Around a year and a half after Battle for control of Impregilo, the 20th of December will see the second true proxy vote involving an Italian large-cap company, Telecom Italia. In this case too, the dispute will centre on the dismissal of the Board of Directors, but it would appear that the similarities end there. Whilst at Impregilo, in fact, a shareholder holding 30% of the share capital was attempting to take control of the Board of Directors, in the case of Telecom Italia all the contenders would, paradoxically, appear to be content with securing a minority stake in the main governing body.
The background
The dismissal of the Board was requested by the major shareholder, Findim Group (5%), the financial company founded by Marco Fossati in 2006, following the sale of the family business, Star, to the Spanish firm Gallina Blanca. Fossati has frequently raised concerns about Telefónica’s conflicts of interest within Telecom Italia, ever since 2010, when the Spanish company acquired control of the Brazilian firm Vivo, a competitor of TIM Brasil.
In fact, Telecom Italia is effectively controlled by a financial vehicle, Telco SpA (22,39%), whose main shareholder is none other than Telefónica, alongside the Italian companies Generali, Intesa Sanpaolo and Mediobanca. In September, Telco’s shareholders reached an agreement whereby Telefonica increased its stake in Telco to 66% by subscribing to new non-voting shares. From 1 January 2014, however, Telefonica has the option to convert all its shares into voting shares, meaning that next year Telco’s shareholding structure could be as follows: Telefonica with 66%, Generali with 19.32%, Intesa Sanpaolo and Mediobanca each holding 7.34%. Furthermore, the agreements also provide that Telefónica may acquire 100% of Telco’s shares, thereby coming to hold 22.39% of Telecom Italia. Obviously, given the current competitive landscape, any further increase in Telefonica’s control – even indirect – over TIM Brasil will be subject to approval by the various Brazilian market authorities. Finally, Telefonica’s two most senior executives, the Chief Executive Officer, Cesar Izuel Alierta, and the Managing Director, Julio Linares Lopez, sit on Telecom Italia’s current Board of Directors. Although the rules of Telecom Italia’s Board of Directors provide for all the necessary procedures to manage conflicts of interest, these appear sufficiently obvious to justify the concerns of minority shareholders.
Further concerns then arose following the Company's latest operations, which increased doubts about the existence of conflicts of interest: the issuance of a convertible bond loan, through a procedure of accelerated book-building (8 November), and the sale of Telecom Argentina (14 November). Both transactions had received a negative vote from two independent Directors, Professors Lucia Calvosa and Luigi Zingales, and. Both are under investigation by Consob.. Regarding the convertible, the main dispute concerns the preferential treatment obtained by Telefonica on subscription. The dissenting shareholder also believes that the sale of the stake in Telecom Argentina took place too hastily and at suboptimal prices.
Fossati's plan
The request for the resignation of the Board of Directors was submitted by Fossati on 16 October (therefore before the two allegedly illicit operations). On 6 November, the same Fossati presented his own alternative plan for the Company in London, the main points of which are: the creation of solid partnerships with relevant international operators (for example with the Brazilian company GVT, part of the French Vivendi group), the issuance of convertible bonds for €2 billion, the sale of Telecom Italia Media and some real estate properties, the freezing of dividend payments for one year and the postponement of the potential sale of TIM Brasil to benefit from more favourable market conditions.
According to Findim's plan, the Company should be governed by a new Board of Directors, which would not include any executive components (no CEO) and whose Chairman would be an individual with solid international experience in the telecommunications sector, capable of supporting and guiding the Company's management.
In short, everything would appear to be unfolding according to the script of a normal battle for control of the Company: a dissident shareholder tries to gain control of the Board of Directors, to change the governance and implement their own strategic plan. Unfortunately, however, things are not that simple. Fossati, in fact, worried about a possible negative outcome at the meeting, does not present any candidate for the new Board, effectively giving up on gaining control of the Company.
The unusual proxy vote
Under Telecom Italia’s election procedure, 80% of the members of the Board of Directors are elected from the list of candidates that receives the highest number of votes, regardless of the actual number of votes received, whilst the remaining 20% are drawn from any other lists submitted. At the last election, in April 2011, there were three lists: the Telco list, which received the highest number of votes; the Fossati list; and a list endorsed by the funds coordinated by Assogestioni, which managed to secure all the votes of foreign institutional investors, and consequently all the directors reserved for ’minority“ shareholders. Stung by this experience, Fossati therefore chose not to risk a repeat and to support the Assogestioni list. And this is where all the complex issues surrounding the forthcoming shareholders” meeting arise:
- The 2011 assembly set the number of Directors at 15. In the absence of different proposals (which were not submitted), this number will not change.
- The two lists presented include only 10 candidates: 7 on Assogestioni's list, all strictly independent, and 3 on Telco's list, none independent and including the current Chief Executive Officer, Marco Patuano, and the Director General of Telefonica, both potentially removed by shareholders.
- According to Assogestioni’s internal procedures, their lists must always qualify as being “minority,” meaning candidates cannot gain control of the Board or obtain executive positions.
- The only shareholder able to table and secure the approval of a proposal put forward directly at the general meeting is Telco (22.4%), as shareholders voting by proxy (of whom approximately 20% of the share capital is represented by foreign asset managers) generally do not grant a blank proxy for proposals not published prior to the general meeting.
- If Telco does not propose reducing the number of Directors to 10, it will be necessary to appoint another 5, to reach the 15 decided by the previous shareholder meeting. The missing Directors can be appointed directly by the shareholder meeting, by simple majority on the proposal of the shareholders, or co-opted by the new Board once it is established.
- The only shareholder with the ability to integrate the Board of Directors directly in the assembly is always Telco, again for the matter of the delegations. Therefore, if this were to happen, the Board would be composed of 7 Directors appointed by Assogestioni and 8 by Telco, including the former Chief Executive Officer. According to press reports, this would indeed be the most probable scenario, given that Telco has called a board meeting for 19 December.. What, then, would change compared with the dismissed Board of Directors? There would certainly be more strictly independent directors (at least 47%), but who would oversee the highest management body? Having been removed by the shareholders, the former CEO could not resume the post, and in any case the majority of the Board would continue to be linked to Telco, with all the issues regarding conflicts of interest already listed. And would the new Board be able to implement Fossati’s alternative strategic plan, which would effectively have had the shareholders’ consent?
- If, on the other hand, Telco were to decide to propose reducing the number of board members to 10 (highly unlikely), the Board of Directors would consist of 70% independent members, with no executive directors. The majority of the members would then represent the funds coordinated by Assogestioni, thereby contravening their own guidelines. As there is no representative from Fossati, who will take charge of renewing the executive appointments and implementing the new strategic plan? According to certain statements made to the press, the Italian funds would have no intention of changing the company's management.
A Fossati list with 12 or 15 candidates would probably have simplified matters: the funds would probably have put forward the usual three candidates (as dictated by the 20% mechanism for “minorities”) and the battle would have been with Telco, which was unlikely to have re-nominated the Board that had just been removed by the general meeting. In any case, if a culprit is to be found, it is certainly, once again, the “list vote” as applied by many Italian companiesInstead of respecting the proportionality of the vote, the Articles of almost all listed companies provide for fixed numbers (generally, in fact, all Directors except one are elected by the “majority”). Had there been proportionality, Fossati might not have been afraid to nominate his own representative, who might even have succeeded in being elected.
The different analyst viewpoints
According to press reports, almost all of the largest proxy advisors They suggested voting in favour of the revocation. Frontis Governance and the ECGS network are the only ones to have gone against the grain, assessing the risks arising from the situation of uncertainty in the event of revocation as greater than the current clear conflicts of interest.
As is clear, Telecom Italia will not see a normal shareholder battle, let alone a normal election of the Board of Directors. The possible scenarios are numerous, too many, to be certain that the company's management can take the right direction to resolve the many problems that plague it. Telecom Italia still has excessive net debt (over €28 billion according to the interim financial statements as of 30 September 2013, equivalent to 1.4 times net equity) and operating results in the domestic market still appear unsatisfactory. The company has recently suffered downgrades from Moody's and Standard & Poor's, which consider it to be at a sub-investment level, or, to put it bluntly, “junk”. If we also consider the still turbulent context of the financial markets and the not exactly stable internal political situation, perhaps adding factors of uncertainty to the company's management may not be the best medicine. Of course, the concern remains strong that existing conflicts of interest could lead to decisions not benefiting minority shareholders. But perhaps, in such a context, the sub-optimal sale of TIM Brasil could even be the lesser evil.
The outcome of the dispute is still very much up in the air. The hope is that all concerns (both regarding the possible uncertainty created by the revocation and current conflicts of interest) will prove to be less realistic than they seem. On 20 December (but more likely at the start of the new year) we will finally know who was right.