'Glencore in serious breach of shareholder protection principles' says The Investment Association
Glencore's actions fell well short of the standards expected by institutional investors says the Investment Association and the NAPF
On Tuesday night Glencore completed a US $2.5bn equity placing. They raised 9.99% of the share capital, for cash. Shareholder pre-emption rights, a core shareholder protection, were disapplied, contrary to the company's unequivocal commitment made in May 2015.
The Investment Association and the National Association of Pension Funds (NAPF) note that 22% of the issue was allocated to employee shareholders of Glencore, while their members, who represent the savings of millions of individuals, enjoyed no such choice.
At Glencore's AGM in May, when gaining shareholder approval for the ability to issue up to 10% of the share capital, the Board stated that it intended to adhere to the provisions in the Pre-emption Group's Statement of Principles (the "Principles"). However, in the placing announcement issued on 15 September, the Board stated that it had reconsidered that promise and had not upheld the Principles. This followed the announcement of 7 September that the company needed to reduce net debt and increase its financial strength.
Whilst shareholders generally recognise that the company needed to strengthen its balance sheet, the use of the authority in this manner is a serious and unnecessary breach of the Principles. Most importantly, there is no evidence of any suitable consultation with existing shareholders. This sets a very damaging precedent for market practices.
Pre-emption rights are a vital shareholder protection. The Investment Association, the NAPF and their members regard the Principles as a critical mechanism for safeguarding shareholder interests. The Associations have asked The Investor Forum to facilitate a dialogue between the company and its shareholders to ensure that shareholders' views are represented and lessons learned so that the Principles are upheld in the future.
As recently as March 2015, the Principles were revised to accommodate, subject to shareholder consultation, a more flexible approach to the disapplication of pre-emption rights. The process brought together all key capital market participants to reach a durable solution. Glencore's actions fell well short of the standards expected by institutional investors, agreed under the Principles and embraced by the company as recently as May of this year.
