if, in fact, any of the above was completely true.

I’ve taken a look at Cryptosoft’s capital structure on the Companies House website. On 12 Sept 2014 (three days before Tern bought its stake in Cryptosoft) Cryptosoft itself underwent a capital restructuring. You can read the return to Companies House for that HERE. And so we discover that there were, in fact, two classes of share in Cryptosoft at the time Tern plc bought in:

A Shares of £1 each: there are 950 in issue. Prescribed particulars:

Ordinary shares

a)      carry one vote each,

b)      rank equally for dividends

c)       rank equally on distributions (including on a winding up) and

d)      are non-redeemable

 

B Shares of 33 1/3 pence: there are 150 in issue. Prescribed particulars:

The holders of the B Shares are entitled to 25 per cent of the proceeds of sale of the Company on a sale.

B shares

a)      carry no voting rights,

b)      rank equally for dividends,

c)       rank equally on distributions (including on a winding up)

d)      are non-redeemable.

 

What Tern told the market on 15 Sept 2014 is surely cobblers. If it owns 95% of the issued ‘ordinary’ capital then it owns 95% of the A-shares. If the minority 5% of nominal share capital is entitled to 25% of any proceeds resulting from the sale of Cryptosoft then that must be the B-shares. So who owns the other 5% of the A-shares? But Companies House was told that Tern bought the ‘entire share capital’ of Cryptosoft. Something is very wrong somewhere!

Then one’s attention is then drawn to the small matter of beneficial ownership. The A-shares have a nominal value of £950 in total. The B-shares have a nominal value of £50 in total. That would mean that the A-shares represent 95% of nominal issued share capital. But it does not mean 95% beneficial ownership, does it?

Since dividend and distribution rights are equal across the A- and B- shares, the A-shares are only entitled to 950/1100 =  86% of dividends and distributions.

And if Tern only owns 95% of the ordinary shares (ie the A-shares), as per the 15 Sept RNS, then Tern is only entitled to 95% of that 86% = 82% of dividends and distributions.

If Cryptosoft is sold on, Tern only sees 75% of the proceeds. This is the only part of the 15 Sept RNS which was clearly stated and –  assuming that Companies House was told a load of cobblers by Tern – just might actually be correct. But then again, it just might not be. Who knows? Aren’t there rules about submitting correct information to Companies House, just as there are rules about releasing correct information by RNS?

Here are three possible scenarios:

1)      Tern owns the entire share capital of Cryptosoft (as per the filing to Companies House) which therefore includes all the A- and B- shares. Therefore the RNS was incorrect and misleading and WH Ireland failed to check and verify it properly in its role as Nomad.

2)      Tern owns 95% of the ordinary shares (ie 95% of the A-shares) as per the RNS but none of the B-shares and some mystery party owns the other 5% of the A-shares, as is implied by the RNS. Therefore the filing to Companies House is incorrect and misleading and the Board of Tern has erred.

3)      Tern owns all the A-shares and none of the B-shares (which is not actually stated anywhere that I can see). Therefore both the filing to Companies House and the RNS are wrong, implicating the board and the Nomad.

If it is option 2), why have Tern’s shareholders not been made aware that they only have a call over 82% of dividends and distributions? And who owns the other 5% of the A-shares? Is this not a serious omission from the RNS? Does this not make the RNS misleading and as such does the RNS not constitute a Market Abuse? Where does that leave WH Ireland in its role as Nomad?

If it is option 3), why have Tern’s shareholders not been made aware that they only have a call over 86% of dividends and distributions? Again, is this not a serious omission from the RNS? Does this not make the RNS misleading and as such does the RNS not constitute a Market Abuse? Where does that leave WH Ireland in its role as Nomad?

In other words, whether it is option 1, 2 or 3 WH Ireland has questions to answer. Maybe there is another explanation. Who knows? Certainly not the shareholders.

Thus far I have examined just two RNSs released by Angus Forrest’s Tern plc. Already we have seen that his shareholders can have no idea of the capital structure of the company, how much cash has been brought into the company from sales of new shares, how much debt has been converted to shares (and therefore how much convertible debt remains to be converted to shares at a very substantial discount to the current share price), what Tern actually owns or what it is entitled to from that ownership.

The similarities to the disaster that was Digital Learning Marketplace plc in 2012 are striking. DLM’s shareholders and creditors know what happened there to their cost. So too do the vendors of a business to DLM (take careful note, Mr Penney). Tern’s shareholders elected Mr Forrest as Chairman having been told that DLM was sold when in fact it had become insolvent and underwent a CVA and restructuring so that creditors and shareholders alike lost almost everything.

In the light of the above, can Tern’s shareholders have any confidence in anything else they are told by Tern while Mr Forrest remains as Chairman? Indeed, can they trust anything signed off as checked and verified while WH Ireland remains Nomad?


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Comments

2 comments

  1. Nigel,

    Agree far from clear, but suspect that reality is option 3. Ref dividends, I would suspect that the entitlement of a B share is 1/3 that of that of an A share meaning that Tern controls 95% of the equity by value, is entitled to 95% of any dividends but holds 100% of the voting rights .

    H69


  2. nigel somerville

    Hammer – also suspect opt 3 but A and B shares rank equally for divs, as is stated in the co hse document. We can’t be v sure of much here, other than the RNSs are a dog’s breakfast and tern’s shareholders need to be told what it is they actually own.
    N


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