I should point out that I have no doubt that compulsory instalments are completely legal (as, indeed, are other forms of liability, debt included). The reason I nevertheless think that instruments like this should not be listed on the ASX is not because they are legal, but because the exchange cannot facilitate fair trading when value becomes negative. No amount of disclosure by brokers would change that. So while improving broker disclosure is a good thing, there is still a fundemental problem with these instruments. It’s just that the problem is hidden in a rising market.

Good post. Agree that the Brisconnect saga has seen a wealth transfer from uninformed to informed investors all of which, while legal, is not good for the reputation of the market. I certainly feel sorry for (some of) the affected retail investors, however in defence of the ASX, partly paid shares have been around in Australia since the 1860s so are not exactly a “new” innovation. So perhaps the fault should lie with the discount brokers in failing to protect their newb clients, rather than the exchange.

A quick (and rough) history lesson
Pre 1850s: Limited liability companies did not exist. Shareholders were responsible in full for any debts of the company even if they owned a small percentage of the firm (sounds scary).

1860: Partly paid shares were introduced in Australia, investors were liable for the full amount of unpaid call payments.

1871: No liability shares were introduced in 1871 in Victoria, under which shareholders were not obliged to pay outstanding calls on shares.

Today: CORPORATIONS ACT 2001 – SECT 254M recognises both contributing and no-liability companies. Under the former “If shares in a company are partly paid , the shareholder is liable to pay calls on the shares in accordance with the terms on which the shares are on issue. This subsection does not apply to a no liability company. Note: The shareholder may also be liable as a contributory under sections 514-529 if the company is wound up”

So BCS does not seem a particularly unusual or innovative corporate structure. It probably made sense at the time given capital was required as the road was gradually built (although paying dividends from year 1 in no way seems natural).

According to Commsec (see http://www.comsec.com.au/public/news.aspx?id=1023), in fact Telstra 3 installment receipts *did* in fact impose a legal requirement on shareholders to make the second payment, as did MGX and BCS.

Imagine if the GFC had arrived a few years earlier, and T3 did a Brisconnect. The fallout from that would have been huge.

Equity Guy

Honest and intelligent insights as ever. The comments from CV about the potential conflict by Trevor Rowe are spot on too. I feel that self directed on-line investors need to be stick the phrase “Caveat emptor” at the top of their PC screen!! Any who has ever bought a few shares should know 1. that the da. suffix to the stock code has has a particular meaning (or at least should prompt additional fact finding), and 2. that considering buying a share worth 1c or less which has dropped from $1 (should prompt additional fact finding).

tim
“video bonaque sed sequor male”

The invention of the limited liability company (shareholders had a floor and could not be asked for a cent more – even if they owned a company which sold asbestos or thalidomide) allowed shares to be traded in the knowledge that if it all went tits up (the boat sank on the way to the new world) there could be no further call on the shareholder.

The partly paid share – with no walk away option – no longer really looks like the kind of equity our exchanges evolved to trade. It starts to look a lot more like debt.

Debt on the other hand is a much older human commercial beast (there being injunctions against in the bible and whatnot).

We have been talking about this Briscon saga for many months now, and I doubt this topic of endless fascination has been exhausted.

Dan

PS. Thanks for picking up my Bolton/One.Tel Dude piccy

The ASX should have noted at the time the perils of allowing such an instrument to exist on their exchange. From memory the units went as low as 40c in the dollar, and the question as to whether these units could possibly have negative value was doing the rounds.

It is astounding how little attention in the press has been given to the ASX in their negligence in permitting such a security to be listed in the first place.

Something else that would help here, I think, is compulsory education for non-professional, mum-and-dad shareholders trading via online brokers. This is required for some things, e.g. if you want to place conditional orders via Westpac Broking, you actually need to pass an online test to demonstrate your understanding of such orders and various scenarios before activating that feature of your account. Anyone trading online should have a base level of understanding of what it is they’re actually doing, especially considering many people are risking their own superannuation savings with self-managed funds.

Everyone likes to focus on Bolton, but the blame really lies with the ASX!…