Shareholder Battles at Telecom Italia

Federica Soro is an analyst at Glass, Lewis & Co. This post is based on her Glass Lewis publication.

Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Against All Odds: Hedge Fund Activism in Controlled Companies by Kobi Kastiel.

The spotlight has been on Telecom Italia since Vivendi, the French media conglomerate controlled by Vincent Bolloré, built up a 24% stake in 2016. In the past few months, the glare has intensified over a series of shareholder meetings, court decisions and backroom negotiations, with governance and control of the Italian company—as well as influence over a strategic asset of national importance—in the balance.

One year ago, Vivendi managed to secure a majority of Telecom’s board for a three-year term, as its slate of nominees narrowly defeated the slate of independent directors proposed by institutional investors. Among rumors of clashes with the new oversight team, CEO Flavio Cattaneo became the second chief executive to leave Telecom in just over a year—receiving €25 million upon termination of his employment contract.

Bolloré has a track record of using minority holdings to pursue control and profit goals, as demonstrated across Bouygues, Aegis and more recently, Vivendi itself. Vivendi’s stake in Telecom was part of a significant media buying spree, taking in Italian broadcaster Mediaset, along with Banijay Group and Radionomy Group, as well as launching takeovers of Canal+ and Gameloft, and prompting some to compare Bolloré’s ambition to that of Rupert Murdoch.

The changes at Telecom didn’t just represent a governance concern for other shareholders. The Italian government saw Vivendi’s growing influence as a threat to competition—and national security. The French conglomerate was already on the radar of the Italian communication regulator Autorità per le Garanzie nelle Comunicazioni due to similar stake building at Mediaset, and the potential for de facto control over multiple entities threatened to violate EU anti-monopoly regulation. Forced to waive its voting rights at one or the other, Vivendi set a 10% cap at Mediaset while continuing to exercise its Telecom stake in full.

But that was only the start. Given the strategic importance of Telecom, in October the Italian government took the ultimate step and exercised its “golden share” under Decree-Law of 2012, which gives the government strategic influence and broad powers over the organisation and governance of the company. So far, the government’s actions have been limited to requiring Telecom to implement investment, development and maintenance plans relating to the security, availability and functioning of networks (the board has filed a complaint to the Italian President of the Republic, leaving compliance in limbo). The golden share has led to speculation that the government could force structural changes, from a sale of international telecom subsidiary Sparkle to a more fundamental split of the company’s network infrastructure into an Italian-owned spin off; however, to date the move appears to be focused on security and constraining Vivendi’s influence.

Matters came to a head in March 2018. With the AGM looming on April 24 and no board election on the agenda, activist fund Elliott Advisors (UK) Limited (“Elliott”) built up a ~9% stake and challenged Vivendi. Elliott submitted proposals asking to replace the six Vivendi-affiliated directors with independent nominees, and lobbied support from other shareholders with a letter explaining that its motive was to promote independent oversight, not to take control.

Rather than let the proposals go to a vote, Vivendi resorted to some bylaw chicanery to get a vote on different terms. First, eight of the fifteen directors resigned. That effectively served as a no-confidence vote, triggering a new board election at a special meeting to be held May 4. Perhaps borrowing an interpretation of equivalent proposals from the U.S. SEC, Telecom’s board asserted the new board election rendered Elliott’s proposals moot, and removed them from the AGM agenda.

Why go to the trouble just to hold a new vote a few days later? In Italy, boards are elected from competing slates, or lists, which are generally proposed by shareholders. Whichever list received the most votes on May 4 would only make up two-thirds of the actual board, with the remaining third selected from the second place or ‘minority’ list. Elliott’s proposals went outside the normal board election procedures to remove Vivendi affiliates from the board; by shifting the terms of the vote, the board ensured that Vivendi would maintain some representation even if it lost.

Because Italian governance is never simple, Telecom’s other board—the board of statutory auditors (“BoSA”), an independent supervisory body—objected, calling for Elliott’s proposals to be included on the AGM agenda pursuant to Article 126-bis of Legislative Decree 58/98. But the board of directors (such as it remained) overruled the BoSA by majority vote, excluding Elliott’s proposals and instead moving forward with a full vote at the special meeting. Even here, tensions were on full display, with five directors voting against and publicly distancing themselves from the exclusion. Ultimately the last word was left to the judges: the tribunal of Milan upheld Vivendi’s complaint, and Elliott’s proposals were off the AGM agenda.

So, instead of voting at the AGM on whether or not to replace the board’s Vivendi affiliates with independent directors, shareholders would choose a whole new board from competing lists in early May. Vivendi and Elliot each submitted a ten-person slate. Vivendi’s consisted of five independent directors, a former Telecom CEO, and four former Vivendi management board members; Elliott’s simply listed ten independent directors.

Elliott won, barely, with 33.47% of votes cast in favour, compared to 31.68% for Vivendi’s list. The narrow victory reflected coordination between independent shareholders, with Assogestioni, the Italian association of institutional investors, choosing to support Elliott instead of presenting its own slate of candidates. That decision came at the urging of Associazione Azionisti Telecom Italia (“ASATI”), which filed a letter criticizing Vivendi’s influence at Telecom and calling for a united front in the voting. Another factor was the Italian treasury’s decision to buy up shares in the run-up to the meeting in order to vote against Vivendi. With every vote crucial, the delay between the initial AGM and subsequent special meeting may have backfired on Vivendi by providing more time for the government to increase its stake, and for Elliott to build support.

It’s a result that illustrates the significant changes Italian governance has undergone in the past few years, as set out in our white paper Shareholder Activism in Italy (available to clients via Viewpoint or contact your client service manager; or, see our special reports page). Companies have seen increased shareholder participation and voting as foreign institutional investors have challenged the market norm of letting large (but not necessarily controlling) shareholders hold sway. The new board comprises a mix: ten directors from the winning ‘majority’ list, and five directors from the ‘minority’ list. As a result, three members of the prior board remain: CEO Amos Genish, Arnaud Roy de Puyfontaine (former chair of Telecom and chair and CEO of Vivendi), and Marella Moretti, an independent director.

About the CEO—in this refreshed structure, the question now is whether a former employee and management board member at Vivendi can continue to lead Telecom with a board where power has shifted towards independents. So far, Genish has maintained support from all sides. At the AGM, 98.6% of shareholders voted for his election, including ASATI, and following the meeting held on May 4 the new board re-confirmed him as CEO. Whether they can work together remains to be seen.

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