Value of the preferred shares--some thoughts [Caution: Nothing below is intended to be a statement of fact. Everything below is my opinion only and is not reliable--do not use it for formulating actions, decisions or opinions.]
A few thoughts and observations:
• my opinion is that the offer is reasonable, a vast improvement over the recent market price, and should be accepted
• the $20 face value is a pretense, a nominal amount only, not the legal, market or economic value of the preferred shares (except in the case of a liquidation, which is not on the table)
• for most months over the past decade, these preferred shares could have been purchased for between $0.10-0.20/sh. and, more recently, for between $0.05-0.10/sh.–suggestive of the market’s assessment of the preferred shares real, inherent value
• I cannot imagine a scenario where the $2.40/sh dividend will be payed out anytime in the next decade (if I had to guess, I would say in 20 or 30 years, after inflation has whittled its value away–but will the company have survived all the downward cycles between now and then?)
• the price for ginseng root is cyclical, and we are at the high point of the cycle which, I think, is the only reason we are seeing this generous offer to make good on the preferreds--if this offer is rejected, I think it is unlikely to be improved and more likely to be completely off the table until the next time we are in a peak cycle, perhaps sometime in the next decade (and perhaps, then, it will just be the same offer, or less)
• regarding the suggestion that shareholder pressure might result in a more substantial payout–the shareholder pressure from common shareholders, large and small (who, after all, are the ones who elect the directors), will be to minimize the payout to the preferreds, not to maximize it
• if the offer is rejected, I suspect that the market price of the preferreds will quickly sink to the $0.05-0.10/sh level, back to where it was
• I have been involved in shareholders rejecting a management proposal before, with the hopes of a better offer (Seaway Energy Services in 2012) only to find that there was none forthcoming, and to see the shares now trading, three years later, for one tenth of the rejected management buyout proposal which, at the time, we had talked ourselves into thinking was so inadequate–I am now more appreciative of the bird-in-the-hand
Some legal thoughts:
• directors in Canada have a legal, fiduciary duty to creditors and shareholders not to erode the value of the company as would happen if there were a voluntary, unnecessary payoutto the preferred shareholders of the magnitude that has been suggested (upwards of $20 million, leaving an asset-stripped shell of a company)–directors can only legally justify a voluntary payment if the company is stronger, not weaker, as a result
• there is some jurisprudence, in jurisdictions that have considered the point, that the directors’ legal, fiduciary duty is to maximize the interests of the common shareholders, and that the only duty to the preferred shareholders is a contractual one to honour the attached provisions of the shares--here is a recent US judgement on the subject:
Generally, the rights and preferences of preferred stock are contractual in nature. This Court has held that directors owe fiduciary duties to preferred stockholders as well as common stockholders where the right claimed by the preferred “is not to a preference as against the common stock but rather a right shared equally with the common.” [Citing Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584 (Del. Ch. 1986).] Where this is not the case, however, “generally it will be the duty of the board, where discretionary judgment is to be exercised, to prefer the interests of common stock—as the good faith judgment of the board sees them to be—to the interests created by the special rights, preferences, etc., of preferred stock, where there is a conflict.” Thus, in circumstances where the interests of the common stockholders diverge from those of the preferred stockholders, it is possible that a director could breach her duty by improperly favoring the interests of the preferred stockholders over those of the common stockholders.
• the preferreds are perpetual with no provision for retraction or redemption–there is no provision for ever paying out the theoretical face value–directors will not create an obligation where none exists
And finally,
•
back to the nominal face value of $20 per preferred share, I am reminded of the nominal face value of my 50 million mark Weimar Germany postage stamps–like the Imperial Ginseng preferreds, despite their face value, they are not likely to ever be worth more than pennies.
