Telecom Italia 2013 EGM: the unusual proxy fight (not) to gain the control

Posted on December 12, 2013

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Introduction

On December 20th, the shareholders of the main Italian telecommunication company, Telecom Italia, will be called to vote on the removal of all Board members. The meeting has been called upon the request of the relevant shareholder Findim SA (5%), an investment vehicle created by Mr. Marco Fossati, who strongly contests the clear conflicts of interest of Telecom Italia’s major shareholder, Telco SpA (22.4%).

The background

Telco is a holding company built in 2007, at the sole scope to acquire the relative majority of Telecom Italia, currently owned by the Spanish telecommunication company Telefonica SA and by the Italian financial companies Assicurazioni Generali SpA, Intesa Sanpaolo SpA and Mediobanca SpA. On September 24th, 2013, Telefonica increased its holdings in Telco, through the subscription of new Telco’s non-voting shares, which may be converted into voting shares starting from January 2014. Following the eventual conversion, Telefonica will control 66% of Telco’s voting share capital, Generali 19.32%, Intesa Sanpaolo and Mediobanca 7.34% each. As per Telco’s shareholder agreement, Telefonica has an option to further increase its holdings in Telco, up to 100%. The CEO of Telefonica, Mr. Cesar Izuel Alierta, as well as the COO Mr. Julio Linares Lopez, sit on the Board of Telecom Italia since 2007.

The two telecommunication companies are competitors on the Brazilian market, through Telecom Italia’s TIM Brazil and Telefonica’s Vivo. Hence, the acquisition by Telefonica of the effective control of Telecom Italia is subject to the approval of the Brazilian Antitrust Regulator (CADE), which recently communicated to Telefonica that any direct or indirect financial interests in TIM Brazil shall be ceased.

Mr. Fossati’s reasons

The clear conflicts of interest of Telefonica in Telecom Italia have been strongly contested by Mr. Fossati starting from 2010, when Telefonica acquired the control of the Brazilian Vivo. The growth of Telefonica’s holdings in Telco even strengthened Mr. Fossati’s concerns: Telecom Italia may be forced to quickly sell TIM Brazil at sub-optimal conditions, as he believes it already happened in November, when the Company sold all its holdings of Telecom Argentina to Fintech Group.

Serious concerns also arose over the recent issue of mandatory convertible bonds reserved to qualified investors. On November 7th, the Board approved the issue of € 1.3 billion convertible bonds 6.125%, due November 2016, which were fully allocated through an accelerated book-building procedure. The Company gave priority treatment in the allocation process to three institutions, among which Telefonica, that subscribed 7.9% of the issue. Two independent Board members (Ms. Lucia Calvosa and Mr. Luigi Zingales) opposed the issue and the Italian Market Authority (Consob) has been investigating over the procedures activated by the Company, as well as over the sale of Telecom Argentina.

In order to eliminate any possible conflicts of interest, the dissident shareholder decided to ask the removal of all Telecom Italia’s Board members that were appointed by Telco (all Directors except the independent member Mr. Luigi Zingales, who was appointed by a group of fund managers). To strengthen his position, Mr. Fossati drafted an alternative strategic plan for Telecom Italia, that was presented to institutional investors on November 6th in London, and that is based on the following key points: to create partnerships with international operators (e.g. with Vivendi’s GVT in Brazil), to issue € 2 billion convertible bonds, to sell the subsidiary Telecom Italia Media and some properties, not to pay dividends for one year and to defer the sale of TIM Brazil.

The unusual proxy fight

If the December 20th General Meeting will approve the removal of the current Board members, the new Directors shall be appointed through slates of nominees submitted by shareholders holding more than 1% of the share capital. According to Telecom Italia’s bylaws, 80% of the Board members will be appointed from the list obtaining the majority of votes, regardless the actual number of votes gathered, while remaining 20% will be appointed from the eventual other lists.

Only two slates of nominees have been submitted so far: by the major shareholder Telco (including 3 nominees) and by a group of fund managers coordinated by the Italian association Assogestioni (including 7 nominees). Although having requested the removal of the Board and having drafted a strategic plan for the Company, Mr. Fossati decided not to submit a list of candidates for the eventual renewal. As he thought that the Assogestioni’s list would have gathered the large majority of institutional investors’ votes, Mr. Fossati found it more convenient to support their candidates. Nevertheless, according to the Assogestioni’s internal rules, the Directors appointed from their lists of candidates cannot represent the majority of the Board members and cannot hold executive positions into the Company. Furthermore, as per the Company’s bylaws, the Board can be made of a minimum of 7 up to a maximum of 19 members. The Meeting will fix the number of members upon eventual shareholders’ proposals. In case no proposal will be submitted to the Meeting, the number of Directors will remain unchanged to current 15 (as fixed by the AGM held on 2011). So far, neither Telco nor Assogestioni proposed a number of Board members.

The oddity of this unusual proxy fight is that, in case the Board will be removed, none of the contenders wants to gain the control of the Company: Assogestioni because of their internal regulations, Telco because their representatives were removed from the Board. All candidates submitted by Assogestioni are strictly independent from the Company (including the two current members Ms. Calvosa and Mr. Zingales), while Telco’s list includes the current CEO Mr. Marco Patuano and Telefonica’s COO Mr. Linares Lopez, both removed by the shareholders. Of course, in case of removal, Mr. Patuano shall not be charged of executive powers.

In case of removal, who will implement Mr. Fossati’s strategic plan? Who will manage the Company? And who will chair the Board? But questions are even more basic: how many directors will be appointed? Assogestioni submitted 7 candidates, being sure that Telco had submitted 15 candidates, but it did not happen. Unless different proposals are submitted at the Meeting, all 10 nominees will be elected and 5 missing Directors shall be appointed. Who will appoint the missing members? Telco is the only one that has the power to appoint them at the Meeting, through individual nominations, but does Telco really want to integrate the missing directors to re-gain the control of the Board? In that case nothing would really change, but a higher number of independent members would be elected. Nonetheless, Telco may decide to leave the responsibility to Mr. Fossati, who won the battle but has no representatives on the Board.

It should also be noted that even some of the subscribers of the Assogestioni’s slate are not strictly independent from Telco’s shareholders: Eurizon and Fideuram are part of Intesa Sanpaolo’s group, Mediolanum and UniCredit’s Pioneer are linked to the shareholders agreement controlling Mediobanca.

Despite the concerns of Mr. Fossati over the clear conflicts of interest of Telefonica are absolutely sharable, not submitting any candidates for the eventual renewal contributed to create a huge uncertainty in case of removal of the current Board members. Telecom Italia has to face a very delicate situation: a very high net debt (amounting to € 28 billion, or 1.4 times the shareholders’ equity, as per the 3rd Quarter Report), poor operating  performances on the domestic market, both Moody’s and Standard & Poor’s recently downgraded the Company to a sub-investment grade and Italian political and financial contexts are still highly turbulent. In a so delicate situation, it is clear that the Company should strongly avoid further uncertainty.

Several newspapers reported that both ISS and Glass Lewis recommended approving the Board removal. Although supporting Mr. Fossati’s reasons, ECGS recommended (proxy reports issued on December 4th) and still recommends opposition, as the concerns over the huge uncertainty deriving from the removal overwhelm the risks of Telefonica’s conflicts of interest. Approximately 50% of the share capital is expected to vote at the Meeting, of which 22.4% represented by Telco, 5% by Fossati’s Findim and approximately 23% by independent shareholders. Hence, it is impossible to predict the outcomes of the Meeting.

Further obstacles to the shareholders’ vote

The problems for shareholders are not limited to the decision whether to support Mr. Fossati or not, as great confusion was also created by Telecom Italia itself, that published inconsistent meeting material: the Notice of Meeting includes a different number of resolutions respect to the proxy card published by the Company itself!

The Notice of Meeting includes 5 resolutions: 1) the removal of the Board, 2) the eventual appointment of the new Board (in case the removal is approved), 3) the eventual integration of 2 Board members (in case the removal is rejected), 4) the elimination of shares’ par value and 5) the share capital increase to serve the mandatory convertible bonds. In case the removal is approved, shareholders will have to appoint the new Board members, having previously defined the number of members, the term of office and the remuneration of the new members. Hence, as per the Notice of Meeting, item 2 and 3 include bundled resolutions. But the bundled resolutions are unbundled on the proxy card, still issued by the Company, that includes 9 items: 1) removal, 2) eventual definition of the number of Directors, 3) eventual definition of the term of office, 4) eventual definition of the remuneration, 5) eventual election of the Board members, 6) eventual appointment of one Board member, 7) eventual appointment of the second Board member, 8) elimination of shares’ par value, 9) share capital increase.

The crazy situation affected also the major voting platform, which is based on the notifications received by the local custodians. Foreign institutional investors found 6 resolutions to be voted! While item 2 is still bundled, item 3 correctly allows shareholders to separately vote for the eventual appointment of each missing director.

At a time when proxy advisers’ activities are strongly criticized, it would be highly recommendable that national and supranational market Authorities cast a glance on the correctness of the entire voting channel, that involves also the issuers (and their advisers), the custodians, the voting platforms and the proxy agents.

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