Burford Capital has bowed to pressure over its approach to corporate governance by announcing plans for a dual listing in the US, fresh directors and a new chief financial officer.
These were all issues raised by the Muddy Waters Research report that led to the company’s share price tumbling last week.
Burford stressed that it did not believe the changes were necessary – having defended them vigorously last week – but said it was listening to shareholders in making them.
As a result, shares in the company jumped 13% to 880p late yesterday – still well below where they were before the Muddy Waters attack but significantly higher than the low of 605p they fell to in its wake.
In a statement to the stock exchange yesterday, the AIM-listed company said it has been clear for some time that it was considering an expansion of its stock market listing and had begun the process before recent events.
“Investors have asked for more clarity and granularity around our plans. Investors have also made it clear that they do not support Burford remaining solely AIM listed.
“We have listened and, while we were already taking action, as reflected in past disclosure, we set out here our plans and our commitments.
“Burford has concluded that it will endeavour to procure a second listing on either NASDAQ or the NYSE as a first choice.
“We believe that the deep liquidity in those markets, as well as the opportunity to access a broad pool of US investors who do not today invest in litigation finance but are generally familiar with US litigation, makes a US listing commercially attractive as an alternative to moving Burford’s current listing to the LSE main market.”
But it said that, as there has never been a litigation funder listed in the US, the process “may take several months”.
If it did not prove possible, Burford would instead pursue a premium listing on the main market in London.
Burford’s board is comprised of four directors who have served in those roles since its listing in 2009. It said their experience meant they “serve the interests of shareholders well”.
However, it has “listened and defer to the wishes of our shareholders”, and has started a formal search to add two new independent directors to the board “as rapidly as possible”.
Once they are in place, there will be “a period of overlap with the existing directors”, before David Lowe leaves the board at the AGM next May and chairman Sir Peter Middleton at the following year’s AGM, when he will be 87.
Further, chief executive Chris Bogart and possibly more senior executives will join the board “in due course”.
The fact that Mr Bogart is married to Burford’s chief financial officer (CFO), Elizabeth O’Connell, has also been a source of criticism.
“We believe that concern is unjustified given Burford’s control structure and ignores Burford’s finance and accounting structure,” the company said.
“Nevertheless, it is clear that investors would prefer an alternative CFO, and thus Burford announces that, with immediate effect, Jim Kilman will take on the role of CFO to buttress confidence in Burford’s financial disclosures and to guide the company through the change in its listing.”
Mr Kilman was most recently vice-chairman of Morgan Stanley Investment Banking, and was Burford’s principal investment banker at Morgan Stanley, and has been serving as a senior adviser to the company since he left in 2016.
Mr Kilman has agreed to serve for up to two years as CFO. Ms O’Connell will become Burford’s chief strategy officer.
Sir Peter said: “Companies are owned by their shareholders, and when the shareholders speak, it is the role of boards and management to listen.
“While we may take a different view on some of these points, shareholders have clearly spoken and we have listened, just as Burford has throughout its existence.
“We trust that these governance enhancements operate to bolster investor confidence in Burford as it enters its next era of growth and success.”
In response, Muddy Waters tweeted that Mr Kilman’s appointment was a fig leaf given his previous involvement with Burford.
It argued that, “given the complexity of Burford’s accounting”, it should be an accountant “who has demonstrated a strong commitment to ethics. Investment bankers don’t often qualify on that front”.
It has also not taken Burford’s counter-attacks lying down, saying: “Leave it to former trial lawyers to talk so much, and yet say so little.”
It said Burford’s initial written response and “numbing” two-hour investor conference call “did nothing to dispel our view that Burford aggressively marks its cases up to generate non-cash profits, manipulates its (non-IFRS) ROIC and IRR metrics in order to justify its fair value gains, deliberately confuses investors about the extent of its fair value gains in each period, and has a fragile balance sheet with too much leverage, particularly given the excessive costs the business runs (of which a significant portion could be management compensation).”
It went on to accuse the company of “effectively sprinting on a treadmill whereby it is growing its portfolio aggressively not because there are so many great opportunities; but, rather because it has so aggressively taken fair value gains that sap the business of future earnings power, and it therefore needs to add litigation assets to the balance sheet in order to take more fair value gains”.
Muddy Waters even engaged Qverity, a provider of behavioral analysis and screening services, to analyse the written and verbal responses of Burford’s management, finding “strong” indications that “Burford’s management was deceptive” in what they said.