ARC Capital, which is currently suspended, has released another update on the sale of Funtalk (it was hoping to get at least $137.3m for its stake). The situation is complex and so we have included the full text of the announcement below but in summary it looks as though that rather than ARC Capital selling its interest in Fortress Group Limited (the holding company for Funtalk), Fortress Group has sold its stake in Funtalk and is presumably now sitting on cash. ARC Capital’s announcement does not say how much Fortress got for the business (it’s possible they do not know). Today’s announcement appears to indicate a deepening of the dispute between ARC Capital and its former manager.
“Update on Sale of FGL Group Limited
On 4 July 2014 and 23 July 2014, ARC Capital Holdings Limited (“ARCH”) (AIM: ARCH) provided an update in respect of the sale of ARCH’s equity stake in Fortress Group Limited (“FGL”) to its shareholders, held through its wholly owned subsidiary, ARCH Digital Holdings Limited (“ARCH Digital”).
Capitalised terms used but not defined in this announcement have the same meanings as set out in ARCH’s announcements dated 4 July 2014 and 23 July 2014.
As stated in ARCH’s announcements dated 4 July 2014 and 23 July 2014, the transaction between ARCH Digital and the Purchaser has not completed. The Board of ARCH has been notified that FGL has entered into an agreement for the sale of its 100% equity interest in Funtalk to the Purchaser (“FGL Sale”). FGL has proceeded with the FGL Sale despite ARCH raising a number of concerns and requests for information regarding the transaction by way of a letter to each of the directors on the Board of FGL dated 28 July 2014. Although a meeting of the Board of FGL had been scheduled for 30 July 2014 to discuss the FGL Sale, after the receipt of the letter from ARCH dated 28 July 2014, on 29 July 2014 this Board meeting was abruptly cancelled and an email was sent by Mr Weijian Shan, the Chairman of FGL and Group Chairman and CEO of PAG Asia Capital (“PAG”), stating that the FGL Sale had been “completed”. ARCH is considering its options.
ARCH has not received a copy of the executed transaction documents relating to the FGL Sale. FGL has not provided ARCH with any substantive information regarding the terms of the FGL Sale. While the Board of ARCH expects that a significant write-down will be required to be made with respect to ARCH’s investment in FGL, they do not presently have sufficient information to make a proper assessment; the Board will provide an update in this regard when it is in a position to do so.
Based on the limited information available to ARCH, ARCH has the following concerns regarding the FGL Sale:
1. The directors of FGL as a body have not been provided with sufficient information to enable them properly to assess whether the FGL sale is in the best interests of FGL as a whole. In particular:
1.1 The directors of FGL have been informed that the FGL Sale is necessary and must be entered into without delay. However, the directors of FGL as a body have not been provided with sufficient information to come properly to the view that this is so.
1.2 The directors of FGL as a body have not been provided with sufficient information regarding the actual financial position of Funtalk, such that they could not properly come to the view that the FGL Sale is in the best interests of FGL as a whole.
1.3 The directors of FGL as a body have not been given adequate information regarding any due diligence process that FGL has undertaken in assessing the FGL Sale.
2. Three of the seven directors appointed to the Board of Directors of FGL were appointed by, and hold concurrent positions with, the PAG group (“PAG Directors”). The interests of PAG are not aligned with that of the other shareholders of FGL due to PAG’s debt claims against FGL. ARCH is concerned that ARCH Digital’s representative on the Board, Mr Cosimo Borrelli, has not been given the information and time required to assess properly whether the FGL Sale is in the interests of FGL as a whole.
3. The directors of FGL as a body have not been given adequate opportunity to consider the transaction documents.
4. The circumstances above raise legitimate concerns as to whether the FGL Sale is in the best interests of FGL as a whole and for proper purposes.
5. In light of the above concerns, ARCH is concerned that the internal processes adopted by FGL for the approval of the FGL Sale have been, and the FGL Sale itself will be, conducted in a way that unfairly prejudices and is oppressive towards ARCH Digital’s position as a minority shareholder of FGL.
In light of the above, ARCH and ARCH Digital has sought from FGL the information regarding the FGL Sale, including:
1. Detailed information regarding the due diligence undertaken by the Board of Directors of FGL to ensure that the FGL Sale is in the best interests of FGL as a whole, including regarding:
1.1 What steps were taken by FGL to value its interest in Funtalk, both internally and through one or more independent third party valuation professionals?
1.2 What attempts did FGL take to seek interest from, solicit offers from and negotiate transactions with parties other than the Purchaser, including any competitive tendering process?
1.3 What legal, financial and other independent third party advice did FGL obtain regarding the advisability of the sale from the perspective of the best interests of FGL as a whole?
1.4 Who on behalf of FGL led the negotiations with the Purchaser, and what efforts were made in the negotiations to improve the terms of the FGL Sale?
2. Detailed financial information regarding Funtalk, including a copy of the June 2014 Funtalk management accounts (and the July 2014 management accounts as soon as these become available), the status of the account receivables and prepayments, and the audited financial statements for the financial year ended 31 March 2014 for Funtalk and FGL (if available), whether finalised or in draft form.
3. Detailed information, including legal advice, regarding the structure of the FGL Sale, how the directors of FGL have satisfied themselves that these arrangements were in the best interests of FGL as a whole, and a copy of the draft transaction documents with respect to the FGL Sale.
4. The reasons why the PAG Closing did not take place, the reason why the original transaction between the Purchaser and each of the shareholders of FGL have been superseded by a transaction between the Purchaser and FGL directly, and the reason why this arrangement is considered by the directors to be more in the interests of the shareholders of FGL than the original transactions.
5. Whether there is anything else that the shareholders of FGL should know about the FGL Sale or the financial or operational position of FGL or Funtalk.
ARCH considers that the directors of FGL were required to, consistently with their duties, in deciding whether the FGL Sale is in the best interests of FGL as a whole, properly address the concerns raised and consider the information set out above, and that they have failed in discharging this responsibility.
On 28 July 2014, the legal advisors for ARCH and ARCH Digital sent a letter to each of the directors of FGL setting out ARCH’s concerns, seeking further information (including that set out above), and notifying that ARCH considered that each of the directors must, at a minimum, discharge their duties to FGL by properly addressing these concerns and considering this information. In light of the statement by Mr Shan that the FGL Sale has “completed”, ARCH is considering its options.
A further announcement will be made in respect of any material developments on this matter.“