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Board should get shareholder permission for rights issue

Sunday, February 8, 2015

Rollin Bertrand

I write in response to an interview in the February 5 Business Guardian with Mr Wilfred Espinet and a letter by Mr Peter Permell concerning the TCL Board’s proposal to remove the company’s 20 per cent limit on shareholding at a special meeting of shareholders tomorrow. Mr Espinet and Mr Nigel Edwards also appeared on Hema Ramkissoon’s morning show to further press their case in a live interview. 

What worries me is that neither the chairman of TCL nor the board is making any effort to have the conversation anchored in facts about the company—and rather than clarifying issues—are allowing misinformation to pervade the marketplace. Let me try to deal with the most egregious errors being perpetuated:
1. Constrained shareholding companies: It is not true that “TCL is the only company on the stock exchange that has a restriction on its share ownership.” Both NFM and NEL have 10 per cent restrictions on their share ownership. 

TCL, NEL, and NFM are called “constrained shareholding companies.” Constrained shareholding is very common on stock exchanges all over the world, but especially in emerging markets. Even in advanced economies such as Canada, there are limits on the ownership of banks (like RBC) and insurance companies. Air Canada has a 15 per cent limit on a single shareholder with 25 per cent aggregate for non­‐residents.

2. Constrained Shareholding is not an obstacle: Given the pervasiveness of “constrained shareholding companies” in emerging and developed stock exchanges, it is clear that the provision is not an obstacle to the raising of capital. 

In 2000, TCL issued 40 million shares at $5 per share, in a Rights Issue, and raised $200 million with the 20 per cent limit on shareholding in place. This was an accretive transaction unlike the highly dilutive proposal to issue over 160 million shares to raise US$50 million. All over the world, constrained shareholding companies raise both debt and equity capital to fund their growth and development and it is clear that the TCL Board needs to learn how to do it.

3. Rights issue will fail: The current plan of removing the 20 per cent and then moving swiftly into a Rights Issue without seriously entertaining other options is clearly tailor­‐made to give Cemex control of the company. Existing shareholders who have seen capital depreciation and no dividends since 2007 are not likely to participate in the Rights Issue. 

This maneuver is a classic “squeeze out” of small shareholders by a large shareholder who has control of the board. When the Rights Issue fails and Cemex takes up everyone else’s shares, then the board will cry “crocodile tears” and say” well everyone had a chance” and “if you don’t want it, let Cemex take it”. 

Anyone with their ears to the ground in this current economic climate—with such instability in the price of oil—knows that investors will be very tentative about participating in a Rights Issue. Mr Espinet also knows that but he “just playing dead to ketch Corbeau alive” (he will need to explain that expression to half his board)

4. Rights Issues is a bad deal: the proposal to raise US$50 million via a Rights Issue is a bad deal for all shareholders except Cemex. Due to the high dilution it will permanently condemn TCL’s share prices to the basement and the price may even go lower than the IPO price of $0.75. It is the Lenders who must take their fair share of the burden that they are now trying to push on to shareholders. 


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