26 August, 2015
Summary
• The recent Amcom / Vocus scheme of arrangement shone the spotlight on how new forms of shareholder communication (in that case online videos) can overcome retail shareholder inertia and generate action.
• While in that transaction the videos supported the target board’s position, they raise the question of how social media might be used in the future by parties opposing deals. For example, if the 2003 Xstrata/MIM scheme – perhaps the high water mark of headcount test proxy battles – was fought now – might social media make the difference and cause the headcount test to fail?
• The rules on shareholder communication by companies undertaking schemes of arrangement and in other proxy fight contexts were developed in an “old media” world. They pose hurdles for companies seeking to respond nimbly in the face of a social media attack. Companies will need to plan ahead to effectively fight a social media campaign with a lesser range of tools in their armoury than are available to social media campaigners.
Successful outcome in the Amcom / Vocus merger shows the power of social media
Amcom’s well-publicised campaign to gain shareholders’ support for its merger with Vocus by way of scheme of arrangement demonstrates the power of social media – overcoming the seemingly insurmountable 19.99% blocking stake held by TPG Telecom, with the deal ultimately being approved with 77.2% of votes in favour and 22.8% against.
A notable feature of Amcom’s campaign was its use of video messaging – involving its Chairman and a retail shareholder, who encouraged shareholders to support the deal in videos on Amcom’s website. After watching the videos, viewers could immediately click through to vote on the scheme.
This tactic helped to overcome one of the challenges in chasing votes from retail shareholders – transitioning them from ‘listening-mode’ into ‘action-mode’. In the past, between speaking to a shareholder on the phone and that shareholder lodging an actual vote, significant steps were required: finding the notice of meeting and proxy form, filling out the proxy form and sending it off. There has no doubt been many a slip twixt shareholder motivation and casting a vote. It can therefore be enormously powerful if a company can allow shareholders to vote on a scheme with little more effort than clicking to “like” a video on a social media site. As Maria Leftakis, Managing Director of GPS – a specialist firm in shareholder engagement and proxy strategies, notes, “getting the attention of shareholders through social media is one thing, getting an outcome is another”. Bridging this gap using online technologies could be revolutionary.
However, a logical extension of the success of these ‘online campaigns’ is that voting campaigns “against” board-supported schemes will also increasingly be fought through social media.
This could pose a new and greater challenge for companies and, over time, replace some of the more traditional forms of retail shareholder engagement on proxy battles, including advertising, shareholder telephone lines and ‘updates’ by mail. Email is already increasingly becoming the engagement form of choice and is being followed by use of social media and, critically, online voting capability.
The use of social media as a means of shareholder engagement in schemes of arrangement
How do social media or video messaging campaigns fit within the existing scheme of arrangement framework? The starting position is to obtain the Court’s blessing of the content and means of any pre-scheme-meeting shareholder communications. Market practice also supports obtaining the Court’s approval for the despatch of any ‘new’ or supplementary information provided to shareholders.
Although court approval for supplementary communications may not be a strict legal necessity, and indeed it appears not to have been sought Amcom for the online videos, this strategy involves some risk of challenge on disclosure grounds. It is open for scheme opponents to argue that, where the scheme meeting is to be convened in accordance with an order of the Court and the Court has approved the explanatory statement, the “Court-approved ‘message’ should not be interfered with by unilateral supplementation by the company”.1
If Court approval isn’t sought, the scheme company needs to be particularly careful that the content and form of the messaging doesn’t ‘taint’ the vote. There can be little harm in urging shareholders to vote but anything beyond this may jeopardise approval of the scheme at the final Court hearing.
Xstrata / MIM scheme – would social media have made a difference if the proxy battle was fought now?
Perhaps the most hard-fought headcount test in recent times was in Xstrata’s bid for MIM in 2003 – a year before the launch of Facebook and three years before Twitter emerged. This was a time when online voting was unheard of, instead the battle was fought by the bidder and its opponents through telephone information lines, advertising and the issue of various paper proxy forms. Even Queensland politicians promoted the anti-scheme message. Ultimately, despite this opposition, the headcount vote passed 58% to 42%, with more than 90% of shares voted in favour.
Some of the messaging in the MIM scheme could be uncannily resonant with retail shareholders in 2015: those who opposed the scheme argued that the bidder was opportunistically taking advantage of historically low commodity prices, and that shareholders would be better off sticking with MIM and waiting for a value uplift once commodity prices improved. It was a remarkably successful argument, even with the effort then required to crystallise a retail shareholder’s opposition into a vote, the opponents got the 'no' vote on the headcount as high as 42%. Might social media tools in the opponent’s armoury – particularly the ability to encourage “clickthrough” to an online voting facility on the spot, have made the difference?
How activists or dissenting shareholders could leverage social media in a scheme context
There is an inherent imbalance in stakeholders’ ability to harness communications in a scheme context. Both bidder and scheme company are answerable to the Court for the integrity of the scheme process, while others opposing the deal are only constrained by the need to not be misleading or deceptive. Further, it can be difficult for large listed companies to distil complex content into ‘sound bites’ and work through internal approvals, then potentially obtaining the Court’s approval. An opponent to a deal will likely be much more nimble than the bidder or target company can be in this context.
If a dissenting shareholder is generating traction disputing the merits of a transaction – perhaps on Twitter along with its own anti-deal website – it can be difficult for the target company, in countering the dissenter’s views, to stick with the message in the approved scheme materials. The instantaneous and abbreviated nature of the communication medium compounds this difficulty. The task only becomes more complex if the dissenter broadens the script outside the ambit of the scheme generally. Yet any slip-ups by the target company in responding could provide ammunition for a challenger at Court, with companies also needing to take particular care not to provide 'new' information within the 10 day period before the vote (noting ASIC’s policy position that target shareholders should generally be given at least 10 days to consider any supplementary disclosure before the vote.
The speed at which social media moves, and the additional ‘main stream’ media following it can generate – from stock analysts, business commentators and journalists – magnifies the potentially damaging reputational impact for companies and their directors. This plays into the dissenter’s hands; first prize for them is often to have their campaign picked up by the mainstream media – increasing traffic to, and the credibility of, their campaign.
In the US, a key focus of activist online activity has been to put a “human face” on the activists and to impress shareholders with their professionalism and analysis. Several corporate activists in the United States are professional outfits staffed by former investment bankers who present very credibly. If an MIM-type scenario was run today, circulating links with websites with videos from analysts and investment bank-style road show presentations may prove influential.
How should companies go on the offensive with social media?
Social media does present some opportunities for companies. A company which is up to speed on how to utilise social media and has its internal approval processes well-drilled, can reach a large body of shareholders quickly and effectively with little dollar spend. Companies can harness social media to 'build relationships, get their message out and build loyalty', Leftakis notes.
As we have seen increasingly in the past few years, listed companies would be wise to collect email addresses from shareholders and to be ready to engage with them as a matter of course. A company that is well-organised in this regard will have an advantage over activists or deal opponents, since the obligations in the Corporations Act to provide copies of its share register do not require the company to hand over email addresses.
Also, email can allow companies to connect with a large body of apathetic retail shareholders – helping ensure that the scheme headcount test is met. We understand the percentage of shareholders who vote on a typical scheme to be 25 – 30%. Even in the Amcom scheme, where the company had made an extraordinary effort to motivate shareholders to vote, only approximately 42% of shareholders (holding approximately 88% of shares) voted.
Leftakis suggests that 'companies should be aiming to control their digital messaging.' If the social media campaign morphs into engaging with a dissenting shareholder or opponent via social media, a bidder or target would do well to be fore-armed – perhaps with a Q&A in the scheme booklet – to try to give it enough pre-blessed latitude to respond quickly to any misinformation that emerges. Although the company faces risk in not having the Court endorse any additional communications it makes in advance, the risk is significantly mitigated if the company can respond using messaging from its pre-approved scheme booklet disclosure.
Another practical tip is for companies to know the composition of their shareholder base – for example, a defensive yield-play stock may have an older demographic who don’t engage in social media. Contrast this with an IT start-up, or even a large blue-chip, with a very broad shareholder base, where the level of engagement with social media is likely to be much higher.
Commentary
The high-level of shareholder engagement in the recent Amcom/Vocus deal demonstrates the potential for social media campaigns to be used in public M&A deals going forward. In Amcom it was used effectively by the target company to allow a deal to proceed despite a 19.9% dissenting shareholder. However, it’s not difficult to envisage a scenario where the opposite impact is felt and social media is used to defeat a deal, particularly by targeting the headcount test.
Companies that have an established mass of shareholders with whom they engage through email or other electronic means help to mitigate the risk of imbalance should this new front arise in the shareholder communications battleground.
Further detail
Further detail in relation to the Amcom/Vocus transaction are contained in the earlier articles ‘Bag of tricks extended in contest for control of Amcom' and ‘Amcom/Vocus – The Wash Up' which appeared, respectively, in our May and July 2015 editions of Mergers & Acquisitions Updates.
End Notes
1. Re Centro Retail Ltd and Centro MCS Manager Ltd in its capacity as responsible entity of the Centro Retail Trust [2011] NSWSC 1321 at [10] – [11].
For further information, please contact:
Rebecca Maslen-Stannage, Partner, Herbert Smith Freehills
rebecca.maslen-stannage@hsf.com
