BrisConnections, a cautionary tale

Generali

In 2008, a company called Bris Connections won a contract to design, build and run a toll road connecting Brisbane Airport with Brisbane and floated part paid shares on the ASX. The structure of the deal was that you paid AU$1/share up front and then 2 further payments of $1/share annually.

As often happens with infrastructure deals, unforseen problems forced down the share price until it hit a low of AU$0.001, a price which lured in many small investors who in some cases were buying a couple of percent of the firm for buttons - one investor managed to acquire 15% of the company for AU$59!

What these small investors hadn't anticipated that along with buying a million shares, they were also buying an AU$2,000,000 liability.

The underwriters of the initial share offering have said that they won't pay out under the underwriting deal unless buyers of units are fully pursued for their liability to the point of bankrupcy.

In many cases, small investors were sucked by email share tip-sheets.

So what do you think? Should the investors lose everything? Should they have been specifically warned before they bought? Should small investors have been banned from buying? This isn't an uncommon way to structure a share issue BTW, many of the British privatisations were done in this manner - BT for example.

Make sure you understand what you're buying before you buy it!

Degenerate

Generali wrote: »

So what do you think? Should the investors lose everything? Should they have been specifically warned before they bought?

Yes, they should have been warned. Traditional "advisory" brokers have no excuse not to have done so. Execution-only brokers need to develop advisory warnings in their systems, or they should not offer trading in shares with outstanding capital. In either case, the brokers should be held liable if the buyer wasn't warned.

Should small investors have been banned from buying? This isn't an uncommon way to structure a share issue BTW, many of the British privatisations were done in this manner - BT for example.

There's no reason to ban people from buying, but any system that allows people to take on financial liabilities inadvertantly is broken - and I doubt the enforceability of those liabilities against people who were not warned, did not agree to them or sign any sort of contract to take them on.

Now can anyone explain why shares are issued and traded with outstanding share capital? It's never made sense to me.

JonnyBravo

Blinkin' 'eck!

<Scuttles off to check his liability from GSK etc

Generali

Degenerate wrote: »

Yes, they should have been warned. Traditional "advisory" brokers have no excuse not to have done so. Execution-only brokers need to develop advisory warnings in their systems, or they should not offer trading in shares with outstanding capital. In either case, the brokers should be held liable if the buyer wasn't warned.

There's no reason to ban people from buying, but any system that allows people to take on financial liabilities inadvertantly is broken - and I doubt the enforceability of those liabilities against people who were not warned, did not agree to them or sign any sort of contract to take them on.

Now can anyone explain why shares are issued and traded with outstanding share capital? It's never made sense to me.

There's been a big fuss about this in Aus - lots of the investors don't speak adequate English to have understood warnings so a warning system wouldn't have helped a chunk of the investors anyway.

In this case, the rationale was that it was silly for the investors to stump up $3/share only for the money just to sit as cash on the balance sheet when investors would rather hang on to the money until it was needed. The original offering was fully subscribed so enough investors liked the structure. The problems have come in the secondary market.

Count_Dante

I was under the impression that owners of shares in public companies had no liability to pay debts, but this would appear to not necessarily be the case.

Degenerate

Count_Dante wrote: »

I was under the impression that owners of shares in public companies had no liability to pay debts, but this would appear to not necessarily be the case.

As a shareholder in a limited company you have no liabilty for it's debts should it become insolvent, however in this case it's the share capital itself that was owed. Basically these shares were AU$3 each, payable in 3 yearly instalments, but were sold on after the first instalment was paid with AU$2 still outstanding.

Generali

Count_Dante wrote: »

I was under the impression that owners of shares in public companies had no liability to pay debts, but this would appear to not necessarily be the case.

These aren't debts that the company has incurred. The shares were partly paid when they were first bought and then there were two further installments each of a dollar per share to be paid, the first of which became due yesterday.

You are right that you are not liable for any debts incurred by a company (apart from in very specific circumstances if you are a director).

lemonjelly

Caveat Emptor?

If they bought through a broker, surely there is a duty of care on the broker?

Generali

lemonjelly wrote: »

Caveat Emptor?

If they bought through a broker, surely there is a duty of care on the broker?

Why? If you're investing in shares then you're taking a risk aren't you?

JayScottGreenspan

So, in theory, rather than selling for $0.01, these probably should have had a negative price.

Sounds dodgy to me. Couldn't shareholders just tear up their certificates, waive their voting rights, and tell the company where to go?

Also, is it just me, or does Bris Connections sound like some sort of made-up company from a Ben Stiller movie?

Degenerate

Generali wrote: »

Why? If you're investing in shares then you're taking a risk aren't you?

The position of a stockbroker is similar to that of a conveyancer for property transactions. You would rightfully expect them to understand the legal implications of any covenants in the deeds etc, which could lead to expensive future liabilities, and to warn you appropriately.

The risk you knowingly take with shares is based on your confidence in the company you are buying into. Just like if you bought a knackered old house, obviously the conveyancer would not be liable for that.

The rise of execution-only stockbrokers has muddied these waters, by using one you are deciding that you don't want your hand held, but I still don't see how they can escape liability if the information was not provided at all.