Last Friday I sent an Open letter raising my objection to the practice of Hancock purchasing its shareholding with the massive support from borrowed shares, thus avoiding purchasing exclusively "free float" shares. I have argued that the use of this practice has effectively shortchanged retail shareholders as the share price would otherwise have been higher. Conversely, Hancock would have been unlikely to be able to accumulate such a large volume of shares in that time frame as approximately 140m extra "non free float shares" were transacted (net change in aggregate shorts). I said such practices should be investigated as to whether they are appropriate during a takeover battle.
Here is the letter and page 1 of the attachment
From
DF
To
Australian Securities and Investments Commission (Brisbane)
Liontown Resources Ltd
Honorable Dr Jim Chalmers (MP) Federal Treasurer
Honorable Stephen Jones (MP) Assistant Treasurer and Minister for Financial Services Honorable Zoe Daniel (MP) Member for Goldstein
Honorable Andrew Wilkie (MP) Member for Clark
Senator Andrew Bragg
Senator Jacqui Lambie
Senator Barbara Pocock
Senator David Pocock
OPEN LETTER
Lack of proper market operation during Liontown Resources Limited Takeover Battle
I am writing this Open Letter to seek regulatory change and lodge my objection to the contrived market for the shares in Liontown Resources Ltd(Liontown) that has permitted the assembly of an almost 20% stake in the company by Hancock Prospecting Pty Ltd(Hancock) without the operation of a proper open market.
Liontown is an ASX 100 public company that is developing a globally significant lithium mining project in Western Australia which is rapidly approaching production. Liontown is currently under threat of takeover by at least 2 parties, Albemarle Corp (ALB), a NY Stock Exchange listed American company, as well as Hancock, owned principally by Australia’s wealthiest person, Ms Gina Rinehart. ALB is the world’s largest producer of lithium chemicals, a critical metal in the transition to an electrified global economy to counter climate change.
Liontown announced on 4 September 2023 that it was contemplating recommending a proposal made by ALB, of its intention to acquire all of the shares in Liontown via a Scheme of Arrangement (SoA). In the period since that announcement Hancock has acquired approximately 300 million Liontown shares “on market” representing around 15% of shares on issue (total including previous undisclosed holdings 19.99%). Hancock has surprisingly managed to do this while keeping its purchase prices at or under $3.00 per share. Maintenance of the price within a tight band has only been possible through the operation of organisations that have borrowed many shares on terms that permit them to then be on-sold while then delaying their repurchase and return over a much longer period.
My concerns, and indeed those of many other shareholders with whom I am in contact, surround two main issues:
- 1. The operation of the rules surrounding the borrowing of shares from lenders and the consequent selling of those shares during the takeover process, and;
- 2. The impact that has upon conventional free market operation of share trading and the “value” of shares in the company.
I contend that these combined elements have led to the sidelining of proper market forces that would otherwise have led to a likely material increase in Liontown share price. In the process, Hancock has avoided the need to purchase significant numbers of “free float” shares. Furthermore, they contributed significantly to the ability of Hancock to secure its current holding of 19.9% of Liontown shares which may otherwise not have been possible in the timeframe (at the price paid).
The loose regulation and availability of borrowing and short selling during a takeover has led to a contrived market in Liontown shares and deprived other shareholders, especially retail shareholders! Effectively, by Hancock being able to purchase borrowed shares, the takeover process for a clearly very desirable company has so far not operated to the benefit of shareholders, but rather to predators.
The use of borrowed shares sold to Hancock allows large volumes of shares to be contracted now through an intermediary and through the loan process, their repayment then to be extended over a subsequent longer period when trading activity is less and therefore more advantageous to acquirers. These sophisticated financial arrangements work against a free market and to the clear disadvantage of retail shareholders who might otherwise have been able to transact their shares at a materially higher market price.
Attached to this letter is a table prepared from publicly available data extracted from the ASX trading information, ASIC announcements about reported short sales of Liontown Shares, and the actual share purchases over a period of time by Hancock. Of special significance are those purchases by Hancock that have occurred since the public disclosure of the ALB SoA proposal by Liontown on 4th September 2023.
It can be seen that over weeks since 4 September 2023, the borrowed and “short sold” shares in Liontown totalling 261,422,686 compare to the Hancock acquired shares of 292,106,280. The aggregated (net) short sales have increased over the period in question by approximately 140m shares, although at time of writing final figures were unavailable. Without the provision of a ready supply in the market of borrowed shares for which repayment can be deferred for an extended period, Hancock could not have accumulated the holding they have! Conversely, had they bought those shares on market in the absence of such supply, the average price to acquire such a stake would indeed have been significantly above $3.00 per share and shareholders would have had an opportunity to sell their own shares at a higher price. The company’s true value is/was not reflected in the trading price. This is NOT a free market, nor is it efficient! It is contrived by powerful financing arrangements available to the few, to the disadvantage of the many other shareholders.
Further, Hancock has now acquired an apparent “blocking stake” against its rival ALB, while maintaining the share price at or below the ALB SoA price representing its “best and final” offer. The Hancock stake achieved could, subject to legal issues being acceptable, be used to secure an advantageous arrangement under an as yet unknown secondary process either pre or post takeover by ALB which may well also disadvantage other Liontown shareholders. It is not known at this stage what Hancock’s intentions are, but it appears from their publicly disclosed commentary that they
I could write pages on how wrong it is to allow market forces to be circumvented, but I put it to you that this matter has materially harmed tens of thousands of Liontown shareholders while advantaging Australia’s wealthiest person.
The loose regulation of such activities as I have outlined above and demonstrated in the table attached, are not appropriate for a country that encourages investment by everyday Australians. Rather, the rules and administration of sophisticated financial instruments provide a means to disadvantage ordinary retail shareholders in the very circumstances (takeover) where they have shouldered large risks during the development phase of Liontown, only to have their just returns diminished by large corporations.
In closing I would like you to know that I have been a modest share market investor for around 40 years. I spent my nearly 35 year work career in banking including at executive management level. I have observed corporate activity and understand the processes. I support an open market with appropriate regulation that ensures fairness and rewards diligence and intelligent investing. I just want a level playing field, and I ask you to please exert your influence to have the matters I have raised investigated by the ASIC and ultimately to have such activities curtailed, especially during takeover battles.
Yours faithfully
DF
Brighton, Victoria
(20min delay)