WHAT a difference a day makes. In July, the Supreme Court found that Jim Flavin had engaged in insider trading in 2000 when his company, DCC, sold its stake in fruit distributor Fyffes . . . run by longtime allies the McCann family . . . for 106m.
On the morning of 13 November 2007, a day after DCC reported an interim profit of 51.6m, a stock analyst who covers DCC told the Sunday Tribune that the whole insider trading incident had . . . and would have . . . very little impact on the business's performance or share price. The following morning, however, after the director of corporate enforcement Paul Appleby said his office would be seeking disqualifications at DCC through the High Court, the same analyst said: "I don't think anyone expected that, and that certainly changes how we see the situation. Things could get bad."
The ODCE clearly has Flavin in its sights, but if the last few years have taught us anything it's that his board will fight it every step of the way. Flavin himself doesn't seem to think that he's done anything wrong. No sooner had DCC been ordered to pay costs in the insider trading case Fyffes brought against him, than he was trumpeting DCC's "high ethical standards" to reporters eager to know how he'd make an account of himself.
And the board . . . featuring such titans as Tony Barry, Michael Buckley and Bernard Somers . . . has always backed Flavin. "The board features a lot of very intelligent men and women who've stayed for the last 12 years, " one senior business figure told the Sunday Tribune. "It's one of the strongest boards in Ireland.
As far as I know only one person has left in the past 10 years. And that must say something." But according to another source close to the company, Flavin has always been "a formidable influence on his board members".
Early days A Blackrock College boy, Flavin started his career as a clerk in the old National Bank. He qualified as a chartered accountant, and by the mid 1970s was running Allied Combined Trust (ACT), the venture capital arm of AIB.
There he developed the skills he needed to start his own VC firm, Development Capital Corporation (DCC) in 1976.
DCC invested in some high profile companies through the 1980s . . . including Flogas, Wardell Roberts, Printech, Reflex and Xtravision.
In 1987 the savvy Flavin stumbled and found himself in court with the McCann family for the first time . . . this time as their ally . . . when Pernod Ricard took them to court over a bait-and-switch Flavin tried to pull over the sale of a large stake in Irish Distillers. Despite such moments of hubris, Flavin's instincts are usually spot on.
By the 1990s DCC had stakes in 38 companies and was in the process of changing from a venture capital firm into an industrial holdings company. It went public in 1994. DCC began to gain 100% control of some associate companies, while shedding others, and thus started the process that led to the Fyffes sale.
The current kerfuffle began in February 2000 when DCC sold its long-held 10% stake in Fyffes, where Flavin was still a board member.
Less than a month later, Fyffes issued a profit warning and the share-price took a significant hit. A year later Fyffes got suspicious of the DCC sale, and by 2005 Ireland's first insider trading case was in full swing. Two issues were at stake. DCC were contesting the notion that Flavin had personally traded the shares, contending that a subsidiary company had done so without his intervention.
Secondly the company maintained that the sale was not based on directors' reports in Flavin's possession, but was based entirely on the rising share price, which had benefited from the hype surrounding Fyffe's digital arm www. worldoffruit. com.
The High Court actually concluded that the reports were not price sensitive and that the sale was based on the dot. com hype, but that Flavin had indeed dealt the shares. It looked like the insider trading charge was quashed.
Support of the board DCC rewarded Flavin with a bonus of 150,000 on top of his usual 500,000, "in recognition of the exceptional demands arising from the successful defence of the action taken by Fyffes against DCC". The board's faith in Flavin was such that in February, when non-executive chairman Alex Spain retired, they agreed to make Flavin an executive chairman . . . a unique position in Irish corporate governance. Essentially Flavin became chief executive and board chairman in one. Yet 99% of the voting shareholders supported this decision, despite the fact that the Combined Code on Corporate Governance recommends not allowing this situation. But in July, a Supreme Court appeal found that the reports in Flavin's possession were actually price sensitive, although it did not overturn other details in the High Court case. So Flavin had committed insider trading.
But Flavin and his friends on the board of DCC had a different interpretation. The board released a statement giving Flavin their full support within hours of the judgment. The certainty of the move surprised some people.
"Many people felt that they were too speedy, " said a senior corporate source. "The board needed to read four judgments and get legal advice on them but a response was out in hours.
From a legal point of view, but also from a governance point of view, I'd have thought it should have taken more time." In other words, the board's support for Flavin was a foregone conclusion.
Ultimately, as their initial statement, correspondence with the Irish Association of Investment Managers and a recent affidavit from nonexecutive director Michael Buckley attest, DCC is sticking to the unchallenged High Court conclusion that the directors' reports in Flavin's possession "simply had no bearing on the share sales", even as the company acknowledges the Supreme Court's conclusion that the same information was "price sensitive". Flavin and the board are essentially making a moral distinction . . . unrecognised by the Supreme Court . . . between possession and use of the information.
'Element of denial' Flavin is not universally liked, so his board member's unhesitant and bullish support is baffling to some observers. Paul Sreenan, Fyffes' senior council, said there was "an element of denial" about DCC's attitude to the case. On the other hand, why wouldn't they be supportive? Despite the Fyffes case, and downgraded forecasts for the sale of their Manor Park construction business (which they own with businessman Joe Moran), DCC has had a good year. Earnings per share for the first half rose by 14.4%, ahead of NCB's forecasts, spurring the broker to revise upwards their projections for next year.
And prior to DCC offsetting 55.7m for "exceptional" payments (the cost of the court proceedings), operating profit was at a very healthy 51.6m. What was an issue for the press simply wasn't an issue for shareholders. "I really don't think that on a day-today basis the Fyffes case or Manor Park issue affects the way the IT business is being run, or the food and beverage business is being run, " said one analyst. Perhaps the board's support for Flavin is because there is no other option. The company has just begun to deal with succession issues. Last February Tommy Breen was promoted to managing director, with an understanding that he would assume the chief executive role after three years, when Flavin would step down to become a non-executive chairman. "I don't think they're quite ready to move on from Flavin, " said the analyst who changed his view after the ODCE statement last Tuesday. "I think there's a sense that this is the guy that's built the business for the last 31 years and that it's inconceivable to run it without him. The board isn't going to let him go without a fight."
Fight to the end If the Office of the Director of Corporate Enforcement gets its way, then such a vacuum could exist. "I think the whole situation is a lot more serious than people thought, " the newly worried analyst continued.
"Because this is the first insider trading case, the regulators seem concerned that a precedent is set, and they've applied for the disqualification of not just Flavin, but also other directors in the case.
Questions of corporate governance are taken very, very seriously, and major shareholders don't take kindly to such questions. Ironically the share price is up today, but you might see a very different picture in a year's time."One thing is certain . . . Flavin won't be going anywhere without a fight.