8 August 2022
Mr. Ross Love,
As you know, I am Structural Monitoring System’s largest shareholder and the 100% owner of Drake Private Investments LLC, Drake Special Situations LLC and Drake Management (together “Drake”), so I read your “Letter from the Executive Chairman” from 04 August 2022 with great interest.
You open the Letter by questioning whether Drake owns greater than 5% of the shares and is even able to call an EGM. While you may be new to the company, it has long been known to the Board and public that I am the largest shareholder, as evidenced by disclosures in Structural Monitoring System’s own annual reports dating back years. For example, the 2021 Annual Report shows Drake as the only group listed in the “Substantial Shareholders” section on page 67. Given the fiscal year ended on June 30th, you were appointed on July 12th, the company filed its Appendix 4C & Quarterly Update on July 29th and you are required to sign the upcoming annual report for the period ending 30 June 2022, you should have received advanced copies of the upcoming report to review.
If, however, you have not, it is hardly a stretch to imagine that during your due diligence on the company you reviewed recent annual reports, all of which disclosed the Drake shareholding. Is due diligence on the Company’s largest shareholders not a high priority for any potential incoming executive chairperson? It also begs belief that, in the midst of a dispute over Board representation by way of a Notice of Requisition that preceded your appointment, Bryant Mclarty did not mention the Drake shareholding. Whether through Drake Special Situations (DSS) or Drake Private Investments (DPI), ultimate ownership of the CDIs resides with me and that has never changed. We fixed our filings to reflect the transfer from DSS to DPI as soon as we became aware this had not been updated properly. In fact, our initial Notice of Requisition dated 8 October 2021 was filed by “Drake Private Investments LLC (the Shareholder),” and the negotiations that led to the ouster of Toby Chandler and the appointment of Mr. Mclarty, regrettably, to the Board of Directors were consummated on the basis of Drake, by way of DPI, holding the shares. At no point in my conversations with you or anyone else at the Company has Drake’s status as SMS’s largest shareholder ever been questioned, and inferences otherwise in your Letter are misleading at best.
You continue in your Letter by taking the position that Drake’s Notice of Requisition dated 8 July 2022 does “not meet the basic and fundamental requirement of the Articles or the relevant United Kingdom statutory requirements” to call an EGM. Your argument that the Company is only obligated to recognize requisitions from registered shareholders and not ultimate owners of CDIs is, at the very least, an affront to the spirit of democracy enshrined in the company’s Articles as well as relevant UK and Australian regulatory requirements. Know that Drake is undertaking steps to address and mitigate this technical point, and it is now a question of “when” and not “if.”
The larger issue here is that you are willfully employing technical gimmicks to avoid letting shareholders have a say in the Board that governs the Company. With all that has come to light in public regarding the conduct and trustworthiness of your two principal supporters on the Board, plus other yet unverified information that has been volunteered to us over the last week from a range of people with whom we have spoken, the shareholders have a right to decide how they would like to be represented, and to do so as soon as possible.
You say that calling a general meeting to decide the Board composition is an “unnecessary wastage of Company resources” without giving any consideration to tradeoffs. The cost of calling a meeting is trivial relative to the destruction of economic value we believe will occur over the coming months should Mr. Mclarty and Mr. Wright be allowed to remain on the Board and vote on matters of strategy, management and fundraising. Board credibility is worth far more than the cost of administering a meeting. There is good reason why ASIC and ASX mandate the availability of the requisition process for shareholders controlling greater than 5%, and it is not your place to dismiss it, even if you believe that an EGM is not in the “company’s best interest.”
The exercise of calling an EGM would also give you the opportunity to speak with your investors and better understand their true concerns. Given your comments to us regarding the “desires of the Australian shareholders,” it is clear you are relying on anecdotal information supplied by Mr. Mclarty and Mr. Wright. If you took the time to speak to your shareholders, you would quickly find that a majority support the changes proposed on 8 July 2022.
Having held productive discussions with shareholders representing nearly 50% of the total shares outstanding of the Company, it has become clear that Mr. Mclarty and Mr. Wright have effectively no path to victory under almost any voting scenario, even 100% shareholder participation. This remains true of an AGM where, when Drake has participated, our votes have historically represented a near majority of votes cast. There is widespread discontent with members of the current Board and the way the Company is governed, which you would learn if you engaged in substantive conversations with as many shareholders as we have. When this vote is finally held, it will not be close as all four resolutions will be adopted, and the Board will change. We realize you may not like the idea of losing your two biggest champions, but we urge you to come to terms with it quickly and stop wasting time as well as legal resources on these fruitless efforts to obstruct the normal governance process.
Your request that shareholders give the Board the time to “review the current Board composition and publish its preferred Board matrix to establish where it needs additional expertise” is nothing more than an attempt to play for time. From our conversations, this Board has nowhere close to the support of a majority of shareholders and as a result is unfit to make these judgements. Most importantly, you make no mention in your Letter that, since 28 June 2022, Drake has repeatedly requested the Board honor the October 2021 Agreement and Board Resolution to make our nominee a director. This is a failure in governance, contract law and integrity that undermines any ongoing and future claims this Board feebly makes regarding its intention to do the right thing over coming months. If you had ever intended to do the right thing, you would have at the very least, put our resolution dated 5 July 2022 naming Andrew Roberto, my nominee, as the sixth director to a vote on 28 July 2022 as we formally asked. The failure to do so is inexcusable.
Your Letter also claims that the Company needs “a period of stability and informed and unbiased deliberation as to board composition, strategy and management.” Until your Update of August 1, Drake was prepared to drop its Notice of Requisition in return for the board seat we are entitled to under the October 2021 Agreement. As an ~18% shareholder, how can it not be fair and reasonable that Drake is one of six seats participating in this “unbiased deliberation”? If there is now a lack of stability, it is due to the actions of Mr. Mclarty, Mr. Wright and now, unfortunately, you as well. How could you not believe this blatant disregard for previous agreements and normal corporate governance would not create an attempt to enforce our rights?
Your silence on the fitness of Mr. Mclarty and Mr. Wright to serve on the Board is deafening. Any objective assessment of their recent behavior and performance of duties would disqualify them. In our view, there is no longer a place for either in providing input to, or voting on, decisions regarding the future of the Company. Both should do the honorable thing and immediately resign. Drake has stated publicly that “we do not consider that either Mr. Mclarty or Mr. Wright have the required degree of industry expertise or professional experience necessary to add value to SMS and its Board or governance processes.” Stock broking (Mclarty) and corporate secretarial services (Wright) are very far from what is required to help an aerospace technology company with its many challenges right now. Additionally, their wholesale disregard for our October 2021 Agreement, which they affirmed at the time, is utterly unacceptable. It shows that they cannot be trusted to abide by basic contractual agreements. Drake does not want them making any further decisions for the Company, a view widely held by virtually all of the shareholders with whom we have communicated.
Finally, I strongly disagree with your suggestion that we wait until the AGM to make changes to the Board. The Company is at a crossroad right now. We do not have time for this Board to deliberate and stall, with the outcome almost assuredly being more of the same. Decisions need to be made now. Key staff need to be retained. Those with real aerospace experience need to be consulted with and listened to immediately. How can this Board be trusted with the key functions you mention when it will not even honor its own agreements? How can we trust that there will be no more delaying and technical gimmickry related to calling the AGM in a normal, timely manner? You began your Letter by saying that “SMS is a great company.” Look at the performance of the share price. Cheerleading does not make something a reality. Structural Monitoring Systems can be great in the future but not without real, immediate, and lasting change. Enough is enough. SMS Shareholders deserve better than this. Call the meeting.
Drake Management & affiliates
For inquiries, please reach out to us at firstname.lastname@example.org or visit us at www.smsrequisition.com