SelfWealth shareholders quash board overhaul attempt

Shareholders in fast-growing online brokerage startup SelfWealth (ASX: SWF) have chosen to stick with the current board despite a spirited attempt from minority investors to replace two directors, although roughly one in three votes at an extraordinary general meeting (EGM) yesterday were in favour of the challenge backed by founder Andrew Ward.

Ward, the former managing director who has been out of the picture since 2019 but retains a 4.7 per cent share in SelfWealth, joined forces with other investors including Nick Kephala in a bid to remove non-executive directors John O'Shaughnessy and Robert Edgely.

Edgely became managing director of the company - now with $9.3 billion in funds under management - in May 2020 after Ward officially stepped aside following six months of extended leave, although he held the role for less than a year before handing the reins over to current CEO Cath Whitaker in April 2021.

The requisitioning shareholders, who also unsuccessfully tried to appoint two of their own nominated directors Neil Schafer and Brett Spork, own around 16 per cent of the company - a similar percentage to the most vocal supporters of the current board structure, Datt Capital and LGGC Pty Ltd.

The EGM vote was a contest of two contrasting narratives - one that the wealth management transformation strategy being led by Whitaker is paying off with a popular platform used by almost 120,000 active traders by the end of the March quarter, and the other that cash burn rates are a concern with $4 million in net outflows over the past two quarters alone.

In an April 29 statement, requisitioning shareholders espoused a "live within your means" approach and criticised the current board's accelerated cash spend during a time of slowed revenue growth.

"They [Robert Edgley and John O’Shaughnessy] oversaw a capital raising which diluted existing shareholders, when SelfWealth’s share price was nearly double that price less than 12 months earlier. We have no confidence in the capital allocation skills of these board members," the challengers stated.

Kephala became a SelfWealth investor while Ward was still managing director, whereas Datt Capital and LGGC took their stakes during the COVID-induced stock market shock between February and April 2020. From March to August of that year, SWF shares rose from 12.5 cents each to almost 70 cents, but have since steadily decline back to 18.5 cents at the time of writing.

In its own statement to shareholders earlier this month, Datt Capital claimed the challengers' strategy focused on cost cutting measures and would lead to further delays in the product roadmap, rather than "leveraging and further monetising the strength of the Selfwealth brand".

"The overall impression was haphazard relative to the considered growth strategy being pursued at present by the company," Datt Capital stated.

"We believe the resolutions equate to a takeover by stealth.

"The requisitioning members (holding ~16 per cent of the company) are requesting board representation equating to 50 per cent of the board vote. Clearly this is a disproportionate, unacceptable level of influence relative to their collective shareholding."

Lee Gaywood of LGGC wrote to shareholders saying he was appalled that the minor shareholders think they can control the board of Selfwealth.

"The Selfwealth team are mid-way through transforming the company from a start-up, into the market leader in retail investment, but a small group of shareholders is attempting to destroy this plan and take control of the board," Gaywood wrote.

"The strategy is based on growth, logic and a market with increasing competition. Let's give them a chance to transform this company from a start-up, into the market leader that it can be.

"Selfwealth has grown into Australia’s third largest retail broker in a very short timeframe, despite the competitive tensions, and continues to capture an outsized portion of customer churn in the sector," Datt Capital stated, although in the company's December half results SelfWealth was described as Australia's fourth-largest online broker. 

Datt Capital also took aim at the requisitioning shareholders' director nomination of Neil Schafer, claiming he left the board of Clime Investment Management (ASX: CIW) in "atypical" circumstances.

"We note that Mr Spork stepped down from Clime shortly after Mr Schafer's removal, further evidence of the close relationship between the two individuals," the company stated.

The requisitioning shareholders defended the pair, highlighting Schafer's track record at Commonwealth Bank (ASX: CBA) and Wilson HTM, as well as Spork's work at Macquarie Bank.

"At Commonwealth, his [Schafer's] responsibilities included both CommSec and a retail client sales team of 7,000. As CEO of leading independent stockbroker Wilson HTM, Neil was successful in generating a 600 per cent increase in profitability, reflecting considerable growth in both revenues and profit margins," the shareholders wrote.

"Having commenced with Macquarie Bank in 1998, Brett Spork became responsible for Macquarie’s embryonic full service private client business in 1998. By 2002, the business had grown to 250 advisers through a network of offices in Australian and New Zealand."

Around 66 per cent of shareholders were against the challengers' motions. Following the victory, Datt Capital founder and CIO Emanuel Datt reiterated support for the current board structure and "augmenting it in the appropriate manner".

"We believe that it would have been destructive to shareholder value to tear up the present strategy to 'future-proof' and lay the foundations for the next layer of services for the SelfWealth platform," he said.

Datt told Business News Australia the shareholder support would bring stability to SelfWealth so it could get on with business, so management could invest in and maintain a growing market position in the retail broking space, as well as on the product side in terms of improving and extending its range of products such as a crypto trading platform that will soon be launched.

"We got involved in SelfWealth at the COVID shock...we just thought the company was incredibly cheap given its market condition," he said.

"I think since we've got in the company itself has grown by multiples of four or five times in terms of user base...I just see the company as being very different, so rather than being a purely transactional service like CommSec or any of the other players, it's really encouraging to see the company focus on financial education for the average consumer.

Even though the requisitioning shareholders were not able to push their motions forward, both were positive about the outcome with a third of the votes in their favour.

"We see it as a significant shot across the bow and puts the company on notice as to their cash burn in this economic environment," Ward said in a statement.

"Also, their project delivery is behind schedule despite quadrupling their staff numbers and growth slowing," he said.

"I'm worried as a shareholder and this continues to be the case."

On his Twitter account, Nick Kephala echoed a similar sentiment.

"Thank you to all those shareholders who voted with us for change at the Board level for SelfWealth $SWF. This was a huge wake up call for the Board," Kephala said.

"We lost the vote today, but we will not give up. Board renewal is critical for this company."

In terms of financial performance, SelfWealth reported a net loss of $2.4 million in the December half, versus a net loss of around $600,000 in FY21 - itself an improvement on FY20. 

Revenue rose by 18 per cent year-on-year to $9.9 million in the December half, compared to 134.8 per cent growth to $18.36 million in the full-year for FY21. 

In the most recent March quarter the company reported an operational cash burn of $1.76 million, although its cash and cash equivalents had risen to $13 million, thanks largely to a $10 million share purchase plan completed in August.