LAST month’s article discussed the importance of ensuring that the perceptions held by a company’s board of directors of the value inherent in the company were aligned with the perceptions held by the shareholders.
The article examined this point in the context of PEP’s hostile takeover offer for Spotless Group Limited.
An important factor in the success of PEP’s offer for Spotless was, arguably, the role played by Simon Marais’s Orbis Investment Management. Orbis was both a supporter of PEP’s bid and an intermediary between PEP and the Spotless board.
The significant influence that active fund managers can have on board deliberations was evident again in the events that led to Echo Entertainment Group Limited announcing that its chairman John Story (pictured) had resigned from the Echo board.
In this instance, it is interesting to note the role played by Perpetual Limited in the matter.
Attack on Echo
The announcement by Echo on June 8 that Story had resigned as a director followed a sustained media blitz by James Packer’s Crown Limited. The placement of full page advertisements in newspapers around the country came in conjunction with a request by Crown for an extraordinary general meeting of Echo’s shareholders to remove Story as a director and chair of the board, and appoint Crown’s choice, Jeff Kennett, to the Echo board.
Packer’s main claim against Story, as contained in a letter from Crown to other Echo shareholders and published in the newspaper advertising, was that under Story’s leadership, Echo had significantly underperformed. Crown also claimed that Story had failed to manage Echo’s regulatory risk and key relationships with government authorities.
It was not clear from Echo’s public announcements what was discussed at the board meeting before the surprise resignation. But noting that directors do not have the power to remove fellow directors who have been appointed by shareholders, it appears that a “vote of confidence" was taken which resulted in Story’s resignation.
Packer’s tactics were not entirely new to the Australian market and were reminiscent of Solomon Lew’s 2002 newspaper and telemarketing campaign for the contested Coles Myer board seats.
What is interesting in this case is the relative short time it took for Packer’s campaign to be successful.
Rules of governance
While it appears that Story was of the view that his removal was a matter that should be considered by Echo’s shareholders, the company’s board took the view that the on-going disruption caused by Packer’s campaign was damaging to Echo and not in the best interests of shareholders.
Acting in ‘best interests’ is fundamental for any director It remains to be seen what Packer’s ultimate intention is for Crown’s holding in Echo.
Similarly, only time will tell whether Story’s resignation proves to be in the best interests of Echo’s shareholders.
But in both the Spotless and Echo examples, each board ultimately took the view that prolonged engagement/resistance was not in the best interests of the company and its shareholders.
In these circumstances, it is important to remember that the fundamental obligation of directors when exercising their powers or discharging their responsibilities, is that they must do so in good faith and in the best interest of the company.
A determination as to whether something is in the best interests of the company will be largely fact specific.
However, it is important for directors to remember that this obligation is primarily owed to the company as a commercial entity, and not necessarily its shareholders.
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