Diligent and Brian Henry pay the price for poor disclosure

Diligent Board Member Services shares finished at 90 cents yesterday, 10% below their issue price, partly because the company failed to disclosure Chief Executive Brian Henry’s involvement in the failed NZX listed company, Energycorp.  Brian Henry has now paid the price as well, being demoted from CEO to Global Sales Director as announced this morning.

Energycorp was listed in early 1987 following the issue of 12.0 million shares at $1.00 each. The company was formed to purchase Heat Harness Corporation from Mr D Henry, the father of Gerard Henry, for a cash consideration of $4.7 million. Heat Harness manufactured and leased wood fuel burning equipment and supplied fuel for these burners.

The Energycorp prospectus noted that Gerard Henry, who was Energycorp’ Executive Deputy Chairman, had been involved in six failed companies in 1982 and 1983. Neil McLaughlin, Chairman and Managing Director of Baycorp, was Energycorp’s chairman.

Energycorp was one of the more spectacular “Rip, Soar & Bust” companies of the late 1980s. Its share price surged from $1.00 to $4.50 and within months of listed it announced it was diversifying into property, electronics, manufacturing, financial services and food.

Brian Henry, Gerard’s brother, was appointed to the board and was given the title “Group Sales Director”. He was the former managing director of Heat Harness, had an extensive background in establishing and training sales organisations and was a significant Energycorp shareholder according to a company profile.

Energycorp promoted Epicorp Investments, which listed in July 1987, and quickly purchased assets from Energycorp at greatly inflated prices.

Epicorp’s share price soared from $1.00 to $2.50 but it was placed in receivership on 23 February 1988, just five months and 25 days after listing.

Chairman Neil McLaughlin resigned from Energycorp on 5 February 1988, the company’s share price went into free fall and the BNZ appointed receivers six days later.

Press speculation that Gerard Henry is involved with Diligent has had a negative impact on investor sentiment as has Brian Henry’s involvement with Energycorp.

The rules regarding prospectus disclosure are vague with no specific requirement to disclose a director’s past history unless they have been bankrupt in the previous five years. However, such disclosures are supposed to be balanced, with positive comments balanced by negative information where appropriate.

The NZX and other parties associated with the IPO are clearly furious that details of Brian Henry’s involvement with Energycorp were not disclosed in the prospectus. The lesson from this is that full disclosure is the best approach because media headlines about a previous failure can be far more damaging than a full account in a prospectus.
       
Brian Gaynor - 13 December 2007.   Disclosure: Milford holds no shares in Diligent.