Thousands of Paperlinx shareholders could soon be holding near worthless stocks if a breach of agreement claim is upheld and hybrid investors take 94 per cent control of the company.
The top three shareholders – Allan Gray, HiShenk and Laurence Rodny’s Communication Power – together own 32 per cent of Paperlinx, with Allan Gray controlling 16.8 per cent.
If the share conversion goes through the trio would be left with just two per cent, according to the Australian Financial Review.
Paperlinx investor Blue Pacific has thrown down the gauntlet to the embattled paper merchant, claiming it breached conditions of its agreement with the hybrids.
Any breach of the agreement triggers a share exchange that, with Paperlinx net assets at just $146.7m and market capitalisation at $18m, would give the hybrids 94 per ownership.
[Related: The ups and downs of Paperlinx]
Under the terms of its $285m capital raising in 2007, which issued priority hybrid securities at $100 each, Paperlinx may not ‘buy-back or acquire any share capital’ unless it pays dividends to the hybrids – something it has not done since June 2011.
Blue Pacific, a New York hedge fund that owns both hybrid and ordinary shares, claims two buybacks of employee shares breach the agreement and has demanded the responsible entity begin the conversion process.
The two transactions, $100,000 in 2013 and $300,000 in 2014, are relatively minor events but – Blue Pacific says – do technically breach the agreement.
“Paperlinx has failed to comply with its obligations under the terms of the SPS Trust,” it says.
A Paperlinx spokesman told ProPrint: “We have been made aware of the accusation by a hybrid unit holder of a possible breach of the SPS undertakings. Clearly the company does not agree with the assertions contained in the Blue Pacific letter.”
The company later posted to the ASX in response to the letter saying: "The hybrid unit holder's suggestion is misconceived. The company denies the accusations and if proceedings are initiated, will defend its position vigourously."
Gaby Berger, acting convenor of hybrid shareholder advocacy group PXUPA Investor Group Supporters (PIGS) agrees the transactions could constitute breaches.
“These were bought for an ‘employee share plan’ whose hurdles were never met. So technically Paperlinx has bought back some its shares – a no no for a judge to sort out,” he says.
Blue Pacific only last month proposed a deal to give hybrid holders 80 per cent of the company and secure its financial sustainability, and says it privately sent four other proposals to the board between December and July.
The firm blames the ‘prolonged stalemate’ on ‘a seeming unwillingness by certain ordinary shareholders to work together to negotiate a solution to Paperlinx's impaired capital structure’.
Allan Gray is also a major shareholder of other companies involving Paperlinx chairman Robert Kaye, who is chairman of Collins Foods and non-executive director of UGL and Magnotec.
Former Paperlinx chief executive Andrew Price told ProPrint in June that a plan to pay off the hybrid shareholders was scuttled by opposition from the 'second biggest shareholder', who was concerned it would heavily dilute his share value.
An upcoming lawsuit by Price against Paperlinx alleges Price fell out with the board when he was told not to pursue it, and that he was sacked as a result of his insistence the deal be done.
[Related: More paper news]
Blue Pacific has advised an immediate trading halt ‘to avoid any possibility of a false market’ in either PPX or hybrid securities.
“We recognise this has been a very difficult situation. The SPS Trust is and always has ranked senior to the ordinary shares in several important, material respects,” it says.
“We respect the hard work and effort of the board, but kindly request that they recognize the terms of the SPS Trust and the senior position of the SPS Trust and work with us to establish a stable path forward for Paperlinx and its stakeholders.”
Paperlinx shares rose by a whopping 19 per cent today.
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