|Last Updated: Jan 22nd, 2017 - 10:03:10
The relationship between Derrimon Trading (DTL) and Caribbean Flavouring (CFF) has long been questionable and complaints were made in May 2016 to the regulators in this regard; one regulator has cleared the companies and the other is still conducting investigation. The complaints surrounded the amount of unsecured loan by CFF to DTL and the appointment of Mr. Derrick Cottrell as managing director of CFF given his position as chairman of DTL and whether it implied effective control. Recent headlines regarding the purchase of another block of shares by DTL in CFF has reignited concerns about the integrity of the local capital market and investor protection.
Sci-Fi or Sam-Fi
A December 22, 2016 news release from DTL stated that it made a prepayment equivalent to $4.50 per share to acquire 23,379,208 stock units in CFF pursuant to a deed dated December 15, 2016. DTL further advised that it is in discussions with the Financial Services Commission (FSC) on the matter.
The Jamaica Observer reported on January 6, 2017 that the board of CFF is seeking confirmation from DTL of its intentions on behalf of minority shareholders and information on the recent purchase of additional CFF shares by DTL.
According to an article in The Jamaica Gleaner dated January 13, 2017 an oral agreement was made in August 2014 (with two major shareholders when DTL initially acquired the 49 percent stake in CFF) to acquire 23.3 million shares at the $4.50
The take-over bid circular posted on the Jamaica Stock Exchange (JSE) website on January 17, 2017 list among documents available for inspection at Mayberry Investments Limited, copy of the agreement between the Jameses and the Offeror dated August 5, 2014 relating to the sale and the purchase of the Jameses shares (refer to page 19 item (i) (v).
DTL and CFF are publicly traded companies and with the same mentor, Mrs. Tania Waldron-Gooden, an employee of Mayberry Investment Limited the lead broker in the listing of both companies.
The former chairman and board member of CFF, Mr. Howard Mitchell is the chairman of the FSC and from the time of his appointment to the latter up to August 2016 served concurrently as chairman of both entities.
Mr. Ian Kelly is a director and chief financial officer of DTL and was appointed as a director and chief financial officer of CFF on January 1, 2016.
Mayberry Investments Limited and Proven Investments Limited have provided commitment letters to finance the acquisition of the additional shares in CFF by DTL.
Riddle me this
So CFF was listed in October 2013 at $2.25 per share and 10 months later “the Jameses” ( Mr. Anand James and his wife Dr. Joan James) made an oral agreement to sell their shares at some future date to DTL at $4.50 per share. This price amounted to a 63.6% premium on the price paid ($2.75) for the block of 44,078,122 shares by DTL at the time, which itself was 12% above the then stock price ($2.45).
So then in May 2016 Ian Kelly purportedly acted independently and without the prior knowledge of the Board acquired 2,000,000 shares in CFF at $8.00 per share.
And now a copy of the agreement between the “Jameses” and DTL dated August 5, 2014 relating to the sale and purchase of the “Jameses” shares are available for inspection at Mayberry Investments Limited.
But “After taking professional advice on the matter, that drew our attention to the principles set out in the Securities (Take-overs and Mergers) Regulations, 1999 (“the Jamaican Takeover Code”), and Part 6 (Takeovers, Mergers and Amalgamations) of the Junior Markets Rules, particularly our duty to take such steps as are necessary to prevent the creation of a false market in the Shares, we have determined that the most effective way of completing the purchase of the Jameses Shares is by way of a takeover bid”, (page 3 of offer circular) .
Here we have two publicly traded companies orally agreeing (it was said) to trade in the shares of one of the companies and effect a change in control of target firm without communicating this information to the regulators or minority shareholders- perhaps!
The oral agreement turns up in writing and available for inspection according to the take-over bid offer circular- perhaps not!
Appointment of the chairman and CFO of DTL as managing director and CFO respectively of CFF in January 2016 perhaps gave rise to a change in control of CFF. If not, the combined shareholding of DTL and Mr. Kelly in May 2016 exceeded 50% in CFF.
Perhaps the FSC under the chairmanship of Howard Mitchell, chairman of CFF at the time of the “agreement” should not have had discussion with DTL about the take-over of CFF.
It is evident that there is/was an agreement with the Jameses and consideration has passed (prepayment in full), then perhaps the delay in transferring the shares on the exchange is guided by self interest of DTL.
Price to minority
On December 21, 2016 the day prior to release of information on the acquisition, the stock closed at $12.24 and its six-month weighted average price was $7.85. The good hearted Jameses have done very well themselves given that the stock closed at $2.45 on August 4, 2014 and the initial sale of 44,078,122 units at $2.75 attracted a premium of 12.2%. The agreement to sell their remaining shares to DTL had a $1.75 or 63.6% premium above the stock price at the time of the said agreement.
The offer price of $4.50 represents a steep discount to minority shareholders and would not be allowed to move forward in a properly regulated market.
The price of stocks ought to be market determined and private deals have no place in publicly traded markets, it undermine confidence, integrity and efficiency and amputate the invisible hand. The belated concern of DTL in restricting their appetite for cheap minority shares is driven solely by tax considerations in that were they to exceed the 80% shareholding and be de-listed they would lose the tax concession and be required to repay all concessions received since being listed.
It is unfathomable that investors could one day purchase a security at market price and the next day be faced with a demand to tender to an offer, made in private, undisclosed and predating his/her purchase at a greatly reduced price (haircut). The investor’s choice if left to him/her should not be accept or reject because going private with an offeror without scruples risk losing all. And that is one main reason why markets are regulated. If it is that the regulators never envisioned this possibility it is no excuse to allow this takeover to proceed because of a loophole; fraying investor’s confidence is more damaging to the future of the capital market.
Source: Jamaica Stock Exchange, Jamaica Observer, Jamaica Gleaner
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