It is quite long, so I wont interrupt -
Insiders win / Outsiders lose
Indeed an astonishing exit @ 90 pct discount to equity value at last raise a good year ago. Sure we have all taken calculated risks, and this is one of the outcomes that was to be expected. HOWEVER, I find it hard to believe that the bank's withdrawal made a fire sale unavoidable, even with unforeseeable (?) challenges in DIY distribution. So the case indeed raises serious questions as to governance, and why we should pay to warm our Directors' cold feet, instead of being able to rely on them exercising their fiduciary duties to everybody's benefit, including ours.
Questions which only the Directors can answer. So I wrote to them today (see below). Let's see what they say.
Keep you posted. Any support / observations welcome.
B.
PS: At least one question missing from my list below, i.e.: Have the Directors / founding shareholders / current top management agreed on continued employment / advisory relationship with Tesa, and on what terms ?
QUOTE
Dear Roger, Jane, Paraic & James,
Thank you for your letter, and congratulations to you on your successful exit.
To me, having acquired shares in the last round of crowdfunding in 2017, this is very disappointing news indeed. How disappointing the news is for the other shareholders depends, I suppose, on the timing and terms of their respective investments.
At this point, as an outsider, I cannot exclude that the incumbent shareholders / Directors may have misled the new investors in the last round of fundraising with the purpose of making a final bet for their own benefit, very largely at the expense of the new shareholders. All this based on a – from today's perspective certainly, and probably even then, taking into considerations the terms of the first crowdfunding - grossly overstated valuation (i.e. 10 x the equity valuation realised only slightly over a year later). For a relatively mature player already profitably active on a highly international scale in both production and distribution, it certainly appears to be highly unusual that the same set of insiders should have revised their views on equity valuation down by 90% within a year. In other words, the final crowdfunding round led to only minimal dilution of the incumbent shareholders' stakes at the time, at the full expense of the last entrants.
The sale to Tesa on these terms, at this time, therefore raises a number of serious questions, in particular with respect to conflicts of interest of the managing incumbent shareholders / Directors vis-à-vis the later shareholders.
May I therefore ask for your co-operation in addressing these concerns, by responding to the questions below. Given the very unfortunate short timeframe of only a few days between your announcement and scheduled completion, I am forced to hereby formally challenge and object the sale itself as well as the lawfulness of the execution of the drag-along right.
Finally I am concerned about the potential reputational aspects of this sale for the Sugru brand. Please allow me, therefore, to share this letter with the Board of Directors of Tesa S.E., and to post it on the respective crowdfunding platform you used in 2017.
Yours sincerely
[Signatory]
SALE OF FORMFORMFORM (THE „COMPANY“) TO TESA
INFORMATION REQUEST AND QUESTIONS
INFORMATION REQUEST AND QUESTIONS
INFORMATION REQUEST
Minutes of all Board meetings since 1 Jan 2016
Minutes of all Board meetings since 1 Jan 2016
Complete copies of any and all business plans and valuation reports on the company produced by it, its advisers, employees, Directors, consultants or similar, since 1 Jan 2016
Any pay-outs to Directors and advisors since 1 Jan 2016 (including cash salaries, stock grants, etc.)
Full copy of the Sale & Purchase agreement with Tesa, including all Annexes etc.
Detailed table of amounts of Sources and Uses of Sale proceeds, including:
Their respective timing (if not paid-out at proposed closing in May 2018)
Allocation of proceeds to each of the Directors and founding shareholders
Their respective timing (if not paid-out at proposed closing in May 2018)
Allocation of proceeds to each of the Directors and founding shareholders
Analysis of financial returns to equity, expressed as percentage p.a. (Internal Rate of Return), and amount (in GBP), including:
In aggregate since foundation
Broken down into classes of shares
Broken down into cohorts by timing of initial investment (i.e. For each funding round until exit)
Individual returns of the Directors and founders
In aggregate since foundation
Broken down into classes of shares
Broken down into cohorts by timing of initial investment (i.e. For each funding round until exit)
Individual returns of the Directors and founders
QUESTIONS
How were the conflicts of interest of the founders / Directors vis-à-vis the later shareholders managed specifically over time ? (pls provide detail)
How were the conflicts of interest of the founders / Directors vis-à-vis the later shareholders managed specifically over time ? (pls provide detail)
Why did the bank withdraw from further debt financing ?
Why did the company not disclose to shareholders at the time that such withdrawal had taken place ?
To preserve value, what alternative funding sources did the Board take into consideration following the bank's withdrawal ? Why did the Board instead ultimately decide to fire-sell ?
Did the Board / Directors actively consider there was a risk of insolvency ? If so, why ? If not, why not ?
Disposal process
Who prepared and negotiated the sale (including advisers, legal counsel, consultants, etc.)
How was Tesa selected as the buyer ? Was there a competitive bidding process ? Please provide details (number of parties approached, engaged, negotiated with, etc.)
Were negotiations with Tesa conducted exclusively at some stage ? Why ?
Who prepared and negotiated the sale (including advisers, legal counsel, consultants, etc.)
How was Tesa selected as the buyer ? Was there a competitive bidding process ? Please provide details (number of parties approached, engaged, negotiated with, etc.)
Were negotiations with Tesa conducted exclusively at some stage ? Why ?
Valuation
Please disclose on what basis and how (exactly, i.e. including methodologies, amounts, etc.) the Company was valued as a basis for sale negotiations ? How exactly did this valuation differ from the ultimate purchase price achieved ? Please provide a detailed and reasoned reconciliation
Please disclose on what basis and how (exactly, i.e. including methodologies, amounts, etc.) the Company was valued as a basis for sale negotiations ? How exactly did this valuation differ from the ultimate purchase price achieved ? Please provide a detailed and reasoned reconciliation
In particular, provide details on the Enterprise Values (i.e. Value of the firm as opposed to certain classes of capital / assets) derived for the last round of crowdfunding vs. Enterprise Value achieved in the sale to Tesa (including a reasoned deviation analysis)
Purchase price
Is the entire purchase consideration proposed to be paid entirely in cash, at closing in May 2018 ?
If so, did the Directors consider negotiating contingent / deferred purchase price elements to allow the (later) shareholders to participate in the future performance of the Company ? If not, why not ?
Did the Directors consider introducing amendments to the distribution of proceeds which would have made-whole, or at least reduced the severe losses of, the later shareholders ? If not, why not ?
Proposed use of proceeds from the sale (in GBP) (in detail, including fees, and allocation of sale proceeds to individual classes of shares)
Is the entire purchase consideration proposed to be paid entirely in cash, at closing in May 2018 ?
If so, did the Directors consider negotiating contingent / deferred purchase price elements to allow the (later) shareholders to participate in the future performance of the Company ? If not, why not ?
Did the Directors consider introducing amendments to the distribution of proceeds which would have made-whole, or at least reduced the severe losses of, the later shareholders ? If not, why not ?
Proposed use of proceeds from the sale (in GBP) (in detail, including fees, and allocation of sale proceeds to individual classes of shares)
UNQUOTE
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An impressive list of questions which I assume might by the basis of an unfair prejudice application to the court. Good luck with that. I only invested a tiny amount so I've taken it on the chin as a good lesson learnt.
Rip off in broad day light :-)
They new they are going to do it.
Let the court decide. I am in :-)
They new they are going to do it.
Let the court decide. I am in :-)
Good list of questions - doubt you will receive answers to all of those (if any). Been radio silence from Crowdcube and Sugru on deal specifics so far. They will likely hide behind 'confidentiality' so as not to reveal what really went on.
Unfair Prejudice proceedings still leave the burden of proof on us. Yet the breach of provisions of the Articles is obvious. No offer was made to the minorities, in breach of para. 7 of the Articles. Also, it is not clear that para 8 (Drag-along) should override para 7. Even if that were so, Tesa does NOT qualify as a bona fide **arm's length ** purchaser according to para 8.1. of the Articles, not the least because of the envisaged continued employment of the Selling Shareholders. Such employment agreement in fact turns the unrelated parties (arm's length) into RELATED parties (NOT arm's length).
Also, the communication of the Company is inconsistent with the Drag-Along-Notice. The latter stipulates the price per share (@ GBP 0.09 / share), as required by 8.2.3 of the Articles, whereas the former is vague on final proceeds, claiming its dependency on currency conversion of financial debt. Unacceptable / invalid.
If all that were not enough, we have to date not received proof that the Conflict-of-Interest rules of the Articles have been properly adhered-to by the Directors in the process of resolving, and effecting, the sale.
The resolution may be, and the Sale and Drag-Along ARE in breach of the Articles, and therefore invalid. As a result of all this, I specifically call on the Selling Shareholders to exit from the Share Purchase Agreement. In particular, I specifically deny any Director's right to act on my behalf in transfering my Shares to tesa SE (para 8.7. of the Articles).
It does appear to me to have been shoddily handled at best.
My reading of it is they were/are very badly advised and left at the mercy of the only game in town who realized this and cut the offer at the last moment and the current directors decided that it was still best for them (as the main shareholders) and the staff to take it and keep their jobs. It could for example have been structured as an asset rather than a company sale.
It doesn't feel that they gave much consideration to the more recent shareholders - to not even delay completion a little so that the first round crowdfunding investors who are only a month or so away from a three year EIS hold suggest they really don't care about them.
There appears to be a question mark as to whether the company was already in breach of its banking covenants in March - May 2017, and if so I cannot see that this was disclosed. It is certainly material. Does anyone have any news of this please before I write to the company asking for proof that it was not in breach at the time.
A 91% devaluation in less than 12 months is not consistent with the tone of the pitch, I am sure that if we pursue this then we will find more information about the state of the company in the last pitch.
I am certainly open to being involved in any class action. This process has been disappointing from the perspectives of both Sugru and Crowdcube; it brings all other investee companies into question and suggests this may be the wrong platform to invest through.
A 91% devaluation in less than 12 months is not consistent with the tone of the pitch, I am sure that if we pursue this then we will find more information about the state of the company in the last pitch.
I am certainly open to being involved in any class action. This process has been disappointing from the perspectives of both Sugru and Crowdcube; it brings all other investee companies into question and suggests this may be the wrong platform to invest through.
As far as I am aware, the company is denying that they were in breach of the covenants at the time.
One thing is clear though, based on the handling of this from Crowdcube, it is absolutely the wrong platform to invest through.
One thing is clear though, based on the handling of this from Crowdcube, it is absolutely the wrong platform to invest through.
I should like to see evidence of this as well as correspondence from the bank as to the level and conditions of support on offer; the pitch makes reference to an agreed £3.5m facility agreed.
ReplyDeleteHi Richard,
Just to clarify the Irish Times have gotten this wrong. What they should have said is what we said in our email to you which is that shareholders representing 51% of the A ordinary shares, these are the voting shares owned by pre-crowdcube investors (the first of whom came on board in 2005) and shareholders from crowdcube who invested £20,000 or more.
Thank you Richard for all your support, we do not and will never take it for granted.
All the best Richard.
Jane.
Hi Jane,
Thank you for clarifying the difference between the voting shareholders and the mugs.
When 51% voted to sell to Tesa, they almost certainly did not vote to slash the value of their own holdings by 91%. But they did inflict that on the crowdcube shareholders.
As I understand it you raised a cool £5 million pounds in tranches of £3.4 million in 2015 and £1.6 million in 2017. Now you are liquidating that £5 million by paying 9 pence on the pound to those who trusted you and enabled you to build your business. So for £450,000 you are able to wipe that £5 million from your books. And then you get a further £7.6 million by selling the company to Tesa. Is this right?
Maybe you have been too close to the turmoil of all this to see it clearly but this is what it looks like from the outside. It stinks.
Best wishes as always…Richard
This is what happens when the crowdfunding platforms interests are not aligned with the crowd. This is my the nominee and carry model is best IMO.
ReplyDeleteI was just reviewing the emails sent me during this whole sorry saga - I originally invested £100 in 2015 to see how Sugru would perform, and I am also a user of the product. Last year they were giving out glowing reports of doubling retail presence etc, so I upped my investment with a further £1000. The 17 May 2018 email from Sugru that they have sold out at <10% just doesn't make sense - should they have filed for bankruptcy with the bank calling in the loan? I have just received a cheque for £88.83. This whole process smells - the sale of FormFormForm to Tesa means that Tesa have a real bargain paid for by us investors, or the whole thing is a con. Lots of further investigation needed, and it puts Crowdfunding in a very bad light, so it would be good to know what CrowdCube think about it.
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