May 26, 2014 8:13 pm

UK capital raising powers trigger investor protests

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One in five of the UK’s largest public companies are facing investor protests over powers to raise funds without seeking approval from shareholders.

Analysis by the Financial Times shows that at their most recent annual meetings, 23 of the FTSE 100 index of blue-chip groups had 10 per cent or more votes cast against the resolution allowing the companies to raise capital in this way.

Shareholder protest

Shareholder protest
Votes against by company

And in two companies – EasyJet and Meggitt – the combination of votes against and withheld meant that the resolution was supported by less than 60 per cent of the shareholder base.

At EasyJet, Sir Stelios Haji-Ioannou, the group’s founder, and other family members own almost 36 per cent of the shares. The airline company, which often suffers sizeable revolts, declined to comment.

Meggitt said 62 per cent of FTSE 100 companies had proposed the same resolution and that in its own case, votes representing 65 per cent of its shares had been in favour.

But corporate governance experts noted that the vast majority of resolutions receive votes in favour of 98 per cent or more.

“The context for annual meeting resolutions is that generally they are voted on by shareholders who have chosen to invest in the company and support the management,” said Paul Hewitt, European business development manager at Manifest, the proxy voting agency.

“If opposition goes up as high as one-third on what should be a routine matter, the company should take it seriously.”

The average for negative votes on similar resolutions is just 3.5 per cent among FTSE 350 companies in this year’s annual meeting season so far.

Protest Votes

The FTSE 100 companies with the biggest protest votes on resolutions giving directors power to allot shares See below

Many of the companies said that in taking the powers they were just following guidelines from the Association of British Insurers, which represents some of the UK’s biggest investors.

According to its best practice guidance, companies should be able to sell new shares worth up to two-thirds of the existing capital without holding a special shareholder meeting.

It said that most major institutional shareholders did not see the capital raising powers as “problematic”; and cited other shareholder protections that came into play.

The ABI relaxed its approach to give companies more leeway late in 2008 after some bank capital raisings ran into trouble because the process took so long.

Even though the worst of the financial crisis has passed and companies said they did not expect to have to use the power now, they said it was still helpful to be able to act swiftly if required. The new shares could be used for employee share schemes, for example, or for acquisitions.

Prudential said it ensured the board “has the strategic flexibility to manage the group’s balance sheet effectively”.

Experian acknowledged that the extent of corporate discretion made some shareholders uncomfortable. “We understand . . . that some of them [our investors] felt that the level of two-thirds of total share capital was too high, where the circumstances in which the purpose for which it would be used were unknown,” it said.

For other companies, overseas investors were a source of opposition. Several of the groups with above-average dissent have some North American or South African shareholders.

British-American Tobacco said overseas investors might be less familiar with the concept of this capital raising power, while energy group SSE said the 19 per cent of votes cast against the resolution at its last meeting came primarily from a few US institutional investors, to whom it has since explained the purpose in more detail.

Kingfisher, the retail group, also said some proxy voting agencies advised clients to vote against these resolutions because they think the company should seek shareholder approval.

“This is the case with the Glass Lewis advisory service which some big North American funds follow,” it said, “[and] Kingfisher has quite a big North American shareholder base.

Experian has been most responsive to shareholder concerns. The data analytics group is altering its policy, and at its next annual meeting will ask shareholders to approve a capital raising limit of just one-third.

But several companies were clear they would not change. Mr Hewitt warned that groups which simply pointed to the ABI seal of approval were doing what they often criticised investors for doing.

“If companies are to expect shareholders to apply company-specific considerations in their voting – so they are not just ticking boxes – they must equally accept that sometimes complying with guidelines like the ABI’s will not be enough to ensure a smooth ride,” he said. “The leeway has to work both ways.”

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