A reminder of the importance of shareholder engagement: the failed Xref scheme

In brief

From the outset, SEEK’s best and final proposal to acquire Xref for 21.8c per share under a scheme of arrangement looked like it would sail through - a significant offer price premium, unanimous board recommendation, a positive independent expert conclusion (above the value range), no rival bidder and the emergence of arbitrage funds on the Xref register.

However, the proposal failed. Only 67.6% of the votes cast were in favour of SEEK’s proposal at the scheme meeting, falling short of the requisite 75% threshold.

This is a rare outcome in our market. It raises the question of what exactly led to this result?

This article explores the importance of shareholder engagement in the lead up to scheme meetings, especially where a large number of shareholders have not voiced support for the transaction.

Shareholder engagement to encourage proxy votes and shareholder support

SEEK’s proposal at 21.8c per Xref share represented a 61% premium to Xref’s undisturbed share price. This is usually regarded as a very attractive premium which, all things being equal, could be expected to be enough to sway the necessary number of Xref shareholders.

The first public sign that things may not be going so well appears to have been on the morning of the scheme meeting.

The release of proxy results revealed that 23.88% of the votes were against the scheme. In addition, Xref also announced that “a large number of discretionary votes have been directed to a person other than the Chair” and such votes were “material to determining the outcome of the Scheme”. These discretionary votes represented 13.47% of the votes.

This proxy information must have raised doubts about a successful shareholder vote at the meeting.

What about voter turnout? At the deadline for receipt of proxy appointments, Xref had received proxies from only 77 out of approximately 1,464 shareholders. That is low, but the total shares represented were approximately 75.2% of Xref’s issued shares, which is a strong voter turnout for a scheme meeting.

At the scheme meeting, a few more shareholders participated. Votes were received from 87 Xref shareholders, with total votes cast representing approximately 75.8% of Xref’s issued share capital. In addition, abstained votes at the meeting represented approximately 5% of Xref’s issued share capital.

Had Xref secured these votes, and encouraged greater voter turnout, arguably they could have carried the vote. This is where shareholder engagement becomes important.

Targets often engage shareholder and proxy advisors to reach out to target shareholders and monitor shareholder sentiment, as Xref would have done here with the Court approving an outbound call script. Whether or not it was apparent from the initial outbound calls that the vote would be thwarted by Xref shareholders, in the lead up to the proxy cut-off date, proxy reports would have provided greater clarity on reservations held by Xref shareholders. At this point in time, encouragement of voter turnout and engagement with shareholders on the merits of the deal would have been critical. 

Role of arbitrage funds

Arbitrage funds inevitably appear on a target’s register in the lead up to a scheme meeting. Usually, this is positive as their objective is to vote in favour and make a profit on their (short-term) investment. This becomes more complex in the context of share registers comprising multiple funds who may adopt differing investment strategies.

In the Xref scheme instance, Harvest Lane, who accumulated a 15.86% stake in the lead up to the scheme meeting, would have voted in favour of the SEEK proposal to capture the arbitrage between their initial buy in price and SEEK’s offer price. However, a differing view was adopted by Thorney Investments who held 8% at the date of the meeting and who had a long-term view that the proposal undervalued the company. It voted against the scheme. 

Substantial holding notices can also signal to the market how the funds view the likelihood of a scheme being implemented. On the day proxy results were released, a substantial shareholder notice was issued revealing that Harvest Lane had reduced their stake in Xref, limiting its exposure. On the other hand, Thorney had increased its stake in Xref on the day of the scheme meeting, which suggests it was confident in its long-term play.

Alternative approaches

At the time the proxy results were known, Xref and SEEK would have been put on notice that the transaction was looking shaky.

Ultimately, Xref was short of 7.4% of the requisite votes. It is impossible to say that shareholders who opposed the scheme could have been persuaded to change their vote to being supportive.

However, it may have been possible for Xref to postpone or adjourn the vote for a few weeks and test shareholder support. Taking this time to reach out to shareholders may have been one way to increase voter turnout or at the very least influence the shareholders proposing to abstain from the vote. This alternative may have altered the vote and been enough for Xref to secure the additional votes to reach the 75% scheme threshold.

This strategy has been adopted in a number of schemes, including perhaps most famously in the Amcom-Vocus merger in 2015. In that transaction, in the face of a 19.99% stake held by rival TPG Telecom which was to be voted against the scheme, Amcom employed an active shareholder campaign and postponed the scheme meeting several times to overcome TPG’s “blocking stake”. Ultimately, 88% of the shares on issue were voted at the meeting by 42% of shareholders. The 77% of votes in favour were enough for the scheme to prevail.

Given the overall level of support from Xref shareholders, another option would have been for Seek to switch to a takeover bid, either alone or, as has become increasingly common to overcome “blocking stakes”, as a fallback in circumstances where the scheme is unsuccessful.¹ This would have tested the resolve of those shareholders resisting the scheme, given the risk of ending up a minority shareholder in an illiquid company controlled by the bidder.

Key takeaways

• Proxy reports and initial shareholder engagement can shed light on shareholder sentiment for a deal. Targets and bidders should actively monitor this data to consider whether greater efforts are required to encourage voter turnout (whether by proxy vote or in person) or to further engage with shareholders on a deal before a scheme meeting.
   
• Even if targets sufficiently engage with shareholders, where proxy results indicate a vote may not be carried, targets may also consider postponing or adjourning the vote to encourage shareholders to attend the meeting and vote in favour of the scheme.
   
• Switching to a takeover bid, either alone or as a fallback to a scheme, should be considered where there is strong support for the scheme but there is a “blocking stake” that cannot be overcome.