A major controversy has arisen over the use by directors of loans from companies such as Equities First Holdings (EFH) which are secured against their equity stakes. The latest company to be affected is Optimal Payments (OPAY) who presented at a recent ShareSoc seminar. The share price fell substantially after comments from a well known blogger, and declined as much as 22% on the 14th November after the comments were widely circulated on bulletin boards.
A number of other public company directors have been using such loans, including Quindell (QPP). Anything associated with Quindell is viewed with suspicion by many investors and it is alleged that the loans and associated transactions in that case were presented in RNS announcements as if they were purchases of stock by the directors when in reality they were sales. Indeed today (18/11/2014) Rob Terry, the Executive Chairman of Quindell, and two other directors announced their resignations as a consequence no doubt of adverse public comment. There was also a rather devastating analysis of the past business career of Rob Terry published in the Financial Times today. Perhaps that contributed to his resignation. It would certainly seem wise if the FCA were to conduct an investigation into the affairs of Quindell.
In the case of Optimal Payments, the original announcement was back in April when CEO Joel Leonoff declared he had “pledged” 1.5 million shares in the company as collateral for a loan. No change in his interests in the company’s shares was declared, which was reported as over 4 million. Indeed in a separate announcement on the same date it was reported that he had increased his stake by purchasing another 80,000 shares.
The key complaint though is that such loan agreements may give EFH the right to sell the shares or otherwise trade in them as title in the shares is transferred – some of this is supposition because the actual contract in the case of Optimal has not been disclosed so these allegations are based partly on other known EFH contracts. It is common of course for lenders to take security if they lend against an equity holding, and may also therefore have the right to trade the shares to protect their interest (to effectively protect their security margin). But the suggestion is that EFH actively trade the shares transferred to them, which can move the share price and which they exploit to their profit. In addition it is suggested that the recipient of these loans can walk away at the end of the 3 year term, i.e. they don’t need to redeem them and get title to the shares back so it is disguised sale.
After the share price movement of Optimal on the 14th November, the company made a further announcement giving a few more details of the arrangement. They also issued a positive trading statement on the following Monday, plus Mr Leonoff also had this to say: “In relation to the loan and pledge agreement I entered into with Equities First Holdings, LLC, I can confirm that I entered into the agreement outside of a close period, the loan was taken for the purposes of liquidity and it is my absolute intention to repay the loan when it falls due.”
Comment: whether such loans technically change the directors declared interest in a company I will not attempt to answer as this is not as simple a question as it might first appear, but if they have the ability to redeem the loan and hence have the shares revert to them, then obviously they do have some interest in them. It is also not unreasonable to allow directors to take loans secured against their equity holdings. But it is does seem that the way these loans are disclosed and the activities that may be pursued by EFH leaves something to be desired. This is surely a matter for regulators to examine, and the directors of public companies should possibly be more wary about entering into such contracts.