Thalassa (THAL) – Disturbing, spooky changes make it uninvestible
Bizarre changes at the holding company Thalassa could be sinister, irrelevant or have some benign explanation. After contacting Thalassa’s Chairman, I’m still not entirely sure which it is. But I’m leaning towards the most negative interpretation (latest share price: 90p, market cap: £16 million).
If you scroll back to the company’s interim results, published in September, the announcement included a cryptic piece of news under “Miscellaneous”:
The Board of Directors has approved the issuance of Preference Shares to all shareholders of record as at 30 September 2018.
No further clues were given. Shareholders were left to guess as to what strange rights these preference shares might have, and how the company or its shareholders would benefit from their issuance.
At the beginning of this month, we got an answer. Each shareholder received one preference share for each ordinary share held, with each preference share carrying 10 voting rights (while each ordinary share carries just one voting right).
The interesting bit is that the preference shares are non-transferable. What this means is that whenever ordinary Thalassa shares are sold from now on, any preference shares attached to them evaporate (along with the 10 voting rights attached to each preference share).
The practical implications of this in the short-term are as follows:
- Buyers of Thalassa shares will enjoy much less voting power than they otherwise would.
- Holders of Thalassa shares will see their voting power increase dramatically when shares are traded by others and preference shares are cancelled.
No reason was given for this unusual development.
I contacted Duncan Soukup, the Chairman of Thalassa, and asked him how the issuance of preference shares would benefit the company or its shareholders. While he was good enough to reply to me, he refused to answer the question, citing the Market Abuse Regulation which prohibits the divulgence of inside information.
So we are left in the bizarre situation whereby an AIM company has changed its capital structure and has provided no rationale for doing it.
Mark Lauber over at the ShareSoc blog has put forward the most obvious explanation: the point of the amendment is to help the Chairman and the company’s employee benefit trust to soak up more voting power over time.
It has also been put to me that the preference shares may be a sort of poison pill, to make the stock unattractive to anyone who might have wanted to make a bid for the entire company. Buying ordinary shares to effect a takeover won’t work now, since the shares won’t come with enough voting rights to dislodge current management (the Chairman speaks for c. 20% of shares).
This story serves as a reminder of the extreme corporate governance risks which investors are exposed to on AIM, and particularly when it comes to overseas-listed entities. Thalassa is incorporated in the British Virgin Islands. Mark Lauber makes the fine point that a UK-registered company would have needed a shareholder vote to get this change through.
If the preference shares are being used as a tactic to prevent any risk of a takeover, then in my view they are being used purely to benefit current management and their issuance has no benefit for the company or for shareholders as a whole.
Indeed, it’s difficult to imagine that there could be any good reason for their issuance. At the end of the day, all they achieve is the redistribution of voting power away from new shareholders and towards existing holders.
Therefore, the likelihood of a benign explanation for the issuance of these preference shares seems rather low to me. I can’t rule it out completely, but there is no evidence for it.
On the other hand, the disturbing explanation for their issuance is simple and clear.
Or they might be utterly irrelevant, since nobody was ever going to mount an activist campaign here in the first place. But then why bother issuing them?
While there are NAV arguments to invest in Thalassa ordinary shares at current levels, the smell of bad corporate governance at this time makes it entirely uninvestible as far I’m concerned.