It appears that defeat of a minority shareholder’s resolution to remove the Aconex chairman Martin Hosking at an EGM last month (post 1, post 2) hasn’t ended the discontent within the highest echelons of the Melbourne-based construction collaboration technology business. Questions have now been asked about the role of another member of the board, with director Michael Robinson (right) now the subject of complaints to the Australian Securities & Investments Commission and the New South Wales Office of the Legal Services Commissioner. Aconex Legal Counsel James Cook is also being investigated.
According to a 14 February post on the Australian legal industry gossip blog, FirmSpy, Mr Robinson is accused of a conflict of interest insofar as he acts as a director of Aconex and is also a consultant employed by law firm Allens Arthur Robinson (AAR), which advises Aconex:
“… there’s a fairly obvious potential conflict here between, on the one hand, Robinson’s fiduciary and directors’ duties to the company and, on the other, his fiduciary duties as its external legal adviser (to say nothing of his fiduciary or contractual duties to AAR as his employer or principal)….”
“… Aconex has allegedly received … ‘some very poor, possibly negligent to the order of tens of millions’ legal advice from AAR….”
Amid more commentary about the affair, FirmSpy then provides a copy of the EGM ‘Questions on Notice’ document which asks some detailed questions about the role of AAR not just in the EGM but in the original year-long dispute between Aconex and Hawthorn Glen that was thought resolved in May 2008 (post).
AAR: “Major Sh*t going down…”
A follow-up FirmSpy post, dated 16 February, suggests AAR people are “very freaked out” about the AAR/Aconex affair, with Tim Lester, a partner in AAR’s Perth office now the subject of a complaint to the Legal Profession Complaints Committee of Western Australia about allowing the alleged conflict of interest between Robinson and Aconex. And James Cook, Legal Counsel at Aconex, among others, is under investigation in Victoria. FirmSpy describes other allegedly questionable conduct by Robinson, including writing a letter on behalf of all the directors to all shareholders, advising them to vote against the resolution and support the incumbent chairman.
After reading FirmSpy’s posts, I emailed Aconex’s VP Marketing Frank Carron requesting some clarifications but the official line I got back from Aconex was an apologetic but firm, on-the-record: “We do not comment on anonymous blog posts” (a bit harsh as FirmSpy has a good track record in substantiating its revelations; meanwhile, it’s not clear if the allegations come from a disaffected AAR employee or someone with an Aconex axe to grind).
My ‘worst case’ analysis
Having recently talked to CEO Leigh Jasper and CFO Matthew Walsh about the financial health and operational efficiency of the business (post), I don’t think Aconex as a company is threatened. These latest legal issues mainly concern a non-executive director at the apex of the business, while the company’s day-to-day activities are managed by over 300 experienced managers and staff, many with strong local relationships with key customers in regional and country markets.
However, while Leigh Jasper dismissed the EGM to me as a “distraction”, if these latest legal enquiries did reach a negative conclusion then he could be losing some a fellow director(s), with the potential to disrupt Aconex’s decision-making processes, at least in the short to medium-term while a replacement(s) is sought and appointed. And such personnel changes, if they happened, could conceivably result in shifts to Aconex’s strategy. For example, from my perspective, the most notable recent move was Aconex’s concerted investment in growing a presence in the Americas market (it previously relied on creating lightly-resourced satellite operations in each new country market). And reflecting on Conject’s recent acquisition of UK-based BIW Technologies (post), could Aconex devote more energy to possible mergers or acquisitions of its own to build as dominant positions in key markets as it has in Australia and some Asian countries?
The reference in the EGM Questions document to Hawthorn Glen’s 2007-2008 legal action also raises the possibility that questions might be asked again about chairman Martin Hosking and about the role of Aconex’s founders and board members, Leigh Jasper and Rob Phillpot. The Hawthorn Glen dispute also, I believe, delayed a fund-raising round by about a year, and had a financial impact on the business (some Au$3.4m) but it was able to absorb that impact due to the high growth rates the business was then enjoying. That pre-credit crunch double-, even triple-digit growth has declined massively over the past two years, so Aconex will be hoping that this latest bickering isn’t costly to resolve.
This is important to shareholders, as I hear some are wondering about how and when Aconex is going to deliver on its promises of growth.
Aconex’s Capital Raising document (produced in March 2007 and widely distributed among potential investors) anticipated a dip in profit growth after the fund-raising round as it invested in the business in the expectation of accelerated growth and higher profits in subsequent years (forecasting Au$146m revenues and net profits of Au$45m by 2009-2010). Since the September 2008 equity injection by Francisco Partners (post), Aconex has been investing in its product and in expanding into new markets such as the Americas, but the expected dip was compounded by the global financial crisis which wrecked its revenue and profit growth projections. The 2008-2009 results showed the company barely achieved single figure growth, and the latest published results (see Accounting for Aconex) are similar, showing the business achieved revenues of Au$39.855m last year and a Au$2.772m profit – less than half the revenue levels anticipated for two years after the capital raising, and a fraction of the anticipated profit.
Of course, the global financial crisis has forced all businesses to reassess their strategies and forecasts, and Aconex has been no exception. As the global slowdown hit some regions harder than others, focus has been switched away from some countries previously identified as growth opportunities (notably, but not only, Dubai), but the recent improvements in bookings in Australasia, Asia and the Americas will not immediately feed through to revenues, and the business is continuing to burn cash (cash was down from Au$25.9 to Au$22.1m last year), particularly as it continues investing in its US-based operation.
The AAR affair may be a bit of a side-show, a “distraction” as Leigh Jasper described it (‘storm in a teacup’ springs to mind too), but if it leads to boardroom change, I am sure any incoming board member will be facing tough questions from some shareholders about how the business is going to deliver the promised returns on their investments in Aconex.