We have David Baines of the Vancouver Sun to thank for a new story on mining investment gone bad. We use this case history to formulate another Investment Rule: Do not buy shares in a mining company controlled by one man.
Over thirty-three years ago, Ross Stanfield founded Gallowai Metal Mining Corp and Bul River Minerals Corp. He is the chairman of both companies and owns all the voting stock. Nothing wrong with that: he founded the company and now owns and controls it. Except that over those thirty-three years, he has sold more than $220 million worth of non-voting shares to 3,765 investors, mainly from Alberta. Nothing wrong with that either: you are entitled to purchase non-voting shares if you consider it a reasonable investment. Except that over those same thirty-three years, no mining has been undertaken and no dividends paid. At least it is not a Ponzi scheme!
Enter a former Lutheran minister and sometime shareholder of non-voting shares. By 2007 he was getting impatient. He convened some other impatient holders of non-voting shares. They no doubt muttered and grumbled. Now they have applied to the British Columbia Supreme Court asking that Ross Stanfield be removed, that new directors be appointed, or that the court appoint a receiver manager to run the company, or that Mr Stanfield be forced to buy or redeem their shares.
At the first hearing the Judge simply said: “NO. Come back on Wednesday.”
David Baines explains the Judge’s NO thus:
Judge Peter Leask, while asserting he has no “preliminary views” on the merits of the petition, said he intends to approach the case “on the basis of the least remedy that will solve the problem. I’m not immediately attracted to the idea of removing Mr. Stanfield, only for that reason.”
It is hard to have any sympathy for the nearly four thousand investors who sit staring at an old man (Stanfield is 81), a property that will never be a mine, a Judge who won’t act as they desire, and a pile of worthless non-voting shares. In the news reports they are described as: all successful business men or professionals from Edmonton. We must hope they have been more prudent in their business and professional lives than they have been in this investment. Or maybe they have been so successful that they could afford to invest over $220 million for thirty years and more for no return and no action.
The unrewarded investors must include a cast of characters. I particularly enjoyed the part about Stanfield counter claiming that one of the petitioners had been authorized to take three tons of rock from the prospective mine to landscape his yard, but had “actually taken more.” Seems the only mining going on at the property was by non-voting shareholders landscaping their back yards.
This is a funny story of folk who fraud one another, make stupid investment decisions, and then resort to the courts with a fervor that would make Charles Dickens proud. That is unless you consider that the law that governs such situation is all wrong and the regulators all inactive. David Baines discusses the problems at this link.
What is boils down to is: how many investors should be allowed to invest in a private company before the security regulators should step in and protect them as a group? Seems obvious that if four sophisticated investors choose to pool their funds to develop a property without going public, they should be allowed to. But should 40, 400, or 4,000 private investors be allowed to pool and stay private with no securities oversight? It is easy to envisage four savvy investors around a table in an expensive restaurant in Edmonton. It is difficult to envisage 400 savy investors in one place anywhere. The idea that 4,000 smart people exist in the business and professional circles of Edmonton is feasible, but disproved by this case.
We will watch as this case unfolds–although the end will probably be a whimper. For in reality there is no mine, no money, and no young muscle to mine. There are only 4,000 investors who were unwise.
This case continues to work its way through the courts. I will keep adding links to updates as I come acorss them.
12 December 2009: Judge delays decision
March 2010: Gallowai dissidents loose bid to oust chairman. It reports;
Dissident shareholders of two B.C. mining companies developing a gold mine near Cranbrook have lost their bid to oust the Calgary promoter behind the project. In a decision released Tuesday, B.C. Judge Peter Leask denied an application by 12 minority shareholders of Gallowai Metal Mining Corp. and Bul River Mineral Corp. to remove Ross Stanfield as chairman of both companies. Leask said he is satisfied that Stanfield and his companies “engaged in no oppressive conduct.” On the contrary, he said Stanfield’s conduct has been “just and equitable.”
He said Stanfield and his companies “obviously believe in the viability of the mine they are attempting to develop.” “Over $100 million has been spent developing the mine; there are over 13 miles of underground tunnels and appropriate subsurface infrastructure. These are not the actions of ‘con men’ or fraudsters.”
Not only did Leask refuse to remove Stanfield, he declined to impose any restrictions or conditions on his future governance of the companies. He also assessed costs against the dissidents. Counsel for the dissidents was Ron Josephson of Vancouver. Representing Stanfield and his companies were Edmonton lawyer Robert Abells and Vancouver lawyer Luciana Brasil, respectively. All declined to comment or were unavailable for comment on Tuesday.
During the past 33 years, a total of 3,765 shareholders — mainly from Alberta — have invested more than $220 million in Gallowai and Bul River. Both are private companies. Stanfield, now 81, owns all the voting shares. He sold only non-voting shares to outside investors under exemptions from prospectus and registration requirements. That means Gallowai and Bul River are not subject to the same disclosure and corporate governance requirements as public companies. Although Stanfield boasted of valuable gold, platinum and feldspar deposits on the property, and repeatedly assured investors that the mine was in production, or on the verge of production, it has never produced anything.
Puzzled and dismayed by the delays, the dissidents pressed for more information, but Stanfield refused to meet with them, so they filed a minority oppression petition in B.C. Supreme Court. The petition alleged that Stanfield has been running the companies in an autocratic and secretive manner, and “has failed to live up to the reasonable expectations of non-voting shareholders” to put the mine into production. The dissidents asked the court to oust Stanfield and restructure the companies’ boards — which have not held annual general meetings for the past 15 years — to ensure the interests of all shareholders are respected.
In his decision, Leask noted that Stanfield had made many bullish statements about the project. For example, in a 1999 letter to shareholders, he stated: “‘But what of our ore grades?’ I am always asked. We have them — Oh Boy do we ever!” In his 2000 letter, he stated: “Platinum and Palladium pay for all the envisaged Mining and Milling Costs! i.e. Gold, Silver and Copper are pure Profit!!! Now you know why we are so happy this Christmas.” And in 2005, he said: “On Friday, August 5th, 2005, late in the afternoon, we received our Permit to bring the Gallowai Bul River Mine into production. What a Momentous Day.”
While acknowledging these boosterish statements, Leask said the companies never mentioned a production schedule in their offering documents or subscription agreements, and the petitioners admitted they knew the investment was speculative and there was no guarantee the mine would ever be brought into production.
The judge also noted that, despite the delays, some of the petitioners continued to buy shares and sign extension agreements. One petitioner even said he was willing to wait until he was “old and grey if necessary.”
“I am satisfied that, if some or all of the petitioners had an expectation that the mine was going to be brought into production ‘soon’ or ‘within a reasonable period of time’ that expectation was not a reasonable one,” Leask said in his decision.
“The petitioners all realized, or should have realized, that their investments in the corporate respondents were highly speculative. They all believed there was an ‘ore body’ which the corporate respondents intended to mine. The larger the ore body is, or is believed to be, the more expensive and time consuming the process of bringing it into production will necessarily be.”
With respect to corporate governance, the petitioners complained that Stanfield did not hold in-person board meetings, didn’t keep formal minutes, and the other directors basically acted as a “rubber stamp” for Stanfield’s decisions.
Leask didn’t buy it: “Considering that both companies were private corporations and that the petitioners held non-voting shares and knew that Mr. Stanfield controlled all the voting shares, I do not regard their expectation that there would be ‘regular and necessary’ meetings of the board as objectively reasonable.”
He also noted that the petitioners did not allege any “particular wrongful decision by the board.”
The petitioners further complained about the companies’ failure to provide financial statements for the year ended Dec. 31., 2008, in a timely matter. These statements were not provided until November 2009, while the hearing was in progress.
Leask said it is perfectly reasonable for shareholders to expect annual financial statements, but the delay in this case does not amount to shareholder oppression.
The judge noted that the previous auditors resigned after Stanfield and the petitioners became embroiled in litigation, and Stanfield and another director, Patrick Campbell, decided not to look for new auditors immediately.
He also noted that, when the statements were provided, there was no indication of any impropriety and, therefore, no evidence they were trying to conceal anything.
As for Stanfield’s refusal to respond to the dissidents’ questions, Leask noted that Stanfield had always been willing to meet with shareholders, but received information that this group was attempting to usurp his control. He also noted that Stanfield argued it was not appropriate to provide information to some shareholders, but not all.
Leask agreed: “Failing to respond to the letter from the petitioners could not have amounted to oppressive conduct, even in the absence of any explanation.”
Although the mine has not yet produced anything, Leask said the extent of underground development indicates that the Stanfield is not trying to “con” investors.
While declining to intervene in the companies’ affairs, the judge said he welcomes Abells’ assurances that Stanfield intends to reconstitute the boards, have more formal and more regular meetings, and provide reports of board meetings to shareholders.
“I would also encourage increased sharing of objective information concerning the ore body, and a progress report on the steps necessary to realize the dreams of both Mr. Stanfield and his investors,” Leask added.