George Economou, the founder and chief executive of DryShips, emerged last week as the biggest winner, perhaps the only winner, in the company’s reincarnation as a going concern. He did so by choosing when to tap the market for public funds, when to stop the public offerings and more importantly when to step in and buy the company’s stock. The biggest loser, sadly, is corporate governance and shareholders’ rights.

After narrowly escaping bankruptcy, DryShips has raised more than $700m since the aftermath of the US presidential election, effectively recapitalising the company. It did so through a series of controversial at-the-market offerings, billed as “purchase agreements” between DryShips and Kalani Investments, an entity registered in the British Virgin Islands.

The fundraisers were controversial because Kalani appeared to be an investor in DryShips when in fact it acted as an underwriter, by buying and simultaneously selling new shares to the public. Kalani has not registered as a broker-dealer with the US Securities and Exchange Commission, based on a legal opinion that exempts it from such registration.

The second coming of Mr Economou
While these “purchase agreements” were taking place, Mr Economou abstained from buying any shares. When that money well was about to go dry, he swiftly stepped in and reclaimed majority control of the company with a $100m private placement.

He will now own 53.6% of common shares at a fraction of what the remaining 46.4% were cumulatively sold for. Mr Economou will buy 36.4m shares at $2.75 per share. Lloyd’s Lists estimates that since last November DryShips sold 31.5m shares at an average share price of $22.33. These figures take into account several reverse stock splits.

Reverse stock splits have the effect of lowering the share count and raising the share price. Dryships has done five reverse stock splits so far in 2017. Shares of Dryships have rallied since the announcement of the private placement and the termination of the purchase agreements with Kalani. They closed on Tuesday at $3.53 per share.

But any stock rally will be of little consolation to the early buyers. For example, shares purchased through December 2016 for a total of $100m have an average cost of $24,500.

Shares purchased through January 2017 for a total of $200m have an average cost of $6,000, while shares purchased through March 2017 for another $200m have an average cost of $1,700. All these purchases, which collectively account for $500m of equity capital, have incurred heavy losses with very little chance of ever breaking even considering today’s stock price. Even the shareholders who participated in the final equity offering are in the red. They invested $194m at an average cost of $6.17 per share.

The shareholder with the lowest acquisition cost is Mr Economou, who was the last one to buy at $2.75 per share. For added emphasis, DryShips announced a shareholder rights offering to the hoi-polloi — everybody but Mr Economou — to buy up to $100m of DryShips shares on the same terms as the private placement. The rights offering appears equitable but it will not make up for the previous losses. In addition, it is back-stopped by Mr Economou, giving him the opportunity to acquire more shares should some shareholders opt out.

There have been several lawsuits, or lawsuit investigations, filed in the US and the Marshall Islands, where DryShips is incorporated. They are challenging Kalani’s exemption from US securities laws, among other allegations. So far none of the lawsuits have been successful, with DryShips vowing to vigorously defend itself.

Corporate governance
As we are awaiting the outcome of legal action, we must address the biggest loser in this saga, corporate governance. DryShips is a public corporation and like all corporations it is governed by a board of directors. Their fiduciary duty is to look after the interests of all shareholders. This is true especially for independent board members. In fact, all board decisions, purchase agreements with Kalani, reverse stock splits, private placement, shareholder rights offering, were expressly authorised only by the independent members, with Mr Economou and other executive board members abstaining from voting.

Were the interests of all shareholders served as the independent members kept authorising successive equity offerings and reverse stock splits? Was it imperative to raise $700m at all costs? There are certainly many shareholders who lost their money in DryShips. While it is tempting to scold them for not doing their due diligence, what about the due diligence of independent board members who serve to look after their shareholders’ rights?
One of the basic auditing standards is being independent in both fact and appearance. Or as the proverb says, “Caesar’s wife must be above suspicion”. It is time for shareholders to demand that companies adopt the same principle for all independent board members.