The furore over director share transactions at Quindell (LSE: QPP), IQE (LSE: IQE), IGas (LSE: IGAS) and other companies has died down, though their share prices remain turbulent.
Several directors had announced share purchases, whilst funding them through much larger sale and repurchase agreements — previously described as loans — with a US finance house, Equity First Holdings (EFH). Attention has focused on whether EFH is free to dispose of the shares it acquired, suggesting that the directors were in substance making disposals.
Most companies have soothed concerns by clarifying that directors are obliged to re-acquire the shares conveyed to EFH at broadly the same price after two or three years, suggesting that they are still financially interested in the stock, which remains included in directors’ holdings. Critics have pointed to the apparent ‘non recourse’ aspect of the arrangements, meaning that the director can walk away if the share price drops.
The crucial question
But what if the share price rises?
Is EFH obliged to deliver shares to the directors at the end of the term, at the agreed price? In other words, do the directors have the right to re-acquire the shares? If they do, EFH would be crazy to dispose of them, risking having to buy them back in the market at a loss.
So it’s a simple question: do the directors have the right to require EFH to sell the shares back to them?
‘Yes’ means the arrangements are broadly in the nature of a loan, and the affair has been a storm in a teacup, albeit one that cracked the fine bone china of Quindell’s elaborately-painted but fragile investment case. ‘No’ means investors have been royally deceived by sophistry. It would, of course, be wrong to assume that all directors have identical contractual arrangements with EFH.
Integrity
This still matters at Quindell, despite CEO Rob Terry having been forced out. It goes to the integrity and effectiveness of the whole board and corporate processes. It further speaks to the competence and integrity of the Nomad Cenkos. Current weakness in Cenkos’ shares is a measure of how much the market discounts the risk of serious negative fall-out for the Nomad.
IQE CEO Drew Nelson has clarified that he is ‘obligated’ to repurchase his shares from EFH – but the words of the RNS leave just enough gap for this to be at EFH’s option, i.e. he has no right to buy them back.
Today’s statement from IGas goes further, saying CEO Andrew Austin is ‘required’ to repurchase the shares and has the right to do so ‘in the event of certain corporate actions’. In any case IGas director dealings only involve the CEO and not the founder and chairman who holds nearly 10% of the stock.
Story stocks
Both IQE and IGas are ‘story stocks’, but with good stories, communicated more clearly and convincingly than Quindell.
IQE is a technology play, with its patent technology in gallium arsenide wafers, used to make low-power semiconductors, having a potentially huge range of applications. IQE’s intellectual property and manufacturing capability should be worth more than its current £107m market cap, though the company’s financial performance has disappointed thus far.
Speculative
IGas is predominantly a speculative play on fracking in the UK, but conventional production and farm-out agreements with Total and SUEZ add ballast to its operations and ability to finance development. I was happy to pick up more shares whilst they were weakened by the director share scandal. They have bounced back after IGas issued clarification, despite interim results showing a fall in profit.
IGas stock will inevitably ebb and flow according to political sentiment towards fracking, offering opportunities for judicious purchases and sales.
