Do your homework
Working in a listed utility firm and most likely still young and a just starting out investor, a distressed Jerry sent an e-mail describing what happened to his investment in Imperial Resources, Inc. (trading symbol: IMP) in view of recent corporate developments in the company.
Last March 1, Imperial Resources started replacing its old certificates to reflect the changes in its par value and declassification of its Class “A” and Class “B” shares into one class of common voting shares.
The market adjustment pulled the stock price of Imperial Resources far below Jerry’s investment cost.
Jerry bought through his broker 510 Class “B” shares last September 9, 2016 at the price of P151.00 per share for a total of P77,617.73. The price of Class “A” shares was at P19 apiece or so at the time.
Due to the change in par value, his original holdings of 510 shares was converted to a total of 2,550 shares. At the “trading price of P4.00” apiece, the value of his stockholdings is now equivalent to just P10,200.
Jerry complained that the corporate acts of Imperial Resources have drastically reduced the value of his investment by “88 percent or P67,760 of my hard-earned money.”
The “schemes,” he bewailed, were “unfair, unjust and highly unfavorable to us small investors.”
He further expressed suspicion that management might have even taken corporate maneuvers for their own benefit. Jerry said the “PSE, should have an immediate review, reevaluation and revalidation of the approved resulting shares conversion and pricing in order to correct and adjust the unfavorable impact it had brought to us, small investors.”
Hurting and desperate, he wanted “to know if this kind of transaction with significant impact” on his investment should be one of those concerns the PSE must watch out for and compel listed companies like Imperial Resources “to publish the declassification details, mechanics and effects to current investors in leading newspapers and not only on the PSE website.”
Jerry went on to further blame his stockbroker for not guiding him properly. He was fuming mad at his stockbroker whom he claimed was clueless of the particulars in the company’s move.
Bottom line spin
Jerry is like most of the typical retail investors. They start out with big expectations although still ill-equipped with the basics of equity investing, which would render them totally hapless in contending with a knotty stock market.
Declassification and change in par value in the shares of a company are methods used to enhance a company’s capital stock and market price. It is deemed better than the dual shares or multiple shares class structure, which usually “allows company founders, executives and family” to maintain control of the company while the general investing public provide the majority of the capital.
In Berkshire Hathaway (led by Warren Buffett), Ford and Facebook, to mention a few known companies, founders are given control of the majority shareholder’s voting power even with relatively small number of shareholdings. The Ford family, for instance, “controls 40 percent of the voting power while owning only about 4 percent of the company’s total equity.”
The move to declassify shares and change in par value was approved by the board of directors of Imperial Resources as far back as March 28, 2016. The decision was subsequently approved by stockholders on July 14, 2016 and approved by the Securities and Exchange Commission on February 10, 2017.
Shares issued and outstanding before the move totaled 78-million Class “A” and 52-million Class “B” common shares. Listed on the bourse were only 14-million Class “A” and 6-million Class “B” common shares.
After the changes, the issued and outstanding shares of the company turned into a one class of 652.5-million common shares.
The trading volume of Imperial Resources over the last seven years was pretty flat. It could hardly make it to the bourse list of top 20 active stocks, except last year when it had an average weekly total value turnover of P14.28 million.
Considering its very limited number of shares on the bourse, this alone should have been an apparent red flag—for Jerry to do his homework—before plunging into Imperial Resources’ sudden stock play.
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