The Mystery of the £5.7m Share Issue Costs

[boss 1,941]

(I would like to have spent more time on this post but work commitments don't permit. I hope this can be the basis for further investigation, particularly amongst the accountants and solicitors on the forum, on a matter that does appear to have been missed by everyone from McMurdo to McCollco and everyone in between. Feel free to correct the post as necessary given my lack of time to follow through some points, but I believe it is basically correct and explains several unresolved issues from the Accounts. For the avoidance of doubt, no illegality is implied.)

The Mystery of the £5.7m Share Issue Costs

It was Charlie wot done it.

One of the main issues raised from the Accounts was that £5.7m of costs were charged against the IPO proceeds.

But we were told the IPO costs would be about £2.5m. So why the difference and who got the other £3.2m?

I believe the answer is that there wasn’t actually £3.2m more physically paid out because it was simply a paper transaction. And it relates to the 5m shares issued to Charles Green basically for free.

As we know, Green was due a percentage of the shares (complicated but basically more than 10% of the company post IPO) for doing the initial deal to buy the club and for getting the initial investors (pre-IPO) to buy £7.7m of shares. There is reference in the prospectus to both an employment contract and an option for Green to buy shares at 1p. The option was eventually satisfied by the issue of 5m shares to Green on 31 October 2012 as part of his agreement for the IPO to go ahead. Green ended up with under 8% of the company - less than originally agreed. This did not cost the company any money – it merely diluted the shareholdings of the initial pre-IPO investors. It is an important technical point that this issue of shares was heavily dependent on a successful IPO.

When shares are issued, the value of those shares (as opposed to the issue price) needs to be reflected in the share capital and share premium accounts. We don’t have the information to know exactly what value was put on these shares because nor do we know exactly how much the IPO costs were, but I would suggest 50p-70p is likely (£2.5m-£3.5m) given the IPO price and the information previously leaked about the pre-IPO share issues.

So far as the company was concerned, the premium element of this deemed value of shares was to be charged against the share premium account as part of the cost of doing the IPO, so it had no net effect on the cash raised. Read Accounts note 23 and think of it like this:

10-6=4. If you add 2 onto both numbers you get 12-8=4. You still end up with the same number. It is accountants playing with bits of paper.

Why was this done? One consequence is that the (say) £3m doesn’t then get charged to the profit and loss account, which would have worsened our loss. But I don’t think that’s the real reason. It was to shift what may be an income tax matter (up to 45%) for Green, to be a capital gains tax matter (up to 28%). HMRC may want to look further at this structure but Green has indemnified the company against any tax that arises, which again points to this being the reason, so it’s not really our problem.

For this structure to work, the share premium had to be charged on paper against the IPO money. That’s why it looks like the IPO cost so much and why the issue to Green was specifically dependent upon a successful IPO. But in layman's terms, it didn’t really cost £5.7m in money paid out – the (say) £3m was really Green’s cut for the initial work. That was of course before we knew what league we would be playing in, hence Mather’s comments today are not incorrect.

A further point worth noting is that the £7.7m initial fund raising exercise is what effectively paid for the purchase of the Club, not the IPO money. It was the initial (pre-IPO) shareholders who gave Green a free ride, not the IPO proceeds. The purchase of the Club appears in the Cashflow Statement as a result of merger (as opposed to acquisition) accounting - an unusual one even for accountants.

So Green walked away with not just £933,376 salary but also 5m shares worth about £2.5m by today’s prices. Nice work if you can get it.

The costs of £5.7m charged to the IPO share proceeds are therefore technically correct but the real pound note cost to us was closer to the original estimate of £2.5m The rest was bits of paper that did not affect the cash from the IPO or the shareholders who invested in the IPO.

[mitre_mouldmaster 21,509]

I dont think so mate.

Was the % deal notified in the prospectus, if so then its possible, if not I dont think it could happen this way.

Reason being is the you could arrange an IPO where you do a deal that an insider would secretly have a default for say £100m worth of shares after the launch.

Loads of people would then invest say a total of £50m in the club not knowing about the above deal.

There would be £50m in the clubs accounts, but a person that invested nothing would by default hold 67% of the shareholding giving them full control over a PLC without investing anything.

It would mislead the investors.

I think the amount declared as raised, has to be actual funds brought into the company.

[boss 1,941]

See Prospectus part XII para 2.1.1 and in particular Part XIII para 12.1.2.

It was all disclosed.

[boss 1,941]

Green got 5m shares at an option price of 1p at a time when the shares were worth much more. The difference has to be accounted for in the share premium account and the debit charged somewhere (usually P&L). Linking this option to a successful IPO allows the paper 'cost' to be debited to the IPO costs account.

[mitre_mouldmaster 21,509]

See Prospectus part XII para 2.1.1 and in particular Part XIII para 12.1.2.

It was all disclosed.

Hmm, interesting.

Possible then, not 100% convinced this is it, but certainly would make sense.

[AlCapone 7,678]

See Prospectus part XII para 2.1.1 and in particular Part XIII para 12.1.2.

It was all disclosed.

lol

[mitre_mouldmaster 21,509]

Green got 5m shares at an option price of 1p at a time when the shares were worth much more. The difference has to be accounted for in the share premium account and the debit charged somewhere (usually P&L). Linking this option to a successful IPO allows the paper 'cost' to be debited to the IPO costs account.

One thing im not sure about would be in regards to how many other shares were issued in this fashion?

If we were counting the cost of each one on the account, would we then not have to balance this with a 'fictional revenue' on the income line?

i.e. if we show a cost of c£3m, we would need to inflate the IPO figure by c£3m. I.e. we didnt have a share issue for £21m but actually only for £18m.

If we only brought in £18m, did we not show an actual balance of £21m cash in the bank as at 31st Dec.

[five stars 1,621]

Sounds plausible, but like a number of other things requires further explanation from the board at the AGM.

[boss 1,941]

One thing im not sure about would be in regards to how many other shares were issued in this fashion?

It's only relevant for options and this seems to be the only one. Other share issues (including IPO) are simply credited to share capital and share premium accounts - there is no paper 'cost' to the company for these (the only costs are those actually paid out to advisers etc).

[mitre_mouldmaster 21,509]

It's only relevant for options and this seems to be the only one. Other share issues (including IPO) are simply credited to share capital and share premium accounts - there is no paper 'cost' to the company for these (the only costs are those actually paid out to advisers etc).

Certainly seems logical. Dont really know enough about share issues do debunk it anyway.

[gogzy 31,195]

idiots guide please.

[boss 1,941]

Certainly seems logical. Dont really know enough about share issues do debunk it anyway.

Neither do I, in truth. But see:

FRS 20 (IFRS2) Share-based Payment

FRS 20 specifies the accounting treatment to be adopted (including the disclosures to be provided) by entities making share-based payments. In particular, it requires entities to recognise an expense, measured at fair value, in respect of the share-based payments they make.

[mitre_mouldmaster 21,509]

Neither do I, in truth. But see:

FRS 20 (IFRS2) Share-based Payment

FRS 20 specifies the accounting treatment to be adopted (including the disclosures to be provided) by entities making share-based payments. In particular, it requires entities to recognise an expense, measured at fair value, in respect of the share-based payments they make.

Interesting, think this might be it.

It is like the polar opposite of the negative goodwill adjustment.

A reflection on the accounts of transaction not representing true market worth.

Negative Goodwill in our favour due to us getting something at way below market value.

CGs shares going against as we gave up something which on the open market is worth much more.

[boss 1,941]

idiots guide please.

Basically, it's the accounting for Green's free shares which was simply a paper transaction.

[Carsons Dog 9,878]

idiots guide please.

Fukkit - I'm going for a drink

[gogzy 31,195]

Basically, it's the accounting for Green's free shares which was simply a paper transaction.

[bawsburst 1,381]

See Prospectus part XII para 2.1.1 and in particular Part XIII para 12.1.2.

It was all disclosed.

A bit off topic but still on the subject of disclosure Richard Wilson today states that the IPO catagorically stated that no IPO money would be used for working capital, Neil Patey showed surprise at this not being the case months after the IPO was successful, neither had obviously read the IPO in any detail as the IPO clearly states that funds would be used for working capital.

Parties blatantly misrepresent or bend the IPO to suit their own ends, as you say Boss it is all there in black and white if they care to look honestly at the content of the IPO.

[Carsons Dog 9,878]

Hey Boss - even more off topic

Royal Mail shares

Yes or No?

[boss 1,941]

Hey Boss - even more off topic

Royal Mail shares

Yes or No?

Only if you have money to risk, but not for me. This is not investment advice.

[boss 1,941]

A bit off topic but still on the subject of disclosure Richard Wilson today states that the IPO catagorically stated that no IPO money would be used for working capital, Neil Patey showed surprise at this not being the case months after the IPO was successful, neither had obviously read the IPO in any detail as the IPO clearly states that funds would be used for working capital.

Parties blatantly misrepresent or bend the IPO to suit their own ends, as you say Boss it is all there in black and white if they care to look honestly at the content of the IPO.

Agreed, it is clearly in the prospectus, so Richard Wilson is talking rubbish.

[Carson's cat 744]

I'm obliged to you, Boss, for providing this possible explanation. Am I not correct, though, in thinking that the IPO cost was about £4.3 million and that the rest was the expenses of the first share issue? Either way, somebody needs Stockbridge to clarify the situation. And it certainly doesn't make comfortable reading for Green.

[Turnberry18 3,204]

Hey Boss - even more off topic

Royal Mail shares

Yes or No?

With it's property portfolio and the potential to streamline and modernise itself, it could be worth an investment.

[boss 1,941]

I'm obliged to you, Boss, for providing this possible explanation. Am I not correct, though, in thinking that the IPO cost was about £4.3 million and that the rest was the expenses of the first share issue? Either way, somebody needs Stockbridge to clarify the situation. And it certainly doesn't make comfortable reading for Green.

You might be right - I've seen that £4.3m mentioned but haven't found the source. Any links?

[Carson's cat 744]

You might be right - I've seen that £4.3m mentioned but haven't found the source. Any links?

Think it was in the March interim results, but don't have them handy.

[woodvale1690 43]

I dont think so mate.

Was the % deal notified in the prospectus, if so then its possible, if not I dont think it could happen this way.

Reason being is the you could arrange an IPO where you do a deal that an insider would secretly have a default for say £100m worth of shares after the launch.

Loads of people would then invest say a total of £50m in the club not knowing about the above deal.

There would be £50m in the clubs accounts, but a person that invested nothing would by default hold 67% of the shareholding giving them full control over a PLC without investing anything.

It would mislead the investors.

I think the amount declared as raised, has to be actual funds brought into the company.

like your thinlking, that's mini and indy's plan