Pre-IPO Shares Press Release - Case Study of Murray Goulburn

PrimaryMarkets is the place to List and Trade Pre-IPO Securities

Case Study of Murray Goulburn (ASX.MGC)

Pre-IPO Shares – Usual Practices by Board of Directors

Most companies seeking to list on the ASX and other bourses (regrettably) DO NOT usually develop an unfettered marketplace for their security holders to enable trading in their to-be escrowed/restricted securities.

Most Boards typically:

  • Are solely focused on raising new equity/cash to flow into the Company.
  • Do not wish any potential subscribers via their IPO to look at purchasing existing securities (e.g. Pre-IPO shares) from founding/existing security holders and employees in the shadow of the proposed IPO despite possible escrow restrictions and/or at a discount to the IPO price.
  • Try as much as possible to ensure that the founder(s), key executive(s)/employee(s) and early stage investors securities are “locked up” via voluntary or ASX required escrow restrictions for periods usually between 12 and 24 months from listing date. Their main purpose of doing so is to reduce the “aftermarket” effect of original security holders trying to get liquidity immediately post the IPO – i.e. trying to stop the rush for the door.
  • Request founder(s), key executives and management employee(s) and early stage investors to accept extensive escrow restrictions including prohibiting any and all dealings with such securities i.e. no trades, options, encumbering forward sales etc. of such securities.

In PrimaryMarkets’ view, such an attitude as outlined above fails a fundamental duty of a Board – namely to act at all times in the best interest of the stakeholders i.e. the holders of their securities. A Board may argue that their decision to IPO has taken into account the “cost” of escrow to stakeholders but fail to give them a liquidity point prior to the escrow restrictions being placed on the holder of the security at the date of listing.

We did note (with some humour) that one company who recently came across our bows referred to their security holders as “steak holders” and that, to us, really said a lot of what that Board thought of whom they represented.

PrimaryMarkets is the platform for dealing with unlisted securities including Pre-IPO securities that are very much sought after by our Institutional/Accredited/Wholesale/Professional Buy-Side Members.

Pro-Active Boards consideration of Pre-IPO Shares

In PrimaryMarkets’ experience we have seen 3 substantive and recent examples of pro-active Boards looking after the best interest of their stakeholders, namely:

  • Tyro Payments Limited - August 2016 – this leading Australian Bank being an unlisted public Company raised A$100M in November 2015 at an enterprise value of A$380M (including A$10M from Mike Cannon-Brooks). PrimaryMarkets has just transacted (August 2016) on our platform >A$9M of Tyro shares from a small group of early stage investors who are PrimaryMarkets Members to Institutional and Sophisticated Investors who are also Members of PrimaryMarkets. To the Tyro Board’s credit they had not imposed any restrictions nor shareholder agreements so that any Sellers were free at all times to sell how and to whom they desired.

  • Facebook (NASDAQ.FB) – From 2007 to 2012 ~US$500M in value of Pre-IPO shares was transacted from employees and original investors in off-market transactions by SecondMarket Inc (NY) – whose Founding Director Philip Reicherz was appointed in late April 2016 as PrimaryMarkets’ North American Representative.

  • Atlassian (NASDAQ.TEAM) – December 2015 – this Australian company listed on NASDAQ raising ~A$550M on a market capitalisation of ~A$5.6B. In 2014 strategic investors willing to accept future escrow acquired shares (valued then in excess of A$50M) from employees and original investors in off- market transactions.

Gavin Solomon, Founder of PrimaryMarkets has also facilitated trading in ~A$16.5M of Pre-IPO shares in companies about to list on the ASX with the buyers accepting the escrow restrictions placed upon them by the ASX.

Clearly it is a well-accepted practice for pro-active Boards to facilitate the sale of shares, options, warrants etc. owned by founders, employees and early stage investors in their to-be-listed entities. Additionally, in our view this approach also creates an additional channel for Boards to source new investors seeking strategic positions to support the IPO.

How should a Board regard limiting or restricting their stakeholders (founders, employees, early-stage investors) from a potential liquidity event that they may or may not accept?

PrimaryMarkets believes that a pro-active Board will support the best interests of their stakeholders (including employees, seed investors and early-stage investors) and source new investors willing to accept the imposed escrow restrictions and may, in turn, support the IPO as well as the aftermarket. This emphasises the rationale for investors taking on escrowed stock will only do so if they believe their investment, and thus the Company, has substantive up-side far beyond the period of the escrow restriction.

How can PrimaryMarkets assist Pre-IPO stakeholders?

PrimaryMarkets in only 6 months of operation (since 25th February 2016) now has:

  • 12,000+ unique website visitors to (39% outside Australia).
  • 6,000+ Member-Followers (22% outside Australia).
  • 3,300+ social media followers.

PrimaryMarkets’ Executive Director, Gavin Solomon said:

“PrimaryMarkets was created with one of our core business verticals being the facilitation of transacting in Pre-IPO Shares. Our recent transactions in Tyro shares exemplify our “proof of concept” in spades.

PrimaryMarkets is well positioned to deliver and enhance liquidity by allowing existing investors and employees the ability to transact through our platform with our wide base of approved Sophisticated/Institutional/ Professional/Accredited Investors.

Boards of companies about to list on the ASX and on other bourses in our view should actively engage with PrimaryMarkets so that the best of breed outcome for their stakeholders can be achieved. Thus, the Board would be fulfilling their duty as Directors.”

PrimaryMarkets believes that Good Corporate Governance is exemplified by a pro-active Board who looks first and foremost at the interests of ALL of their stakeholders.


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Shown below as Annexure A to this Press Release is our Case Study of how the Board of Directors of Murray Goulburn Co-Operative Co Limited (ASX.MGC) created the current unpleasant predicament for all their Stakeholders – be they suppliers, unitholders or shareholders.




What occurred with Murray Goulburn?

  • In November 2013 the Board of Murray Goulburn at its AGM recommend to its co-op members (who voted in favour of) an “enhanced capital structure” that was to maintain 100% farmer-supplier control yet allow external investment (namely a partial float).

In July 2015 the Murray Goulburn IPO raised ~A$500M on a market capitalisation of ~A$2B and listed on the ASX (ASX.MGC) yet no marketplace was established prior to the IPO to permit farmer-suppliers who held Pre-IPO securities a potential liquidity event prior to having escrow/restrictions placed on their shares.

The IPO of Murray Goulburn was effected via a special purpose unit trust - MG Unit Trust - as part of its corporate/capital structure (see MGC Prospectus p 59):


MGC had on issue 348M shares and 206.7M Units as set out below (extract from MGC half yearly 2016 Report 29/2/16 slide 16):


  • Under the capital structure (MGC Prospectus p27) all Suppliers to MGC were required to hold at least 500 Shares.

  • A New Supplier who has no previous MGC shareholdings is required to purchase at least 500 shares upon commencement, as a condition, of making their supply to MGC. The MGC Prospectus stated “Eligible Suppliers” were to pay between A$1.00 and A$1.24 per milk litre, subject to various conditions (some outlined below).
  • The share standard (MGC Prospectus p28) stated the minimum numbers of shares that Shareholders were required to hold based on the volume of milk they, or their associated Supplier, supply to MGC. That Share Standard is one share for each kilogram of milk solids supplied to MGC assessed on the basis of a 3-year rolling average (Share Standard).
  • If Shareholders hold shares in excess of their respective Share Standard then those excess numbers are converted into Non-Voting Shares. PrimaryMarkets believes this was planned to prevent a Shareholder obtaining voting rights out of proportion to the volume of milk supplied to MGC by them or their associated Supplier.
  • At the time of the MGC Prospectus the IPO offer price for units (IPO Price) was expected to exceed the price range offered under the Supplier Share Offer (SSO). Suppliers would still have the ability to acquire additional MGC shares under the SSO at the higher market price.

  • MGC's IPO offered:
    • Units in a price range of between @ A$2.10 to A$3.20;
    • Implying a forecast P/E of 13.6 to 17.7 and an annual dividend yield of 5.6% to 7.4%.
  • Macquarie Capital was the sole lead manager on the IPO whilst Morgans, Evans & Partners, PAC Partners and Bell Potter also participated in the IPO.
  • The faith of MGC and its now disappointed IPO investors sadly turned into a disaster in less than a year of the commencement of trading of MGC units on the ASX - starting @ A$2.42 during its early days dropping by 62.4% to a low of A$0.91 as at 20th May 2016 and now (5th September 2016 @ A$1.30).


  • Under the capital structure, shares owned before the opening of the IPO Priority Offer (as at 9 June 2015) by supplier Shareholders, were made subject to a 3 year sell down restriction which locked them into a restrictive escrow environment for a period well in excess of what is required under the ASX Listing Rules. The terms of the Board created 3-year sell down restrictions (MGC Prospectus p 116) are:

    • A Shareholder who holds shares in excess of their Share Standard may sell those excess shares at any time on their newly created/invented “Shareholder Trading Platform” (STP) unless they were acquired before the opening of the Priority Offer in which case they may only be sold in accordance with the following schedule:
      • by 30 June 2016 – up to 25% of the excess shares may be sold;
      • by 30 June 2017 – up to 50% of the excess shares may be sold;
      • by 30 June 2018 – up to 75% of the excess shares may be sold; and
      • After 30 June 2018 – any remaining excess shares may be sold.

    • No acquisition of shares will be allowed by a Shareholder where such an acquisition would move the Shareholder above the Hard Cap (being a capital budget to which a Supplier must adhere so MGC looks out for projects that may or have gone over budget that may land the Supplier in financial trouble)(Hard Cap).

    • Where a Shareholder is found to hold shares above the Hard Cap (Excess Shares), those Excess Shares will be converted into non-voting shares and could be made mandatory to be sold under direction from MGC.

    • The MGC Board also has the discretion to suspend the payment of a dividend on those Excess Shares.

    • Suppliers associated with a Shareholder who does not hold at least its Share Standard will be required to participate in MGC’s “share off-take program”. Under this program, a portion of a Supplier’s monthly milk payment will be diverted by MGC in consideration for the transfer to the applicable Shareholder of shares to assist them to achieve a holding of at least their Share Standard.

    • If a Shareholder was to retire or leave MGC as a supplier (under the constitution) there was no requirement for MGC to repurchase the relevant shares.
  • As mentioned above, MGC developed a Shareholder Trading Platform (STP) that is/was intended to allow its Shareholders to buy and sell shares through MCG’s Nominated Broker (Macquarie Bank) (see MGC Prospectus p115) :

    • The STP only operates when the ASX is open and Units are trading.

    • While separate to the market for MGC units (on ASX), the STP is linked to the Unit Market via the Market Facilitator (Macquarie Bank).

    • “Trading on the STP will influence the number of transactions in Units on ASX and potentially the price at which Units are trading on ASX, just as any other buying and selling of units would”.
  • In plain English, what MGC imposed was that a supplier Shareholder may only sell, buy and encumber its shares through the private platform in the manner set out the “Share Standard Policy” and in accordance with the STP terms and conditions stated in the Prospectus.

The question one has to ask is, if in hindsight, Farmers / Co-Op security holders really believed that their Board acted in their best interests when the capital structure was created and promoted to all shareholders - alongside with all of its restrictive and all-encumbering regime?

It appears to PrimaryMarkets that:

  • Trading in shares was not encouraged nor offered the opportunity to be bought or sold by Shareholders other than Post-IPO via the off-take scheme and the Board mandated process.

  • All securities falling under that off-take scheme Pre-IPO and Post-IPO would, on any view, be considered highly illiquid, as they could only be bought and sold via a facilitated process with no alternatives available to the Shareholders, other than the Board’s calculated strategy of building up a complex “framework” only there to create difficulties and confusion to the detriment of the holders.

  • Potentially it is possible where a Supplier off-take was suspended there is no avenue for retiring or exiting farmers to get their desired share value.

  • Should the Farmers/Suppliers have had their own independent advice from market experts, lawyers etc. prior to the convoluted capital structure being put in place? Clearly, the MGC Board did present to Farmers/Suppliers and did receive their approval for the corporate structure of MGC so are they now entitled to be critical of others for their own past actions?

    • In normal circumstances such a duty of seeking and obtaining independent expert advice falls upon a Board of Directors. However, did the MGC Board have a conflict of interests, as clearly it was pushing hard to get the IPO completed. Whereas, in hindsight, maybe it should have focused more on what was in the best interest of their stakeholders.

    • The MGC Board has an ever continuing conflict of interest as on the one hand it wants to maximise returns to ASX investors (unitholders) i.e. take advantage of the farmer-suppliers by creating huge returns/dividends to ASX Investors, YET simultaneously on the other hand, the MGC Board desiring to maximise returns for the farmer-suppliers by taking advantage of the ASX Investors with low or nil returns/dividends.

      • Unkindly, some investors have said to PrimaryMarkets that the “geniuses” who promoted this remarkable situation deserve a medal for the “One of the Worst Corporate Structures in Australian Marketplace history”.

    • During 2013-2015, the MCG Board and its advisers had worked on a structure they believed best aligned the interests of its farmers, shareholders and unitholders. With the benefit of time, would they set the same structure again?
  • PrimaryMarkets believes Good Corporate Governance is exemplified by a pro-active Board who look first and foremost at the interests of ALL of their stakeholders:

    • A classic example of poor Corporate Governance was the Board of Westpac in May 1992 which culminated in September 1992 with the Chairman and 4 Directors resigning after Australia’s shortfall of a Rights Issue - ~A$800M on a ~A$1.2B Rights Issue – which remains the largest recorded shortfall (NB: Gavin Solomon, Founding Executive Director of PrimaryMarkets, led the shareholder revolt against the Board of Westpac at that time).

Groundhog Day Perspective

If today was the AGM day to consider approving a new corporate structure for MGC, PrimaryMarkets believes that the farmer-suppliers would not have implemented nor voted in favour of the current Corporate Structure of MGC especially with the restrictions on shares and the “locked down environment” with the STP.

Concentrating solely on liquidity for their shareholdings and excluding matters relating to their supply undertakings etc. PrimaryMarkets believes the farmer-suppliers would have asked their Board to be pro-active and provide to them both Pre-IPO and Post-IPO with unrestricted opportunities in respect of their shareholdings for:

1. Liquidity:

  • Transparent marketplace;

2. Wider network of investors via a platform such as PrimaryMarkets and access to Institutional and Sophisticated Investors.

3. No Restrictions – giving the shareholders the ability to decide on its own investment path without being subjected to any cumbersome rules or restrictions.


PrimaryMarkets delivers liquidity for Unlisted Securities and Investments. PrimaryMarkets is led by a highly-professional Board with strong marketplace experience and is an unlisted public company with a diverse shareholding of institutional, professional and wholesale/sophisticated/accredited investors. PrimaryMarkets has an ever growing base of Sellers, Buyers and Intermediaries and offers solutions for global investors in most jurisdictions worldwide.

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