When Xstrata Plc (XTA) shareholders decide whether to approve Glencore International Plc (GLEN)’s sweetened $32 billion offer, they will face an array of ballot choices that would confuse even a Washington policy wonk.
The vote on the year’s biggest takeover, expected in mid- November, will offer shareholders an unprecedented three ballots with 27 different voting combinations. The structure reflects the difficulty in achieving the deal, announced in February, which drew investor criticism on the price and retention packages the companies first agreed to. While investors will get the chance to vote on both the merger and retention bonuses for more than 70 managers totaling 144 million pounds ($233 million), the issue may have been needlessly complicated.
“If you just have a single vote to choose one winner, that tends to encourage sincere voting,” said Steven Brams, a game theorist and political scientist at New York University who has specialized in so-called approval voting. “Here you have the retention package on all three ballots. The more complicated you make the votes, the more manipulable it is.”
The balloting structure proposed by Xstrata, the world’s largest exporter of thermal coal, to recommend Glencore’s offer came after at least two weeks of consultations with large institutional shareholders including BlackRock Inc. (BLK:US), placing the fate of the deal in Xstrata shareholders’ hands, said a person familiar with the situation.
The deal was almost derailed by investor demands for improved terms and opposition to the bonuses aimed at retaining key Xstrata executives.
Qatar’s sovereign wealth fund, which owns 12 percent of Xstrata and is the largest shareholder behind 34 percent-owner Glencore, opposed the commodities trader’s initial offer of 2.8 shares, even after Xstrata’s board had recommended it.
In a dramatic 11th-hour move, Baar, Switzerland-based Glencore on Sept. 7 raised its all-stock offer to save the transaction. Glencore also proposed that its Chief Executive Officer Ivan Glasenberg eventually lead the enlarged company in place of Xstrata CEO Mick Davis, who was originally slated to remain at the helm.
Now, Glencore, the world’s largest publicly traded commodities supplier, and Zug, Switzerland-based Xstrata say the deal to create the world’s fourth-largest mining company is on track to be completed by the end of the year.
With the first two votes, the balloting will give investors the option of approving the takeover on the condition that the retention payments to managers are also passed -- or, of approving the deal provided the bonus package is rejected, in back-to-back votes.
“The votes are designed to facilitate the deal,” said Jeff Largey, an analyst at Macquarie Group Ltd. (MQG) in London. “By separating the issues, Glencore and Xstrata are forcing investors to decide whether they support the deal at all.”
The so-called scheme of arrangement between Glencore and Xstrata, which the companies describe as a merger of equals, is the first major deal in the U.K. to adopt such a voting structure. When used in takeovers, normal schemes of arrangement are simply agreements on friendly bids, which are then taken to court for approval.
The split-vote structure “is certainly not something practitioners recognize as a normal scheme,” said Adrian Clark, a takeover specialist at the law firm Ashurst LLP in London. “There’s not usually a lot of technical innovation around schemes.”
When Xstrata shareholders vote, either of the two proposals would require the support of investors representing at least 75 percent of the company’s shares by value -- as well as a simple majority of shareholders by number.
This is intended to block a scenario in which a few large investors pass the deal over the opposition of many more smaller shareholders.
While the three-vote format seems to allow shareholders to support the deal and object to the retention packages, the process is actually more complex.
“When you have three ballots with two different sets of rules, that can lead to strategic, insincere voting,” Brams said. “It would have been better to answer the retention question with a first ballot, and then have a vote on the merger on the second ballot. This would have clarified what the voters were choosing on the final vote.”
While a simple voting structure would have made shareholders’ decisions easier, a complex one may clear a path for Xstrata to get what they want, according to James Morrow, professor of political science at the University of Michigan.
“This is a clever parliamentary maneuver that will allow a few shareholders who support the management payout to block the second ballot, which needs a supermajority,” Morrow said. “Then on the third vote, they can say: If you kill the retention package, you kill the merger.”
Glencore is barred from voting its shares under U.K. takeover rules governing schemes of arrangement.
For the first two votes to approve the merger, shareholders have nine possible combinations of checking “yes” or “no,” or leaving the ballot blank.
The first ballot is to approve the merger only if the management payout is approved. The second is to approve the merger only if the management payout is rejected.
Those who support the deal irrespective of management retention packages can vote “yes” on both counts. Those who oppose the deal can vote “no” twice. They can also vote for one proposal and against the other, depending on whether or not they believe Xstrata managers are worth the payout.
“On one side, you have the Qataris, who want a higher exchange ratio, and on the other, you have investors like BlackRock who have a policy against paying so much as a retention package,” said Paul Gait, an analyst at Sanford C. Bernstein in London.
A separate, third vote on the retention package only requires a simple majority of Xstrata shareholders’ approval.
If the first and third votes win approval, then the deal goes through with the retention package. If the second vote wins approval and the third fails, then the deal goes through without the pay package. If only the first vote wins approval without the retention package passing, or if the second and third votes pass, the deal will lapse.
Should that happen, Glencore will have to wait three months before it returns with another offer recommended by Xstrata’s board, or 12 months before it makes a hostile approach, according to U.K. Takeover Panel rules.
Those rules, at least, are easy enough to understand.
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