Introduction
On 20 December, the shareholders of Italy’s leading telecommunications company, Telecom Italia, will be called upon to vote on the removal of all Board members. The meeting has been convened at the request of the relevant shareholder, Findim SA (5%), an investment vehicle set up by Mr Marco Fossati, who strongly objects to the clear conflicts of interest involving Telecom Italia’s major shareholder, Telco SpA (22.4%).
The background
Telco is a holding company established in 2007, with the sole purpose of acquiring a majority stake in Telecom Italia, which is currently owned by the Spanish telecommunications company Telefónica SA and by the Italian financial institutions Assicurazioni Generali SpA, Intesa Sanpaolo SpA and Mediobanca SpA. On 24 September 2013, Telefónica increased its stake in Telco by subscribing to new non-voting shares in Telco, which may be converted into voting shares from January 2014. Following the eventual conversion, Telefónica will control 66% of Telco’s voting share capital, Generali 19.32%, and Intesa Sanpaolo and Mediobanca 7.34% each. Under Telco’s shareholder agreement, Telefónica has an option to further increase its stake in Telco to 100%. The CEO of Telefónica, Mr Cesar Izuel Alierta, and the COO, Mr Julio Linares Lopez, have been members of Telecom Italia’s Board of Directors since 2007.
The two telecommunications companies are competitors in the Brazilian market, through Telecom Italia’s TIM Brazil and Telefónica’s Vivo. Consequently, Telefónica’s acquisition of effective control of Telecom Italia is subject to the approval of the Brazilian Antitrust Regulator (CADE), which recently informed Telefónica that any direct or indirect financial interests in TIM Brazil must be relinquished.
Mr. Fossati's reasons
The clear conflicts of interest of Telefónica in Telecom Italia have been strongly contested by Mr. Fossati starting from 2010, when Telefónica acquired control of the Brazilian Vivo. The growth of Telefónica’s holdings in Telco even strengthened Mr. Fossati’s concerns: Telecom Italia may be forced to quickly sell TIM Brazil at sub-optimal conditions, as he believes it already happened in November, when the Company sold all its holdings of Telecom Argentina to Fintech Group.
Serious concerns were also raised regarding the recent issue of mandatory convertible bonds reserved for qualified investors. On 7 November, the Board approved the issue of €1.3 billion of 6.125% convertible bonds, maturing in November 2016, which were fully allocated through an accelerated book-building process. The Company gave priority treatment in the allocation process to three institutions, including Telefónica, which subscribed to 7.9% of the issue. Two independent Board members (Ms Lucia Calvosa and Mr Luigi Zingales) opposed the issue, and the Italian Market Authority (Consob) has been investigating the procedures implemented by the Company, as well as the sale of Telecom Argentina.
In order to eliminate any possible conflicts of interest, the dissenting shareholder decided to ask for the removal of all Telecom Italia's Board members who were appointed by Telco (all Directors except the independent member Mr. Luigi Zingales, who was appointed by a group of fund managers). To strengthen his position, Mr. Fossati drafted an alternative strategic plan for Telecom Italia, which was presented to institutional investors on November 6th in London, and which is based on the following key points: to create partnerships with international operators (e.g. with Vivendi’s GVT in Brazil), to issue €2 billion convertible bonds, to sell the subsidiary Telecom Italia Media and some properties, to pay no dividends for one year and to defer the sale of TIM Brazil.
The unusual proxy fight
If the General Meeting on 20 December approves the removal of the current Board members, the new Directors shall be appointed from lists of nominees submitted by shareholders holding more than 1% of the share capital. In accordance with Telecom Italia’s articles of association, 80% of the Board members will be appointed from the list receiving the majority of votes, regardless of the actual number of votes cast, whilst the remaining 20% will be appointed from any other lists.
Only two slates of nominees have been put forward so far: one by major shareholder Telco (comprising 3 nominees) and another by a group of fund managers coordinated by the Italian association Assogestioni (comprising 7 nominees). Despite having requested the removal of the Board and having drafted a strategic plan for the Company, Mr. Fossati decided not to submit a list of candidates for the eventual renewal. As he believed the Assogestioni list would garner the large majority of institutional investor votes, Mr. Fossati deemed it more advantageous to support their candidates. However, under Assogestioni’s internal regulations, Directors appointed from their candidate lists cannot constitute the majority of the Board members and cannot hold executive positions within the Company. Furthermore, as stipulated in the Company’s bylaws, the Board can consist of a minimum of 7 up to a maximum of 19 members. The Meeting will determine the number of members based on any eventual shareholder proposals. Should no proposals be submitted to the Meeting, the number of Directors will remain unchanged at the current figure of 15 (as set by the AGM held in 2011). To date, neither Telco nor Assogestioni have proposed a number for Board members.
The peculiarity of this unusual proxy fight is that, should the Board be removed, neither of the contenders wishes to gain control of the Company. Assogestioni is unable to do so due to their internal regulations, and Telco because their representatives have been removed from the Board. All candidates put forward by Assogestioni are strictly independent of the Company (including the two current members, Ms. Calvosa and Mr. Zingales), while Telco's list includes the current CEO, Mr. Marco Patuano, and Telefonica's COO, Mr. Linares Lopez, both of whom were removed by the shareholders. Naturally, should their removal occur, Mr. Patuano shall not be vested with executive powers.
In the event of a removal, who will implement Mr. Fossati’s strategic plan? Who will manage the Company? And who will chair the Board? But the questions are even more basic: how many directors will be appointed? Assogestioni submitted 7 candidates, being sure that Telco had submitted 15 candidates, but this did not happen. Unless different proposals are submitted at the Meeting, all 10 nominees will be elected and 5 directors will be missing. Who will appoint the missing members? Telco is the only entity with the power to appoint them at the Meeting, through individual nominations, but does Telco really want to integrate the missing directors to re-gain control of the Board? In that case, nothing would really change, but a higher number of independent members would be elected. Nonetheless, Telco may decide to leave the responsibility to Mr. Fossati, who won the battle but has no representatives on the Board.
It should also be noted that even some of the subscribers of Assogestioni’s slate are not strictly independent from Telco’s shareholders: Eurizon and Fideuram are part of Intesa Sanpaolo’s group, Mediolanum and UniCredit’s Pioneer are linked to the shareholders’ agreement controlling Mediobanca.
Despite Mr. Fossati's concerns regarding Telefonica's blatant conflicts of interest being entirely understandable, the failure to put forward any candidates for the imminent renewal has created significant uncertainty in the event of the current Board members’ removal. Telecom Italia faces a very precarious situation: extremely high net debt (amounting to €28 billion, or 1.4 times shareholders' equity, according to the 3rd Quarter Report), weak operational performance in the domestic market, recent downgrades to sub-investment grade by both Moody's and Standard & Poor's, and a persistently turbulent political and financial climate in Italy. In such a delicate position, it is evident that the Company must strongly avoid any further uncertainty.
Several newspapers reported that both ISS and Glass Lewis recommended approving the removal of the Board. Although it supported Mr Fossati’s reasons, ECGS recommended (in proxy reports issued on 4 December) and continues to recommend opposition, as the concerns regarding the considerable uncertainty arising from the removal outweigh the risks of Telefónica’s conflicts of interest. Approximately 50% of the share capital is expected to vote at the Meeting, of which 22.4% is represented by Telco, 5% by Fossati’s Findim and approximately 23% by independent shareholders. Consequently, it is impossible to predict the outcome of the Meeting.
Ytterligare hinder för aktieägaromröstningen
The problems for shareholders are not limited to the decision whether to support Mr. Fossati or not, as great confusion was also created by Telecom Italia itself, that published inconsistent meeting material: the Notice of Meeting includes a different number of resolutions with respect to the proxy card published by the Company itself!
The Notice of Meeting includes 5 resolutions: 1) the removal of the Board, 2) the potential appointment of the new Board (should the removal be approved), 3) the potential integration of 2 Board members (should the removal be rejected), 4) the elimination of shares’ par value and 5) the share capital increase to facilitate the mandatory convertible bonds. If the removal is approved, shareholders will need to appoint the new Board members, having previously defined the number of members, their term of office, and their remuneration. Consequently, as per the Notice of Meeting, items 2 and 3 comprise bundled resolutions. However, these bundled resolutions are presented as unbundled items on the proxy card, which is also issued by the Company, and includes 9 items: 1) removal, 2) potential definition of the number of Directors, 3) potential definition of the term of office, 4) potential definition of remuneration, 5) potential election of the Board members, 6) potential appointment of one Board member, 7) potential appointment of the second Board member, 8) elimination of shares’ par value, 9) share capital increase.
The crazy situation also affected the major voting platform, which is based on the notifications received by the local custodians. Foreign institutional investors found 6 resolutions to be voted! While item 2 is still bundled, item 3 correctly allows shareholders to separately vote for the eventual appointment of each missing director.
At a time when proxy advisers’ activities are strongly criticised, it would be highly recommendable that national and supranational market authorities cast a glance at the correctness of the entire voting channel, which also involves issuers (and their advisers), custodians, voting platforms, and proxy agents.