In our forthcoming edition of Activist Insight Monthly, due to be published at the tail end of next week, we have a feature on the proxy fight between Aristeia Capital and Sina, the Chinese venture capital company that helped incubate Weibo. Since the meeting itself takes place around the same time as our publication deadline (next Friday, to be specific), I don’t mind giving you a sneak preview.
The contest is remarkable for a number of reasons. First, it may just be the first proxy fight to take place at a Chinese operating company. The only other Chinese proxy contest we have tracked since 2010 was at a London-listed closed-end fund.
Granted, Sina is listed in New York and incorporated in the Cayman Islands, where activists are at something of a disadvantage but can at least rely on company bylaws and a relatively non-partisan legal system. But to understand how steep the climb is, consider how easily Altaba (formerly Yahoo) caved in when Starboard Value threatened to remove its board based on a thesis that is essentially the same as Aristeia’s – unlocking value from Sina’s giant passive stake in a much larger company. Sina’s near-13% insider ownership and 20% retail ownership allows its combined Chairman/CEO Charles Chao to take a much tougher stance, while in its defense the company says many of Aristeia’s proposals would likely be blocked by Chinese regulators. Online media is, after all, a highly guarded sector for China’s rulers.
The idea that an activist would dare take this step is interesting enough, but the fact that it is the first public campaign by 20-year-old hedge fund Aristeia Capital makes it doubly interesting. A representative of the fund told me last week that Aristeia took this extraordinary step because of the size of the opportunity and the stonewalling it received from management. "We certainly believe that it’s a winnable contest,” the representative said.
So far, Aristeia has picked up support from Institutional Shareholder Services for one and a Glass Lewis recommendation for both of its nominees. The single incumbent director seeking re-election received support from both proxy voting advisers. A quirk in this contest is that it is effectively being run on a universal proxy card, allowing shareholders to elect any combination of the three directors they choose. That should help Aristeia.
Should the activist win a board seat, or at least come close, it will be a warning to foreign companies listed in the U.S. that they cannot rely on local governance standards. As MSCI prepares to admit China A Shares to its World Index, creating an opening for passive investors to build large positions in the country, activism in China may get a boost.
“Standards [for foreign issuers] are fairly low and making it worse is that there are no rigorous independent checks,” Peter Halesworth, an investor with no position in Sina but a professional interest in seeing Chinese companies opened up to more activism, told me. “If they’re self-regulating, companies won’t make standards too high… they’ll just fill in the blanks and move ahead.”
Aristeia’s proxy fight could provide the necessary balance, but even if it wins, it will have to battle hard. Its nominees get one-year terms, versus the indefinite terms given to incumbents (a set proportion of the board comprised of the longest-standing directors are required to stand). The activist will likely have its lawyers ready to fight for its nominees’ re-election. More to the point, the chances of the Chinese government or fellow tech firms with an interest in Weibo interceding must be high.
Our verdict on the fight’s merits may not be too late, but rather too soon.
Graeme Roustan knows how to time a campaign. Just over a week shy of his speaking appearance at Arrowcon Partners’ Shareholder Engagement in Canadian Companies conference, a letter he sent to Power Corporation of Canada in which he asked for a board seat and series of non-core asset disposals leaked. Having seen the letter, Activist Insight can confirm that it is as polite as one would expect from a Canadian activist. But there is a back story. In the run-up to the event last year, Roustan was fighting to block a bid by hedge fund, Sagard Capital, in which Power Corp is a major investor, to acquire hockey equipment company Performance Sports Group. Sagard prevailed, but only after dismissing its CEO in peculiar circumstances. Whether the Desmarais family, which runs Power Corp, sees Roustan’s latest move as polite or cold revenge remains to be determined.
Quote of the week comes from Monday’s statement by Land & Buildings’ Jonathan Litt, reacting to the departure of Hudson’s Bay CEO Jerry Storch. A day later, the company sold one of its key pieces of real estate and took an equity investment from a private equity firm that creates 51 million preferred shares – convertible into a 22% stake in the common shares – that it said a majority of its shareholders had already approved. Activists have a mixed record of overturning share issuances in Canada, but Ontario, where Hudson’s Bay is based, is one of the most pro-shareholder jurisdictions.
“It is typical for undervalued and struggling companies such as Hudson’s Bay to try to position the exit of top executives as a reason for investors to give them more time to right the ship – while choosing to ignore the fact that the true decision makers and those at the Board level who have been complicit in the decision making remain in power.”
Article by Activist Insight
