Corporate Governance,
Insider Reporting, Technology Financings, New Stock Exchange, Worth Mentioning
and Capital Pool Corps Update
Corporate Governance
When you invest in a company, you are counting
on the management team to execute a business plan and give you a return on your
investment.
In addition to working hard and smart,
shareholders like to know that their company, at a higher level, adheres to
certain corporate governance practices. What does this mean and
why is it important, other than having a nice ring to it?
We know from experience that very few companies
actually follow their business plans. Indeed, many of our successful local tech
firms are doing something quite different from that which they originally
started out to do. But that's OK because it's incumbent on management to
identify new opportunities and capitalize on these.
However, investors deserve to know what is going
on, especially with regard to financial performance, material changes, new deals
and other matters. This means that companies need to adopt certain disclosure
procedures.
The Board of Directors of a company is its soul
and conscience. It's the Directors that ultimately bear any legal liabilities.
Having a "limited liability" company - as all incorporated firms are -
does not mean that its people, i.e. directors, can hide from prosecution. The
Canada Customs and Revenue Agency, Labour Boards, and the Courts can make
directors compensate for any mis-dealings.
Many companies, especially small ones, can run a
sloppy operation, governance-wise. Often, they don't do this maliciously - they
just don't understand the importance of a properly functioning board and its
role.
Who can make what decisions? How far can
management go without board approval? How independent is the board from
management? Is there an audit committee? What about compensation, especially
dilutive compensation matters such as stock option plans?
Shareholders like to know that their companies
are in good hands and that there are systems and procedures in place to avoid
flying-by-the-seat-of-the-pants.
To give shareholders such comfort, various stock
exchanges require that their listed companies adhere to certain standards. NASDAQ,
for example, has very specific guidelines as to when insiders can buy or sell
shares in their companies. The Toronto Stock Exchange is reviewing its
own guidelines with a view to improving the standards which it imposes on its
listed companies. Similarly, the CDNX is seriously looking at its
policies in this regard. One could argue that the rules which apply to a senior
company might be more onerous for a small emerging company. There's a lot of
debate as to what should be hard and fast as opposed to voluntary reporting.
A special committee, known as the Joint
Committee on Corporate Governance (see www.jointcomgov.com),
produced an interim report, dated March 2001, in which it makes various
recommendations as to governance practices, especially pertaining to Board
matters.
Company directors, senior officers, and
shareholders ought to take a look at these recommendations and provide some
feedback. The Listed Companies Association (www.lcacdnx.com),
which represents CDNX listed companies is interested in making sure that its
members are not nails being hit with a sledgehammer. What's nice from a
ideological perspective may not work for practical reasons. In any event, the
report makes for some interesting reading.
Although we expect companies to operate on a
professional and informed basis, it's also up to investors to be educated on
matters relating to public companies.
In addition to acting as a watch-dog, it's
encouraging that securities regulators, notably the B.C. Securities
Commission, are sponsoring various educational initiatives. One of these
which caught my attention recently was a series of seminars aimed at seniors to
help them avoid getting scammed. Information on this and other programs can be
found at the Commission's web-site at www.bcsc.bc.ca.
Insider
reporting goes online
Finally!
Yes, soon insiders of companies will be able to file their trading reports
online. Timely insider filings and public access to these are all part of good
corporate governance practices as discussed earlier.
Presently
insiders have to file by fax in each jurisdiction where the company is a
reporting issuer. As a director of a company which reports in B.C., Alberta, and
Ontario, I've had to fax my report (the same report) to the securities
commissions in each of these areas. Then, some weeks later, the data are
available (to varying degrees of accessibility) to the public. Can you believe
it?
The new
system - known as The System for Electronic Disclosure by Insiders (SEDI), will
take effect October 29, and insiders will be required to file their trading
reports electronically starting November 13.
This means
that beginning in November, investors will have access, free-of-charge, to
insider reports via the Internet, giving them more timely information about
insider transactions.
By the way,
an "insider" of a company is any senior officer or director or major
(>10%) shareholder of a company.
According
to the Canadian Securities Agency (CSA), filing deadlines will be
harmonized in all jurisdictions and all insiders will be required to report
trades within 10 days of the transaction.
Investors
will be able to obtain reports such as: a weekly summary for all reporting
issuers; the details of individual transactions by insiders; a list of
registered insiders for each SEDI issuer; and an issuer "event
history", which includes a stock dividend, stock split, consolidation,
amalgamation, reorganization, merger or other similar event.
The $12.2
million SEDI system was developed for the CSA by CDS Inc. (a subsidiary
of the Canadian Depository for Securities, Ltd.), which also developed
and operates SEDAR - the main repository for corporate filings (see www.sedar.com).
Technology Financings
In my previous column I mentioned that
technology companies were still managing to raise capital even under current
market conditions. Companies such as Nxtphase Corp ($30m), Datawest
Solutions Inc ($20m), Sideware Systems ($6.3m) and Kinetek
Pharmaceuticals ($16.5m) were joined by Xantrex Technology Inc, which
raised $58M from more than two dozen purchasers took out. TIR Systems
Ltd (CDNX:TIY) closed a small $1.5 million placement. Xenon Genetics Inc,
found 50 investors who took down $4.1 million and Protiva Biotherapeutics
Inc., a spin-off from Inex Pharmaceuticals Corp. (TSE:IEX), announced
that it has signed a $14.5 million equity financing agreement with leading
venture capitalists private investors.
Instead of going after investors to get cash,
other companies are doing just the opposite - giving investors cash in order to
buy back some of their issued shares.
Often, large cash-rich firms such as IBM will
use their excess cash to buy-back their own shares on the public markets in the
belief that an anti-dilutive move is in the best interests of its shareholders.
This makes good sense in times like this when stock prices are relatively low.
It isn't too often, though, that we see junior,
CDNX-style, companies in this enviable position. Yet, a couple of local CDNX
ventures are doing just that. Triant Technologies Inc, (CDNX:TNT) has
made an offer to buy up to 2 million of its own shares up until Aug 31, 2002.
Similarly, Ignition Point Tech (CDNX:IPN), a developer of broadband
communications technologies, plans to re-purchase up to 730K of its own shares
up until Aug 16, 2002. From an investor's perspective, these companies deserve a
closer look. Buy-back offers generally indicate financial health, management's
confidence in the business, higher EPS potential (due to fewer shares), and at
least some assurance that someone (the company in this case) will be a buyer of
shares in the future.
New Stock Exchange?
Want to start a new stock exchange? No problem.
A little-known company, Diversified Technologies Group, Inc. did just
that. It recently announced that its corporate name and stock symbol was
changed to The X-Change Corporation (OTCBB:XCHC).
The X-change Corporation is developing an
alternative trading system which makes it possible for more than 5600 so-called
Pink-Sheets companies (these are even "worse" than the OTCBB
companies) to be traded on a fully automated basis instead of by telephone!
The X-Change Corp itself is being actively
promoted on the 'net. I've already received several unsolicited emails touting
the merits of making an investment in this company. Although public companies
are often reluctant to give forecasts of future revenues, this one is not so
shy. It estimates revenues of $14 million in 2001, and $56 million by 2003. It
is trading in the US$0.70 range with "target" trading prices ranging
from U$3.00 in the short term to U$6.00 in the long run. We'll see.
To its credit, though, note that the senior
exchanges (TSE, NASDAQ, etc) have talked about being publicly owned and traded
entities themselves but seem to take a long time getting there. Leave to a
startup to beat them to the punch!
Worth Mentioning
Burnaby-headquartered Future Shop Ltd. (TSE:FSS),
about to be taken over by US based Best Buy, reported that its sales this
past August were up 5% over August of last year. That's pretty encouraging, if
you ask me. The fact that consumers are spending under clouds of economic
slowness may fend of the proverbial self-fulfilling prophecy.
Fellow T-Net columnist Brent Holliday
recently made a pitch for boosting our manufacturing capability in B.C. in the
area of photonics, believing that this could be a ground floor opportunity akin
to that of silicon chip fabrication a couple of decades ago. Coincidentally, I
found it interesting that Ottawa's Terry Mathews is aggressively moving
into electronics manufacturing by spinning off one of his recently acquired Mitel
units - to be called BreconRidge Manaufacturing Solutions - and merging
it with a couple of other production firms. The leader in this field, Canada's Celestica
Inc. (NYSE:CLC) was mentioned in this column recently insofar as it was the
top-ranked company in Business Week's Info-Tech 100 report.
I'd love to see hardware production facilities
grow here in the lower mainland. The growth of companies like Burnaby's Xantrex,
which recently closed a $58 million private placement demonstrates that there's
an inherent technological capability here ranging from R&D to production.
And, it shows that investors still like to invest in tangible deals. It's a lot
more exciting than a bunch of people sitting in front of screens all day. I just
love the fresh smell of a wave soldering line early in the morning!
Capital Pool Corporation
(CPC) Update
In this column, I
keep track of Capital Pool Corporation ("CPC") companies (see
chart below) as defined by the CDNX because they may provide funding and
management to, and in the process acquire, technology companies. They provide
companies with an alternative to traditional venture capital financing. CPCs are
the continuation of the former VCP and JCP programs on the Vancouver (VSE) and
Alberta Stock Exchanges.
I've previously commented that
Ontario might adopt a capital pool program. Well, finally after many years of
snubbing the idea of "blind pools", the Ontario
Securities Commission (OSC) is now proposing to allow Capital Pool companies
to raise money in Ontario. The OSC has proposed a new policy, which sets out its
views as to whether issuers participating in the Canadian Venture Exchange
Inc.'s capital pool company program should be permitted to conduct public
offerings in Ontario.
Historically,
the OSC has been reluctant to issue a receipt for a prospectus where the
prospectus revealed the issuer to have neither a business nor operations and no
assets, other than cash. The commission now says it is aware that the
implementation of the program in Ontario may also confer benefits upon Ontario's
capital markets by providing entrepreneurs and emerging businesses access to the
financial and other resources necessary to fully develop. Amen. Moreover, the
commission has also noted that the program provides certain investor protection
provisions, which help mitigate the potential for harm to investors. It invites
comments on the proposed policy by October 31. For more information on this, go
to the Listed Companies Association website at www.lcacdnx.com.
Since the program
was launched in B.C., more than 250 CPCs have been formed and more than 30 have
completed their so-called Qualifying Transactions (QT). It takes at least a year
- usually longer - for a CPC to find a suitable takeover candidate and another
six months to a year for a deal to be finalized. One way to expedite the
process is to eliminate the need for a special shareholders meeting to approve
the deals - leave it up to the CPC boards.
Check our Capital
Pool Corporation chart (in .pdf format) for a complete list of the CDNX's
CPC and VCP companies, thanks to David Ing of Pacific International
Securities. This list is updated on a monthly basis. The Chart is now
current to August 31, 2001.
The new additions to the list since the July
31st edition, are Alegro Health Corp., Crescendo Capital Corp., Dynamic
Capital Corp., Maximus Capital Corp., Techcore Capital Inc. and TheraMed
Capital Corp.
Alegro is from Ontario; Dynamic is from
Saskatchewan; and Maximus and Techcore are from Alberta. The rest are from B.C.
(Soon - if the OSC gets on board, there'll be lots from Ontario!)
The following companies have come to trade in
the past month: Brockton Capital Corporation, CastleRock Capital Inc.,
Developer Ventures Inc., Peterborough Capital Corp., Tamerlane Ventures Inc. and
TheraMed Capital Corp.
The following seven companies have been removed
from the list because they have completed their Qualifying Transactions and are
no longer seeking acquisition targets: Gentech Capital Corp., Hollingfield
Capital Corp., Longbow Energy Corp., Longview Petroleum Corporation, Red Oak
Trail Corp., Technology Growth Partners and VTEC Capital Corp.
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Footnotes
Now that summer's over, it might
be time to check out upcoming Fall meetings in the tech sector. A couple of
upcoming events deserve being mentioned, however.
At its Fall kick-off session,
the Vancouver Enterprise Forum will feature early stage venture
financing. The speakers - three entrepreneurs, two of which have become angel
investors, will present their views on the local startup investment climate.
This event will take place in the evening of Tuesday, September 27th. See www.vef.org
for more details.
On October 4th, Ernst &
Young's Entrepreneur of the Year awards gala will be taking place at the
Vancouver Trade and Convention Centre. Thirty-two Pacific entrepreneurs are
finalists in eight different categories. This black-tie event is expected to
draw 800 guests. For more info, call 604-891-8270 or visit www.eoy.ca.
A complete calendar of
technology events can be found on T-Net's
Events page.
SFU's TIME Centre is open
for business - business folks, that is. TIME is an acronym for Technology,
Innovation, Management, and Entrepreneurship. TIME supports the growth and
development of the tech industry in B.C. TIME features a "Business Centre"
(looks like an airport business lounge) which is open to technology
entrepreneurs and business people to use as a drop-in downtown office facility.
Need to plug-in? Make some calls? Do some work? Hold a meeting? Why hang out at
MacDonald's when you can work productively at the TIME Centre? Drop by and check
it out! It is located at SFU's downtown Harbour Centre campus at 515 West
Hastings St. More information can be found at www.sfu.ca/time.
PS - there are some great facilities for holding your company meetings.
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