Shares sold: Why Zip is under fire from its own shareholders

Some Zip investors had their shares sold without their knowledge.

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The Zip Co Ltd (ASX: ZIP) share price has been staging a quiet, but rather remarkable recovery in recent months. It was only back in October that the buy now, pay later (BNPL) share was trading for around 26 cents.

Today, those same shares are worth 94 cents each, up an extraordinary 263% in roughly four months.

So some Zip shareholders are certainly celebrating this lucrative run. But perhaps not as many as there should be.

Last October, which turned out in hindsight to be unfortunate timing, Zip undertook what's known as a 'small shareholding sale facility'. This involved a share buyback of any shareholder who, at the time, owned under $500 worth of Zip shares.

These programs are often undertaken by companies that have experienced a massive drop in share prices. This, at the time, included Zip. At that point, the company had seen its sales fall more than 97% between February 2021 and October 2023.

The purpose of a small shareholding sale facility is to reduce the regulatory burden of the company by removing large numbers of investors who only have small sums invested in the stock.

Zip ruffles feathers with small share sales

The problem was this was an 'opt-out' program, rather than an 'opt-in' one. Zip itself stated in December that 69,669 out of 78,000 eligible small shareholders had not opted out of the program and thus had their shares sold.

According to a report from the ABC, there are more than a few would-be Zip shareholders who had their holdings stripped because they failed to opt-out. These investors are now feeling ripped off, given the subsequent Zip share price recovery.

One former shareholder told the ABC this:

I don't think there is any justifiable reason a small shareholding sale facility like this should ever be anything but OPT-IN… I think it's unethical to ever sell someone's shares without their explicit consent.

Making matters worse for these investors, Zip's management was heavily buying shares around the same time smaller investors were having their stock bought back. ASX filings show that Zip chair Diane Smith-Gander and board member Meredith Scott purchased 111,111 and 35,607 shares respectively on 28 September.

That's not something that many of Zip's smaller shareholders reportedly appreciated.

Another former Zip investor was quoted as stating:

In my opinion they should know that the timing of their share purchases don't look great, given they were executed two days before a prohibited trading period and six days before the announcement of the small shareholding sale facility…

From an optics perspective, I personally think they look terrible. However, in terms of timing the market, they couldn't have done better.

Of course, Zip hasn't done anything illegal here. The company is perfectly entitled to conduct a small shareholding sale facility. And its management is welcome to buy shares of their own company outside the restricted periods.

Zip itself told the ABC this:

It was an initiative that was a few months in the planning and… we had a very large register that was very costly to maintain… It [the small shareholding sale facility] was largely a cost-driven exercise. The directors have complied with the shareholding policy or the share purchasing policy of the company and again that was disclosed to market at that time.

But many of Zip's former shareholders have taken their complaints to the Australian Securities and Investments Commission (ASIC). ASIC's response didn't let Zip entirely off the hook:

ASIC has not observed any non-compliance but believes there is room for entities to more clearly articulate the action required by those identified as holding small shareholdings should they wish to retain their shares.

The Zip share price is up 4.97% today at 96 cents a share.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Zip Co. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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