By Nigel Somerville, the Deputy Sheriff of AIM | Friday 4 September 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.
As previously flagged HERE there is some mystery regarding a warrant exercise announced by AIM-listed Tern plc (TERN) on 17 August (see HERE). I wondered where these warrants, which were exercised at 0.02p, had come from. Following quite a bit of enquiry, it is still unclear. What is also unclear is where the responsibility may lie. So this is not an attack on Tern plc, or its Directors, or its Nomad. It is more a case of how the current regulatory set-up has once again failed investors. In this case it is in a small way, but next time?
To outline the problem, we need look back to the FY13 and FY14 audited accounts. In both of those there are details of outstanding warrants given. None are disclosed as being exercisable at 0.02p. We have some at 2p, 3p, 4p and 4.6p. But none at 0.02p.
The RNS linked above announces the conversion of warrants at 0.02p – 588,640 of them. If we look at the FY14 accounts, we see that there are not enough 2p or 4p warrants for them to have morphed into the warrants in question. Further, given that an exercise of 3p warrants is also announced in the very same RNS, one might presume that the warrants in question are not the 3p ones either, and in any case I have accounted for those. That leaves the 4.6p warrants – of which there are enough. Have the warrants which are reported in the audited Annual Accounts to be exercisable at 4.6p (which would have brought in a useful £27,000 or so) been exercised at 0.02p (to bring in enough for one of Tom Winnifrith’s bags of crisps)?
If we go back to 31 July 2013, we can see HERE that a warrant instrument was issued, exercisable at the same price (0.23p) as a placing also announced in that RNS, over 1.5% of the company from time to time. Following various share splits and consolidations which had the effect of twenty old shares becoming one new share, the effect on the 0.23p exercise price comes out at 20 x 0.23p = 4.6p. By the time of the FY14 accounts, that 1.5% of the company appears to be reported to confer the right to buy 678,427 new shares at 4.6p on the holder of the warrant instrument.
So it would seem that warrants which are disclosed in the FY14 annual report to be exercisable at 4.6p were exercised at 0.02p. This issue of shares has since been notified to Companies House, with 0.02p being stated as the price paid, and that they were issued for cash. Either that, or a raft of warrants were not disclosed at all.
Now this raises a few questions. Firstly, one would surely presume that all has been carefully checked by all those who are currently responsible for the company - especially in the light of a series of restatements and clarifications earlier this year. But there is another fly in the ointment: the original RNS which announced the creation of this warrant instrument was signed off by a different Nomad to the current one. The RNS was issued by the company while it was still called Silvermere Energy, not under its current name of Tern. Not only that, but the board of directors at the time consisted of a completely different group of people. Clearly the current board and Nomad cannot be held to account for the actions of the previous incumbents, and vice versa.
What is clear is that something has gone wrong. As far as I can see, either
a) the creation of the warrant instrument was incorrectly disclosed in the original RNS, and incorrectly stated in the audited Annual Reports, or
b) a completely different warrant instrument was exercised, one which was not disclosed in the FY13 or FY14 accounts, nor announced by RNS
c) the warrant was incorrectly exercised, depriving Tern plc of a handy £27,000.
I simply have no idea which is the case. And thus we have no idea whether the current Board of Tern plc or the old Board (led by former CEO Andy Morison and former Chairman Frank Moxon) of what was at the time called Silvermere Energy has messed up here. The same goes for the old Nomad (Sanlam) or the current Nomad (WH Ireland). And it is also unclear whether the audit passed over something erroneous, something missing, or got it all completely correct.
What I can accept is that the current incumbents will have been very careful to be sure to have got it right, especially given the series of embarrassing clarifications earlier in the year. But then the RNS of 31 July 2013 would have to be wrong – and that is not the responsibility of the current Nomad. If Sanlam messed up you could hardly yell at a different Nomad for that. If it was incorrectly reported in the audited accounts, that is down to the auditor and not the Nomad at all.
I could also accept that the 2013 RNS was correct and that the exercise of the warrants was not. That would be consistent with the audited accounts. But an incorrectly handled warrant exercise would not be the responsibility of the old Nomad to oversee.
So where does that leave us? Well, I guess losing out on £27,000 (or not!) is relatively small beer. Someone has walked off with over 1% of the company for more-or-less nothing, and may have had a right to do so, or may not. It doesn’t sounds much, but given the expectations of some on the BBs there are those who would think it will end up being a great deal. Either way, shareholders have not been correctly told about this.
As I said at the start, you can’t pin the blame on anyone here. The old Nomad will say they checked and verified at the time, and it has nothing to do with them now. The new Nomad will say the same, but in reverse. Was it the old Board or the new one?
If anyone thought that they’d been done over here, who would they complain to: AIM Regulation? The FCA? Which Nomad missed a trick? We simply don’t know, so I guess that nothing will be done. Perhaps nothing can be done.
But what if it was not 1% of the company, but 10%? What if it was a company worth not (say) £10 million, but £10 billion? Would anyone bother to get to the bottom of it then?
So where is the regulatory oversight here? Everyone can blame everyone else. But it is the shareholders of Tern who have lost out. Either they were unaware that 1% of the company could be given away (effectively) or they’ve been mugged.
Regulation? What regulation?
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