Merger Proposal dispensed with, next up the Directors and E&P

 Summary: In a humiliating retreat, the CD Fund Merger Proposal was withdrawn by E&P on Oct 31st as votes already cast made passing the resolutions impossible. Immediate distributions were then announced for CD1, CD2, CD3 releasing some of the cash holdings.

However, the work for investors is unfinished. There has almost certainly been a majority vote of no confidence in both the Directors and E&P. The Directors should be replaced. And E&P should then be forced to hand over to a more competent and responsible entity to govern all CD Funds, including CD4 which has the biggest issue of no feasible ability to sell.

A humiliating retreat but if they aren't finished off we'll be back here again!

Details:

1. The Merger required resolutions needing 75% of votes in each of CD1, CD2 and CD3. It's likely the NO vote was already over 50% and thus a de facto vote of no confidence in the Directors and E&P

Clearly the NO vote was already on track to far exceed 25% in at least one of CD1, CD2 or CD3. But I suspect it may have already exceeded 50%, perhaps in each of CD1/2/3, and thus was on track to be a majority vote of no confidence.

If E&P had allowed the vote to take place and an embarrassing majority had voted against, the CD1/2/3 Directors would have been under pressure to resign after having agreed to spend millions of dollars on the secret Merger Proposal and strongly recommending it. Any new Directors acting for investor interests would be seeking to replace E&P as the responsible entity for their many failures to pursue the interests of CD1/2/3 shareholders.

Remember, E&P continue to insist that: "it was in the best interests of investors to recommend the Proposal and put it to investors for consideration." 

2. Investors should demand E&P reimburse the millions of dollars of investor funds they have wasted on multiple secret Proposals they didn't consult investors on

Instead of taking the obvious actions to reduce the NAV discounts and improve liquidity, E&P has recklessly wasted millions of dollars over many months secretly working on this Merger Proposal and doing whatever it can to get it passed.

This is in addition to the money and time wasted on the 2019 Whitehorse Proposal (selling CD1/2 at 17-18% discounts while they had entered harvest phase and had many substantial distributions to come as well as valuation uplifts). CD1/2 investors overwhelmingly rejected the Whitehorse Proposal (over 90% voted against), yet E&P learnt nothing about transparently consulting all investors about their interests and the extent of tradeoffs they'd accept to achieve desired outcomes.

It is timely to remind everyone that after the Whitehorse defeat the Responsible Entity stated:

"The Responsible Entity (RE) is very pleased with the resounding endorsement of the strategy and the investments held by the Fund."

But the RE had in fact been responsible for the Whitehorse Proposal and had advocated its advantages. Here are quotes from the Whitehorse Proposal announcements (15th Oct 2019):

"...the responsible entity is pleased to announce (it) has entered into a sale agreement to sell, subject to unitholder approval, CD II’s interest in US Select Private Opportunities Fund II, L.P (LP)... to an entity controlled by Whitehorse Liquidity Partners."

"The Responsible Entity believes the Whitehorse offer provides several advantages to Unitholders. It allows Unitholders to crystallise the strong returns achieved to date and to exit fully their investment at a time when liquidity of units traded on the ASX is relatively limited. Unitholders will accelerate the return of capital when compared to the gradual realisation of the portfolio and subsequent capital returns, providing investors with full flexibility to reallocate the proceeds of the Sale. However, by approving the Sale, Unitholders will forgo any potential future growth of the underlying portfolio."

So you can see the RE's track record. Perhaps when enough time passes it will have the gall to claim CD1/2/3 investors have again endorsed the RE's existing management of the funds!

3. Corporate Governance and Director Responsibilities 

Each CD Fund Annual Report contains a Corporate Governance Statement describing how the CD Funds meet the ASX corporate governance principles. So let's assess just a couple of examples.

Lay solid foundations for management and oversight

"• overseeing the Fund’s process for making timely and balanced disclosures of all material information concerning the Fund; and

• communicating with and protecting the rights and interests of all unitholders."

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Given the information I've detailed on this blog, has the Board really made timely and balanced disclosures regarding the Merger Proposal and significant considerations like cash levels (including look-through levels) and when distributions could actually be made (as opposed to held back)?

Indeed the Explanatory Memorandum cast doubt on the liquidity at NAV for CD1/2/3 saying: "the timing of future capital returns is unknown" when it knew the look-through cash levels were 20-30%. In reality, the timing of the next capital return for CD1/2/3 was only dependent on the Merger Proposal being defeated!
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Respect the rights of unitholders

"The Fund promotes effective communication with unitholders. The Board has developed a strategy within its Continuous Disclosure Policy to ensure unitholders are informed of all major developments affecting the Fund’s performance, governance, activities and state of affairs."

"The Board encourages full participation of unitholders at the general meetings held by the Fund to ensure a high level of accountability and identification with the Fund’s strategy. Unitholders who are unable to attend a general meeting are given the opportunity to provide questions or comments ahead of the meeting and where appropriate, these questions are answered at the meeting. Unitholders may also contact the Board directly through the Company Secretary by using the Responsible Entity contact details found at the end of this document."

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Do investors in CD1/2/3 feel they've been adequately consulted by the Board or E&P regarding spending investor funds pursuing these Proposals to sell at deep discounts or merge the funds into a permanent fund they can't exit for several years?

The CD Funds hold no annual meetings at all and there is no opportunity for all interested investors to join a regular meeting in person or virtually and hear the Board or E&P respond to investor's questions.
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4. Next Steps...

- Replace the Directors with independent ones focused on actively consulting with investors in each separate fund and pursuing their separate interests.

- Once the Directors are replaced, seek the quickest way to replace E&P with a more responsible and competent entity that works hard and effectively for investor's interests.

- Establish regular Annual Meetings for all CD Funds with an open process in advance to collect written issues and queries from any investor and enable them to be heard.

- Establish a process for investor-led Resolutions to be voted on at meetings. (E.g. With at least 5% of votes).

- Until Directors and E&P are replaced, investors will need to organise their own mechanisms to collaborate and maintain pressure on them to act for investor interests and stop wasting money and resources pursuing initiatives the majority of investors (and votes) are clearly against.