WHEN YOU SHOULD SELL A SHARE

Finweek English Edition - - FRONT PAGE - Si­mon Brown is a Fin­week con­trib­u­tor and heads ju­s­tonelap.com, a f ree re­source of f inan­cial in­for­ma­tion and in­vest­ment ed­u­ca­tion.

So at what price can you sell a share? It seems like a silly ques­tion, you can sell at what­ever price you can find a buyer and as a rule you’ll find the buyer in the mar­ket – that is the point of stock ex­changes, match­ing buy­ers and sell­ers. Fair enough, but not com­pletely ac­cu­rate ei­ther, as a re­cent Sher­bourne Cap­i­tal SENS il­lus­trated. It bought a hold­ing com­pany for R1.8m us­ing script to fund the pur­chase and the shares were is­sued at 12.5c each.

The big­ger pic­ture here is that not only is Sher­bourne cur­rently sus­pended (and has been pretty much since Fe­bru­ary of this year), but the last trades done at the be­gin­ning of this year were at ei­ther 1c or 2c. So how can it is­sue new shares at 12.5c, a mas­sive pre­mium on the last traded price?

Well, a cou­ple of points on this – with over 780m shares in is­sue, another 15m is­sued to pur­chase some­thing cost­ing R1.8m is re­ally a drop in the ocean. But, more im­por­tantly, ex­ist­ing (and trapped) share­hold­ers should not get all ex­cited that their shares are now worth some 12.5c each. That 12.5c is just what some­body was pre­pared to ac­cept shares for a R1.8m deal. Is it a good deal for the seller? In short, no, as the shares are sus­pended and frankly un­likely to hit 12.5c any time soon, but we only know half the deal, that be­ing the price paid.

The point is that a com­pany can is­sue shares at pretty much any price they like, with share­holder ap­proval that is typ­i­cally given at the an­nual gen­eral meet­ing. Now as a rule, the new shares be­ing is­sued will be at or around the lat­est traded share price, or maybe a thirty-day vol­ume weighted av­er­age price (VWAP). Of­ten they will be is­sued at a slight dis­count to en­tice who­ever is re­ceiv­ing the new shares. But a pre­mium on the price is fairly com­mon with low liq­uid­ity shares. This pre­mium in low liq­uid­ity is be­cause one sim­ply can’t buy the quan­tity in the open mar­ket so in or­der to get quan­tity, the buyer pays up.

Im­por­tantly, if the quan­tity of shares be­ing is­sued leaves the buyer with a hold­ing of over 35%, this would be con­sid­ered a change of con­trol and the buyer would need to make an of­fer to buy the shares of other share­hold­ers at the same price.

In the case of Sher­bourne, it re­ally is just buy­ing with worth­less pa­per and the seller was pre­pared to ac­cept the deal. We could do our own off-mar­ket deal whereby I sell some of the shares I hold to you at a mas­sive pre­mium to the cur­rent share price – but why would you want to over­pay when you could go to mar­ket and get them for less? Un­less, of course, you couldn’t find them for less due to liq­uid­ity.

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