Following a ruling by the Supreme Court of Victoria, Australia, a 27-year-old will have a chance to shut down the A$4.8 billion Airport Link toll road next Tuesday. The BrisConnections toll project, built upon highly leveraged shareholder debt, fell apart as the credit crisis hit and the share price plunged to just A$.001. This allowed a young Internet entrepreneur, Nicholas Bolton, to snap up 73,100,993 shares representing eighteen percent of the company with an initial investment of just A$47,923. That cheap initial purchase price, however, came with a catch. The BrisConnections stock is a “partly paid security” that requires a A$1 per-share payment on April 29, 2009, and a second A$1 payment on January 29, 2010, for the shares to become fully paid.
This setup has created what is considered the most disastrous share offering in the history of the Australian Securities Exchange. Many small investors and housewives were caught by surprise and found their bargain stock purchase converted each $100 investment into a debt of $200,000.
To salvage the situation, Bolton called for a special shareholder meeting to close down the toll road construction project and sell its assets. In this, Bolton won the support of Deutsche Bank, an underwriter that wants to get out from under this doomed project. BrisConnections management, however, took a dim view of the maneuver and sued to have Bolton’s company, Australian Style Investments, disbanded. The suit backfired.
“I find that Mr Bolton’s primary objective was to extract some value from his significant holding,” Justice Ross McKenzie Robson wrote in his decision Thursday. “I accept that some value may have been extracted by strong ‘negotiating position’ which included being able to call a meeting of unit holders many of whom were disgruntled.”
The court ordered the shareholder meeting to go forward after recognizing that Bolton began his efforts with a reasonable chance of taking control of the toll road. A September analyst report suggested the the toll road stock was undervalued and would be worth $2.95 per fully paid share. By October, the financial outlook worsened and a revised report suggested the stock’s true value at just $1.35 — a significant loss to shareholders. At this point, Bolton believed closing the company was in the best interest of investors and the sale of assets would provide a return of 67 cents per share to shareholders.
At the April 14 meeting, investors will first have a chance to vote on whether to shut down the project entirely. If this motion fails, the next vote will be to restore the distribution of a 5.95 cent dividend that had been promised in an announcement made on September 3, 2008. Another vote would delay or allow members to vote on whether to collect on the remaining $2 payments. Should these attempts fail, the shareholders would vote on whether to remove the management team of BrisConnections. The vote to dissolve the company will require a three-fourths vote, while removing management only requires a simple majority.
To counter Bolton’s moves, the management of BrisConnections joined with Macquarie Bank in offering to cancel personal liability of shareholders for the $1 payment due April 29 as long as none of Bolton’s resolutions pass. The shares would then be forfeited to the underwriters.
The uncertainty over liability has already scared several investors into dumping their shares to buyers like Brisbane Toll Road Link Pty Ltd. This company, run by David E Houge, 62, offered to buy shares at the rate of $10 for one million shares. By Monday he had collected 50,672,505 and a 13 percent stake in the company. In 1999 the US Securities and Exchange Commission banned Houge from trading in the US after accusing him of having “orchestrated the manipulations of three publicly traded micro-cap stocks.” Macquarie likewise acquired 31,429,332 shares and an eight percent vote at the end of March.
Today, BrisConnections announced that negotiations between Macquarie and Deutsche Bank to resolve the standoff have failed.
“There can be no assurance a satisfactory proposal will emerge,” BrisConnections said in a statement.
After years of government sweetheart deals with road developers, this has to be the silver lining on the recession cloud. The state government handed out contracts for roads and then all but closed off alternative routes. I hope they all go bankrupt.
Yup, this is hilarious in Australia. It’s fun to see the Masters Of Investment being comprehensively outsmarted. Somehow the dollars seem insignificant in the comedy.
WTF, I’ve never heard of a partly-paid security, and that’s saying something because I’m The Man. I guess the intent is to stagger incoming flow of capital in stages (for some inexplicable reason) but really it sounds like it was designed by some psycho financier entirely to screw the unwary.
Proud to be an Aussie! lol!
I am eagerly awaiting the hilarious follow-up where Mr. Bolton gets the current management voted out, liquidates the project assets, and kills the toll road!
Wow, I totally didn’t understand that. Can someone summarize? Who is the good guy here? Is the shareholder required to make the extra payments or is it the company?
I’ve never heard of a partly-paid security
I hadn’t, either. One minute spent with my friends at Google makes it seem that this might not be uncommon in Australia.
I guess the intent is to stagger incoming flow of capital in stages (for some inexplicable reason)
It reminds me a bit of the old Lloyd’s insurance shareholder model, that went nuclear on its investors about a dozen years ago. A lot of the retail shareholders didn’t realize that their shares were not free of liability, so they received capital calls and were on the hook for liabilities that the company couldn’t pay on its own.
It’s a clever strategy. The vulture buyers such as Bolton are betting that they can gain control of the business to such an extent that they can avoid their commitments to make the payment due at the end of the month. If they default, leaving millions of dollars unpaid, you have to wonder who has the bigger problem here…
Aeroelastic: Wow, I totally didn’t understand that. Can someone summarize?
1. Aussie gov’t attempts to screw public with toll road
2. Credit markets collapse
3. Scruffy kid buys toll road for $40,000 (ha!)
4. Supreme Court sides with kid
5. Tune in next Tuesday to find out if kid gets away with it
The kid is a hero. Toll roads suck.
The news is full of reports of families and retirees who thought it’d be smart to sink $500-$1,000-$2,000 as a gamble and are now liable for $500,000-$1,000,000 or more because they didn’t read their prospectus properly.
They thought the shares would rise tenfold for a quick buck.
Bolton is probably safe. I think he set up a shelf or LLC company with the only asset being the $50,000 parcel. So if he loses that… who cares? That’s the price of a reasonable car in Australia.
He’s a rich kid anyway.
The whole partly paid securities thing sounds like a total scam. As for the toll road, they have their merits, but not knowing anything about this one, I can’t make a judgement. We have a few here in DFW, and for the most part they’re convenient, and the fact that we pay to use them means that they stay in pretty good shape, too. It sucks that they’re so damn expensive, but you pay for the convenience I guess. There are alternative routes around the toll roads here, but the traffic makes them hell, and usually stretches your trip to twice the time.
Toll Roads don’t necessarily suck; however, investment bankers, etc. who set up something like partially paid securities that would seem to be designed to NSFW the unaware do suck. I hope Nicolas Bolton beats them at their own game.
Aeroelastic : Basically, for every share owned, you eventually end up having to pay them $2. The rest of it is legal stuff that my brain is too tired to figure out…
The illustration at the top of the news item is of Melbourne. The toll road (being built) that they are arguing about is in Brisbane – about 2000km north of Melbourne.
The court case is in the Supreme Court of Victoria (Melbourne) because (I think) that is where Nick Bolton’s company is registered. That court case was started by Brisconnections to try and wind up Bolton’s company.
There is also court proceedings in Brisbane. One of the things they are arguing about there is whether that case should be transferred to the Supreme Court of Victoria.
I hope that’s clear now.
Well, The Kid (Bolton) knifed everyone and sold his $30,000 voting stake for $4.5m to the prime contractor. Now the project is going ahead again (pending the almost certain legal action that will follow).
More here.