This is an opinionpiece and should be read accordingly.
I believe there is acompelling argument that the ISX directors’ motive for earning the performanceshares in 2018 were not primarily for self-interest but in the best interest ofshareholders. Ensuring that the person who designed the product, created the company’s potential and its future direction is the major shareholder, guarantees that the direction of the company and its success will continue to be driven by this shareholder into the future.
Some of the best andmost productive businesses are family-owned businesses and businesses thatthrive particularly because the majority shareholding is held by the person orpersons who developed the idea and the business. In an article by MITSloan, The Value of Family Ownership, it states, “according to a new studyof large, publicly traded U.S. firms. In “Founding-Family Ownership and FirmPerformance: Evidence From the S&P 500,” slated for publication in theJournal of Finance, Ronald C. Anderson and David M. Reeb report that companieswith significant levels of founding-family ownership or control typicallyoutperform industry peers.”
The top 10 Australian Family-owned public companiesare listed in the following article2. Amongst them are Linfox (Fox), Westfield (Lowy), Hancock Prospecting (Rinehart). The worlds top family-owned public companies are listed here3. Included in these are Walmart (Walton), Volkswagon (Piech and Porsche), Berkshire Hathaway (Buffett).
Karantzisand the directors know their shares are worth nothing if not for the business,so it does not make any sense for them to do something – just to have greatershares – if it does not benefit value of the business and therefore theshareholders. There is nothing wrong, in my opinion, with - in order to achieve the objective or earning the performance shares – the directors choosing the product that will best achieve that goal at that time. Installations were slow and transaction rates were held up by that fact as well as technology issues. This, in my opinion, is reasonable.
Directors would have known the success rate, timeframe, the potential GPTV, and end-revenue of uploaded successful companies post installation. That only two out of the four key contracts succeeded is not a surprise in the world of online business. In fact, a 50% success rate is actually quite remarkable. Statistics show that ~ 90% of on-line start-ups fail within the first four months of operation. 4 The fact that two produced a return in 2019 of $1.06 million is an indication of the potential of successful installations of new ISX customers. The cost of installing those four customers was $2.85m (according to ASIC), so the payback period for those installations would be ~ 3 years – and this is ignoring the fact that ISX actually earned ~ AU $410k on these installations which negated the cost altogether. The only reason I have used the cost by itself, is if ISX had invested in installing these companies with no payment from them at all, the payout period would have been < 3 years with true return occurring thereafter.
This isaltogether made even more remarkable by the technology issues that wereexisting in 2018 and the fact that to overcome these ISX needed to quicklyinstall its own infrastructure – which it did by the end of 2018. Then we found out what ISX could actually do – It made an increase from $6,091,994 to $29,853,045, an increase of 390% in revenue between 2018 and 2019.
It shouldbe made clear that there are many good people in ISX which made this possible,but still, it cannot be discounted that the driver of this success was thefounder and major stockholder – Karantzis. We should also make very clear that Karantzis could not have done this without the support of the other directors in the company.
What is a mystery is what really motivated ASX to suspend ISX (allegedly) without sufficient evidence? This is a mystery. ISX shareholders on hot copper began speculating after ~ the third query letter. It appeared clear to many shareholder posters that ASX was looking for this “sufficient evidence” and we said so. It is only now that we find our suspicions have been confirmed – at least if we assume these notes taken, and found in discovery, are an accurate reflection of what has been said. We now find that ASX is going to have to answer this question in their reply to the 4FASOC.
This fuelled other speculations. The fact that ISX since late 2018 had been speaking to regulating authorities including ASIC and AUSTRAC about the intention to become a substantial holder in NSX and create a competing D/L same day settlement system ignited conjectures of ASX attempting to destroy ISX in order to protect its own post-trade systems. Forget the “in competition” angle, the fact that some of ASX’s revenue might erode from its then (in 2019) $30 million dollar investment which was slated to be the real money earner of ASX with all its “bells and whistles” - see Boss article on the perceived potential of this future D/L system 5 – the fact that there happens to be something that can potentially erode some of that revenue, is worth considering as a motive (i.e. consider if CHIx decided to use NSX’s settlement system, for example, because it was better and/or cheaper).
This all did happen not long after there was a reasonable negative hit (~$10) to ASX’s share price between Feb and end-Apr 2019 from, according to Boss, “reaction to strategic shifts in data services and the Deloittes’ report revealing market criticisms of the blockchain project”. There was then a push to “educate” the market culminating with the Boss report in June 2019. It is a fair assumption that ASX would not have liked a then successful technology company messing up its plans and potentially its share price along with it. Fair assumption considering the confusion of why this, why now.
It is my hope that there has turned up evidence in discovery that this was, in fact, known to ASX pre ISX suspension, along with their concern. If the evidence did turn up, it will be interesting to find out what, if anything, is revealed during questioning under oath.
ISX’s reputation is very often denigrated on Hot Copper and the media (especial AFR) by listing the court cases starting with ASX, ASIC and now the ATO. Surely with all that going on it must be concluded that there ISX is rotten from within. But consider this:
1. ASX suspended without sufficient reason and acting beyond its authority,
2. ASIC has a weak case against ISX/JK regarding VISA (of which I am also waiting to find out if ASX/ASIC was talking to VISA pre VISA suspension of ISX. If this exists in the discovery, it will be explosive), is not contesting the earning of the performance shares – just whether JK earned them at the expense of us – the shareholders. I don’t like their success in this one. Then there are disclosure issues, which is open to interpretation.
3. ATO: It is clear that the ATO delivered an assessment, froze Karantzis’ accounts, attached a DPO without fully investigating the corporate details of ISX(BVI). It appears that the ATO was going on the incorporation documents, in which Karantzis was the sole shareholder, rather than after the distribution of shares in 2013-2014 to other shareholders in ISX(BVI) pre the CGT event.
I wonder whose reputation will be damaged at the end of this very painful saga.
1https://sloanreview.mit.edu/article/governance-the-advantages-of-family-ownership/
2https://www.campdenfb.com/article/top-10-australian-family-businesses
3https://www.famcap.com/the-worlds-750-biggest-family-businesses/
5https://www.asx.com.au/documents/asx-news/high-stakes-afr-boss-article-140619.pdf
