Corporate Governance into Tesla short call ; A look into DCS listings rules in Singapore & the r

With SGX recently approving rules surrounding dual class shares structures, allowing companies with such share structures to list on the SGX with immediate effect, we like to talk about a few interesting points surrounding a potential premium attached to the class with more voting rights.

https://www.moneysense.gov.sg/articles/2018/10/guide-to-shares-dual-class-shares - This link by the Singapore government summarises the basics of DCS

There is an implicit value premium for shares with more voting rights due to the agency problem and value of control.

Research has shown that a large premium/discount occurs when the company has more than 1 significant shareholder and therefore voting rights are important to each of these majority shareholders. Unlike other large DCS stocks like Alphabet and Facebook, we expect DCS on the SGX to be mainly utilised by smaller companies that could be in various growth stages. Such smaller companies tend to also be involved in more significant market transactions.

Where there could be a boardroom tussle between 2 major shareholders with voting rights, there is a risk of minority shareholders receiving the short end of the stick. SGX has tried to mitigate this risk by enabling all share classes to vote equally on certain significant corporate actions. This process is known as the enhanced voting process and covers the following matters:

730B For an issuer with a dual class share structure, the following matters must be voted through the enhanced voting process: (1) changes to the issuer’s Articles of Association or other constituent documents; (2) variation of rights attached to any class of shares; (3) appointment and removal of independent directors; (4) appointment and removal of auditors; (5) reverse takeover of the issuer as set out in Rule 1015; (6) winding up of the issuer; and (7) delisting of the issuer as set out in Rule 1307. For the avoidance of doubt, the relevant voting thresholds in respect of each of the above matters will continue to apply.

There are a few matters we can think of that will fall through the cracks based on current polices – approval of executive pay, interested party transactions, significant transactions that do not fall into the 7 matters above. There could even be instances where the different classes do not rank pari passu and therefore the valuation premium/discount could range from 0% to 99%.

Thinking on the current Hyflux saga, we are of the view that the current status quo is as a result of a far from ideal business model combined with poor economic conditions. We think parties like ACRA, SIAS, Hyflux, Auditors etc have largely done their part with no obvious signs of negligence.

What is lacking in the Singapore market is the concept of an activist shareholder/investor that voices out and challenges the board and management on a myraid of issues. The activist shareholder’s interest is largely aligned with any other shareholder’s and that is to extract the best performance possible out of the company. Of course we are aware of the negatives associated with an activist shareholder as well.

Telsa [Nasdaq : TSLA] Short call 24/2/19

Current closing price : $295

1 year target : $150

As with all our earlier posts, we like to provide a strategy to our readers rather than simply providing information and viewpoints (however insightful they may be).

We know most people are already aware of the operational uncertainty that plagues Tesla as a consequence of the balance that the business is trying to manage, that is between innovation and delivering on production promises. In this post, We look at Tesla from the risk of a DCS.

We note that Tesla's bylaws contain supermajority voting requirements that require the approval of two-thirds of shares to OK major changes at the electric-car maker, including mergers, acquisitions or changes to the board's compensation. Elon Musk has been able to essentially do what he liked with the support of the Board that he personally stacked with people who support him. The only reason he had to appoint new Board members recently was as a consequence of his own screw up which gave the SEC the opportunity to force this on him.

Currently insiders -mostly Musk -- control about 25.5% of Tesla's shares and as a result, without Musk's support, a minimum of 89.5% of outside shares must vote to approve key changes -- an incredibly high hurdle. Think of the effort needed to rally external shareholders to cast 89.5% of their votes and think of how often this has succeeded. Most shareholders would not bother to cast their votes on the assumption that someone else would do the voting and sway the decision accordingly.

Tesla has a billion dollar debt coming due, and it could wipe out nearly a third of the company’s cash if the stock price doesn’t improve.

About $920 million in convertible senior notes expires on March 1 at a conversion price of $359.87 per share. But Tesla’s stock hasn’t traded above $359 for weeks. If the shares are about $359.87, then Tesla’s debt converts into Tesla shares. If not, Tesla will have to pay the debt in cash.

Our take is that Tesla is at risk of further dilution to shareholders as the one man key manager Elon Musk will likely have to seek for a mix of equity and bond issuance in the near future for debt payments and further capex.

Conclusion

We expect there to be significant opportunities to trade DCS shares as a consequence of the expectation of the inherent nature of the companies on the SGX who will utilise DCS and expect to issue strategic calls in time to come.

We also announce a short on Tesla with a TP of US$150.