I attended the General Meeting of Patisserie Holdings (CAKE) this morning at the ungodly time of 9.00 am – presumably chosen to deter attendance. An announcement earlier from the company will also have deterred attendance as it said no questions on past events would be answered so as not to prejudice investigations by “multiple regulators and authorities”. But there were about 20 shareholders present, including some institutional representatives.
This GM was to approve the second tranche of share placings and I expected it to be voted through which it was on a poll by more than 90% of shareholders. To remind you this company was on the brink of going into administration after the board discovered the accounts were false and the claimed cash on the balance sheet non-existent. In fact it was stated in the meeting that net debt was more like £9.8 million rather than as previously stated. Executive Chairman Luke Johnson kept the company alive by giving it an interest-free loan and arranging an emergency placing. As I said in the meeting, I considered the company had no better alternative to the actions taken having been involved in other similar problem situations before. I think shareholders (including me) are very lucky that Mr Johnson chose to take the steps he did. Mr Johnson reiterated there was no viable alternative several times in the meeting because there was no time to arrange anything else. He indicated later that he had not participated in the placings because he did not want shareholders to think he was acquiring shares cheaply and hence his interest in the company will now be diluted (he’s now down to 28%).
However there were several shareholders who expressed their unhappiness at the turn of events as one might have expected. There was one particularly vociferous shareholder who suggested that shareholders will lose 88% of their value as a result of the placings and that there should have been a rights issue instead. The shareholder said it was immoral, and unfair.
Mr Johnson opened the meeting by thanking shareholders for the messages of support he had received in the recent dark days. The board was doing everything it can to safeguard the company. There was potential fraud and a misstatement of the accounts. Those errors are likely to have affected previous annual accounts.
He said that regulatory authorities including the SFO were investigating so he could not comment further. He believed it was a business worth saving and he had committed to reduce his other activities (in response to a question later he said he had no other roles now).
Chris Boxall from Fundamental Asset Management asked if those supporting the placings had access to more information that others, i.e. other than that publicly disclosed? The answer was no. Comment: they must have faith in Luke Johnson because with so little information available it is very unclear what the future profitability of the business might be and there are big potential liabilities.
In response to other questions he said current trading had not been affected, although two sites had been closed. They are recruiting new staff when asked about management changes.
I tried to ask two questions:
- Is it possible the company could become liable to compensate shareholders for the “market abuse” related to the issue of false accounts [on which basis some investors will have purchased shares]? This is surely a similar situation to the case of Tesco where the FCA instructed the company to pay compensation. Shareholders taking up the placing shares might be interested in the answer. Mr Johnson refused to answer the question.
- Have you appointed lawyers to pursue claims against the former finance director (Chris Marsh) in respect of the fraud or to recover the value of share bonuses paid to him and the CEO (Paul May) on the basis of the false accounts? Mr Johnson refused to answer that question also.
Note that as this was a General Meeting there was no good reason not to answer those questions as they could not possibly prejudice the investigations by the legal authorities. This is an abuse of company law and I will be making a complaint about it.
What can shareholders do at this point? Not a lot but just await the results of the investigations and possible subsequent actions by the legal authorities. This might take many weeks, months if not years from past experience. The shares will remain suspended for the present. But I suggest shareholders should do the following:
- Write to Luke Johnson requesting that the company takes all possible legal steps to recover losses to the company that have resulted from the fraud from those who perpetrated the likely fraud, and in addition take steps to recover the value of shares issued to former and current directors under share option schemes that were based on the false profits that had been declared. In addition the company should examine the role of the auditors as it appears that they may have failed to pick up the accounting errors and failed to check all relevant bank balances and hence there may be a claim against them. Note: it is a lot easier for the company to sue former directors or auditors than it is for shareholders, however much they may wish to forget about it and move on.
- Write to the Financial Conduct Authority stating you were induced to invest in the shares of the company based on false accounts and encourage them to pursue legal actions against those at fault accordingly. In addition as this was a case of market abuse (similar to that at Tesco), request that the company be forced to compensate the affected investors accordingly. You should also encourage them and the SFO to move as fast as possible in their investigations as they are not known for speed in such matters.
So that’s a summary of the meeting held on a gloomy wet day in London – which probably matched the mood of the shareholders present. There were members of the press there getting their views no doubt for publication in the media later.
To look on the bright side, as I have an enormously diversified portfolio I found on exiting the meeting that my overall portfolio had risen more that morning than my potential losses on Patisserie simply as the overall market picked up. I may therefore be more sanguine than others. There is a lesson there of sorts for investors, but I also consider myself relatively lucky.
As someone said to me in the meeting, this was a company where there were no warning signs that investors could easily pick up in respect of the accounts. Investors cannot blame themselves for investing in what appeared to be a sound, profitable company from the accounts. Fraudulent accounts can fool even the most experienced investors.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
Thanks for this commentary Roger which was very helpful. Three points to raise.
1. There is really no reason why the company cannot be given an opportunity to subscribe for a rights issue at the same price as the ‘new’ institutional shareholders. He can use the extra funds to pay down more of his loan.
2. It may well be similar to the Tesco market abuse situation, but big claims from shareholders against Patisserie Holdings would speedily result in the company going under. There would be little point in pursuing this route to recover capital losses.
3. Paul May and Chris Marsh were the only directors in Stonebeach, the trading subsidiary of Patisserie which received the winding up petition from HMRC, and they were the only two who traded options at enormous financial benefit to themselves. Paul May must have been aware that there was something fundamentally wrong with the company’s finances, and if he wasn’t then he is not a competent chief executive. He should resign or be fired.
I think there would be very little appetite for a rights issue among shareholders prior to publication of more financial information on the position of the company. Certainly the appetite would have been uncertain which makes rights issues very difficult. I was not even willing to participate in the placings even though I was offered the opportunity to do so.
Lombard in the FT suggests that a rights issue was a practical alternative to the placings but I don’t think so. Why would Luke Johnson do a placing if there were better alternatives. He is being substantially diluted by the placings. In reality many people in his position would have done a pre-pack administration as a way of acquiring the business on the cheap. He should be complimented on rescuing the business in a way that at least protects the shareholders interests to some degree.