Magnus debacle a grave case of misgovernance

ON Jan 9, Magnus Energy, a company whose shares have been suspended from trading since Aug 23, 2019, got an opportunity for a reboot after minority shareholders voted in a new board.

For many Magnus shareholders, this could not have been a better outcome. There have been cases where companies became insolvent and shareholders were trapped in limbo.

Had it not been for Charles Madhavan, who had a brief but critical two-month stint as the company's managing director before he was terminated, no one would have been privy to the extent of the shenanigans that contributed to many people losing their investments.

In its heyday, Magnus was trading close to S$4 a share in early 2013. That was before the massive fund-raising activities the company undertook from FY2015 to FY2018. In total, Magnus raised gross proceeds of S$31.3 million, and had used close to S$20 million. As a result of a notes issue exercise and share placement, the company issued a significant number of new shares during the period, amounting to 11.5 billion shares.

Magnus' share price plunged from S$0.85 in FY2014 - adjusted for the 50:1 share consolidation on April 21, 2015 - to an abysmal 0.1 Singapore cent, as a result of what shareholders call "the relentless issuance of convertible notes by the company and the subsequent conversion of those notes into shares".

Over the fiscal years from 2016 to 2019, the company made a cumulative net loss of S$39.9 million. Non-current assets - or fixed assets needed to generate business - has been severely eroded from S$23.6 million in 2016 to S$1.3 million by 2019.

Mid-Continent, a provider of oil field equipment and services in the US, is Magnus's sole revenue and gross profit generator. Yet, after deducting expenses, the gross profit of S$2.1 million became a net loss of S$1.2 million for the nine months to FY2019.

Amid such performance, the company's rather flippant guidance to keep its cash burn rate to below S$3 million per annum is hard to swallow.

Based on Provenance Capital's report, Magnus, under the previous board and management, was a corporate governance nightmare. Questionable commercial decisions aside, Magnus clearly lacked internal controls when it came to acquisitions and investments.

These included its disposal of nine million GSM Resources shares without legal advisers to review the agreement; loans given to Indonesian contractor PT Hanjungin; blatant disregard of Indonesian lawyers' warnings on the enforceability of the Kupang Land project (which is now the subject of two suits in Indonesia, with at least three other parties asserting rights to the land); and a US$12.75 million micro-algae project where US$9.55 million had been paid to Algae Farm Engineering Sdn Bhd, but has been at a standstill since the founder withdrew his involvement.

In many instances, Magnus did not have robust procedures on how management and board conduct risk evaluations, approvals, agreements, records and even how money was transferred and cheques issued, leaving the company with no recourse in getting back some of those investments.

One cannot help but wonder where was the oversight and due diligence by the board? What were the independent directors doing? Were concerns raised? More importantly, can this blatant misgovernance be prevented from happening again under Singapore Exchange Regulation's new risk-based approach and more stringent disclosure requirements?

No remorse

At the EGM, neither CEO Luke Ho nor the independent director Seet Chor Hoon appeared to be remorseful. Mr Ho brazenly asked the roomful of about 100 angry retail shareholders to support future share issuance and consolidation in the event that the company has to consider a reverse takeover (RTO) if it fails to get out of the trading suspension. Ms Seet seemed happy to hide behind the guise of poor English comprehension - which if indeed true, is unacceptable given her responsibility as an independent director, and the fact that money spent was not hers but belonged to investors who had put their trust in her to do her job.

As the regime moves towards tighter continuous disclosure requirements, it will be harder for companies like Magnus to repeatedly raise funds as more information will be sought for dilutive rights issues. This includes a board statement on why a rights issue is in the company's interest, particularly if the company conducts a rights issue within one year from its previous equity fund raising.

However, the enforcement regime - especially on directors - needs to be further fine-tuned, even as the reliance on professionals increases and they are held accountable. Ultimately, the responsibility lies with directors - often, the first point of contact for auditors or regulators and other professionals. Information provided is as good as what the board is prepared to say.

Corporate governance and directors' duties are mainly regulated legislations including the Companies Act (Chapter 50), which is administered by the Accounting and Corporate Regulatory Authority (Acra), and the Securities and Futures Act (Chapter 289) under the Monetary Authority of Singapore (MAS). The problem with inter-organisation reliance is that whenever an issue crops up, it has to fight with other priorities and limitations faced by the other side.

Magnus also provides a lesson for retail investors. Many of the company's transactions had been approved by shareholders, which included the old management and board. This would not have happened if minorities came out to vote - like they did on Jan 9. That meeting was very well attended for a Catalist firm, with many intelligent questions asked. Retail investors are no longer looking for free meals or door gifts, but are serious about their investments.

Let's attend every general meeting, and not just when the company hits the headlines. Shareholders need to understand what they have invested in, and not merely follow the crowd. The problem with that kind of investing is no one tells you when to get out.

Angela Tan, The Business Times