We recommend (with reservations) that shareholders vote in favour of the resolutions to merge Foresight 3 & 4 and to raise additional funds of £50 million, and possibly up to £100 million, (including a possible over-allotment facility for an additional £50 million).
In summary, we acknowledge the recent communication and documents outlining the terms of the merger, but we are disappointed that the directors were unable to negotiate better terms for shareholders. There are positives but also negatives: on balance we think shareholders should not oppose the merger, but going forward there need to be changes to the Board of Directors and/or improved corporate governance. ShareSoc may put forward proposals via resolutions at the next AGM to address these outstanding issues.
Considering these points, we think it is better to support the directors at this time. There are a number of good points, highlighted in the Companies’ shareholder letter. The good points include:
- Dividend
- Tender
- Regular buy-back programme
- Commitment to narrow the share price discount to below 10%
- New monies remove lack of liquidity concern.
However, we have a number of remaining concerns, which we think should have been addressed:
- Directors should have negotiated better terms, i.e. high ongoing management fees and incentives. The fees for the fund manager are still high by industry standards (n.b. the AIC publish fees data).
- Historically the directors have made some mistakes, such as paying dividends which may have been in contravention of CA 2006 S847 which requires companies to have distributable reserves in filed accounts. Foresight dispute this claim, but they may have mistakenly stated the distributable reserves on the balance sheet which, in turn, may have impacted the directors’ explanations of why they were not willing to pay higher dividends. Those responsible have avoided the blame and this merger will provide the opportunity to sweep these issues under the carpet.
- The manager seems to be benefiting more than the shareholders. The benefits for the shareholders should be more. The contribution to costs by Foresight is very small compared to the fees they will earn from the fundraising both as promoters and on higher net assets.
- Merger costs are too high and higher than elsewhere.
- Cash drag (assuming significant levels of cash will be raised) as a result of having lots of cash for some time, by raising so much new money at an opportune moment. This may create an incentive and temptation to make risky investments.
- New chairman was previously a board member of Foresight 4, so has been involved with two badly-performing VCTs. We question his value and hope that he will step down after, say, 12 months.
- New director (Mr Gray) has no relevant experience and appears to have been hired by the two exiting directors – both of whom stepped down after ShareSoc’s campaign. (Note: Michael Gray qualifies as independent by all parameters used to determine independence, under corporate governance and listing rules.)
- Tender offer is too low in size and no reasons given for why so. No detail has been given as to which assets are being realised/sold to raise the funds for the dividend/tender, but the most obvious and simplest would be Datapath, in total or in part, an investment which is by far the largest holding in both funds.
- No information was provided in the shareholders’ letter on the NAVs of the two VCTs on which to judge recent performance (last is Dec 2016).
We had hoped that the above issues would be addressed but they have not been.
However, we think it best to support now and to reserve our position to oppose the re-election of the new director Mr Gray and possibly others at the next AGM; and possibly to propose alternative directors or a shareholders’ committee.
A number of shareholders have worked hard on this campaign and their efforts are much appreciated. There are complex issues involved and we do not all agree on everything. One important view (but a minority view of those shareholders involved) was that the ShareSoc Campaign should not be happy to endorse this untimely merger.
Individual shareholders will make their own decisions but we hope the above guidance is helpful and lays out the main arguments we have considered.
Cliff Weight, ShareSoc Director