Ian Nar­ine

The share­hold­er agree­ment (SA) be­tween the Gov­ern­ment and CL Fi­nan­cial was signed on June 12, 2009. I point­ed out last week that this agree­ment un­der­took to "pro­tect the in­ter­est" of "share­hold­ers" of CL Fi­nan­cial. My ques­tion to the many le­gal lu­mi­nar­ies in this coun­try versed in cor­po­rate law is as fol­lows: Is an agree­ment that man­dates that "cer­tain steps be tak­en to cor­rect the fi­nan­cial con­di­tion of Cli­co, Cli­co In­vest­ment Bank and British Amer­i­can, in or­der to pro­tect the in­ter­ests of de­pos­i­tors, pol­i­cy­hold­ers, cred­i­tors and share­hold­ers" en­force­able?

The in­ter­ests quot­ed above are, at the best of times, in con­flict with each oth­er. In a sit­u­a­tion where a cor­po­rate en­ti­ty is un­able to meet its oblig­a­tions, the ten­sion be­tween the var­i­ous in­ter­ests be­comes even more acute.

If cer­tain CL Fi­nan­cial as­sets were sold un­der the terms of the SA, but the high­est bid­der was not cho­sen be­cause it was not in the na­tion­al in­ter­est to do so, sev­er­al is­sues arise. First­ly, the si­lence as to the strate­gic out­look of the State has an ad­verse con­se­quence since no one can say for sure what is "the na­tion­al in­ter­est."

Re­call it was in May 2011 that the cur­rent ad­min­is­tra­tion spoke of an ex­it strat­e­gy for the Gov­ern­ment. There has been no up­date on this mat­ter since. Sec­ond­ly, un­der the SA does the State have an oblig­a­tion to act as trustee and, there­fore, be pro­tec­tive of the in­ter­est of the share­hold­ers? Can the share­hold­ers mount a le­gal chal­lenge if the State is seen to place the in­ter­ests of any of the oth­er in­ter­est groups above that of the share­hold­er?

My ex­pec­ta­tion is that, at the very least, the in­ter­ests of the var­i­ous groups would be ranked. Fur­ther, the in­ter­est of the tax­pay­er does not form part of the agree­ment, yet it is signed by the State, whose pri­ma­ry rea­son for ex­is­tence is to man­age the na­tion­al purse.

I've got a se­cret

Afra Ray­mond in the Busi­ness Guardian of April 1, 2010, point­ed out that the Min­istry of Fi­nance press re­lease of June 12, 2009, told the pub­lic "this new agree­ment is de­signed to give sub­stance to the mem­o­ran­dum of un­der­stand­ing (MoU) of Jan­u­ary 30, 2009." Ray­mond fur­ther ob­served, and I point­ed this out last week as well, that the in­tro­duc­tion of "the in­ter­est of share­hold­ers" in­to the June agree­ment changes the na­ture of the SA com­pared to the MoU. In oth­er words, the press re­lease was mis­lead­ing. How many per­sons in T&T have seen the doc­u­ment to which I am re­fer­ring? My ac­cess to the SA was via the Web site: www.afraray­mond.com. Vis­it to see that it re­quired the use of the "Free­dom of In­for­ma­tion Act" to gain ac­cess to this doc­u­ment and its re­lease was on March 10, 2010, based on a re­quest made in No­vem­ber 16, 2009, for a doc­u­ment draft­ed on June 12, 2009. Why the de­lay and se­cre­cy for a doc­u­ment that os­ten­si­bly gov­erned how bil­lions of tax­pay­er re­sources was go­ing to be used?

The SA gives the Gov­ern­ment, through its ap­point­ed di­rec­tors, tem­po­rary con­trol of CL Fi­nan­cial, but the pri­or share­hold­ers re­main as ma­jor­i­ty share­hold­ers of the en­ti­ty. Once again, I re­it­er­ate that the ma­jor li­a­bil­i­ty of the group, which was to the ex­ec­u­tive flex­i­ble pre­mi­um an­nu­ity (EF­PA) in­vestors, was na­tion­alised by an open-end­ed guar­an­tee of prin­ci­pal and in­ter­est where such in­ter­est pay­ments were above mar­ket rates, so there was no way that the ex­ist­ing as­sets on the books could have sup­port­ed the in­ter­est el­e­ment of the guar­an­tee. The SA makes al­lowances for the Gov­ern­ment to be re­paid any sums ex­tend­ed dur­ing the three-year pe­ri­od of the agree­ment, but as was point­ed out in the Feb­ru­ary 23, 2012, edi­tion of this pa­per, this agree­ment can lapse af­ter three years with no re­pay­ment and no mech­a­nism to com­pel such re­pay­ment.

Whose in­ter­ests were be­ing served here?

Con­flicts of in­ter­est

It is well es­tab­lished that a key mem­ber of the gov­ern­ment of the day al­so had an un­de­clared share­hold­ing in the CL Fi­nan­cial Group. This is­sue has not to the best of my knowl­edge been dis­cussed in the con­text of the high­ly un­usu­al cir­cum­stance of us­ing state re­sources to give pro­tec­tion to pri­vate share­hold­ers.

Be­fore one goes off on a tan­gent sug­gest­ing that the lack of dis­clo­sure by the gov­ern­ment mem­ber re­lat­ed to a small num­ber of shares, one must ap­pre­ci­ate what share own­er­ship means.

The down­side risk to share own­er­ship is that the shares go to ze­ro. CL Fi­nan­cial was clear­ly in­sol­vent from a cash flow per­spec­tive, hence the need for sup­port. Af­ter hav­ing four months to con­sid­er the sit­u­a­tion dur­ing which it was de­ter­mined that there was a "$10 bil­lion hole" in the bal­ance sheet that need­ed to be filled, the Gov­ern­ment signed an agree­ment that re­moved the down­side risk to the share­hold­ers and left the pre-bailout share­hold­ers with a ma­jor­i­ty con­trol.

The up­side po­ten­tial of shares is vir­tu­al­ly un­lim­it­ed. Con­sid­er a share­hold­er of Ap­ple in the 1990s, a com­pa­ny that was on the brink of go­ing un­der and what those shares are worth now. Al­so, con­sid­er the artist who paint­ed a wall mur­al for Face­book when they were now start­ing out and who was paid in shares. The con­sid­er­a­tion for that paint­ing is now val­ued at US$200 mil­lion be­cause the shares are worth that amount. By prop­ping up the down­side risk, the State sought to pre­serve the as­sets of 325 share­hold­ers, one of whom was a gov­ern­ment in­sid­er in the process open­ing up the pos­si­bil­i­ty of the un­lim­it­ed up­side that goes with share own­er­ship with­out any di­rect con­sid­er­a­tion from the ben­e­fi­cia­ries of this agree­ment for such un­prece­dent­ed sup­port.

With four months be­tween the MoU and the SA, one can on­ly con­clude that this was a de­lib­er­ate and con­sid­ered choice. As I asked last week: why were the share­hold­ers not wiped out and the en­ti­ties in ques­tioned na­tion­alised? Fur­ther, has the is­sue of any con­flict of in­ter­est been ad­dressed in this con­text and if not, why not?

Be­yond the ques­tion of what was at the time an un­de­clared con­flict of in­ter­est by a gov­ern­ment in­sid­er, there is al­so the role of two prin­ci­pals with­in the CL Fi­nan­cial ne­go­ti­at­ing team. One is on record as of­fer­ing a schol­ar­ship to fam­i­ly mem­bers of a sit­ting prime min­is­ter, an­oth­er un­de­clared in­ter­est. The oth­er held the po­si­tion of trea­sur­er of the then gov­ern­ing po­lit­i­cal par­ty.

Re­form

De­spite their ob­vi­ous short­falls, I am on record as be­ing sym­pa­thet­ic to the plight of the reg­u­la­tor in this CL Fi­nan­cial de­ba­cle. This is so be­cause the is­sue was not one of pure reg­u­la­tion, but rather the po­lit­i­cal pres­sure that was like­ly to be­come ap­par­ent were the reg­u­la­tor to have act­ed in a more forth­right man­ner. Had the reg­u­la­tor in­ter­vened in the CL Fi­nan­cial Group in, say 2007, when methanol prices were at the high, John Pub­lic were able to get a prod­uct pay­ing ten per cent in­ter­est and po­lit­i­cal con­nec­tions very strong. what do think would have been the fate of the reg­u­la­tor? If you are not sure, look again at the agree­ment drawn up that seeks to pro­tect the in­ter­ests of pri­vate share­hold­ers in an in­sol­vent en­ti­ty us­ing tax­pay­er funds and draw your own con­clu­sions.

Step back and con­sid­er the gov­er­nance is­sues as­so­ci­at­ed with the han­dling of this mat­ter at a na­tion­al lev­el and de­ter­mine whether it is any dif­fer­ent from what passed for gov­er­nance with­in the cor­ri­dors of the CL Fi­nan­cial Group. Yet, the fo­cus is on cor­po­rate gov­er­nance and the is­sue of na­tion­al gov­er­nance is ig­nored. The cur­rent ad­min­is­tra­tion is not with­out cen­sure be­cause if one is not part of the so­lu­tion, then one is part of the prob­lem. I dis­tinct­ly re­call the is­sue of cam­paign fi­nance re­form be­ing part of the cam­paign rhetoric dur­ing the last elec­tion by el­e­ments of the cur­rent ad­min­is­tra­tion. This is not a mat­ter that can be ad­dressed in the fourth and fifth year of a five-year term, so the time to do so is now.

There is a deaf­en­ing si­lence re­lat­ed to this par­tic­u­lar is­sue. I will dis­cuss again next week but, at this point, it should be clear that with­out a mech­a­nism to con­trol how one gains ac­cess to the Gov­ern­ment in a post-elec­tion sce­nario no amount of reg­u­la­tion, such as the pend­ing In­sur­ance Act or Se­cu­ri­ties Act, can con­trol those with strong po­lit­i­cal con­nec­tions, such as was the case with CL Fi­nan­cial. In or­der to have the po­lit­i­cal cap­i­tal to deal with the next cri­sis, there must be con­fi­dence in the han­dling of the cur­rent is­sue. If you were to vote, would you say "con­fi­dence" or "no con­fi­dence?"

Ian Nar­ine is a bro­ker reg­is­tered with the Se­cu­ri­ties Ex­change Com­mis­sion.