To follow up on my previous report on a presentation by Lakehouse directors following a requisition submitted to remove three of the non-executive directors, the company has now published a 21 page document giving their reasons why shareholders should support the board. As is customary in these battles, the board “unanimously recommends you vote against the resolutions” to remove the three new directors and appoint new ones.
I said in my previous note that it was “all still a puzzle” as it was not clear why the requisitions had been made (the directors of Lakehouse seemed oddly ignorant on that subject), and the requisitioners (Slater Investments and company founder Steve Rawlings) had not yet published their arguments to inform shareholders – and they still have not. This note published by Lakehouse does not provide further explanation in essence so it is still a puzzle.
It does provide some reasons why shareholders should support the board. In summary these are:
– The requisitioners have not provided any information in relation to their strategic vision for the company. Comment: We may yet see this from the requisitioners of course, but it might instead be about operational and tactical performance in any case.
– An independent Lakehouse board, without any significant shareholder representation, represents the best corporate governance structure for Lakehouse shareholder. Comment: It is certainly advisable to have a majority of independent non-executives on the boards of fully listed companies. Even taking that into account there can be exceptions under the UK Corporate Governance Code if explanations are provided and it is not unusual when a company is in difficulties. But it is also not unreasonable to have a nominee of a large shareholder (Rolls-Royce recently appointed a non-exec director on that basis). The two can often be combined and we will see no doubt in due course what the requisitioners have to say on that subject. But to suggest that there should be no significant shareholder representation is surely misconceived. Large shareholders have a very strong interest in the success of the company and hence their interests are likely to be aligned with other shareholders. Investors are reminded that under UK Company Law, all directors must act in the interests of the company, not in their personal interests or of the person or organisation who has nominated them as a director.
– Steve Rawlings’ lack of involvement in the Group and track record as a director since 2012, together with his lack of experience as a director of listed companies, does not suggest he has the necessary skill set to be able to provide a meaningful contribution to the Board or the Group going forward. Comment: This is the kind of personal attack one often sees in such battles. It goes on to say that “Although nominally ‘Chief Executive’ Steve Rawlings did not attend a single board meeting during the three years prior to the IPO…..” which is a rather odd statement. But if you look at the prospectus for the IPO he is not listed as either a director or a member of the senior management so there is probably more to this than meets the eye. Indeed it is obvious from later comments in the document that Mr Rawlings had been dropping out from active involvement in the company some time previously. To have one non-executive director who does not have a lot of experience of listed public companies is hardly a major difficulty and his knowledge of the business and the market in which it operates might counterbalance that surely.
– The Requisitonists’ actions have caused unnecessary disruption to, and uncertainty within, the operations of the business at a time when the Board wants to focus on the trading performance of the Group. Comment: That may well be the case, but shareholders who requisition EGMs usually do so in the belief that there are serious problems that need rectifying and that it is in the interests of investors to suffer some short term disruption for longer term benefit. One cannot make an omelette without breaking eggs as the saying goes.
So in summary, this document is not a wholly convincing one even without seeing what Slater and Rawlings have to say.
Tungsten and Founders Coming Back
Now it might just be that the battle at Lakehouse is about a founder of a company who still has a major stake in the shares becoming unhappy with the performance of his “baby” under new management. This can be a common feeling (look at Easyjet and Sir Stelios Haji-Ioannou as a good example). Another recent case was probably that of Tungsten Corporation (TUNG) an electronic invoicing and business exchange business. This company was led by Ed Truell as Executive Chairman who listed it on AIM in 2013 when it was valued at £225m. It’s now valued at £65m and that’s after somewhat of a recovery from its market lows after Mr Truell was demoted and became only a non-executive director. Consistent lack of profitability was one possible cause of the management revolution and having seen Mr Truell present in the past I cannot say that this writer was particularly surprised by the company’s disappointing progress. Breakeven kept drifting out and losses rose as Mr Truell kept spending money.
Now it seems that he wishes to make a comeback. He has stepped down from the board and the company have issued an announcement regarding a proposal that they have received from him to “combine certain assets”. It is not an offer for the company. This is what the announcement says: “The resulting effect of this conceived combination would be that Tungsten’s primary asset would be a minority stake in an enlarged group of disparate, illiquid assets controlled by Mr. Truell and Tungsten itself would be transformed into an investment vehicle. The Board of Tungsten has spent considerable time reviewing these suggestions, including the most recent proposal, and found them to date to be universally without merit for shareholders.”
As a small holder of shares in Tungsten, recently acquired, let me say that I completely agree with the board and I would not wish to have Mr Truell back and involved with this business. One of his bright ideas for developing Tungsten was the acquisition of a bank to provide invoice finance but there were always doubts as the benefit of that and it has now been sold. Tungsten is a business with great potential but it has been consistently loss making. It surely just needs competent operational management in the short term to get it to longer term viability and like all “network” businesses the jam will then come.
But Mr Truell may not be easily deterred from making a comeback. That’s the problem with those who feel they have been personally prejudiced or their past efforts discounted. Founders need to forget and move on, but that does not mean that their advice as non-executive directors and shareholders might not be helpful.
Roger Lawson
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