Hancock Prospecting’s explanation for selling down to 15% of Fairfax suggests it is unlikely either to bid or sell down further in the short term.
Its stated reason was to clear an obstacle - arising from Fairfax’s directors and officers (D&O) insurance - stopping Gina Rinehart joining the board. For the time being, she appears focused on that rather than acquiring control through options such as making a full takeover offer. Hancock’s statement expressly denied “unsubstantiated rumours” that it is about to “make an offer”.
One factor that may make a takeover less attractive is New Zealand’s “upstream” takeover laws, which are relevant due to Fairfax’s 51% shareholding in Trade Me. Although Trade Me is listed on the ASX, it is New Zealand incorporated, meaning that it is governed by New Zealand (rather than Australian) takeover laws.
Under those laws, an “upstream” takeover of Fairfax would require a contemporaneous takeover offer for Trade Me unless an exemption is obtained from the NZ Takeovers Panel. Given the size and value of Fairfax’s stake, any exemption is quite likely to be conditional on the acquirer, either, causing Fairfax to sell down its stake in Trade Me to 20% or less within 6 months, or making a “follow on” downstream bid for the remaining 49% of Trade Me.
Both these alternatives may be unattractive. Gina Rinehart has already expressed concerns about Fairfax’s recent partial sell down of its stake in Trade Me. And a bid for the remainder of Trade Me would significantly increase the cost of acquiring Fairfax, given Trade Me’s market capitalisation is not much less than Fairfax’s.
This would not be an issue if Trade Me was an Australian company. In comparison with the New Zealand requirements, Australian takeover law is much less likely to require a downstream bid, provided the upstream company is listed on ASX or an ASIC-approved foreign stock exchange. That was why no offer needed to be made to Leighton shareholders when control of its holding company, Frankfurt-listed HOCHTIEF, was acquired by ACS in 2011.
The New Zealand requirements provide good reason for Gina Rinehart to avoid acquiring “effective” control of Fairfax and seek instead to exercise influence through a large shareholding and representation on the board.
As it happens, the influence conferred by a 15% to 20% shareholder has probably been increased recently, albeit unintentionally, by the new “two-strikes” rules.
These reforms were proposed by the Productivity Commission to strengthen the non-binding vote on remuneration reports. Under the provisions, a resolution requiring a board spill must be put if, at two successive AGMs, 25% of votes cast are against adoption of the remuneration report.
The holder of a 20% stake can single-handedly trigger a “strike” if 80% of the shares or less are voted - as is often the case. With a 15% stake, support from other shareholders is needed if more than 60% of the shares are voted. The Productivity Commission found that 54% was the median percentage of shares voted for an ASX200 company. In Fairfax’s case, given the attention it has attracted, a high percentage is to be expected.
Curious, isn’t it – the things that affect control. The Trade Me stake has a “defensive” effect for Fairfax, whereas reforms aimed at a different purpose altogether arguably shift the balance in the other direction.