Power plays behind bitter battle for Contango

The battle for control of $172 million listed investment company Contango MicroCap is going down to the wire.

George Boubouras of Contango Asset Management.

The battle for control of $172 million listed investment company Contango MicroCap is going down to the wire.

But with just days ahead of a vote on whether to punt three directors — stalwarts of the Melbourne business scene — shareholders are still mostly uninformed about what has prompted the governance turmoil between the small cap investor and a James Packer-backed fund manager.

Shareholder letters, obtained by The Weekend Australian and sent to the three “independent” directors who are the subject of resolutions to remove them from Contago MicroCap’s board — Ian Ferres, David Stevens and Glenn Fowles — reveal a bitter battle to wrest the governance of the fund back from the men, who allegedly have drawn high directors’ fees for more than a decade.

Mr Ferres, Mr Stevens and Mr Fowles are in the firing line of Contango Asset Management, the separately listed fund manager run by George Boubouras, which looks after the MicroCap portfolio.

A plan to sideline Boubouras’ investment mandate by dividing portfolio management duties with a second fund manager — OC Funds Management — has led to the suspension of MicroCap’s investment grade rating by Independent Investment Research, which called it “a highly unusual step (that) creates new risks” for shareholders.

The decision to bring in OC Funds Management was based on a Lonsec report paid for by three directors, which allegedly failed to advocate the unorthodox move.

On Monday, MicroCap shareholders will vote on the proposed appointment of Trevor Carroll and Ken Poutakidis as new directors and the removal of Mr Ferres, Mr Stevens and Mr Fowles. Contango MicroCap chairman Mark Kerr failed to make any recommendation on the appointment of new directors.

The governance standards of the Australian Securities Exchange mean the lengthy board tenure of Mr Stevens, who founded MicroCap in 1998 with Stephen Babidge, arguably put him outside the definition of “independent” director. The same is true of Mr Fowles, a founding director and former chief financial officer of the fund. Mr Ferres, a former director of 15 companies and a chairman of another 15 groups, has been on MicroCap’s board since 2009.

The management conflict comes after James Packer and business partner Robert Rankin last year paid $13m to back a management buyout of Contango Asset Management, the incumbent funds manager for MicroCap and two other separate Contango-branded listed companies.

The deal saw Mr Boubouras promoted from chief investment officer to managing director of Contango Asset Management, which earns fees from its investment mandates with the Contango companies and 29 industry superannuation and retail funds backed by Peter Switzer.

The three MicroCap directors under threat allege Mr Poutakidis has conflicting ties to Contango Asset Management, because he advised on the fund manager’s 2016 float.

The incumbents claim the proposed replacement directors have “no experience sitting on a listed investment company board” or managing small-cap investments and they are also wary that two requisitioning shareholders, Robert Fraser and Scott Dolling — directors of broker Taylor Collison — have an interest in carrying out dilutive raisings at prices below MicroCap’s the net tangible assets.

Those agitating for sacking the three directors argue they have for years drawn director fees well above the industry average.

Mr Ferres last year took $115,000 director fees and Mr Stevens $58,000. The average fees for directors of similar listed investment companies — Perpetual Equity Investment, Argo Infrastructure Fund, WAM Capital and PM Capital Global Opportunities Fund — are around $37,000.

Directors of such companies are usually paid modestly for a limited role in ensuring compliance with corporate standards.

Critics also claim the trio closed down fund manager Bellwether Partners at a significant cost to shareholders after acquiring it in 2013 for more than $300,000. Accounts show Bellwether made losses exceeding the purchase price in fiscal 2014 and its goodwill was written down to zero.

In early December, Contango MicroCap issued a contentious release outlining director fees would be slashed “in the order of” 30 per cent per annum, and that it was considering a name change to shed its “Contango” associations.

MicroCap also said a second manager — later revealed to be OC Funds Management — would manage $27m funds, the proceeds of the recent disposal of MicroCap’s holding in sister company Contango Income Generator.

A letter sent from Mr Fowles in response to grievances of Shartru Wealth director Andrew Meakin, obtained by The Weekend Australian, said “an overall better outcome” would be to remunerate OC Funds at a lower rate than Contango Asset Management. However, in February, an announcement to the ASX said “operational terms” for OC Funds would be the same as Contango.

Independent Investment Research suspended its rating for MicroCap in January, noting it had met several MicroCap directors to discuss the move but still held “a number of concerns given the potential differences in style and process to the existing manager”.

The three MicroCap directors argue the rating suspension was “typical of any researcher when significant events occur at a company”. However IIR analyst Peter Rae told The Weekend Australian he was not aware of any listed investment company with more than one fund manager, unless it was specifically a “manager of managers” arrangement — which MicroCap was not.

The Lonsec report, which the trio use as justification for appointing OC Funds, has not been released. But Mr Meakin argues in an email to Mr Ferres the report indicates a “general lack of conviction” from MicroCap’s board to act in shareholders’ best interests.

The vote on Monday will be closely watched by in the Melbourne business world.