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Opinion piece: Less than Diligent disclosure turns ugly

By Simon Louisson NZPA

Friday 14th December 2007

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New exchange listings this year have been as rare as New Zealand's sporting success, so it was highly unfortunate the Diligent Board Member Services float this week turned into a fiasco.

This is an interesting company and listing for several reasons. Its product -- software allowing board members to work in a paperless -- has global aspirations.

A high-tech New York company listing on the local exchange, is a nice reversal of local firms finding other exchanges to list on.

The company also added in one admirable provision, whereby the founding shareholders, who sold 23% of the company, have said if sales forecasts in the prospectus are not met, they will forfeit 20% of their shares.

There was no public offering for the $24 million shares on offer. Brokerage McDouall Stuart lead managed the issue and took firm offerings from other brokers, which amounted to $54m. Demand was high, and following an impressive briefing at the prospectus launch, it seemed as though the shares would list at a considerable premium.

Things started to unravel the week before the listing. First, blogs appeared on the internet, and then the National Business Review carried a story revealing the murky past of the brother of Brian Henry, Diligent's New Zealand founder.

Gerald Henry floated Energycorp in this country in 1987. It was one of the more controversial of many questionable companies that listed around that time, and by February 1988 receivers were dealing with $30m of debts.

Energycorp was infamous for having a Lear jet and leasing 60 BMWs and Mercedes cars for its executives and sales staff, despite having virtually no companies of substance to its name.

Gerald Henry fled to the United States, owing $57m. In 1991, he hit the headlines again when he was jailed in the US for four years for fraud totalling $US1.3m ($NZ1.7m).

While Brian Henry does not have to be his brother's keeper, what made this relevant was that Brian worked for Energycorp as well, and was also made bankrupt.

Diligent rushed out a statement soon after, denying Gerald had any association with the company.

NZX chief executive Mark Weldon made a personal investment in listing Diligent here, including two trips to New York to persuade Diligent, which had had offers from Nasdaq and London's AIM markets.

Brian Henry, who owns 20% of Diligent, admitted his failure to be open about his and his brother's past.

He said he received a "good telling-off" from Weldon.

"In hindsight, I should have said something about this...I didn't think I had to. It was a mistake."

Henry said he made a myriad of silly assumptions. "I thought everybody knew about this and they didn't. It's unfortunate".

But it didn't end there. He actually offered to resign as chief executive that day but the announcement was not made until yesterday.

Henry remains on the Diligent board and has been appointed to a new position as global sales chief.

Some of those connected with the float were less than impressed by the performance of the chairman Edward Charlton, a City of London banker.

He failed to address the issue when it arose and failed to front up to the media when Henry resigned.

Some questions about Diligent's PR firm Senescall Akers arise also. Ultimately, they should have advised Henry to publicly acknowledge his history, so as to defuse the situation.

Diligent's promoters and directors, including director Mark Russell of law firm Buddle Findlay, knew of Brian's connection with Energycorp, but decided not to disclose. Coincidentally, Russell, in the 1980s worked for the Bank of New Zealand, which had lent the company $15.5m on a handshake.

Russell said Buddle Findlay was "proud to have our brand associated with Diligent and with Brian in particular. We have no concerns whatsoever".


So where does this leave Diligent? It is now being led by Alex Sodi, the current president and board member.

A big part of the rationale for listing was to give Diligent credibility. The target for its expensive software is high-powered, high profile companies and it wanted to be publicly listed so potential customers could fully check it out. Time will tell how much its reputation has been damaged.

While Diligent believes it has a world-beating product, rivals say it won't by any means have the market to itself.

Michael Douglas, a spokesman for Australian rival 80-20 Software, told Infotech that Diligent is up against heavyweight US vendors BoardVantage and Thomson Boardlink as well as 80-20 in the Australasian market.

"Diligent has had some success in the US, but is not challenging for market leadership. They remain a small player, particularly given the recent market entry by Thomson, Computershare and Nasdaq."

However it performs, it has set off on the back foot. Instead of listing at a significant premium, as everyone had predicted, the $1 shares are trading 20% below that -- indicating the company is valued at $83m instead of around $115m as had been expected.

NZX head of markets Geoff Brown summed it up nicely: "For all these things, disclosure is the best medicine".

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