Charles Robert Darwin used to say, “History repeats itself. That’s one of history’s mistakes”. If there is a common trait that has characterized the successive scandals and irregularities occurred in our financial system, it has been the analytical and preventive inability of the different agents that compose it to prevent the reproduction.
Consequently, shareholder activism was born, as a movement that not only aims the guard of the minority shareholders rights as legitimate owners of the companies, but that stands as the main and sometimes single instrument to prevent history from repeating itself.
In this incessant struggle, adopted by the common-law under the name of “involvement” and that has for dogma the participation and involvement of minority shareholders in the social life of the companies, as well as the dialogue with the managers of the same, now from CaixaBank, the minority shareholders are joined again to denounce the violation and safeguard of their legitimate interests and rights as owners of the entity.
CaixaBank announced the past December 3rd, 2015 the transmission to its controlling company, Criteria Caixa, of the shares that the first one owns in two major financial institutions, The Bank of East Asia (BEA) and Inbursa, in the strategic markets of Hong Kong and Mexico, respectively. Indeed, through the Relevant Fact issued by CaixaBank on December 3rd last year, it is reported that a swap agreement was signed with its controlling shareholder, Criteria Caixa, under which CaixaBank will transfer to Criteria Caixa all its Inbursa shares, which represents a percentage of 9.01% of its share capital, and all of its Bank of East Asia shares, which represents a percentage of 17.24% of its share capital. Likewise, Criteria will transfer to CaixaBank shares from the same owned by Criteria, representing 9.9% of the CaixaBank’s share capital; and a cash amount of 642 million Euros.
Ultimately, a linked operation between a company and its controlling company, which as identified in our own jurisprudence and recent amendments proposals to European regulations, whose main risk is to uphold the majority shareholder particular interest to the social interest. Therefore, the minority shareholders risk of expropriation or tunnelling is particularly serious, being vital to provide these operations of the highest levels of information and transparency, as well as the approval and majority consent of all the shareholders.
The main concerns of CaixaBank’s minority shareholders in this operation are focused on two issues. On the one hand, the assessment made of the shares owned by CaixaBank of the involved entities, mainly in the Hong Kong Bank, The Bank of East Asia (BEA), and on the other hand, the General Shareholders Meeting potential competition to rule on the transaction.
In this regard, in reference to the first question, CaixaBank values its BEA share parcel in 1,549 million Euros, based on the average weighted price per the trading volume during the last month prior to December 2, 2015, applying the arithmetic mean of the euro official exchange rate of the Hong Kong dollar published by the European Central Bank during the month prior to the above mentioned date. The complaint made by the minority shareholders of CaixaBank seems reasonable, since the sale of a significant share parcel (17.24%), control in turn, of a financial institution that is defined by CaixaBank as strategic, doesn’t have the same value as the one derived from a simple secondary market trading mean.
Following the above, an additional factor must be added related to the Strategic Investment Agreement signed between CaixaBank and BEA, at the time of the old box landing in the Hong Kong entity. The Agreement included a number of restrictions to the share transmission owned by CaixaBank in BEA, in particular, CaixaBank would have to follow the BEA Board of Directors formal recommendations in connection with any offer that is made in the event of a takeover bid, which means that CaixaBank could not accept a take over offer for the entire share capital of BEA, unless the Board of Directors recommended it.
In this matter, there wasn’t any type of communication from CaixaBank before December 3rd, 2015, in relation to the possibility of modifying the Strategic Investment Agreement, and in particular, on the elimination of the restrictions in case of a take over bid, which, however, did took place just a few weeks later, through a BEA press communication on January 19th, 2016 to the Hong Kong regulator, reporting that Criteria, the CaixaBank itself and the Asian bank had agreed to eliminate certain restrictions including the Restrictions if case of a take over bid of the Strategic Investment Agreement.
Therefore, the concern of CaixaBank’s minority shareholders is evident, in connection with a sale to its majority shareholder of a share parcel of more than 17% in a strategic asset, that not only does not valuates the corresponding control premium but also does not take into account in its assessment the lifting of a number of restrictions on its transmission, that now make possible a take over bid scenario, investment revaluation climax, as well as demonstrate the commercial and financial practice. The local and international press makes reference to the value of a BEA share on the scenario of a take over bid -which is now possible because of the elimination of the restriction in case of take over bid-, could reach even to $60 Hong Kong dollars, that would potentially raise the compensation to 3,300 million Euros, compared to 1,549 million which is currently arranged. Therefore, with the current transaction valuation, CaixaBank is giving up a possible higher retribution on 1,700 million Euros.
Secondly, it stands out the fact that an agreement of this magnitude, formalized by related parties, wasn’t submitted to the approval of the General Meeting of Shareholders, in a case that falls squarely with the spirit of recent reforms about a good corporate governance, in short, with the revitalization of the General Meetings and opening channels to promote shareholding participation, that proclaims, among others, the recent reform of the Law of Capital Companies and the new Code of Good Governance. The previous, even more if it fits, within an operation that includes an asset that the company itself categorized as strategic, and whose perfection will require the approval of a capital reduction as a consequence of the amortization of the own shares acquired by CaixaBank with the operation, and that must be adopted in Board.
To these effects, it must be highlight the more remarkable fact that is that the operation is taking place between related parties, and that the same wasn’t submitted to the approval of the General Meeting of Shareholders. In this regard, it is convenient to bring to the attention the recent approval from the European Parliament, the past July 8th, 2015, to the amendment proposal made by the European Commission to the Directives 2007/36/CE and the Directive 2013/34/UE, which establish the foundations of the current corporate regulation, and that are already affecting the serious damage that the related operations may cause to the societies, especially in the risk that they may give to the related party the possibility of appropriating the value that belongs to the society. Therefore, these reform proposals affect the need of establishing the necessary safeguards for these operations, which is why, among others, Member States must guarantee that the important transactions with related parties have to be approved by its shareholders.
Thus, is again this shareholder activism, now championed by the minority shareholders of CaixaBank, whom on behave of the legitimate rights of the minority shareholders claimed this new capitalism to the citizens. This complaint is doing no more than encouraging and strengthening the guarantees of the financial system, against of how it has been received by the manager of the entity: as an action that’s clearly outdated and that has a lack of communication with the minority shareholders, which must rule the corporate governance of the modern companies.
So, it has to be the Administrative Board of the entity supported by, not confronted, its own minority shareholders, have the ability to rectify in an operation that generates serious damage not only to minority shareholders, but mainly to the company. Is because of this that, CaixaBank has to be an ally of this new capitalism, that far from the inspiring principles of the past and in favour of the communication and creation of synergies with its shareholders leads to a “everything for the shareholder, but with the shareholder”.
Therefore, CaixaBank has in front of him a crucial and historical opportunity of joining the group of pioneer companies that are already moving forward hand and hand with its shareholders, correcting the existent errors of an operation that will be subject of a new valuation, debate and approval from all of the company’s shareholders.
María Fernández Conradi
Executive Director of the Spanish Association of Minority Shareholders of Listed Companies (AEMEC)
version in Spanish: