Thursday, June 28, 2018 02.52PM / By Nonso Okpala
An integral component of the long-term strategy of any company is corporate governance, epitomised by transparency and accountability. By extension, it is also the single most important means of sustaining the vibrancy and relevance of any capital market in the world. Furthermore, it has been observed that regulated markets with that adhere to best corporate governance practices have attracted and retained the confidence of investors, local and foreign alike.
As the CEO of VFD Group Limited, a company implementing a long-term investment strategy in the financial services industry, I basically assess companies on three cardinal points. First, the presence of a visionary and selfless leader as espoused by Jim Collins in his book, “Good to Great”. I also look for companies that have strategically positioned themselves within the context of their operating economy. These are companies that have developed a niche, either by way of technology, regulations, efficiency, etc., and established a moat around their business, as a barrier against competitors. The last cardinal point I consider is the company’s adherence to best practice in corporate governance, regardless of the local governance standards or regulatory requirements.
In the course of our operations, we have invested in a few listed companies – despite being mainly focused on private investments – and we intend to increase our capital allocation to this class of investments. One of our early investment picks was NEM Insurance Plc. The company had been a diamond in the rough for years with its market price then below N1. However, our valuation of the company, on a futuristic earning basis, was conservatively about N4 per share. This valuation has subsequently been validated by market trends; as at 21st June 2018, the market price of the stock was N3.04. We invested in the company based on our confidence in the long-term prospects of the company and its high score on our three-assessment parameters (i.e. strong leadership, strategic positioning and best practice in corporate governance) particularly the first two parameters.
NEM Insurance has a visionary leader, Tope Smart. He stands out as an extraordinary leader and is remarkably humble at it. He took on a struggling company in 2007 and bootstrapped it into one of the top five insurance companies in the industry. The company has doubled shareholders’ funds in the last five years and consistently paid dividends over the stated period. He has also built a team of remarkable lieutenants who rank as the best in the industry on a cost basis consideration.
As a result of their strategic positioning within their operating economy, the company not only enjoys the insurance regulatory environment, but has further enhanced its economic moat via efficient performance in a sector that is spectacularly known for inefficiency and poor regulatory compliance.
Unfortunately, it appears that the company is not nearly as strong on governance practices, relative to its stellar performance on the other two counts as stated above. I will elucidate with the organization of the company’s purported 2018 Annual General Meeting (AGM).
As a background, the Directors of the company collectively own less than 23.73% of the company’s issued shares. 22.98% of the 23.73% of the shares attributed to all Directors are held by four Directors (the “ruling 4”) out of ten Directors (source: NEM 2017 Annual Report & Accounts). On closer examination, the situation gets even more interesting. The same audited financial statements reveal that only 16 shareholders, inclusive of the “ruling 4” Directors, have up to 50m shares each and this group of 16 shareholders collectively controls 52.11% of the company’s issued shares. The implication is that there are 12 shareholders who collectively control 29.13% of the company’s issued shares that are not included in the management of the company. VFD Group is one of the 12 shareholders, with a 2.11% stake. In recent times, we have made efforts to identify the other 11 shareholders and observed a trend of exclusion of these shareholders from the activities of the company. For instance, as a run up to the 2018 AGM of the company, most of these shareholders did not receive notice of the meeting, the proposed special resolutions, proxy forms and audited financial statements as required by CAMA. This is extremely suspicious, particularly if one considers the special resolutions proposed for consideration and approval at the purported AGM.
First, special resolutions are usually passed by 75% of the votes of shareholders present and voting in an AGM. In the case of NEM, none of these resolutions can be passed if the 12 excluded shareholders were present and voted against the resolutions. It will be mathematically impossible because if all shareholders are in attendance, the 12 shareholders would represent 29.13% of the possible votes. This will preclude the possibility of achieving the 75% approval that is required for the resolution. This is further compounded by the fact that 100% attendance of its shareholders in NEM’s AGM is impossible. Thus, the only way to assure the passing of such resolutions (if management is not sure of the position of the 12 shareholders) is to tactically exclude them so as to ensure victory if a poll is conducted.
I am certain the question running through your head is, why go through all of these, at the risk of regulatory sanctions? Why risk the company’s reputation and particularly jeopardize the otherwise stellar achievements and track record of the Group Managing Director? The answer is simple: the company is run by a minority group of shareholders, “the ruling 4” Directors, who want to secure their hold on the company, at all costs.
The Directors, at the purported AGM, sought a resolution to issue 1.056bn shares of the company by way of private placement, at a price of N2.50. Looking closely at the proposal reveals why, in the words of former President Olusegun Obasanjo, “it is a do or die” affair for this ruling group of Directors. By maintaining the status quo and buying up shares on the floor of the stock exchange, it is currently impossible for anyone with minority holding to gain majority shareholding, and neither is it possible through fair and equitable rights’ offers. Nevertheless, the proposed special/private placement makes it possible for “the ruling 4” Directors plus the “special interest” beneficiary of the special/private placement to achieve a super majority.
Putting this in clearer context, post the proposed private placement, the collective stake of the “ruling 4” Directors plus the special interest to whom the placement shares are issued will increase to 35.82% from 22.98%. Kindly note that the provisions of the special placement gives “the ruling 4” Directors the right to pick who these shares can be allotted to. They can even allot the said shares to themselves or any one of them in the absence of any sensible checks and balances.
In truth, if the intention of the “ruling 4” Directors is to increase their interest or influence in the company, I have no fundamental objection to this goal. After all, we believe that the interest of shareholders is best served when management is significantly invested in the subject company. But the offer should nevertheless be appropriately priced. If I were to negotiate on behalf of fellow shareholders, I would place a price tag of N4 per share as I initially stated in this article and every kobo of that valuation can be justified. However, do not take my valuation as it is, let’s look to the market for the appropriate valuation of the company’s shares. The special placement is priced at N2.50 while the market price is currently N3.34 as at 27/06/18, representing a discount of 25.15%. This is clearly unusual and indicative of management’s destruction of other shareholders’ value and is designed to grant inordinate gain to an unidentified “special interest”. The question is: who will these shares be allotted to?
As an investor and specifically a shareholder of this company, VFD Group will like to participate in this offer. In fact, we will like to take up the entire offer. Why is such a compelling offer restricted to the exclusion of other shareholders who are willing and able to participate? How do you offer a significant stake of a company via a special/private placement priced at a significant discount to market?
My basic understanding of special/private placement posits the following considerations:
If any of the above stated is the situation with NEM Insurance Plc, then the offer as proposed will be in the best interest of the company and shareholders alike. Unfortunately, this is not the case. Shareholders are willing to participate in a public or rights offer because the company is doing very well. As mentioned earlier, the Management of the company have done remarkably well based on the operations of the company and this is indicative in the current market price, profitability and industry ranking of the company. The company is also not cash-strapped; in fact, the Board proposed and obtained approval for the payment of 10k/share dividend at the purported AGM and has consistently paid dividend in the prior years. It is also not under pressure by regulators to recapitalise, as it is one of the few insurance companies that has maintained a clean bill of health. By the way, to date, no one has explained to shareholders what the funds to be raised will be utilised for.
So, what is the justification for the proposed special/private placement? What are the proceeds of the proposed offer for? If we must raise funds, why not do it via rights issue or public offer? A private placement appropriates the value in the company for the benefit of a few and savvy shareholders will have none of this.
On a general note, I will like to address the role of institutions in the pursuance of best practices in corporate governance. Their roles are integral to its attainment or otherwise. I have reviewed the activities of our corporate regulators e.g. SEC, NSE, CAC, NAICOM and others and I am extremely confident in their capacity and moral commitment to upholding global best practice standards in governance in our market. They have demonstrated this time and time again and we have no doubt that it will sustain through the foreseeable future. It is important to ensure that this governance standards are not only upheld but are seen to be upheld by all relevant parties, including NEM Insurance Plc and all auxiliary and related parties or officers of the company, such as the directors and the company secretary, as well as the Company’s Registrar, APEL Capital & Trust Limited. These parties all owe a fiduciary responsibility to all shareholders and are expected to always act in the best interests of the shareholders.
Before I conclude this piece, I will like to state a few things about VFD Group as a background to this matter, and with specific reference to our investment in NEM Insurance Plc.
In conclusion, I call on the Board and Management of NEM Insurance Plc to set aside the purported 48th AGM of the Company and the resolutions passed thereat. This should not be done with the mind-set of a victor or vanquished but should be done in the interest of all shareholders, majority or minority alike. I am certain that if we do the right thing by the company, all shareholders will be better for it in the long run instead of a slow and deliberate process of destruction of value that is inevitable, if we continue down this path. In the meantime, VFD Group will take all necessary lawful steps to protect its investments in NEM while supporting the company to continue its growth trajectory.
Group Managing Director/CEO of VFD Group Limited
Twitter Handle: @nonsomokpala