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140 —
a large percentage of the company’s shares are, concurrently, with
Majestic trying to raise capital, you’ve got Suncastle and Mr. Adams selling
their shares of the—their existing shares of Majestic, in the company.
What basically happens at this time is those shareholders, or those
investors coming in, who are buying secondary shares, are basically
holding worthless shares with very little value and they’re paying, for the
most part, $1.00 a piece, but that dollar goes to Suncastle or Majestic [sic]
in large part. So Majestic is not benefiting from new investors coming in, in
terms of their money, but a controlled block holder is actually bailing out
concurrently, at the same time, selling out its shares. Normally I would
have expected to have seen some escrow arrangements in force on two
fronts: One is actually to consolidate your shares to make sure that dilution
doesn’t take place to the extent that it does and restricting resale of shares;
I’ve seen this in the past. And that’s to be fair to shareholders coming in
because then they have some sort of belief in the credibility of
management staying in the company and not selling out. So investors
coming in are picking up shares with very little or no value in the company.
And what it does, what it does, in essence, is, because Majestic doesn’t
have any business, Suncastle is getting the money from the new investors
and Suncastle then has the choice of doing what it wants with the money; it
can take it out and distribute it to the management and the directors and
the founding shareholders or use the money to exploit in research and
development, and if Mr. Adams receives money from secondary sales as a
person, that belongs to him, it’s his money, there’s no obligation that he
puts it into Suncastle or Majestic, that’s his money, his right. But coming
back again to the unfairness, what is happening here is that Suncastle is
getting the money through secondary sales, which, if it uses in the
business to exploit in research and development, then is developing its
own product, it’s own technology, and if the company’s at arm’s length with
Majestic, ultimately, such a technology is then sold to Majestic, so Majestic
would then have to buy a technology from Suncastle, and, in fact, the
shareholders initially put their money in for research and development, but
the scenario, the business profile that we now have two independent
companies, is that Suncastle may develop, and has hope of developing,
the product, which, if it does, sells it to Majestic, Majestic has to purchase
that product, and Suncastle benefits by bailing out from Majestic and
paying for it with shares which it cost nothing, which it received freely. So I
see that as being fundamentally unfair. You can also look at it from a
different angle: If Suncastle raised such finance on the market itself,
Suncastle would now have shareholders, and those shareholders would
have a right in the profits and gains of Suncastle; if Suncastle did that, and
developed a technology, the technology then belongs to the new investors
and shareholders and not to Mr. Adams and Suncastle. So the way it was
done was detrimental to Majestic, in my view, unfair to Majestic, because
any funds that are raised is outside the control of Majestic and it doesn’t
see, and it doesn’t have right to, any gains arising thereafter because it’s a
property, now, of Suncastle. So, I, I found that the methodology adopted in
concurring or acquiescing to secondary sales not very meaningful and
quite unfair to Majestic shareholders.
[
609]
De Souza testified that approximately $5.3 million was invested by
investors. No funds were recovered.
