Yesterday the shareholder activists at Management Resources Solutions (LSE:MRS) were defeated. Having requisitioned a general meeting to seek replacement of the board, following a highly controversial acquisition, MRS’s directors were able to corral 40.7% of the company’s shares into a supportive voting block. Although this meant they won the battle, questions are now being asked around whether or not an undeclared concert party exists at MRS and, much more significantly, whether or not any such concert party should be required to make a takeover bid?
The recent trouble all began on 28 March, when MRS announced the £1.32m acquisition of Alerion Consulting Limited. The RNS was released at lunchtime and within an hour an anonymous twitter account started releasing more information about the transaction tying Alerion to Leon Hogan, a major shareholder in MRS.
This all made for uncomfortable reading, especially in the context of how much MRS paid for Alerion. MRS had announced that its target was only set up on 03 August 2018. In its first eight months of trading the company had made a loss before tax of £88,800 and had tangible assets of £47,650. Eyebrows were already raised at the £1.32m price tag MRS was going to pay for this business, but when the anonymous Twitter account weighed in with its contribution shareholders were quickly up in arms.
Whoever was behind the Twitter account knew what he or she was doing. The strong likelihood is that person or persons had advance warning of the Alerion deal. It is impossible to believe that whoever created that account could have pieced together the links between Hogan and Alerion in just an hour. No, this was a carefully constructed hit, but irrespective of this the allegations were serious.
So much so in fact, that MRS’ Nomad stepped in and forced the company to take action.
On 15 April, MRS released this bizarre update. In it the company went to great length to clarify its relationship with Hogan and detailed the various business dealings between Hogan, John Zorbas (Chairman of MRS) and the vendors of Alerion. Although it doesn’t appear that anything criminal occurred, the cosy nature of the various parties and the £1.32m price tag assigned to Alerion left shareholders feeling aggrieved.
Prior to this, Hogan and Zorbas had been instrumental in the original shareholder action, which removed the then board of directors. Both were seen as champions of MRS’ long standing shareholders, so for the pair of them to have been involved in a deal, which is widely seen as a stitch up, has created a deep sense of betrayal.
In its defence, MRS did announce on 16 April that its legal advisors would “draw up a report to assess the merit or otherwise of… any potential conflicts of interest” in the Alerion transaction, but six weeks later and there is still no sign of this.
This promise of the report did nothing to soothe shareholder anger and the requisition for yesterday’s meeting soon followed.
Unfortunately this was always doomed to fail.
The Alerion transaction involved the issue of 26.4m consideration shares at 5p per share. This equals 11.8% of MRS’ issued share capital. When combined with the 39.9m MRS shares not in public hands (as of 16 April) and Hogan’s 17.6m, meant that the board could pretty much count on at least 37.6% of the company voting in its support.
As it happened 40.7% of MRS’ shares voted in favour of the board yesterday, so the directors were able to pull in some small additional support from elsewhere.
For MRS’ wider shareholder base, the message is simple. Tough luck.
What happens next will be intriguing.
Some MRS shareholders have talked about requisitioning another GM. This would be pointless. The MRS board has already revealed itself willing to dilute shareholders and put new shares into friendly hands, so as to secure its position.
Another alternative is simply for MRS’s shareholders to accept that it is game over, sell their shares and just walk away.
However, what would be very interesting to see is whether or not anyone gets the Takeover Panel involved.
After all, there could well be an argument that an undisclosed concert party is exerting management control over MRS. If this is the case, and such a concert party exists, then based on yesterday’s voting records such a concert party would own >30% of the company’s issued share capital.
According to MRS’s website, the company is subject to the City Code on Takeovers and Mergers, even though it is an Australian-registered company. Under the rules of the Takeover Code, any concert party that has a >30% stake in a listed Plc is required to make a takeover bid for the company at the highest price that any member of the concert party has paid for stock in the last twelve months.
If the Takeover Panel were to look at this episode and decide that the MRS board was working in concert with Hogan and Alerion, then any bid would have to be at least at 5p per share (the issue price of the Alerion consideration shares).
Given that MRS’ shares currently trade at 2.9p, this would certainly be in shareholders interests.