Regulation of Proxy Advisors – Our View
What is the issue?
In Australia, any organisation providing research that investors might use to buy and sell securities is rightly subject to regulation. There is a public interest in establishing minimum acceptable standards for investment research, so that securities markets are not unduly influenced by conflicts, shoddy practices and provider insolvency. Proxy advice, particularly where it impacts on the market for corporate control, falls squarely within this regulatory regime.
OM obtained an Australian Financial Services Licence (AFSL No: 423168) at inception because we knew that our analysis would be used by our wholesale investor clients as part of their investment decision making process. We satisfied the Australian Securities and Investments Commission (ASIC) of our solvency and competence to produce financial and governance research for sophisticated clients. We abide by ASIC’s Regulatory Guide 79, the same guidelines which govern research quality and conflicts of interest for all sell side researchers, independent experts and investment banks. OM supports this approach and abides by the law.
We are perplexed by recurrent calls about the urgent need to “regulate” proxy advisors in Australia, when there is a perfectly adequate regulatory regime already in place. Any firm providing voting recommendations on the full gamut of shareholder meetings is subject to the same standards that apply to all licenced investment research.
Continual demands to regulate proxy advisor practice by the Australian Institute of Company Directors, numerous corporate lawyers and associated shills, is the simple derivative of a failed campaign led by the extreme right wing of the US corporate lobby against the US proxy advisory industry.
In OM’s view it is misguided and contrived to transplant a uniquely US conflict to the Australian environment. Notwithstanding the presence in Australia of two large US-domiciled proxy advisors, Australia is different because:
· The AFSL system is already a perfectly adequate regulatory regime;
· There is a more competitive market for domestic proxy advice than offshore; and
· Most sophisticated investors apply a commercial filter to their voting decisions rather than a ‘back office’ approach which follows advisory recommendations.
Unlike the US, in Australia there is no compulsion for any wholesale investor to vote their securities. No one is forced to buy proxy research. If research is not of good quality then a provider ought not to expect their work to have much influence or commercial success.
OM’s experience is that research quality is kept high by the expectations of clients, not by regulatory oversight.
We believe that our approach to engaging with issuers regularly and without limitation or charge, employing only skilled and educated staff onshore, and providing copies of our proxy analysis to issuers without charge is the right way to go.
However we defend our competitors’ rights to do things differently. We are untroubled that there is a market for badly prepared proxy research, so long as there is no compulsion to follow it. Provided that there is a free and competitive market for proxy advice, good research will prevail over bad. Wholesale investors are capable of identifying quality research, regulators do not need to do it for them.
The existing regulatory regime already addresses the corporate lobby’s constant peenging about proxy advice. An AFSL could be cancelled if:
· Error-ridden reports were published that misled investors
· Quality fell below the minimum standard as a result of failing to meet issuers, or
· Conflicts of interest unduly impacted on research recommendations.
OM doesn’t believe that there is any need to establish a “Code of Conduct” for proxy advisors in Australia. The AFSL regime is enough. Behavioural codes generally favour incumbents and provide additional barriers to entry to new market players who may not have the resources to compete with practices stipulated. In particular we oppose demands by companies to receive our reports 48 hours before publication for “fact checking”. Not only would this propose a higher operating standard (and cost) on proxy research than any other form of investment research, this approach is unnecessarily censorious and an unwarranted intrusion of the rights of private citizens to contract with each other for the provision of a legal service.
We suspect the complaints made by many corporates about the poor quality and practices of some proxy advisors are really complaints about shareholders having followed their recommendations. Whilst those issuers who believe their shareholders are poorly served are welcome to refer them to OM, we don’t think that the State has a role in regulating voting behaviour. In a free market each actor bears the consequences of their own decisions: sophisticated investors should be free to make their own mistakes.
Corporate Voting – improving the voting system
What is the issue?
Australian law devolves a lot of authority to directors of public companies but some powers are rightly reserved for shareholders. Owners of a company get to vote on a range of important issues spanning remuneration, capital raisings, director elections, takeovers and constitutional matters.
Just as in politics, voting integrity matters because investors need to have confidence that, where they do have voting rights, their collective intentions are accurately captured and implemented.
The current voting system for listed companies in Australia is unwieldy and in need of reform, as was outlined in this 2012 report we prepared for ACSI: ‘Institutional Proxy Voting in Australia’. We uncovered evidence of miscounted votes, timing issues with voting entitlements, manual processes, lack of transparency and the absence of an audit trail.
A wide coalition of investors, including the Financial Services Council endorsed the need for change to protect investors’ rights in a Parliamentary Joint Commission inquiry which touched on this issue.
In response to investor submissions advocating a record date 5 days before the AGM, the Parliamentary Joint Committee on Corporations and Financial Services concluded in Recommendation 13: “The government should consult with industry on amending the record cut-off date.” Almost a decade later, very little has changed.
In many cases, the whole proxy debate is irrelevant, because many resolutions in large ASX companies are still passed by a ‘show of hands’ of those in attendance (frequently less than 1% of shareholders) rather than calling a ‘poll’ where all proxies submitted are formally counted.
There needs to be a range of transparency improvements, which would be facilitated by compulsory electronic voting and the adoption of SWIFT as the common proxy voting messaging system on the investor side. Technology can facilitate the development of a full audit trail for contested situations, which we currently don’t have. This would also assist with reforms such as electronic confirmation notices to institutional investors (or their agents) when votes have been processed. If all Australian state and federal political elections are conducted by independent electoral authorities, shouldn’t Australian investors at least be able to appoint an independent scrutineer, as occurs in the UK?
There are as many as 9 different players involved in the public company voting process – ASX, company, share registry, fund manager, custodian, sub-custodian, voting agent, proxy adviser and beneficial owner. And with a minimum notice period of just 28 days for public company shareholder meetings, the reconciliation process is currently too intensive given that instructions are received before the final eligibility to vote is determined on the ‘record date’, usually 48 hours before the meeting. Much of the pressure on system participants – and scope for errors – would be alleviated if the record date was brought forward to 5 business days before the AGM rather than the current requirement of “no more than 48 hours”. Most other jurisdictions have much earlier record dates and Australian political elections close the roll weeks before polling day. Such a reform has been previously recommended by CAMAC and a Parliamentary committee, but there has been no movement.
The principle of excluding conflicted votes on resolutions – such as executives voting on their remuneration or placement recipients refreshing placement capacity – is a good one but market practice appears to be inconsistent, particularly in relation to exclusions for investors who have themselves participated in selective capital raisings.
Our research for the 2012 ACSI report identified a wide range of practices and we revealed that exclusions on capital raisings are sometimes not observed by either the company, the beneficial owner or some of the other players in the voting chain.
Given such evidence, it would make sense for companies to be required to disclose the total number of excluded votes on each resolution in their reporting to the ASX.
There is one area in the voting system where less transparency is required, namely the ability for companies to issue tracing notices under section 672A(1) of the Corporations Act which compels investors to disclose how they voted their stock. This chapter 6 provision was originally designed to help companies identify potentially hostile shareholders building a stake, not delve into voting decisions. Given that issuers can act punitively against investors in areas such as allocations in capital raisings, the sanctity of the secret ballot should be preserved for institutional investors who choose not to publically disclose their voting practices.
- Bring the record date for voting entitlement forward to 5 business days before the scheduled meeting rather than the existing two day deadline.
- Embrace modern technology through electronic voting which creates a data base that enables an independent audit of the outcome if required.
- Empower shareholders representing more than 5% of issued capital to appoint an independent scrutineer to oversee the voting process and counting in a contested election.
- Compel the voting on resolutions at all listed company shareholder meetings to be conducted by way of poll rather than a show of hands to ensure all legitimate votes are counted.
- Standardise the application of vote exclusions on capital raisings and require issuers to disclose the total amount of excluded shares on each resolution.
- Require issuers to electronically acknowledge that the votes of shareholders have been processed or discarded and confirm to major institutional shareholders what proportion of the final results their votes represented.
- Remove the ability of companies to issue tracing notices to institutional investors requiring disclosure of how they voted at individual shareholder meetings.
After initially announcing it had narrowly incurred a first strike, the company issued tracing notices to all institutional shareholders which establishment one custodian had double counted the votes of two beneficial owners.
Emeco then commissioned an independent scrutineer to validate that a remuneration strike had instead been narrowly avoided.
Why shouldn’t shareholders be able to commission an independent scrutineer as well?
The remuneration report attracted 327.8 million proxies in favour and 110.05 million against, representing 24.3% of directed proxies. There was an additional 10 million undirected proxies but neither the chairman or any shareholder present called a poll, so the resolution was formally passed on a show of hands.
The Australian Shareholders’ Association intended to vote undirected proxies against and expressed regret at not calling a poll, instead its votes weren’t counted. Compulsory polls would prevent this from happening again.
Making capital raisings fair, efficient and transparent
What is the issue?
Australia has a relatively laissez faire system when it comes to capital raisings which has aided capital formation, but is subject to abuse. Our system has proven highly lucrative for advisers and under-writers (refer ownership-matters-research-paper/media/Ownership-Matters-research-paper.pdf” target=”_blank”>ownership-matters-research-paper) but also led to substantial dilution and value leakage for shareholders.
The first point to observe is that the opportunity to participate in a capital raising is a valuable right. However this right can easily be rendered worthless where directors exercise their discretion to issue shares in ways that dilute existing owners through placements or non-renounceable entitlement offers. Wherever possible, capital raisings should be pro-rata and respect the pre-emptive rights of owners. Owners should be given the opportunity to ‘renounce’ their entitlement to buy shares in companies they own by selling their rights on the open market.
The $100 billion of capital raisings in the 2008 and 2009 GFC period featured many placements and non-renounceable offers which helped issuers raise capital quickly but were often regarded as unfair to incumbent investors.
The lack of disclosure about who was issued these placed shares remains a problem today. Why not require public disclosure of any recipient of shares in a non pro-rata offer?
Prospectus requirements have subsequently been loosened since the GFC but should be abandoned altogether in order to encourage more pro-rata renounceable offers to be conducted in an efficient and timely manner.
The emergence of the PAITREO (Pro-rata Accelerated Institutional with Tradeable Retail Entitlement Offer) –(refer ownership-matters-research-paper/media/Ownership-Matters-research-paper.pdf” target=”_blank”>ownership-matters-research-paper) – has balanced the desire for speed of raising with fairness and should be further encouraged. However, over the past two years the likes of ANZ, Slater and Gordon and Cardno have failed to follow the lead of issuers like JB Hi Fi, Origin, NAB, CBA and AGL which have conducted PAITREOs when raising capital.
There are still too many selective placements, frequently at a discount to the prevailing share price, which often lack transparency.
As it stands, a company is able to place 15% of its issued capital to a non-shareholder without shareholder approval. There is no limit to the discount that can be applied. This would be unthinkable in the UK, which has the world’s most robust culture and regulations respecting pre-emptive rights of owners (refer Pre-emptive Group Guidelines UK: Disapplying Pre-emption Rights).
A notable example of the Australian system from 2013 was when Alumina placed 15% of it issued capital to the state-owned Chinese investor CITIC, raising $452 million at $1.235 a share. The independent shareholders did not get a say in the transaction which introduced CITIC as the largest shareholder, putting it in the box seat to block any future third party bid for Alumina.
The rules are even looser for companies outside the ASX300 which are able to place up to 25% of the company’s capital provided there has been prior shareholder approval for the additional 10%. However, some of the same major shareholders pre-approving this additional 10% are also likely to benefit from the change.
Another problem with the current system relates to the disclosure of under-writing fees, which appear excessive for the risk being taken. The full costs of capital raising are often not explicitly disclosed (refer ACSI discussion paper: Underwriting of rights issues) and it was disturbing to see costs actually rise (refer ownership-matters-research-paper) in the post-GFC period.
Shorter time-frames, the removal of prospectus requirements and encouragement of directors to market test pricing, potentially from alternative providers to conventional investment banks, are all avenues through which value leakage from capital raisings could be reduced.
To make capital raisings with pre-emptive rights more attractive, all requirements to produce prospectuses for entitlement offers should be abandoned, instead relying on the continuous disclosure regime and cleansing notices to inform investors.
Disclosure of the participants of capital raisings done in a non-pro rata basis after the allocations have been made.
Increased disclosure of capital raising fees to encourage reduced costs. Total fees to be paid should be disclosed when the raising is first announced, and also captured later in the appendix 3B ASX announcement (including for placements).
Prior shareholder approval for placements required where there are top-up rights, allocations of more than 10% of a company to a single shareholder or allocations to existing members already holding more than 20% of an issuer.
Abolish the additional 10% placement capacity for companies outside the ASX300.
The ASX listing rules should require directors to contemporaneously announce these details to the market when unveiling a capital raising:
- “If not, why not” on a renounceable rights issue
- Total fees to be paid to third parties under the proposed offer
- The basis of pricing;
- Any related party involvement and whether or not this was done at arms length
- Allocation policy and specifically whether existing members will be given priority
Chinese state-owned investor CITIC was placed 15% of Alumina at a marginal premium of $1.235 in 2014 when it would have been preferable for CITIC to buy these shares on market and then have a pro-rata raising to all shareholders.
$350 million non-renounceable 5-for-13 entitlement offer at 38c in 2013 saw retail investors squeezed out of 3.88% of the company, which was picked up by the 3 foreign airline shareholders (Singapore Airlines, Etihad and Air New Zealand) which under-wrote the offer.
Executive chairman and largest shareholder Gerry Harvey personally under-wrote a heavily discounted a 1-for-25 $120.7 million non-renounceable entitlement offer at $2.50 in late 2014 when the stock was trading at $3.71.
Almost 70% of the company’s 12,000 retail shareholders declined to take up the offer and weren’t compensated for their rights. This could not have happened with a PAITREO.
ASX capital raising result announcement
Private equity firm Crescent Capital initiated two heavily discounted entitlement offers after securing board control in 2015. The first was a 1-for-2.75 offer at $1 to raise $78 million when the stock was previously trading at $2.35. Crescent partially under-wrote the offer and lifted its stake from 39% to 43%.
The second was a non-renounceable 1-for-1.07 offer at 40c which Crescent again partially under-wrote, lifting its voting stake to 46.71% (see change of interest announcement here). Non-participating shareholders have not been compensated for their rights.
Use of derivatives in the market for corporate control
What is the issue?
Australia has a relatively good system for regulating the market for corporate control. Minorities, with some noticeable exceptions, are generally protected by a system which usually generates an equitable control premium for all shareholders.
The 20% takeover threshold, combined with the 3% creep provision every six months, make it difficult for a predator to get control of its takeover target without making a full bid.
One ongoing flaw in the system is the increasing use of derivatives to subvert the disclosure regime around substantial shareholding when control is in play. Ironically, control transactions, especially when a “blocking stake” under 20% is involved, are precisely when the value of substantial shareholding disclosure is greatest.
Properly administered, the Australian rules dictate that any shareholder that acquires more than 5% of a company’s shares (or any subsequent 1% increment) should make a disclosure to the ASX within 2 business days of purchase. The intention is that the regularity of the disclosure informs the market that an acquirer may be acquiring a blocking stake or a material parcel in anticipation of a full bid. Sellers can make an informed assessment if they are being adequately compensated for the control implications of selling or lending into an open market where a substantial shareholder is actively acquisitive.
What should be a simple regime has been made complex by the emergence of ‘swap’ transactions which means the rules are very easy to side-step. Substantial shareholders are not required to disclose anything if they hold an interest in a ‘swap’ – an instrument that guarantees payment to a third party that has acquired shares on its behalf, if that shareholder ‘elects’ to receive them. So instead of telling the market that you have acquired 10%, you simply go to a couple of investment banks and get them to acquire 5% each pursuant to a ‘swap’ and the market is none the wiser! Once upon a time this behaviour was regarded as ‘warehousing’ but the involvement of the transaction industry, notably investment banks, has institutionalised this loophole to the extent that it is now regarded as commonplace and ‘savvy’ behaviour.
The history of this goes back to BHP Billiton’s 2005 acquisition of WMC Resources, when it launched a counter-bid to Xstrata’s offer but had already emerged with a 4.3% exposure through an arrangement with Deutsche Bank, its corporate advisor on the deal.
The UK regulators sorted out this issue a decade ago by declaring that exposures through derivatives must be disclosed with each 1% change of interest. Australia has a higher 5% threshold for the initial disclosure but isn’t mandating disclosure of derivative exposures above this level.
Unlike UK regulators, Australia is yet to act and we think it is beyond time.
The purchase of ordinary shares is harder to conceal because targets can issue tracing notices, as Brambles famously did to Asciano in August 2007, prompting this unusual ASX announcement by Brambles.
In light of this embarrassment for Asciano, you can understand the attraction of dealing through a third party investment bank to retain the element of surprise and lower the average cost of entry, but such tactics mitigate against a fully informed market.
The derivative arrangements with investment banks are opaque and difficult to regulate. There may be conflicts of interest where banking conglomerates with corporate advisory relationships either take principal positions or deal with clients as brokers, prime brokers or facilitate the ‘acquisition’ of shares pursuant to the swap via securities lending transactions. The delivery of ‘borrowed’ shares under swap transactions is becoming increasingly frequent in Australia when control is at stake.
Why should a selling or lending institution receive a lower price than others in the market for corporate control, just because the derivative arrangement allowed the predator to remain invisible to the market?
We believe that Australia should adopt a version of the UK rules such that any interest under a derivative arrangement should be added to shares already owned.
If the combined interest is greater than 5% (and any subsequent 1% interest), timely disclosure should be made.
BHP & WMC Resources
BHP Billiton launches $9.2 billion cash bid for WMC Resources, disclosing that it already has a 4.3%exposure through an arrangement with its corporate advisor on the transaction, Deutsche Bank.
Bruce Gordon & Ten Network
Shortly after achieving board representation, Bruce Gordon, the largest shareholder in Ten Network Holdings increased his holding through a derivative arrangement with Deutsche Bank which the substantial shareholder notice observed didn’t technically need to be declared.
Dexus & CPA
Dexus emerged with a 14.9% blocking stake in CPA through a derivative arrangement with Deutsche Bank (involving borrowed securities) just one day after the Commonwealth Bank announced its intention to exit the property management business.
Crown & The Star
Crown announced it had secured 10% of Echo through an arrangement with Deutsche Bank (involving borrowed securities) at the same time as it launched a proposed joint development of a new casino at Barangaroo.
Related Party Transactions – why not best practice in Australia?
What is the issue?
Australia likes to think of itself as a sophisticated jurisdiction when it comes to corporate governance, but the lax treatment of related party transactions for listed companies, suggests we have a long way to go.
There are two broad antidotes to avoid abusive related party transactions: systematic and timely disclosure and independent shareholder approval for deals with associated entities or individuals.
Whilst major related party transactions in Australia – think News Corp’s $2.5 billion Queensland Press acquisition from the Murdoch family in 2004 and Seven Network’s $2 billion Westrac acquisition from controlling shareholder Kerry Stokes in 2010 – did go to an independent shareholder vote, we think there are far too many scenarios where shareholders are either not informed or given a vote.
Let’s start with the issue of new shares to a related party. If a major supplier or joint venture partner to an ASX listed company is not represented on the board, it can be issued with up to 15% of the company’s shares at a substantial discount without shareholder approval. Similarly, a substantial holder above the 20% takeover threshold can be selectively issued with 3% of additional stock every 6 months under the so called “creep” provisions, without being considered a related party. EZ Corp relied on an exemption to the Listing Rules governing related party approvals [link to 10.3], which carves out the issuance of shares for cash, when it received a placement at Cash Converters in 2010.
Even when a substantial shareholder is on the board with control, there are limited restrictions on increasing their stake when capital raisings take place. Harvey Norman executive chairman Gerry Harvey increased his stake in 2014 by under-writing a discounted non-renounceable entitlement offer which about 70% of retail shareholders declined to take up.
The US has world’s best practice for disclosure of any benefits paid to relatives of directors or senior management, such as hiring the chairman’s son.
Australia is lagging in this area. Investors only learnt that two children of then Rio Tinto CEO Sam Walsh were employed by the mining company through a newspaper article in 2015 and ABC Learning CEO Eddie Groves approved large payments to his brother in law, Frank Zullo, without disclosure or shareholder approval.
When it comes to triggers for shareholder votes on related party transactions, Australia is lagging.
For instance, shareholders in Macquarie Atlas Roads have not been asked to approve more than $200 million in fees paid to its manager and largest shareholder, Macquarie Group, since the arrangement was first put into place in 2010. Specific approval of such related dealings would be required in other jurisdictions such as Hong Kong and Singapore.
Australia also provides a carve out for related party revenue transactions deemed to be in the “ordinary course of business”. This is why Coca Cola Amatil shareholders were not asked to approve $811 million (see p104 of annual report) Coca Cola Amatil Annual Report worth of purchases in 2015 from its US parent and 29.2% shareholder, The Coca Cola Company.
What would be lost from an annual approval of such arrangements, as would be required in China?
Australia should aspire for world’s best practice in terms of disclosure and shareholder approval of related party transactions and these are the changes we’d like to see:
- Annual approval of revenue transactions with a related party worth more than 5% of revenue, market capitalisation or net assets.
- Independent shareholder approval for any non pro-rata issue of shares to a director, substantial shareholder or associated party.
- US-style disclosure of any payments to relatives of directors, senior executives and substantial shareholders, including the quantum and nature of the payment and the service rendered.
- Shareholder approval for any asset sales or acquisitions to a related party involving cash payments worth more than 5% of market capitalisation or net assets.
Rupert Murdoch and his fellow directors agreed to buy Elisabeth Murdoch’s production company – Shine Group – for more than $700 million in cash in 2011 and neither NYSE or ASX listing rules required shareholder approval.
Founder, substantial shareholder and CEO Eddie Groves awarded numerous construction and maintenance contracts for childcare centres to companies controlled by his brother in law, Frank Zullo, but disclosure was limited and none of these payments were ever approved by shareholders.
The three executive directors – John Kirby, Robert Kirby and Graham Burke – have controversially voted their combined 42% stake in favour of the remuneration report since 2004. However, in 2015, Robert’s son Clark Kirby signed a statutory declaration claiming not to be associated with his father. This allowed the chief operating officer to be issued Village Roadshow incentive shares valued at $2.1m without shareholder approval.
After agreeing to pay Metcash $283 million in 2015 for its auto business, Burson launched a $217 million entitlement offer. CEO Darryl Abotomey spent just over $2 million taking up his entitlement but this was funded by a company loan which was not approved by shareholders.
Reverse takeovers – what about the shareholders?
What is the issue?
The key protection against dilution for a shareholder in an ASX company is the rule that prevents more than 15% of new shares being issued in any 12 month period. So should an issuer be able to buy a more valuable competitor by issuing an unlimited amount of scrip without seeking shareholder approval? We don’t think so, but this has happened all too often in the Australian market.
We see this as an issue of property rights – why should the economic interest in the property you own (a share) be fundamentally transformed by a “merger” with a third party at a price that you and a majority of other owners don’t agree with?
Many jurisdictions, including the UK and South Africa, give both sets of shareholders a say in major transactions, including on the very specific situation of this note: all scrip mergers.
However, Australian law and the ASX listing rules only requires approval from the company nominally being taken over (usually by way of a scheme of arrangement) even when the situation is effectively a reverse takeover because it is much smaller than the prey.
This has created a loophole for clever players in the market for corporate control who can choose which set of shareholders get to vote, regardless of the number of new shares being issued. Surprise, surprise, it is often the shareholders who are giving too much value away who don’t get to vote.
This wouldn’t matter so much if a capital base was only being expanded by 15% (the current limit) through the issue of new shares, but under Australian law there is no limit to the amount of new shares which can be issued as part of a takeover without shareholder approval.
This whole situation could be fixed by a quick amendment to the ASX listing rules or some legislative changes to the Corporations Act to bring our listing rules into line with those in London, Singapore and Hong Kong at a minimum.
The revised rules should mandate that no company can issue a quantum of new shares representing more than 25% of its issued capital, net assets, market capitalisation, revenue or profits in in a merger transaction unless it first has shareholder approval for the transaction.
The market for corporate control hasn’t stopped in other jurisdictions that have similar protections and it won’t here either.
Oxiana Resources & Zinifex
Think back to the merger between Oxiana Resources and Zinifex in 2008, which was billed as a ‘merger of equals’ transaction because each set of shareholders would own precisely 50% of the combined company.
However, Oxiana shareholders were less likely to approve a transaction which would see its popular CEO Owen Hegarty replaced, so it was decided that Oxiana was the acquirer meaning that only Zinifex shareholders got to vote. They supported the deal with more than 99% of voted shares in favour.
Rather than creating Australia’s 3rd biggest mining house with a market capitalisation of $12 billion, the renamed OZ Minerals almost went broke in 2009. All this could have been avoided if Oxiana shareholders had been able to vote the deal down.
Australian shareholders get to approve even the smallest issue of new shares to a director, yet the current law can theoretically exempt shareholders from approving a 100-fold increase in a company’s total issued capital in what is effectively a reverse takeover.
Roc Oil & Horizon Energy
Perhaps the best recent example of this was when Roc Oil and Horizon Energy proposed merging in 2014. Roc was deemed the less valuable merger partner with just 42% of the stock in the new entity, but it was also the nominated acquirer which denied its shareholders a vote.
In a rare example of institutional direct action, the late fund manager Simon Marais from Allan Gray called an EGM and proposed a constitutional change at Roc Oil so that it could not issue more than 30% of its stock in a merger transaction without shareholder approval.
The resolution was supported by 46% of voted shares, falling short of the 75% super-majority required but sending a powerful message that shareholders want their rights protected in these reverse takeover situations.
Skilled Group & Programmed Maintenance Services
The same issue also arose when Skilled Group was nominally bought by the smaller Programmed Maintenance Services in 2015.
Programmed shareholders only ended up with 47% of the combined company and its share price under-performed after the deal was announced, suggesting it had offered Skilled a sweet deal, which was overwhelmingly endorsed by its shareholders.
Federation Centres & Novion Property Group
This was repeated with the 2015 merger between Federation Centres (the old Centro Retail) and Novion Property Group.
Federation Centres was the nominated predator (Federation centres shareholders only owned 36% of the combined group) snapped up a much larger rival so its shareholders didn’t get a vote. Surprise, surprise, Federation Centres under-performed on the market after the deal was announced, suggesting its shareholders, many of whom were smaller retail investors, got the worst of the deal.