VenGrowth is still on the market. At a fairness hearing last Friday in Toronto both the court and the Ontario Securities Commission rejected Covington Fund’s bid for the firm, largely due to poor disclosure practices, forcing the boards of both companies to terminate the acquisition agreement.
The decision is a boon for David Levi, president of competing bidder, GrowthWorks. After aggressively challenging Covington, Levi says he feels vindicated. “No one likes to fight a battle in the open like we did,” says David Levi, president of GrowthWorks. “Our view from the beginning was there is a much better opportunity for shareholders and they can still earn a reasonable return.”
During the hearing, a surprise revelation that Vengrowth managers had entered into a consulting-fee agreement with Covington giving them at least $5-million annually for five hours of work a month. Neither firm disclosed details in their information circular or before the November 25 vote where shareholders overwhelming voted in favor of the Covington offer. VenGrowth says it does not have enough time to correct and reissue a new information circular before the deal deadline of December 31, effectively killing the Covington bid.
In the meantime, there are plenty of angry financial advisors and shareholders out there, believes Levi. “I don’t know what the shareholders will do, he says. “What I do know is the status quo can’t remain. The management has been discredited.”
At least one financial advisor based in Waterloo, Ontario is irate over VenGrowth’s handling of their funds. “VenGrowth has given the industry a black eye,” the advisor says, requesting anonymity. “The VenGrowth directors do not have the shareholders’ back right now. Why are they entitled to so much in fees when the clients get nothing?”
She has between 30-70 clients invested in VenGrowth and rallied her clients to vote against the original Covington-VenGrowth deal because she felt details were slid under the table and she lost faith in the VenGrowth management. “I am an advisor fighting for my clients,” she says. “I just want the best deal for them. I need to sleep at night and that is why I pushed my clients to get their proxies in to me.”
Her holiday wish list includes a VenGrowth conference call with advisors to have a straight up discussion and to ask advisors what they want. “VenGrowth had no problem coming in and telling us how great they were and why we should sell them to our clients,” the advisor says. “I have no problem sitting in front of them and asking them why they get so much in fees when the client gets nothing and the stock price is dropping.”
She compliments GrowthWorks efforts in uncovering the details of the Covington-VenGrowth deal. “If it weren’t for GrowthWorks no one would know what is really going on.”
VenGrowth’s board reconvenes in January committed to start from scratch with a strategic formal review, says David Ferguson, managing partner of VenGrowth. “The board will look at all viable options including GrowthWorks,” says Ferguson. The objectives remain the same, he adds: improve the liquidity of the fund, increase follow on funding and lower MERs.
GrowthWorks’ offer includes 15% penalty-free share redemptions annually, $5 million toward manager termination costs and lower performance incentives and redemption penalties compared to those offered in Covington’s original offer.
“It’s not like the [VenGrowth] board didn’t do a thorough review of GrowthWorks back when Covington was considered,” says Ferguson. At the time GrowthWorks was considered, their Canadian Fund had entered into a $20 million participation agreement with Roseway Capital to allow for follow-on funding. This agreement impacted GrowthWorks’ net asset value, and made the firm appear to be in a negative cash situation, says Ferguson.
“It was an unanticipated consequence,” says Alex Irwin, COO, Matrix and Growthworks. “But there is more to the story than meets the eye.” A GrowthWorks merger proposal submitted to VenGrowth on December 9 explains the minute details of the Roseway agreement.
VenGrowth expects the board will take four to six months for a review and decision.