showdown looms, page-19

May 19 2014 John Addis

Shareholders gagged by ASX rules
shareholders to think like owners of a business is one of the great tenets of value investing. And, by and large, it's a good rule of thumb. The problems start when management, which should represent owners' interests, go native.
If you've ever wondered how the CEOs of the stocks in which you invest are paid such huge sums, there's your answer.
Company executives, along with politicians, are in the unusual position of being able to set their own pay. It's a temptation many fail to resist. That's how money that should end up in shareholders' pockets is re-directed to line the pockets of those they employ.
The ASX's two-strikes rule addresses this problem. If 25 per cent of shareholders reject two consecutive remuneration reports, the board can be dumped if 50 per cent of votes support the motion. The ASX should be commended for the introduction of this shareholder-empowering rule.
But there are other areas where managers can behave in ways not necessarily in the interests of their shareholders without constraint. The case of Roc Oil's proposed 'merger of equals' with Horizon Oil is but the most recent example.
The deal proposes that Horizon shareholders will receive Roc shares in exchange for tipping their assets into the combined group. Horizon's existing shareholders will control 58% of the combined entity and Roc shareholders the remainder. In essence, Roc is bringing the cash, Horizon the assets.
But here's the strange part: Whilst ASX rules permit shareholders to spill the board over executive pay, when it comes to whether they want to become minor shareholders in a deal like this, they're totally gagged. The board is free to do as it sees fit, without consultation.
There's an odd inconsistency here. If Roc Oil wanted to raise cash via a share issue for more than 15% of its market capitalisation, it would need shareholder approval. But more than doubling the shares on issue in a scrip merger like this? No problem chaps, move along. Next!
The ASX should require a vote on such 'company transforming' initiatives not just because it's the right and proper thing to do but also because the alternatives for shareholders are expensive and time consuming.
Simon Marais of fund manager Allan Gray Limited represents about 19% of Roc Oil shareholders through a stake worth almost $70m. By comparison, Roc's board collectively has under $800,000 invested in Roc shares. And yet the board can run off and do whatever deal it likes without seeking his approval.
Roc chairman Mike Harding has referred to the merger as a 'cracking deal', which is presumably why the board has already signed a binding agreement to proceed. Under current rules this is entirely legal and permissible. But Simon Marais disagrees and the gloves are off in a very public and bitter battle.
Marais first considered a board spill, an approach he's used successfully in the past at PaperlinX and APN, but has now called for an emergency general meeting to change the company's constitution.
If approved – such a change requires a 75% majority – the board would be unable to issue new shares in excess of 30% of the existing share base without a shareholder vote.
Shareholders should think very carefully about this vote because Roc's history in deals like this is anything but glorious.
In 2008, the company executed a mostly scrip acquisition of Anzon Australia and Anzon Energy, resulting in a doubling of the shares on issue. A shareholder vote, despite much lobbying of the company by Intelligent Investor staff, was rejected.
The deal ended up as a full-blown, Hail Mary disaster. Anzon's equity cost Roc Oil in the vicinity of $500m worth of Roc shares (at the time of the merger). It raised a further $95m in 2009, much of which was spent developing Anzon's main asset, which was supposed to hold 27m barrels of oil.
That figure turned out to be a little bit wrong. In 2011, the proven and probable reserves were slashed to 3-5m barrels and the field was sold a few months ago for $1m, plus a possible contingent consideration of up to $5m. Yep, inspiring stuff.
Had shareholders had their say beforehand, this disaster could have been averted. So who could possibly blame Marais for forcing the issue now?
The fact is he shouldn't have to. The ASX listing rules need to be changed. No board should be able to execute a deal like this, whether it appears beneficial or not, without shareholder approval.
John Addis is a Director of Intelligent Investor Share Advisor (AFSL 282288). To unlock all of Share Advisor's stock research and 23 current buy recommendations, take out a 15-day free membership.


Read more: http://www.smh.com.au/business/comment-and-analysis/shareholders-gagged-by-asx-rules-20140519-38j32.html#ixzz32gVjx9tb