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The Tern warrant mystery – an Open Letter to AIM Regulation

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.

Following on from THIS ARTICLE from earlier today, I have written to AIM Regulation and asked them to step in. This is an important matter, because shareholders in AIM-listed Tern plc have just seen more than 1% of their company near-enough handed out for almost nothing, by way of an unexplained warrant exercise which they would have been unaware of. This is not an acceptable situation because the implication is that ownership rights on AIM can become arbitrary. 

Part of the problem is that there are two different Boards, and two different Nomads which are each not accountable for the other’s actions and thus what is plainly an error cannot be pinned down. This, therefore, has slipped through the regulatory net. 

Will AIM Regulation step up to the plate? It is surely simple enough for them to get to the bottom of what was correct, and what was not. As such, if shareholders have been mugged in a small way then this can be corrected. If, on the other hand, it is found that they simply had not been informed correctly then those responsible can have their knuckles rapped and we can all move on. 

The financial magnitude of the anomaly is small, but the consequences could be far-reaching. Thus I urge the regulator to deal with the matter effectively. The letter reads: 

Dear Sirs,

Tern plc (the Company) - exercise of warrants at 0.02p as per RNS released on 17 Aug 2015 

I refer you to THIS RNS

Please note the announcement herein that 588,640 warrants had been exercised at 0.02p. Please also note that this has now been reflected in a corresponding filing to Companies House HERE

The existence of warrants exercisable at 0.02p is not reflected in the audited Annual Reports for calendar 2013 or calendar 2014. In those documents, it is disclosed that there are warrants exercisable at 2p, 3p, 4p and 4.6p, but not at 0.02p. Nor does there appear to be any RNS which discloses the existence or creation of warrants exercisable at 0.02p. 

I now refer you to THIS RNS of 31 July 2013 issued by the Company, then under the name of Silvermere Energy. In this document, which details a proposed restructuring of the Company, it is announced that a warrant over 1.5% of the share capital from time to time of the Company is to be issued, exercisable at the Placing price. The RNS contains details of this Placing, at 0.23p per share. Thus we are led to conclude that the exercise price of the warrant instrument is indeed 0.23p per share. 

Please note that there were two capital reorganisations, one which was a simple share split into one new ordinary share and one deferred share for each old share (and which therefore did not alter the number of ordinaries in issue, and would leave the warrant instrument unaffected) and another as detailed HERE which had the effect of consolidating twenty old share into one new share (via a 1000:1 consolidation and a subsequent 1:50 split). This would have the effect on the warrant instrument described above of making the exercise price 0.23p x 20 = 4.6p. 

The audited accounts of the company for FY13 and FY14 reflect this position. 

It appears that the warrant instrument in question (which was previously disclosed to have an exercise price of 4.6p per share) has resulted in the issue of 588,640 new ordinary shares following a warrant exercise at just 0.02p per share. Either that, or the 0.02p warrants were not disclosed at all either in an RNS, or in the audited accounts. 

According to the FY13 and FY14 audited accounts, there were fewer than 588,640 2p and 4p warrants. The 3p warrants are accounted for HERE. That leaves just the (apparently) 4.6p warrants, or undisclosed warrants as the source. 

Thus it would appear that one of three scenarios applies, all of which would appear to contravene AIM Rules: 

1) The warrants were exercised at the wrong exercise price, thus depriving the Company (and therefore its shareholders) of approximately £27,000 in cash; 

2) The details of the warrant instrument were incorrectly reported in the RNS of 31 July 2013, leaving shareholders and potential shareholders misled over the potential (and now actual) dilution; or 

3) The warrant instrument is a different one to that disclosed in the RNS of 31 July 2013, and has not been disclosed at all to shareholders until the RNS announcing the exercise of the instrument, and thus shareholders who bought shares in Tern plc were blissfully unaware of the dilution to come. 

I would add that not only did the Audited Accounts for FY13 and FY14 not disclose warrants exercisable at 0.02p, but the final results RNS for FY13 (HERE – see note 19) and the final results RNS for FY14 (HERE – again, see note 19) also fail to disclose warrants exercisable at 0.02p, despite appearing to detail all outstanding warrants (exercisable at 2p, 3p, 4p and 4.6p in the case of the latter, and at 4.6p and 600p in the case of the former). Thus it would appear that investors have been misled. 

Since the RNS of 31 July 2013 was issued by a wholly different Board of Directors to the current one, and was signed off by a different Nomad to the current one, it would appear that under AIM Rules that both Nomads concerned can disclaim any responsibility. The same is true for the two Boards of Directors. The reasons are simple: 

1) If it is the case that the warrants were exercised incorrectly then the former Nomad and Board are not responsible for the incorrect execution and reporting of the transaction, and are therefore not obliged under AIM Rules to take any action. Thus the veracity of the original terms of the warrant instrument is not asserted, or tested, and any error does not come to light. 

2) On the other hand, if it is the case that the warrants were exercised correctly then the current Nomad and Board will be able to demonstrate full verification to support their actions, and are under no obligation under AIM Rules to take any action with regard to the previous incorrect reporting of the details of the instrument (if that is the case), or the non-disclosure of the existence of this instrument (if that is the case). Thus the veracity of the actual terms of the instrument is not tested against the veracity of previous statements, and any error does not come to light. 

3) The Audit is not the responsibility of the Nomad, so the Nomad is under no obligation to take any action to discover or correct any mis-reporting in the audited accounts. 

As such, regardless of which is the case, shareholders are deprived of any regulatory oversight. In this case, more that 1% of the Company has been given away for a negligible sum without any possible way for shareholders to foresee it. They will have been unaware that they were getting less than 100% of what they thought they rightfully owned. 

I put it to you that this is an unacceptable situation: 1% of the Company, or £27,000 in cash may seem relatively trivial, but there are those who have bought this stock in the belief that it will be worth a very substantial sum in the fullness of time, and that 1% would still amount to a sizable asset. What if it were 10%, or 50% of a company with a market capitalisation of, say, £1 billion? Or £10 billion? Where does one draw the line?  

I am sure that the London Stock Exchange will not wish the AIM market to be seen as market where equity ownership rights are arbitrary. 

Shareholders should have been able to see this coming and have been deprived of correct reporting somewhere along the line. Yet each Nomad in question is in the comfortable position of being able to blame the other, as are the two Boards of Directors.  

The fact of the matter is that either the old Board and Nomad, or the new Board and Nomad (or all of them) have erred here, to the detriment of the Company and its shareholders who have been misled as to what they own. That undermines the integrity of the AIM market, and thus brings it into disrepute. 

Please would you investigate the matter so as to ensure that shareholders have not been unduly deprived of their ownership of the Company, and enforce any corrective measures which may be necessary. 

Please would you also investigate whether one or other of the Boards/Nomads has failed in their duties under AIM Rules and AIM Rules for Nomads, and take any action which may be appropriate in a public manner so as to reassure investors that these matters are taken seriously by you. 

Thirdly, please would you ensure that shareholders are made fully aware of their ownership rights. This is an entirely reasonable requirement of any company listed on any market, and this information is something which shareholders should be entitled to anywhere. Any sense that ownership rights on the AIM market of the London Stock Exchange are of an arbitrary nature would be very damaging. 

This is an important matter which needs to be addressed. Otherwise AIM will be seen as merely a Casino, rather than the world's most successful growth market

We wouldn't want that, now, would we? 

Your humble servant,


Nigel Somerville

The Deputy Sheriff of AIM

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  1. Hi Nigel
    I’m sure all Tern shareholders, me included appreciate your efforts in getting to the bottom of this matter. Thank you.


    Rob Ward

  2. Nigel Somerville

    Rob – thank you. I’d just like to see that everything is done correctly and it is clear that something has gone wrong somewhere. For the avoidance of doubt, I’m am still no bull of Tern (although the market heavily disagrees with me!) and I think the current market cap discounts an incredible amount. But the point here is that something has not been done correctly. If Tern succeeds I will be very happy for its shareholders. But I’d like to see them get all of what they deserve, without a few trimmings missing.

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