GFH 2017 Unexplained Pricing on USD 314.5 Million Share Issue - What Did We Learn About Transparency?

AA Promised a Rant and Here it Is

In an earlier post, I outlined what appears to be a discrepancy between the price at which GFH issued some 1,186,904,148 new shares in 2017 and the price that the Board requested shareholders approve and which they did approve at GFH’s 1 March 2017 EGM.

According to AA’s analysis, on average the shares were issued at USD 0.2505 per share (a 5% discount to par value) instead of the approved price of USD 0.953 per share.

AA could find no explanation from GFH for the discrepancy. So let us assume that the lower pricing is appropriate.  The fact that there is no disclosure suggest some serious shortcomings in disclosure.

This is not simply an exercise in quibbling.  The difference in price had an immediate impact on dilution of the existing shareholders.  Had shares been issued at USD 0.953 each, GFH’s “old” shareholders to use Abdul Muhsin AdDarwiish’s happy turn of phrase would own some 88% of GFH.  Instead they own 61%. 

That in turn, leads AA to ask did shareholders understand the potential impact of dilution.  Was that impact sufficiently disclosed to them at time of approval? Was the significant change in price disclosed to them prior to conclusion of the transaction?  Were they asked to reaffirm their approval? Or otherwise consulted?  

You can read more details here. 

Let’s turn to the lessons AA thinks regulators, stock markets, shareholders, and GFH management should have learned from the share issuance. 

Dilution

1. If we take the EGM minutes as an accurate and complete account, then there was no discussion about the effect of dilution on current shareholders resulting from the issuance of a potential 3.4 billion of new shares.
2. Shareholders didn’t ask.
3. GFH’s Board did not raise the topic.
4. Perhaps, the Board are forgetful. If only they remembered, they would have raised it.
5. Perhaps, they forget they have a fiduciary duty to their shareholders. So they don’t feel a need to raise it.  The shareholders should look after themselves.
6. Whatever the case, it’s clear that the authorities need to establish a rule. You must tell your shareholders in writing what the proposal means.  If all the shares being offered are taken up, your shareholding will go from x% to y%. You must provide this document to them as part of the EGM package prior to the meeting.  And it must be clearly mentioned and discussed at the meeting.
7. External auditors should also be counseled that they have a fiduciary duty to the shareholders on matters like this, not a fiduciary duty to the board.  And that duty means they must bring up the topic if no one else does. One way to solve this issue so external auditors won't be shy out of concern about re-appointment is to make it a requirement that when dilution may occur, the external auditors are required by law to give a report.  
8. Representatives of the Central Bank, the Ministry of Commerce should be trained to make sure dilution is discussed, raising the topic if they have to. 
9. When the promised issue price is changed in a way that would increase dilution, as is the case here, It seems that the board at a very minimum needs to advise shareholders.  AA's minimum though would be a bit stricter to give shareholders a second vote at a second EGM.  Why? Because the change in price dramatically changed the shareholders' ownership interests in the company.

Disclosure

1. When there is new share issuance, details of the transaction need to be provided in writing to shareholders via a discussion in the annual report and a special disclosure on the exchanges where the company is listed.  Both ways.
2. The ludicrous two line “disclosure” given by GFH is completely inadequate.
3. Because of this it is clear that the authorities need to establish a rule requiring such a report and mandate its format and contents as issuers appear unable to determine what material information should be included. 
4. Data should include:  number of shares issued, class of shares, issue price per share allocated between par value and share premium. Gross proceeds, expenses, net proceeds.
5. If there are unusual accounting entries, e.g., the unexplained USD 24.3 million debit to the Capital Adjustment Account, these need to be explained in understandable language in financial statements.
6. Note 16 page 41 in GFH's 2017 AR has the following “explanation”: “Shares were issued to the subscribers resulting in increase in share capital by US$ 314,530 thousand. Excess over the par value of US$ 0.265 per share has been considered as share premium and reflected accordingly under share premium account (including transfer from capital adjustment account).”
7. That is not an adequate explanation.
8. And, no, management cannot hide behind the bogus excuse “the auditor made me do it”.  If the auditor is adamant that its language is unalterable, which seems unlikely. AA has never had a problem with auditors refusing to provide additional information. Then the management can explain in the MD and A in the AR. Or by  other means.
9. Frankly, the opaque language used in this note looks like a deliberate attempt to keep information from readers of the financials, to obfuscate the transaction, though it could also be the result of other deficiencies in aptitude or attitude.
10. How can a share premium be negative?  
11. Why is there a need to use the capital adjustment account? What on earth is being adjusted? 
12. If shares were issued at a discount, then that needs to be clearly and simply stated.
13. (شفافية) is not simply a word, or an expression of intent.
14.  It is proven by action – providing detailed, understandable information. 
15. Failure to do so is (خداع) in the worst case.  Or deficiencies in attitude or aptitude.  In either of these two cases one probably would be well advised to entrust one's money to other stewards.