I would like to preface this postmortem by saying that Hanlon’s Razor almost certainly applies throughout this saga. I do think Zip Co acted in an unethical manner. However, much of the conduct I take issue with can probably be explained by innocent mistakes or errors, coincidence, incompetence, and maybe even a touch of stupidity. A touch of stupidity certainly applies to me.
”Never attribute to malice that which is adequately explained by stupidity.”
My Shares Are Gone
On Monday, 11 December 2023, I received a Chess Holding Statement letter that showed my holding balance of ZIP shares had been reduced to zero. The letter stated the transaction type as “Adjustment to Balance due to Divestment”.
I hadn’t sold any ZIP shares so this was news to me. I called my CHESS Sponsor, however it was outside of office hours so got an automated message telling me to call back. I then called Computershare. Their IVR System redirected me to a line dealing with Zip Co, which also told me to call back during office hours. However, the IVR system did mention a “small holding sale facility” which seemed like a great place to start looking for some answers.
I went to the asx ZIP announcements and found an announcement from 4 Oct 2023, titled “Small Shareholding Sale Facility”.
This 8 page document announces the establishment of a small shareholding sale facility for shareholders who hold less than $500 worth of shares.
Zip Co presents that the sale facility will help small shareholders sell their shares and save on brokerage costs, and that it will help to reduce administrative costs associated with maintaining the company’s shareholder register.
“Zip appreciates that Small Shareholdings can be difficult or expensive to sell and the Sale Facility enables eligible Zip shareholders to sell their Small Shareholdings without having to act through a broker or incurring any brokerage costs.
The Company expects the sale of Small Shareholdings through the Sale Facility will help to reduce the administrative costs (including printing and mailing costs and share registry expenses) associated with maintaining a large number of Small Shareholdings on the Company’s shareholder register. On 3 October 2023 (“Record Date”), Zip had approximately 78,000 shareholders with a Small Shareholding.”
This sounds like a good thing and could be to the potential benefit of small shareholders and the company. A win-win for those who want to take part in the sale facility. However, this sale facility is OPT-OUT. Meaning that unless small shareholders complete a share retention form their shares will be sold.
“Shareholders with Small Shareholdings will have the ability to opt-out of participating in the Sale Facility. Shareholders with Small Shareholdings who wish to retain their shareholding must complete a Share Retention Form and return it to the Company’s share registry, Computershare by 5:00pm (AEDT) on Monday, 20 November 2023.”
This is the first thing I have an issue with. I don’t think there is any justifiable reason a small shareholding sale facility like this should ever be anything but OPT-IN. I think it’s unethical to ever sell someones shares without their explicit consent. The only exceptions I can think of would be for situations involving takeover bids or criminal activity.
If a company wants a high adoption rate of such a sale facility I believe the onus should be on the company to adequately engage their small shareholders to get the adoption rate they desire. I personally think it’s unethical to make the sale facility OPT-OUT to achieve a high adoption rate; relying on small shareholders being unengaged investors and not realising they have to OPT-OUT or even realise the process exists, until it is too late. Did Zip Co make their sale facility OPT-OUT to ensure a high adoption rate? It’s up for debate. Regardless, I still personally think there is no justifiable reason a small shareholding sale facility should ever be OPT-OUT.
According to an announcement from 12 Dec 2023, titled “Small Shareholding Sale Facility Update”, the adoption rate was approximately 89.3%.
“On the Record Date, Zip had approximately 78,000 shareholders with a Small Shareholding.
At the close of the Sale Facility there were 30,861,767 ordinary shares to be sold held by 69,669 shareholders. The shares were sold at a volume-weighted average price in the ordinary course of trading on the ASX at $0.4034 per share between 23 November and 7 December 2023.
Sale proceeds will be paid to participants on 20 December 2023.”
According to the announcement from 4 Oct 2023, titled “Small Shareholding Sale Facility”, there were approximately 108,000 ZIP shareholders in total. So about 64.5% of all shareholders were removed from the company’s shareholder register.
”Zip has a large shareholder base of approximately 108,000 holders of ordinary shares”
How does Zip Co have the authority to establish the sale facility?
When I first read through the small shareholding sale facility document I thought that surely this can’t be legal. How can they sell my shares without my consent? It turns out it is legal, and they don’t need explicit consent to do it.
The announcement from 4 Oct 2023, titled “Small Shareholding Sale Facility”, contains an FAQ that answers how they have the authority to carry out the sale facility.
“15. How does the Company have the authority to establish the Sale Facility?
The Company has the authority to establish the Sale Facility and proceed with the sale of Small Shareholdings Clause 14 of its Constitution and the ASX Listing Rule 15.13.”
After reading this I went looking for Zip Co’s Constitution, to see what it actually said. Googling brought me to a useless page that does not contain the constitution. I’m not sure if it’s just broken for me or if it’s just a forgotten page that hasn’t been updated. The constitution does exist though and can be found under charters, here: zip.co/investors/corporate-governance.
Clause 14.1 and 14.2 of Zip Co’s constitution state the following:
“14.1 Power to sell
Subject to the Corporations Act and the Listing Rules, the Directors may sell Securities which comprise less than a Marketable Parcel.
14.2 Procedures for sale of non-marketable parcels
(a) Subject to the Corporations Act and the Listing Rules, the Directors may give written notice to a Member who holds less than a Marketable Parcel of Securities of the Company’s intention to sell those Securities.
(b) A notice under clause 14.2(a) must:
(i) explain the effect of the notice;
(ii) specify the Securities to which the notice relates and a day (at least six weeks from the date the notice is sent) by which the Member can notify the Company that the Member wishes to retain those Securities; and
(iii) be accompanied by a form of election for the purpose of clause 14.2(b)(ii).
(c) If:
(i) the Company has not received a completed form of election from a Member by close of business on the date specified in the notice under clause 14.2(a); and
(ii) the Member’s holding of the relevant Securities in the Company has not increased to a Marketable Parcel, the Member is taken to have irrevocably appointed the Company and each Director of the Company as the Member’s agent for the purpose of the sale of the Member’s relevant Securities.
(d) The Company may:
(i) sell the Securities comprising less than a Marketable Parcel as soon as practicable at a price which the Directors consider is the best possible price available for the Securities when they are sold;
(ii) subject to clause 14.4, deal with the proceeds of sale in any manner permitted by law; and
(iii) receive any disclosure document as agent for the Member.
(e) The costs and expenses of any sale of Securities arising from a notice under clause 14.2(a) (including brokerage and stamp duty) are payable by the purchaser of the relevant Securities or by the Company.
(f) A notice under clause 14.2(a) may only be given to a Member once in any 12 month period and may not be given during the offer period of a takeover bid for the Company.
(g) If a takeover bid is announced after a notice is given but before an agreement is entered into for the sale of the relevant Securities, the provisions of this clause 14 cease to operate. After the offer period closes, a new notice may be given under clause 14.2(a).”
ASX Listing Rule 15.13, Small holdings, covers how a company’s constitution can permit it to sell securities of a holder who has less than a marketable parcel (i.e. less than $500).
There are a few rules, however, there is no requirement to obtain shareholder consent. So an OPT-OUT sale facility is completely legal.
The rules do state that a company must notify the shareholder in writing of its intention, but there are no requirements given around how this should look besides a note about taking care not to mislead holders as to the nature of the share holding that is being sold.
“15.13.2 The entity must notify the +security holder in writing of its intention.
Note: In the notification to security holders, care should be taken not to mislead holders as to the nature of holding that is being sold. The fact that a holding is less than a “marketable parcel” for the purposes of the Listing Rules does not mean that the holding is not capable of being sold and hence it is potentially misleading to describe the sale as being a sale of an “unmarketable parcel”.”
The ASX listing rules can be found here.
The Email
The announcement from 4 Oct 2023, titled “Small Shareholding Sale Facility”, states:
“Shareholders who hold a Small Shareholding on the Record date will be sent the attached communication by email or post on 9 October 2023.”
The “attached communication” refers to a shareholder letter that starts on page 3 of the small shareholding sale facility announcement document. This letter explains what the sale facility is, the key dates of the sale facility, and what you need to do if you wish to sell your shares or if you wish to keep your shares.
If I had received this letter I would still have my Zip Co Shares. Instead of a letter I received an email.
I went looking for this email on 12 Dec 2023 to see if I had actually received it. It was marked read and filed away. Did I actually read it? I’m not sure. It definitely didn’t ring any bells.
The email states the following:
9 October 2023
Dear Shareholder,
Zip Co Limited - Sale of small Zip shareholdings
Zip Co Limited (ASX: ZIP) has established a Small Shareholding Sale Facility (Sale Facility) for shareholders that hold less than A$500 in value of Zip shares (Small Shareholdings).
The Sale Facility is available to Zip shareholders with Small Shareholdings of between 1 and 1,851 Zip Shares on Tuesday, 3 October 2023 (Record Date), based on the Australian Securities Exchange (ASX) closing price of $0.27 per Share.
You can access your personalised Share Retention Form by clicking either of the links below:
1 . Click here to access your personalised Share Retention Form online and follow the prompts; or
2 . Log onto www .investorcentre.com/au using your username and password
Select ‘Statements and Documents’ and click to view your form titled ‘Share Sale Facility Forms’ dated 9 October 2023.
If you require further information about the Sale Facility, please contact the information line on 1300 850 505 (within Australia) or +61 3 9415 4000 (outside Australia).
Zip Co Limited
ACN: 139 546 428
This is the second thing I have an issue with. This email is not the shareholder letter mentioned in the 4 Oct 2023, “Small Shareholding Sale Facility” announcement.
“Shareholders who hold a Small Shareholding on the Record date will be sent the attached communication by email or post on 9 October 2023.”
The shareholder letter was not attached to the email. The email had no attachments.
The email did however have 2 links to Computershare. If you logged into Computershare you could then find and download a document titled “Share Sale Facility Forms”, which was referenced in the email. I never got to this form. If I did I would still have my Zip Co shares.
Why didn’t Zip Co include the contents of the shareholder letter in the email body?
Why didn’t Zip Co attach the shareholder letter to the email?
Why didn’t Zip Co do what they stated in the 4 Oct 2023, “Small Shareholding Sale Facility” announcement?
I don’t have answers to these questions and I don’t understand why none of those three things happened.
I believe this email doesn’t satisfy clause 14.2 of Zip Co’s constitution.
Whether this email is a breach of the ASX listing rules is up for debate. I do believe the shareholders who received this email instead of the shareholder letter, were not adequately informed that they must act and OPT-OUT if they wished to retain their shares.
Very Bad and Very Good Timing
The final issue I have with this sale facility stems from two announcement from 5 Oct 2023, titled “Change of Director’s Interest Notice – DSG” and “Change of Director’s Interest Notice – MS”.
These announcements disclose that on 28 Sep 2023:
- Diane Smith-Gander AO (Chair of the Board and Non-Executive Director) purchased 111,111 shares through DSG Pty Ltd at an average value of $0.275
- Meredith Scott (Non-Executive Director) purchased 35,607 shares directly at an average value of $0.273804
These purchases rub me the wrong way.
On 4 Oct 2023, Zip Co’s announcement included:
“Many of our shareholders, like you, hold a small number of Shares that we know can often be difficult or expensive to sell.
To assist, Zip will operate a Small Shareholding Sale Facility (Sale Facility) from Monday, 9 October 2023 to Monday, 20 November 2023 for those who hold a parcel of Shares valued at less than A$500 (Small Shareholdings).
The aim of the Sale Facility is to provide you with a convenient and cost-effective way to sell your Small Shareholding without having to act through a broker or incurring any brokerage costs.”
Zip Co was presenting that the small shareholding sale facility would be helpful to small shareholders and a favourable way to sell their shares. They established an OPT-OUT sale facility that many small shareholders didn’t see or received unclear communications about. They established this sale facility when the share price was $0.27.
Less than a week before this, on the 28 Sep 2023, members of the board (including the Chair) thought it was in fact a great time to be buying shares, not selling.
It looks terrible, at least to me. In hindsight it looks even worse.
It turns out it was an amazing time to buy; and Diane Smith-Gander AO and Meredith Scott almost nailed the 52 week low of $0.255. Is this share purchase timing simply pure coincidence? Probably.
I do think it’s worth noting a couple more things about these share purchases though:
- Zip Co’s Securities Trading Policy indicates a prohibited trading period in the lead up to the release of Q1 results, which starts “from 30 September each year, until the commencement of trade of securities on the ASX on the second trading day on the ASX following the announcement of Zip’s quarterly results for the period 1 July to 30 September”.
- So Diane Smith-Gander AO and Meredith Scott made their purchases 2 days before the prohibited trading period.
- Zip Co announced their “Updated Securities Trading Policy”, on 5 Dec 2023.
- These purchases would likely not have gone through if they were subject to this new policy. The new policy is far stricter on “Designated Persons”, which includes directors. They would have both had to receive prior written approval for their trades.
- This is a good policy improvement in my opinion.
- Both Diane Smith-Gander AO and Meredith Scott are members of Zip Co’s Audit & Risk Committee, with Meredith being the committee Chair.
- In my opinion they should know that the timing of their share purchases don’t look great, given they were executed 2 days before a prohibited trading period and 6 days before the announcement of the small shareholding sale facility (I would be astounded if they didn’t know of the small shareholding sale facility in advance and when it was going to occur).
The timing of these trades were very bad and very good.
From an optics perspective, I personally think they look terrible. However, in terms of timing the market, they couldn’t have done better.
Learnings
ASX Listing Rule 15.13
The key thing I learnt from this whole saga is the existence of ASX Listing rule 15.13. Good to know it exists and how it can be implemented. I think there is definitely room for improvement in how it is written in order to protect small retail investors.
I will definitely be looking into the rest of the listing rules to see what else I’m ignorant of.
Companies Act In Their Own Best Interest
This seems obvious and makes sense. However, a company’s best interests are sometimes at odds with the best interests of individual shareholders, especially small retail investors.
You should not assume that your interests and the company’s will be consistently aligned. Companies can and will act against the best interests of shareholders, even the majority of investors on the company’s share registry.
Read Your Emails
It might save you your shares. Or not. Oh well, my shares are gone.
Timeline
4 Oct 2023
- Small shareholding sale facility announced
5 Oct 2023
- Change of Director’s Interest Notices
- Meredith Scott purchased 35 607 shares on 28th September 2023 directly at an average value of $0.273804
- Diane Smith-Gander AO purchased 111 111 shares on 28th September 2023 through DSG Pty Ltd at an average value of $0.275
9 Oct 2023
- Email from Zip Co
- There is no mention of the sale being opt-out
- The email’s contents were significantly different from the shareholder letter disclosed on 4 October 2023
- No Shareholder letter was attached to the email
- I never received a copy of the letter
24 Oct 2023
- Q1 FY24 Results - Zip achieves positive Group cash EBTDA
- This announcement was marked price sensitive
5 Dec 2023
- Updated Securities Trading Policy
11 Dec 2023
- I receive a letter that shows I now have a holding balance of 0 ZIP shares
- “Adjustment to Balance due to Divestment”
12 Dec 2023
- Small Shareholding Sale Facility Update
- “At the close of the Sale Facility there were 30,861,767 ordinary shares to be sold held by 69,669 shareholders. The shares were sold at a volume-weighted average price in the ordinary course of trading on the ASX at $0.4034 per share between 23 November and 7 December 2023.”
- “Sale proceeds will be paid to participants on 20 December 2023”
15 Dec 2023
- ZIP’s closing price was $0.63. Approximately 56% above the sale price of the small shareholding sale facility