No conflict of interest? ISR's stand on adviser's role puzzling
The board of ISR Capital is making a mockery of the notion
of conflict by insisting that there is no issue with taking deal advice from
someone who also sits on the opposite side of the table.
Comments
Kenneth Lim
16 August 2016
The board of ISR Capital is making a mockery of the notion of conflict by insisting that there is no issue with taking deal advice from someone who also sits on the opposite side of the table.
In reply to pointed queries by the Singapore Exchange (SGX), ISR revealed on Sunday night that Timothy Morrison, a partner of Empire Capital Partners, is also a director of REO Magnetic, the company from which ISR has agreed to buy a 60 per cent stake in a Madagascar rare earths miner in exchange for ISR shares.
Empire Capital Partners also happens to be advising ISR on the deal with REO, which has yet to be completed. That Mr Morrison has a seat on both sides of the table does not appear to concern ISR's board, which said that it does not consider Mr Morrison's directorship at REO to be a conflict of interest.
ISR's board explained its stance with two arguments: First, that Empire Capital's primary role is to help ISR to raise capital, not to negotiate the terms of the sale and purchase; and second, that Mr Morrison's appointment at REO may help the acquisition post-signing of the sale and purchase agreement.
Neither argument holds much water.
In terms of Empire Capital's advisory role, saying that the adviser's function is primarily to help raise funds is inconsistent with other disclosures by ISR.
On July 1, which was the first time that ISR announced Empire Capital's appointment, ISR's announcement made it clear that Empire Capital's advisory role was just as prominent as its fund-raising one.
"The company is also pleased to inform shareholders that it has appointed Empire Capital Partners Pty Ltd as corporate advisers for the company's acquisition of the project. Empire Capital Partners will also lead and manage a fund-raising exercise for up to S$30 million."
On Sunday evening, ISR also described the scope of Empire Capital's advisory role in this order: (1) assess market information and business strategies relevant to the operations of the company; (2) review, evaluate and structure any proposed transaction; (3) develop a general negotiating strategy and assist in actual negotiations with potential investors and consult with and assist counsel and independent accountants in structuring and executing any agreement; and (4) prepare summary information for potential investors in ISR.
Note that the first two directives refer more to strategy and advice on deal terms, and it is only in the latter two directives that fund-raising is mentioned. In both the July 1 and Aug 14 announcements, the deal advisory functions received just as much prominence, as the fund-raising functions.
It is therefore strange that ISR's board would argue that the scope of appointment as described shows that the "primary role" of Empire Capital was "to source for and raise funding for the company from potential investors, and not to negotiate the terms of the sale and purchase agreements".
ISR's position that Mr Morrison's appointment at REO may help the acquisition post-signing is also puzzling, and flies in the face of commonly understood principles regarding independence and conflicts of interest. While completion is an important part of the deal process, actually having a fair deal to complete is just as important.
One too can quarrel with the timing of Mr Morrison's appointment at REO. ISR said that it appointed Empire Capital as a corporate adviser in May. Mr Morrison was appointed as director of REO in June. The ISR-REO deal has not been completed yet. Any financial professional worth his or her salt will know that Mr Morrison's taking of a key appointment with the opposite side of a live deal is a big no-no.
It therefore boggles the mind that, given what has been disclosed, ISR's board continues to insist that Mr Morrison has no conflict of interest, when this is textbook conflict.
To put it bluntly, if ISR's board is unable to recognise a clear conflict of interest when it sees one, then the quality of its judgment must be questioned, and the soundness of the deal needs to be revisited. There is an even worse scenario, that ISR's board perhaps recognises the conflict of interest yet refuses to acknowledge it.
ISR's minority shareholders will have to figure out this entire matter and, in this, ISR's independent directors owe them an explanation.