Feb 2006 Financial News

FirstCaribbean International irks minority shareholders

Feb 02, 2006

The Barbados-based parent of FirstCaribbean Jamaica has outraged some minority shareholders, by diluting their stake in the bank through a capital injection in which the locals were not allowed to participate.

The parent, which already owns nearly 95 per cent of the local subsidiary is pumping US$20 million into its capital base, but without going the route of a rights issue which would have allowed the participation of all shareholders, thus enabling them to maintain their shareholding.

"It is an outright affront to minority shareholders' rights," snapped Charles Ross, a minority shareholder and CEO of Sterling Assets Management. Ross has filed a formal complaint to the Jamaica Stock Exchange, in which he questioned whether the principal shareholder met the exchange's requirement to pursue such a course. Ross has threatened legal action over the issue.

Financial analyst and minority shareholder John Jackson also charged yesterday that the majority shareholder was "disenfranchising shareholders, and their reason is a non-issue".

Shareholders were first made aware of the bank's intention to raise US$20 million - by way of direct injection - to support a major branch expansion drive, via a letter from the managing director, Milton Brady.

Yesterday, shareholders met at an extraordinary general meeting to approve the transaction. To effect the injection, some 72.4 million shares were created in FCIBJ and given to the Barbados parent in exchange for the US$20 million. The Barbados bank already owned 183.3 million shares or 94.8 per cent of the Jamaican subsidiary.

The effect of the capital injection was a 27 per cent dilution of minority shareholders' interest, and an increase in the interest of the parent to over 96 per cent.

At yesterday's meeting, held at the Courtleigh Hotel in Kingston, Brady told shareholders that the capital injection was the best possible route to raise the funds.

"We examined all possible routes to get the funds, but we determined that we needed it in a matter of weeks... time to market is key," he told shareholders.

For those objecting to this method, the issue is whether the need for capital to fund branch expansion, rises to the level of critical urgency that would allow the bank to circumvent JSE rules regarding the raising of capital.

The JSE rule 412 requires listed companies offering securities to its shareholders to do so by way of rights unless there is exceptional circumstance.

Says the rule: "In the absence of exceptional circumstances the issue for cash of equity capital, or capital having an element of equity, must be offered in the first place to the equity shareholders unless those holders have agreed in a general meeting to other specific proposals. Such an offer must normally be made by way of rights as opposed to an open offer to shareholders."

In his letter to shareholders, Brady noted that the board of directors had determined that exceptional circumstances existed, and on that basis, made an application to the JSE to permit the parent company to inject the entire US$20 million into the local subsidiary.

The JSE was persuaded by the argument and granted the waiver.

But Jackson was not: "Branch expansion does not happen overnight" he said. "Perhaps if the company had the opportunity to buy a block of business then I would understand, but even if that were the case, the parent company could give it to them in a number of forms."

Brady's argument is that the bank wanted to "move quickly and aggressively to increase its market share" and that "the capital injection required should be made within the first four months of its fiscal year (November 1, 2005 to February 28, 2006)".

He said that it took on average, four months to undertake a rights issue "which would delay the capital injection by way of proceeds from the rights issue until the second quarter of the fiscal year 2006. On the other hand, a direct capital injection has the advantage that it can be made within two weeks, thus significantly minimising any negative effect on the bank's strategy for expansion".

Moreover, significant costs were avoided by going the route of the direct injection, he added.

"The average cost of a rights issue would be 1.5 per cent to two per cent of the capital raised or $20 million to $26 million," he told shareholders. "The costs would be more usefully employed to help finance the bank's expansion, which in turn will accrue to the benefit of all shareholders."
But Jackson cited a number of options that he said the parent could have pursued without diluting the interest of the minority shareholders.

"They could have issued redeemable preference shares convertible to ordinary shares," he noted. "They could have loaned the company money until they could raise the rights. Also, the parent could take up their rights immediately, which is 95 per cent anyway, and then give minority shareholders the opportunity to partake later. This is setting a very bad precedence."

Ross echoed Jackson's argument, telling the Business Observer that the same objective could have been accomplished even if the money were needed immediately.

"The minority shareholders rights could still be protected," said Ross. "A rights issue only needs to take a few weeks. It appears to squeeze out the minority shareholders. I think the members of the JSE council need to explain what is going on, whether they are enshrining the rules of the stock exchange. If companies are going to list on the exchange they must behave as public companies. I just find this shocking."

On Monday, Roy Johnson, the executive chairman of the JSE defended the decision.

"There are exceptional circumstances, but the exchange has required that they have a (extraordinary) general meeting, in which shareholders can approve any other specific proposal," he said. "They are in fact going to an EGM to consider a specific proposal and it is that meeting that they would vote on the issues put at the EGM."

But yesterday Ross said that the owners had "called a meeting at which minority shareholders can't affect the decision at all. We would have to seek other redress. Perhaps go to court".

By issuing itself the entire 72,423,398 shares at $17.95 per share, the parent increased its stake in the Jamaican subsidiary from 94.8 per cent to 96.21 per cent, while simultaneously decreasing minority shareholder stake from 5.2 per cent to 3.79 per cent - a 27 per cent dilution.

If the bank had opted for a rights issue at the same average market price of $17.95, it would have raised $68.7 million from the 3,823,953 shares issued to minority shareholders.
This is the second time in three years that FirstCaribbean is having a dispute with minority shareholders over share issue.

In April 2003, the parent, which at the time held an 82 per cent stake in the local bank, attempted to swap all the outstanding shares held by minority shareholders for direct stake in the Barbados bank.

In effect, the 34.35 million shares held by minority shareholders in the Jamaican operation, worth around J$274 million at the time, would have been exchanged for 4.58 million FirstCaribbean International shares.

If the local bank had become a wholly owned (100 per cent) subsidiary of the Barbados parent, it would have been delisted from the Jamaica Stock Exchange. Its parent, which is also listed in Jamaica, would continue to trade.

But the offer price was rejected by a group of Jamaican shareholders including the National Insurance Fund, Mayberry Investments, Donovan Lewis, and Manufacturers Sigma Merchant Bank, which together controlled more than 10 per cent of the 34 million shares held by minority shareholders. At least 90 per cent of them would have had to agree to the exchange for the transfer to become automatically enforceable to all.

Apparently that threshold was not met.
Yesterday FCIB chairman, Michael Mansoor, declined to comment on whether there was any parallel between that situation and the latest development.

"This meeting is not about that, that was in the past," he told the Business Observer when pressed for a response. "It was an option available to shareholders then. I would not want to talk about that now."

Mansoor also pointed out that the thrust now was "to attain increased earnings per share (EPS). When there is an increase in [EPS] each shareholder benefit. We expect that the strategy which has been put forward will result in, not only the earnings for the bank, but very importantly increased earnings per share."

Investment, the Jamaican bank hopes, will increase its share of the commercial banking market from seven per cent to 14 per cent over the next five years.

This would be done, according to Brady, through "focus on retail, wealth management and new products which include doubling the loan portfolio and making substantial capital expenditures to expand the existing branch and ABM network."

FCIBJ currently has six branches located across the island, and the plan is to build another 12 at a cost of $225 million.
The local bank's loan portfolio as at October 31, 2005 stood at $13.86 billion - a 61 per cent increase over the previous year.

Camille Thame
The Jamaica Observer
Wednesday, 1st February, 2006
http://www.jamaicaobserver.com/magazines/business/html/20060131t230000-0500_97768_obs_firstcaribbean_int_l_irks_minority_shareholders.asp