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Phronimos Urges Polo to Respond to Shareholder Requests and Concerns
March 13, 2019—Subsequent to the publication of Phronimos Capital's (“Phronimos”) letter to the Board of Directors of Polo Resources (“Polo” or the “Company”), on February 13th, we have heard from numerous other Polo shareholders supportive of our cause and, consequently, the concerned shareholder group has grown significantly. We believe there will be broad shareholder support for a substantial cash distribution or share buyback if the proposal to return capital were put to a vote at a requisitioned meeting of the shareholders of Polo. Fellow Polo shareholders supportive of a significant share buyback or distribution are encouraged to contact us at sjohn@phronimoscap.com.
Phronimos transmitted a follow-up letter to the Polo Board of Directors today. The full text of the letter can be found below or at: www.phronimoscap.com/news
Polo Resources Limited
Craigmuir Chambers, P O Box 71
Road Town, VG1110
British Virgin Islands
To the Board of Directors:
We are disappointed with Polo’s response to the proposals put forth in our letter dated January 28th, 2019. We write to you again so that the Board and the Company’s shareholders fully understand our viewpoint and the reasons for our concern. We firmly believe the underlying value in Polo is significantly higher than the current share price and that the stubborn adherence to the Board's current investment policy is detrimental to the interests of shareholders as a whole. The market’s lack of faith in the stated investment policy is evidenced by the greater than 70% discount of Polo’s share price to its Net Asset Value (“NAV”) per share. The persistently large discount of Polo’s share price to net asset value precludes shareholders from realizing anything remotely close to its fair value through open-market transactions. The status-quo, which has resulted in significant realized and unrealized losses for past and present shareholders of Polo, is unacceptable. Consequently, we request that the Board:
1. Provide fellow concerned shareholder Nicholas Greenwood with the register of members within five business days. As you are aware, Section 100 of the BVI Business Companies Act grants shareholders a statutory right to inspect and make copies of the register of members. The Company has denied Mr. Greenwood’s request to exercise his statutory right, citing “data privacy” concerns. The right to inspect shareholder lists for the purpose of communicating with shareholders with regards to a proper purpose, being in this case the exercise of shareholder rights in the form of gathering support for a potential requisition of a shareholder meeting, is enshrined in company law. We urge the Board to respect this right.
2. Provide an explanation and/or the remuneration committee minutes regarding the appropriateness of Chairman Michael Tang’s total compensation (including the 2018 share option grant of 20 million shares at a greater than 70% discount to NAV.) We note that Chairman Tang’s consulting fees of ~USD 1 million per year from Polo Resources and its investee company GCM Resources is many multiples above the norm. According to BDO’s AIM Directors Remuneration Report 2018, the median average total salary for CEOs of AIM constituents was approximately GBP 150,000. The QCA Remuneration Committee Guide for Small and Mid-Size Quoted Companies states:
“Companies should communicate their decisions and supporting rationale clearly to shareholders and other stakeholders, most importantly through the report of the remuneration committee chairman. A company will face severe criticism if it rewards failure. Just as important is to ensure that mediocre performance is not rewarded as if it were good performance. It is fair that executives are offered the opportunity for higher levels of remuneration if they prod
and excellent long-term sustainable value creation. Companies should avoid paying their executive directors more than is necessary to remunerate and motivate them. … No board should allow any executive director to be, or to consider himself or herself to be, irreplaceable: amongst other governance challenges that will inevitably arise, this may lead to demands for excessive remuneration.”
Furthermore, we note that in 2018, the Company issued share based payments granting Chairman Tang the option to purchase 20,000,000 shares at a greater than 70% discount to NAV. We believe the valuation methodology chosen by the Company significantly understates the fair value of the grant. The choice of a particular valuation method to determine fair value is not “fair and reasonable” if it does not take into account information material to the value of the corporation. With regards to investment companies (like Polo) in particular, the Net Asset Value per share is of paramount importance in determining “fair value.” Had the NAV per share been used to determine the fair value of the share based payment, we calculate the value of the grant to be ~USD 2.9 million (or ~USD 1 million annually considering that the options vest in equal instalments over a three year period.) Summing up the 2018 consulting fees and the share based payments using NAV as the fair value in pricing the options, total annual compensation for Chairman Tang was approximately USD 2 million (or GBP 1.5 million.) Even if we were to exclude Chairman Tang’s ~USD 400,000 salary from Polo’s investee company, GCM Resources, his total annual compensation of approximately USD 1.6 million (or GBP 1.2 million) is significantly above the median average total remuneration of GBP 248,000 for CEOs of companies trading on the AIM (as cited in BDO’s AIM Directors Remuneration Report 2018). As we stated in our previous letter, we do not begrudge management teams being adequately compensated when they have helped to create shareholder value. However, Chairman Tang’s significantly above market compensation (approximately 5-6 times the median) stands in stark contrast to the historical returns of Polo’s shareholders, who have witnessed c.80% decline in the share price and received no dividends or return of capital since his appointment in May 2013.