With prolonged operational delays, questionable management behaviour and all sorts of other nonsense forming part of everyday life on AIM, shareholder activism has become a vital method of self-preservation for private investors in this market. If managed properly, shareholder activism can be an effective way for private investors to get their voices heard and instil real change at a company level. This grassroots approach can often be the only way for retail shareholders to protect the value of their holdings.
Naturally, shareholder activism is not always welcomed with open arms by companies themselves, and activists can expect filibustering, eye-watering legal fees, and aggression on the road to getting their desired outcome. But perseverance is key, and if activists are ultimately successful, then the value added to their investments will more make up for any troubles along the way.
We spoke to Dan Smith, a major figure in a group of shareholders who took on the board of Management Resource Solutions (LSE:MRS) in 2016 for an example of activism and the value it can end up adding.
Turn for the worse
MRS is a support services firm focused on Australian energy and mining that sources contractors from a database of more than 23,000 professionals around the globe. It also operates a subsidiary called Bachmann Plant Hire, a bulk earthworks specialist. It listed on AIM in December 2014 with the aim of strategically expanding and diversifying. Ambitiously, it even aimed to distribute up to two-thirds of net profits after tax to shareholders via dividends at the time of listing.
Problems at MRS began on 26 October 2016, when the firm suspended its shares from trading after an audit process revealed problems in its consulting arm. It was later revealed that this related to two consultancy contracts in Papua New Guinea and New South Wales that had failed to meet financial obligations. Part of this side of the business, based in Guernsey, was later put into liquidation– the rest continued to leak money.
Just one day after the announcement of MRS’s suspension, the company’s founder and chief executive Paul Morffew was fired. He was replaced as chief executive by Joe Clayton, formerly boss of mining services provider SubZero, which MRS had acquired just a month earlier. MRS’s board, under the guidance of chairman Murray d’Almeida, said Morffew was not fit to run the enlarged group.
With MRS also claiming that funds raised in August 2016 for the acquisition of SubZero had not be applied as promised, Smith said it was initially hard to determine which management team was in the wrong.
He told us: ‘We were hearing conflicting stories from both sides and neither was positive. The chairman was saying that the contracts on the consultancy side negotiated by the CEO had significant liabilities and the CEO was saying that he had tried to remove the chairman as he was holding the business back.
‘We as shareholders were stuck in the middle. Because of everything that went on, we wanted to get in two UK-based non-executive directors as quickly as possible to protect shareholders. Regardless of who was right and who was wrong, we didn’t know any of the people who were now on the board, so we were naturally sceptical.
‘As our money was locked up due to the suspension of trading we felt like we had no choice other than to take matters into our own hands. We just wanted some protection for our money.’
With shares now suspended and MRS’s future looking uncertain both in managerial and financial terms, Smith said he and several other investors on Twitter shared their concerns and decided to club together. An activist investor group was formed.
The group’s first request was that Clayton and d’Almeida appoint two UK non-exec directors of the activists choosing. The investors felt that getting two UK non-executive directors on board would be key to protecting their interests. Two were needed as one could get voted straight back off with a 75pc majority vote. The group threatened to call an EGM requesting d’Almeida’s removal if this demand was not met.
MRS kept putting off the group’s demand, which Smith saw as an act of self-preservation that indicated that the new management had something to hide. Furthermore, at its AGM in December 2016, the firm took the remarkably brazen move of seeking approval to issue new shares without shareholder consent. Despite MRS telling investors that the proposal was not ‘designed solely to dilute existing shareholders’, investors understandably voted against the proposal to protect the value of their suspended shares. This is where things started to get really confusing.
The first challenge was gathering enough shareholders together to call a general meeting of the company. Under English and Welsh Company Law, to call a GM, shareholders must collectively have a 5pc stake in a company. However, this percentage threshold can be different for companies registered in other countries or which have adopted special provisions in their articles of association.
Having identified enough shareholders the next obstacle to overcome was to make sure enough of those holders had their names on the company’s shareholder register and were “members” of the company. This meant getting stock certificated (i.e. transferred into physical share certificates). As most of MRS’s UK shareholders shares were in nominee accounts it was difficult to round up all the nominees needed to get to this figure in such a short space of time. Smith and Leon Hogan, another significant shareholder, got in contact with former MRS chief executive Paul Morffew who, alongside wife Santina, still owned a large stake in the firm to call the general meeting.
Morffew was supportive of the proposals outlined by Smith and Hogan as they protected his position as MRS’s major shareholder; not to mention the fact there was little love lost between himself and d’Almeida.
On 9 January 2017, Morffew issued a request for an EGM. Let’s call this EGM 1. Among other things, the EGM included a proposal to appoint two new directors to the MRS’s board. The chosen candidates were Nigel Burton, an investment banker, and Trevor Brown, a strategic investor.
In response, MRS issued a statement accusing Morffew of a variety of misdemeanours during his time as CEO. Among these, it said he had falsely acquired A$15.2m of funds by claiming MRS was profitable when it was, in fact, losing money. It suggested he was now trying to regain control, so he could misappropriate funds.
Chairman d’Almedia advised investors to vote against the activists’ proposals and attempted to further smear Morffew by claiming: ‘Morffew has undertaken a campaign to stifle the directors’ ability to put the business back on an even keel and correct the catalogue of errors, misjudgements and inappropriate behaviour that put the business under such severe pressure.’
In a separate announcement after the general meeting was called, MRS once again attacked Morffew, blaming him specifically for the ongoing suspension of shares. It said: ‘The MRS Group accounts audit is ongoing and proving more difficult than anticipated as a result of financial and operational issues kept from the board by former CEO Paul Morffew.’
For its part, the Morffew camp, backed by the activists, was unwilling to let this slide and on 31 January 2017, a second requisition signed by Morffew’s wife Santina was released. Let’s call this GM 2. EGM 2, which had been delayed by MRS, took a more aggressive approach than its predecessor, calling for a vote to sack d’Almedia.
Meanwhile, in February, MRS declared the original EGM invalid on a legal technicality. As an olive branch, MRS said it agreed that more board members were needed to ‘operate appropriately’.
But this setback was not enough to stifle the activists’ increasing momentum. On the day of EGM 2, the pressure became too much for d’Almeida and he resigned from MRS’s board. He was replaced by former MRS director Chris Berkefield, who was voted out at the firm’s 2016 AGM.
Just days later, the true scale of the financial dire straits that MRS had been dragged into became truly apparent. The firm said a fundraise was ‘urgently required to ensure the continued solvency of the group.’ It added: ‘If a fundraising is not concluded and suspension in trading of the Company’s shares is not lifted, by 28 April 2017, its AIM listing will be cancelled.’
A condition of the placing – you guessed it- was the appointment of Burton and Brown as non-exec directors. John Zorbas, the chief executive of URU Metals, was also brought on board as MRS’s new chairman. URU Metals was and remains a significant shareholder in MRS.
Importantly, Morffew’s name was also cleared in the placing notice, with MRS stating: ‘the company has found no fraudulent activity, misappropriation of funds or gross misconduct by the former CEO, Paul Morffew, and will not be pursuing these or other matters any further’.
With a new management team in place (minus Clayton, who remained chief executive) things moved forward quickly from here. The placing – and an additional placing – were undertaken and MRS returned from suspension in May 2017. Clayton then left MRS in August before current chief executive Paul Brenton came on board in December 2017. As it stands, just one member of the firm’s old guard remains in place- finance director Tim Jones.
However, it was not until last week that true vindication came for the activist shareholders, with MRS announcing its first set of six-month results under the guidance of its new board members. The business reported a net profit after tax of $2.5m in the first half of its 2018 financial year, a noteworthy turnaround from a net loss of $4m a year previous that exceeded expectations.
Looking deeper, its beleaguered consultancy division moved from a loss of $1.8m to H1 2017 to a profit of $1.9m in H1 2018. Ironically, Morffew’s controversial acquisition of SubZero couldn’t have been timed more perfectly. It completed around the same time as coal prices bottomed, giving MRS maximum upside exposure as commodity prices recovered.
In its outlook, the company said it is currently working at full capacity and has a strong pipeline of work to complete. Indeed, it expects to see further progress in 2018-2019 as debt continues to be repaid from strong operational cash-flows generated by the organisation’s restructuring.
As Smith, who now owns a 4.2pc stake in MRS, put it to us: ‘The latest results mark the first full six months in which they were in charge and they have managed to turn a severely loss-making organisation into one that is generating profit in a very short space of time.
‘MRS is a great business that is capitalising of the boom in coal prices by being the largest services provider for the biggest coal producing area in Australia. It’s a great time to be in that sort of firm but the opportunity was being ruined by people who did not know how to run a company basically.
‘I have absolutely no doubt that MRS would have gone into administration if we had we not done what we did and that new board not taken over. There was no management accounting information, they didn’t have a handle on their expenses or revenue, and they had no sight of what was possible and what wasn’t. It was just a joke and as shareholders, we were never privy to any of this. We managed to get some good guys in there who know how to run a business.’
Rooting for the underdog
This lengthy case study reveals two key points about shareholder activism. The first is that taking on a company is not easy. It a great deal of requires perseverance. Even with access to Morffew to call a general meeting and social media to build a presence, MRS’s investors were hit by excessive fees, stalling board members and legal technicalities designed to thwart their efforts. Perhaps it is time for a change in the way shareholders can hold board members to account. Is it really fair that MRS’s investors were unable to have any input as their shares sat locked up in suspension?
As Smith put it to us: ‘We got to where we wanted to be, but the journey was so awkward and difficult. We had to get holders across the world. It was like a campaigning when you’re a politician. The Nomad was also complicit in these delays. The whole process was fairly appalling.
‘Activism is not something I would want to do every week, but it is an interesting way of seeing how some people operate and it is really a chance to get to see the best and the worst of people. It also really highlights the power of social media. It really would have been impossible to galvanise a group of individuals and be as mobile and act as quickly as we could without twitter groups to contact people.
This brings us on to our second point. If activists are willing to see their efforts through to completion, then the rewards they can receive can be enormous. Thanks to MRS’s investors, the firm has been able to transform from a sinking ship into a strong, stable profit-maker in just six months- and this looks set to continue. The value of a strong management team cannot be understated, and sometimes shareholder activism is the only way of ensuring the correct leaders are in place.
Authors: Daniel Flynn & Ben Turney
The author of this piece does not own shares in the company mentioned