IMPORTANT INFORMATION FOR CONTANGO SHAREHOLDERS
31 January 2017
Dear Contango shareholder, We are writing to you as proposed independent directors of Contango MicroCap Limited (Contango or the Company). You may be concerned to know that on 8 December 2016, the existing Board of Directors of Contango (Board) lodged an ASX announcement that included proposals to:
• divide its investment assets into two distinct portfolios;
• engage an unspecified "second investment manager" to manage initially approximately $27 million in funds and over time up to 50% of the Company's investment portfolio; and
• change the well respected Contango name to an unspecified name.
Together these proposed changes are referred to below as the "Proposals".
WE DO NOT BELIEVE THAT THE PROPOSALS ARE IN YOUR BEST INTERESTS AS A CONTANGO SHAREHOLDER
As a result of the Contango Board's actions and pursuant to the Corporations Act, on 27 January 2017 a number of Contango shareholders requisitioned the Directors of the Company to call a general meeting of all shareholders to pass the following resolutions (the Resolutions):
• to appoint ourselves, Trevor Carroll and Ken Poutakidis, as independent directors of the Company (a brief summary of our expertise is attached to this letter); and
• to remove Ian Ferres, David Stevens and Glenn Fowles as directors of the Company.
The date of the shareholders' meeting will be advised by the Board in the next few weeks.
When the notice of meeting is received, WE URGE YOU TO VOTE IN FAVOUR OF:
• APPOINTING Messrs Carroll and Poutakidis; and
• REMOVING Messrs Ferres, Stevens and Fowles.
WHY YOU SHOULD VOTE IN FAVOUR OF THE RESOLUTIONS
The Proposals contained in the ASX announcement are not in the best interests of shareholders for the following reasons:
1. Shareholders should be given the opportunity to vote on fundamental changes to the investment management arrangements
The changes to the investment management arrangements were announced without proper consultation. The Company purportedly relied upon "feedback from shareholders" at the 2016 AGM. However, the proposals were neither discussed nor endorsed by shareholders, including the Company's largest shareholder. The changes are in fact contrary to the wishes of shareholders.
We believe that all shareholders should be given the opportunity to vote on any fundamental changes to Contango's investment management arrangements.
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2. The proposed changes are contrary to the previous representations of the Board
Contango's existing shareholders have invested in the Company based on the very successful track record of the existing investment manager. In June 2016, the Board renewed the investment management agreement with the existing investment manager for five years and stated as follows: "The CTN Board is now satisfied with the resources, capabilities and direction of its investment manager"
Furthermore, as recently as October 2016 the Company's 2016 Annual Report stated as follows:
"Importantly, we retain Contango Asset Management as our Investment Manager and we expect the portfolio to continue to perform well, under the guidance of Mr George Boubouras CIO, Senior Portfolio Manager Mr Bill Laister, and the broader Contango Investment Team.
The proposed changes to Contango's investment management arrangements conflict with the Board's previous representations and existing shareholders deserve the opportunity to consider properly fundamental changes of this nature.
3. The proposed changes jeopardise the highly successful investment strategy of the existing investment manager
The investment performance of the existing investment manager under Senior Portfolio manager, Bill Laister, since inception and under the Chief Investment Officer, George Boubouras, since his appointment in December 2014 has been highly successful over a sustained period. This is shown in the following graphs:
Value of Investment
$80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0
--.....Contango Micro Cap Unit Price Total Return
Small Ordinaries Accumulation Index
'17 0 4 '/c, 47 0 s ••/<, 47 0 sss ./ '17 6 4 -' 47 6 0,.. C ' 1, Or (1' % '7 0 0 % •> c,),, q-‘ 4 ', 0,, q • s , 3 , b , ),0. cb I, ) N -) N . )0 , )0 N . ) , ), 9 0 '-)G. cb ,'o oos, ,,,,,, qs, 06, oo..., 0,, ocp os9 eio % ,,, ,,,,, c?„„), ,e,„, 4 .es ,i6, .15, Source: Contango Asset Management, Bloomberg *Total return (including distributions) since inception calculated before fees and taxes
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Value of Investment
$15,000 $14,000 $13,000 $12,000 $11,000 $10,000 $9,000 $8,000
----...Contango Micro Cap Unit Price Total Return Small Ordinaries Accumulation Index
0 A' -7 ./‹, 1 0 0 A*, s,‹, -I, 4 ')
•
•
0 0 0- O. Aso, 10 '4, le, ice 0, e "s " 6, rO ''() )0, 0.i 0.? •e,s, 5 6 6'
Source: Contango Asset Management, Bloomberg *Total return (including distributions) since 31st December 2013 calculated before fees and taxes
It is clear from the above graphs that the performance of the existing investment manager has been outstanding. The Proposals put shareholders' funds at risk for no tangible benefit. The Board's reasons for changing these arrangements without shareholder approval simply do not make sense.
4. Contango's investment rating has already been cut by independent research houses as a result of the Proposals announced by the Board
As a result of the Board's Proposals, shareholder value has already been adversely impacted by the Company's investment rating being cut by two leading independent research houses.
Lonsec has downgraded Contango's investment rating to "Screen Our, while Independent Investment Research has changed the Company's rating to "Rating Suspended, Under Review" and stated as follows:
"We have suspended our investment rating for CTN and placed the LIC under review following an announcement by the company about changes to its investment management arrangements...
The appointment of a second manager is a highly unusual step and creates new risks for CTN shareholders. The motivations and logic for such a move are unclear to us."
The recent actions of the Board have contributed to the historical inability of Contango to trade at or above its net asset backing, unlike its listed investment company peers which have traded at healthy premiums to their net asset backing.
5. The Contango name is well recognised, well respected and a valuable asset that will be lost if the Company's name is changed
The Board has announced its intention to change the name of the Company. The Contango funds management brand has existed since 1998 and is familiar to listed companies, other fund managers and asset consultants. Contango enjoys considerable brand equity which shareholders will lose if the Contango name is changed.
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6. Costs are likely to increase as a result of the Proposals
If the Proposals are implemented, costs are likely to increase, reflecting the duplication of effort to track and report on two funds management operations. While the Board has announced a reduction in Directors fees, this has previously been resisted and was only announced in response to long-standing corporate governance concerns.
Shareholders should be rightfully upset that certain Directors of the existing Board were paid fees for being members of the Remuneration and Nomination Committees even though the Charters of these Committees appear to have been breached as there is no evidence in the 2016 Annual Report that these Committees met during FY2016. This is in addition to various related-party consultancy fees.
If our resolutions are approved, annualised total directors' fees for the new Board will be cut by more than 60% compared with the 30% reduction belatedly proposed by the existing Board.
7. The Board of Contango should have a majority of independent directors
The five-member Board of Contango presently has only two independent directors and the Proposals were approved by directors who were NOT independent. This unsatisfactory corporate governance has contributed to the historical share price discount of Contango.
If shareholders approve the resolutions to appoint us to the Board, Contango will benefit from the appointment of two highly qualified independent directors and the majority of the Board will then be comprised of independent directors. A brief biography detailing our credentials is attached.
WE STRONGLY BELIEVE THE CURRENT BOARD OF CONTANGO IS NOT ACTING IN THE INTERESTS OF ALL SHAREHOLDERS.
WE URGE YOU TO VOTE IN FAVOUR OF BOARD RENEWAL AND IMPROVED CORPORATE GOVERNANCE WHEN YOU ARE SENT THE NOTICE OF MEETING AND PROXY FORM.
VOTE FOR TREVOR CARROLL AND KEN POUTAKIDIS AND FOR REMOVING MESSRS FERRES, STEVENS AND FOWLES AT THE SHAREHOLDERS' MEETING.
Please do not hesitate to contact us on 0421 058 104 if you would like to discuss this matter at any time.
Yours sincerely,
Trevor Carroll
Ken Poutakidis
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SHORT BIOGRAPHIES
Trevor Carroll
Trevor Carroll has held senior management positions with a number of major international corporations and since 2008 has been a professional company director. In his management capacity, Trevor was the Managing Director for Australia and New Zealand of Electrolux Home Products between 2001 and 2008. Prior to 2001, Trevor held senior management positions with substantial companies including Email, Simpson Appliances and Nissan Motor Company. He was the National President of the Australian Industry Group between 2006 and 2008. More recently, Trevor has also served as a non-executive director on the boards of The Good Guys, Big Sister Food Group, Fusion Retail Brands and Crane Group. Trevor has a Bachelor of Commerce degree from Canterbury University in New Zealand.
Ken Poutakidis
Ken is a corporate adviser and corporate finance executive with extensive small cap expertise and over 16 years of finance experience. He is presently the Managing Director and founder of Avenue Advisory, a boutique advisory firm providing corporate finance and capital markets advice to emerging companies. Previously, Ken worked as a management consultant and a corporate finance executive with leading equity firms across Australia and Asia. His particular expertise includes capital raisings, mergers & acquisitions, corporate advisory, asset divestment and strategy development, with sectoral expertise in healthcare, industrials, engineering and financial services. He has also previously served as Chairman of the boards of Alchemia and Mach7 Technologies. Ken has a Bachelor of Business degree from Monash University and brings a range of commercial skills to the role.
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