Fiduciary Responsibilities and Shareholder ValueI had a long chat this morning with a good friend who is a fine lawyer (very much in the dolphiin model - highly intelligent, loyal, empathetic and caring - rather than the more usual shark like characteristics of most in the legal profession). While discussing more mundane business, we strayed onto the fiduciary responsibilities of the members of the Board of a publicly traded company, and also of the CEO and senior management they retain to run the business on a day to day basis.
All of these individuals are fiduciaries, and have a fiduciary duty to the Company first and foremost, and a secondary duty to shareholders and other stakeholders in the company (employees, crditors, the community in which they operate, etc.) What this means under the laws of Canada (and the UK where the Company is incorporated) is that these individuals must, at all times, place the interests of the Company and its shareholder owners ahead of their own personal interests and benefit.
Using the financial capital shareholders advanced to the Company, the Board and management of Verde AgriTech have secured a significant long term asset in its ownership of the right (with appropriate government approvals in hand) to exploit the mineral reserves in the 33 land leases. With properly engineered extraction, processing, sale and delivery, the Company believes it can generate net returns over the next 30 years that have a calculated Net Present Value (based on disclosed assumptions) of almost $2 billion.
Let's assume the NPV is correct, and the Company has an off balance sheet asset of $2 billion. With 50 million common shares issued an outstanding in the hands of current shareholders, this means that each share has a currently unrecognized value of $40 per share.
For a fiduciary Board member of Verde Agritech, I would like to suggest that issuing treasury shares as compensation to themselves, or to senior officers and managers in lui of cash settlement of salary and benefit obligations, needs to be assessed in terms of the currently unrecognized $40 per share value.
That $40 per share value belongs to the current existing shareholders, and needs to be safeguarded and preserved for their benefit. The beauty of the proposed 3% Royalty Trust sale is that the beneficiaries of this funding proposal are exclusively the existing shareholders. And yes, the payout under the Royalty Trust will, in time, be significant. Let me give you a sense of what that might be:
Let's look to a future year where the Company has finall hit the 5 million tonnes per year sales target. Using Q3 metrics, we sell the $5 million tonnes at $37 per tonne and recognize the costs of production to be $12 per tonne, for a gross margin (net smelter revenue) of $25 per tonne. Under the 3% royalty obligation, 3% of this net figure is paid to the Royaty Trust or $0.75 per tonne. With sales of 5 million tonnes, the Royalty Trust receives $3,750,000 for distribution to the beneficiaries of the Trust, the 2020 shareholders who participated on the basis of paying roughly 8 cents for each share they owned in 2020 to the Company for $4 million in total.
The Trust beneficiaries would receive 7.5 cents for each of their 1 share interest in the Royalty Trust, or roughly what they had advanced back in 2020. Then every year after that where 5 million tonnes was sold, they would be getting paid another 7.5 cents in pure profit.
And all this Royalty represents is a small part of the $40 of unrecognized Net Present Value that they owned back in 2020.
Why wouldn't the Board consider securing part of what shareholders already own by allowing them to become pro rata owners of the 3% Royalty, a royalty that the Company had unwisely GIVEN AWAY to a single individual employeed to do some survey work for the Company. There certainly does not appear to have been much fudiciary responsibility being exercised when that contrat was agreed to back in 2009. You might want to have a look at whose signatures were on that contract on behalf of the Company.
Can we at least enter into a reasonable discussion about protecting existing shareholders and aligning their interests with those of the Company. Based on my discussion with a well informed legal counsel, our fiduciary Board Members and our CEO have a legal duty to do nothing less, and can be held to account if they do not.
Would love to hear your thoughts and opinions - all reasonable and polite discussions are most welcome.