Welcome to the June 2010 edition of The Director's Dilemma newsletter. I hope you find it interesting, informative and inspiring.

I advise Boards and Directors on complex and challenging issues which can be resolved in a variety of ways. Each way has different pros and cons for the individuals and companies concerned. Every month this newsletter considers several responses to a real issue. Which response would you choose?

Phil is a non executive director of a medium sized listed company.

The company had financial problems last year and raised money by a placement with a new large shareholder. The shareholder took a 15% equity stake at a slight discount to the then share price. Some longstanding shareholders complained afterwards saying they would have liked to 'top up' their holdings at that price.

An AGM has been held and the issue of shares to the new shareholder was ratified. There was a substantial vote against this. It was obvious that many shareholders felt they had been denied a valuable opportunity. The new shareholder was given a seat on the Board and this was also carried but with a large vote against.

Now the market has recovered and the company needs to raise funds to expand. The Chairman and the new shareholder are keen to do a placement which would be quick and relatively cheap.

Phil knows that a rights issue is more expensive and that a prospectus is time consuming and distracting for management to create. He is unsure that shareholders will support another placement, believes he has a duty to consider the wishes of even the smallest minority shareholder as well as those of the large sophisticated investors, and knows some small shareholders want to participate in future raisings.

What should Phil do?

Frank's Answer

At the AGM:
 - The share issue to the new shareholder was ratified.
 - The new shareholder was elected to the Board.

While some disgruntled shareholders objected, they were outvoted on both counts.

These shareholders have nothing to complain about (other than not being invited to participate last time) but rather should be grateful that this new shareholder bailed out the company in an emergency situation - a situation that likely would not have allowed enough time to include other shareholders, and which therefore would have risked their entire investment to delay.

Obviously the majority of shareholders were happy about it, so the action was taken and ratified.

It is the duty of directors to protect the best interests of public shareholders at large, not that of a disgruntled minority, no matter their number.

Since the market has recovered, this offers the opportunity for the company to expand, and it would be in the best interests of all shareholders to raise capital to facilitate the expansion, which in turn will boost earnings and hence the share price.

Phil can make his feelings known. But he should vote in the overall interest of all shareholders, that is, an expedient placement, because all indications are that the majority of shareholders will again be in support, as they were before.

Frank Feather is President & CEO at NorthStar Stadium Resorts International, President & CEO at Geo-Strategies Inc, and Interim CEO/CFO at Fortune 100-500 Companies.

Julie's Answer

Before Phil raises any money by any means he must be sure that it is to be used as described. Have the problems that caused the difficulties been fixed? Is there evidence the fixes are working? What aspects of expansion are these new funds required for?

He then needs to ensure the Board has a robust process for making a decision about how much funding is required and how best to raise it. The new shareholder, as a shareholder, has a clear conflict of interest especially if he or she plans to take part in the placement.

Phil and his fellow independent directors should assess the liquidity, spread, current shareholding and future needs of the company to determine what course of action will generate the best strategy into the future. The last capital raising was an emergency bailout and, under the circumstances, a raising from a single sophisticated investor was probably the most viable course. That does not mean it is the best course now. The costs and benefits of each possible method should be assessed and ranked. The Board will then be able to precisely explain to shareholders the method they have chosen.

My preference would be for a fully renounceable offer or an underwritten rights issue to allow existing shareholders to participate. There may be specific reasons to use another method, however, Phil must make certain that the new major shareholder does not gain control without a transparent process and a premium for other shareholders. He must also ensure that capital planning is performed better in the future so that emergency action is never again required.

Julie Garland McLellan is a specialist board consultant and practising non executive director based in Sydney.

Ian's Answer

For me, the issue is one of fairness and maintaining confidence in investment markets.

If a shareholder fears his stake can be diluted almost at the will of management, he will demand a greater risk premium for his investment thereby depressing prices and hindering the efficient operation of markets. It is thus better to use a rights issue.

In the UK this can now be executed in a matter of weeks and though it is likely to be more expensive than a placement, you may find that the process of writing the prospectus could inject some discipline and force management to really think through their problems in what appears to be a failing company.

As is so often the case in life, the easiest option is not always the best.

Ian Burrows is Investment Manager at Brewin Dolphin, one of the largest independent private client investment managers in the UK.

The opinions expressed above are general in nature and are designed to help you to develop your judgement as a director. They are not a definitive legal ruling. Names and some circumstances have been changed to ensure anonymity. Contributors to this newsletter comment in the context of their own jurisdiction; readers should check their local laws and regulations as they may be very different.

What's new

Book reviews – Directors need to read. It is a great way to learn from other people's experience. This month I have reviewed 101 Boardroom Problems and How to Solve Them by Eli Mina.

I have received a review of Dilemmas, Dilemmas; Practical case studies for company directors by Stephen Gagelar. Dilemmas, Dilemmas is now also stocked by Amazon.com, as well as the Australian Institute of Management (AIM) and available online or in their bookstore. Recent reviews have also been published in AFR Boss and Boards & Directors Magazine.

The Qantas In-flight Radio program 'Talking Business' featured an interview on governance last month. The May 2010 transcripts are available here for those who missed it.

Where's Julie? – A few readers manage to catch up with me on my travels and it is such a pleasure to meet them now that I share my travel plans each month.




1 June am


AICD How to get on Boards workshop

1 June pm


Chartered Secretaries Australia conference

8 June


Private Company Directors Course

10 June


Ethical Leadership and Governance in the Public Sector Conference

15 June


Executives Global Network - Would you, could you, should you join a Board?

17 June


Graduate Management Association of Australia - Would you, could you, should you join a Board?

17 June


Sports NSW - Common Board problems and their solutions

21 June


NGO Governance Masterclass - Common Board problems and their solutions

25 June


Private client workshop

29 July


Private client workshop

Please call or email me if you would like to schedule a meeting or find out more about attending one of these events.

This newsletter – If you have any ideas for improving the newsletter please let me know. If you are reading a forwarded copy please visit my website and sign up for your own subscription. It is (still) free. As an existing subscriber you will continue to receive a free subscription when a charge is introduced this year.

Suggestions for dilemmas – Thank you to all the readers who have suggested dilemmas. I will answer them all eventually.

Farewell until next issue (due 1 July 2010). Enjoy governing your corporations; we are privileged to do what we do!

Best wishes

www.mclellan.com.au | PO Box 97 Killara NSW 2071
email julie@mclellan.com.au | phone +61 2 9499 8700 | mobile +61 411 262 470 | fax +61 2 9499 8711