Shareholders Disputes – When shareholders go to war

Shareholder disputes can waste executive time, squander scarce cash resources and leave your business rudderless. If you are really unlucky, they can put you out of a job.

While colourful French entrepreneur Nicholas Miguet was rallying investors to oust the board of Eurotunnel, across the Channel, Spanish architect Jose-Luis Ripoll was quietly ringing round old ladies in Sussex and other shareholders of London-quoted architectural, design and engineering group Aukett to bring about a similar coup. There was nothing like the same hullabaloo and financially rather less was at stake than the £6.4 billion owed to the banks by the Channel Tunnel operator with millions of vanishing Eurostar passengers.

But in both cases the outcome was the same. Shareholders were persuaded the future of the company was at stake — and the incumbent bosses had to walk the plank.

Theirs was the fate which befell Press baron Lord Black of Crossharbour, the Napoleonic ex-chairman of Telegraph Newspapers and Jerusalem Post owner Hollinger International, who had to relinquish the top seat amid claims and counter-claims over the use of funds within his complex corporate empire. If John Radziwill and Duncan Soukup of Bermuda-based ‘vulture fund’ Acquisitor Holdings have had their way, the same fate will also soon have befallen Bijan Khezri and David Weaver, chairman and chief executive respectively of fallen dotcom star Baltimore Technologies.

A recent corporate struggle at apparently-grounded ex-high flier PNC Telecom had the opposite result. The company’s founder, ex-chief executive and largest single shareholder Geremy Thomas has come back to the helm, after winning a court fight to take the loss-making company out of administration and overturn an order to return any remaining funds to shareholders.

Shareholders disputes are a part of corporate life

Battles between groups of shareholders with different interests or views on strategies and assets are a recurrent feature of corporate life. Investment bankers, fund managers and City lawyers recall with nostalgia the great fee-generating running battles of yesteryear, when Tiny Rowland battled with Mohammed Fayed for control of Harrods-owning House of Fraser and Sir Charles and Rocco Forte fought Sir Hugh Wontner for control of the Savoy hotel group.

In some cases, as with Hollinger, shareholder disputes hinge on the corporate stewardship of the incumbent regime. The perennial issue of “fat cat” boardroom remuneration packages recently provoked some unavailing shareholder anger and action at advertising colossus WPP and elsewhere.

Members of institutional shareholder bodies, such as the National Association of Pension Funds, the Association of British Insurers or the more politically-minded PIRC, weigh in from time to time on corporate governance issues. Over the years these have prompted a succession of pious reports, from Cadbury and Greenbury to Myners and Higgs.

A boost to the share price?

The juiciest shareholder battles, however, are often genuine power struggles and the prospect of a good dust-up can sometimes liven up a quoted company’s share price. This is especially true if it is likely to provoke a bid from a discontented shareholder or group of shareholders, or galvanise an incumbent board to offer a sweetener, such as a big pay-out hike, to keep shareholders loyal.

A battle between shareholders can force the company’s management, advisers and outside groups to study it with a new intensity, to see whether more could be made of its potential. If this process leads to rival bids or significant internal changes, it should enhance the company’s value.

But that is far from always, or even most often the outcome. Eurotunnel’s shares fell on the realisation that the new regime had few concrete plans, except to request massive new subsidies from the French and British governments, which were not keen to pay them.

The senior management’s time and expense involved in waging a prolonged shareholder dispute can have a damaging effect on a company’s performance and prospects. Shareholders in private, unquoted companies with stakes of less than 50 per cent have little power, except where they have some pre-agreed rights or face motions requiring, say, 75 per cent assent.

Acquisitions can bring a cuckoo into your nest

Ripoll had nearly 15 per cent of Aukett, a stake he acquired when the British company took over his architectural practice, Imagina, for shares some years ago. He was supported by former Aukett directors, Andrew Lett (ex-chairman), Robert Warner, Gerry Deighton and John Thake, in a concert party with a combined 24 per cent holding.

The Imagina deal had not been a success. Aukett had taken a £465,000 loss last year on disposing of its investment — which wiped out last year’s £308,000 pre-tax profit, itself down from 2002’s £2.1 million profit.

Managing director Geoffrey Harwood and his fellow directors blamed the previous regime’s red-ink legacy on over-ambitious European expansion, whose consequences they claimed to have repaired only by extensive restructuring. Ripoll says he felt Harwood was trying to ‘disengage’ Aukett from Europe and had tried unsuccessfully to dissuade him at board meetings and on the eve of the annual shareholders’ meeting.

Rebuffed, Ripoll and his friends called a special meeting, claiming Aukett now had ‘no strategy’ and offered to see any shareholder to argue their case. ‘We did not like the way it was structured,’ says Ripoll, ‘with a whole bunch of subsidiaries and a strategy of running projects from London.’

Their tactics worked. Harwood and co were voted out of office, though Harwood still works for the company.

Ripoll has been appointed chairman and chief executive. Sympathisers with the ousted board say ‘the people who took Aukett into Europe and nearly busted it have chucked out the people who rescued it.’

They point out that Aimshot, Aukett’s only institutional shareholder, supported Harwood, who had been with the company since 1979, and his team. They maintain the European push, of which Imagina was the prime component, cost the company dear both in money and staff morale.

Ripoll’s supporters, however, hail a victory for ‘shareholder democracy’. Insisting not all the European offices lost money, Ripoll says the plan now is for an integrated European network serving European clients and points to contract wins the week after the coup as evidence the shareholder fight had not taken management’s eye off the ball.

As yet, the outcome is far from being a victory for shareholders’ wallets. Aukett’s shares were recently trading at 4.75p, 2p off their 12-month peak, though nearly twice last year’s nadir but below their 5p level two years ago.

How the old guard can make a comeback

PNC Telecoms, once a darling of the mobile telecommunications sector with a speciality in numbering services, enjoyed a market value of nearly £150 million in its turn-of-the-century heyday. Today, it is a cash shell, with an AIM value of £1.9 million and £1 million in the bank, after a long legal battle by Geremy Thomas, founder and 18 per cent shareholder, to prevent the company from being wound up.

Once chaired by the abrasive Lord Stevens, ex-boss of the Invesco investment group and Express Newspapers, PNC had been seen as a sure winner in the mobile phone retail market, but over-ambition and over-capacity in the market put paid to these dreams. The shares moved from AIM to the Full List and reached 240p, before ignominiously returning to the junior market amid losses at one point heading towards £10 million a year.

Suppliers had threatened to withdraw credit and PNC’s share price plummeted to below 2p. Despite the efforts of its new chairman John Peet and Ian Gray, founder of the Society of Turnaround Specialists who had replaced the controversial Darren Ridge as chief executive, the company went intro administration last year.

All this happened after Thomas had resigned in early 2001, following the board’s decision to reject a £14 million offer from him for half the business. Thomas later opposed putting the company into administration and mounted a challenge in the High Court.

Earlier this year, Justice Peter Smith freed PNC from administration, censuring accountant Numerica for withholding information provided by the company’s credit committee (chaired by Thomas), which could have ended the administration last October. The board resigned — after, as Thomas bitterly commented, spending £350,000 of PNC’s money fighting him in the courts ‘for no apparent reason’.

Back in the saddle as ‘an additional director’, Thomas argued that, despite his earlier offer to refinance the business, the vanquished board had instead sold key assets to another company, Vanguard, and later put PNC into administration. He indicated that he was considering legal action against the company’s advisers.

Now, with the ball back in his court, Thomas says ‘what has happened is a sorry tale. We are left with just a cash shell, but the quote has been restored and I am looking at ways of rebuilding shareholder value.’

The company has had ‘several approaches’ from groups with ideas about how to spend its cash. One strong possibility is that PNC could do a deal with Talk Me Through It (TMTI), a new help-line company offering technical advice to mobile phone users. Conveniently enough, TMTI was itself launched by Geremy Thomas and his brother Crispin. ‘to give advice where the networks no longer want to’.

For outside investors, the battle over PNC has lifted the shares from last summer’s 1.37p low to nearly 4p, after an uptick to 7.5p. Having plucked the company from administration, Thomas now has to show he can obtain a more rewarding future than the old plan of dishing out its remaining cash to shareholders and bringing down the curtain.

An opportunistic outsider can stir the pot

Another fallen star whose incumbent directors fought a long battle to resist a campaign mounted by significant dissident shareholders is Baltimore Technologies. This company briefly made it into the FTSE 100 share index in the 1990s as an internet security specialist with a £5.5 billion market tag.

But, after a series of disasters, by the beginning of 2004 it had become a shell, with £24 million cash and a £23 million stockmarket value. That was the bait which encouraged Acquisitor Holdings, an AIM-quoted ‘vulture fund’ based in Bermuda, to build up a 13 per cent stake and propose the removal of the incumbent board.

Radziwill, Acquisitor’s chairman, and his deputy Duncan Soukup pointed to Baltimore’s past record of disastrous acquisitions. They did not omit to note that these had happened during a period when the company’s present chairman Bijan Khezri, was one of those making the decisions, which saw losses hit £660 million in 2001.

Baltimore, whose shares once traded above £8 in the late 1990s before collapsing all the way to 20p last year, argued it had plugged its losses, after turning 2002’s £65 million deficit into a £7.3 million loss last year, and now had a credible strategy for rebuilding its fortunes. This was based on moving into the business of providing ‘clean energy solutions’.

To put this strategy into practice, Baltimore recruited David Weaver, former European head of oil giant BP’s gas, power and renewables division, as chief executive. The company accused Acquisitor of sheer opportunism, spending £3 million on its Baltimore stake to use it as a lever for control of £24 million cash and with no practical proposals of its own, except making vague and undescribed takeovers of its own.

Acquisitor riposted that it could not be too specific unless and until it had access to full information about Baltimore’s internal condition. Radziwill and Soukup said Acquisitor would use most of the £24 million to repay shareholders (including Acquisitor) and use Baltimore’s past tax losses to fund a modest acquisition.

But Acquisitor based its case principally on the question of management credibility. It claimed the incumbent regime had destroyed £5 billion of shareholder value by recklessness, citing as an example its acquisition of Content Technology for a price which was 30 times that company’s annual revenues and 129 times its book value.

Soukup argued that the new plan for clean energy was a pipe dream. This, he insisted, was a big company game, heavily dependent on playing the European Union grants system and other imponderables.

Acquisitor suggested even Weaver’s BP experience might not be worth all that much, maintaining the division he headed there saw operating profits fall 85 per cent to £20 million between 2000 and 2003. Soukup claimed it was not even worth winding up Baltimore, because of long-term liabilities on its property leases.

The dispute saw Baltimore’s shares rally to 42.5p, more than twice their all-time low but still a small fraction of earlier levels. Acquisitor would attribute this to its attempt to oust the board, which for its part would argue, perhaps somewhat less convincingly, that it was due to its own efforts in pulling the company through its troubles.

Corporate chess in the property game

Property companies can sometimes provide the setting for prolonged shareholder battles for control of the assets they hold. The early months of this year brought the conclusion to just such a power struggle at London-based business centre specialist Grosvenor Land.

Aggressive investor Andrew Perloff set the ball rolling with a hostile bid from his Panther Securities vehicle. Perloff initially sought to have AIM-listed Grosvenor’s directors removed and replaced by himself and his son.

When this ploy failed, he sought to acquire Oakburn Properties, which had a key 29.3 per cent stake in Grosvenor. To strengthen the status quo, Grosvenor’s managing director Douglas Blausten had issued new shares to his brother-in-law, raising the board’s holding in the company to 41 per cent.

The Blaustens followed this by teaming up with Terrace Hill, an AIM-listed property developer, and launching a successful counter-bid for Oakburn. Glasgow-based Terrace Hill, itself the product of a merger of chairman Robert Adair’s Westview company with the Capital Tech group, absorbed Grosvenor Land in a £6.2 million deal and managing director Ross Macdonald waxed enthusiastic about the combined group’s chances of doubling its asset value to £100 million.

Tactful telecom tactics

If you want to avoid the pain and distraction of lengthy shareholder disputes, entrepreneur Simon Slater-Thomas has two pieces of advice. First, ‘you should not ride roughshod over major shareholders’.

When he floated telecoms specialist Redstone in the late 1990s, the move came after two to three years of blunt-spoken discussions at board meetings and other occasions. Slater-Thomas describes these as ‘grown-up discussions, rather than disagreements’, and he realised that, ‘once the conditions are right, you must act fast’.

Soon after Redstone was floated, Slater-Thomas left in early 2000 to pursue other interests, only to see the new management embark on a near-fatal takeover spree which drained the company of cash.

He returned as chairman and arranged a £25 million emergency funding on inevitably punitive terms. Redstone is faring better now and Slater-Thomas has no remaining interest, but he has taken a second lesson with him to his current vehicle, Reality Telecom, which he is grooming for a potential float.

The lesson is: you can minimise the risk of shareholder conflicts by keeping an unassailable majority holding. ‘Reality Telecom has one big shareholder – me, and about fifty smaller ones.

‘When we raised our first money, I spelt out our strategy to investors. And, while I take their views into account, I can make the decisions very fast.’

Move early to forestall conflict

However, not every entrepreneur is in a position to retain a commanding shareholding and raise the finance the business needs. Keith Richards of accountant Kingston Smith, who has advised on setting up and floating many companies, argues, ‘ideally, you want to draft a shareholders’ agreement from the earliest possible moment.’

This would set out agreed goals and strategies. Richards says ‘such agreements can provide ways of resolving potential shareholder disputes, such as putting in place put or call options to enable a dissatisfied shareholder to be bought out.’

Sponsors of a company planning to float will often insist on a lock-in deal, obliging key holders not to sell their stakes in the market for a set period, though they could realise their holdings through a vendor placing. ‘A big minority shareholder at odds with your objectives can make things very difficult and so you need a management team in place and the ability to replace him or her with a supportive corporate investor.’

This can sometimes be easier said than done. That is why it is crucial to prepare as early as possible to minimise the risk of shareholder battles that can eat up a company’s time, cash and sense of direction.

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