Changing a company’s place of incorporation may look like a simple move. But there are occasions when the transition plan meets with shareholder resistance and IR plays a key role in maintaining the marital bliss between a company and its shareholders.
There are a number of reasons why companies choose to reincorporate. Tax advantages, protection against hostile takeovers and better corporate laws are three important ones. Companies often relocate to a market where their shares do the most trading. For many US companies who decide to shift state (most heading for Delaware and its copper-bottomed corporate practices) there aren’t any great difficulties. But those who seek to move country and list on a new stock exchange should approach such a move with caution. That’s if the saga of internet gaming company Starnet is anything to go by.
Starnet decided to move from the US to the UK because its consumer demand and investor interest is more buoyant in Europe. But such a decision involved wooing three different shareholder groups – investors in the US, the UK and Germany. It was the German prong of this triple-tipped problem that proved the most difficult to tackle.
After two failed attempts to win shareholder support, Starnet turned to Georgeson Shareholder for help. Georgeson’s director of corporate actions, Tony Quinn, says previous votes foundered because of poor communication with the German shareholders, and he attributes some of the success of the third attempt to the use of new proxy voting technology. ‘We have a product called Tele Vote, which allows registered shareholders to call in and vote via phone.’ A help line was also set up to answer questions about the reincorporation material, with Georgeson staff on hand to explain the process.
But for Quinn, the eventual success of Starnet’s reincorporation vote was also thanks to good old tried-and-tested IR practices. ‘It was a question of going after the institutions and knowing who the voting authority was. We made direct contact with them and mailed out the correct information. A lot of the previous problems were about the information not going into the right hands. If people receive the right material at the right time they will vote, but they won’t if they don’t,’ he explains.
Starnet’s IR manager, Rob Grace, says eventual success was inevitable. ‘We had a wide retail shareholder base and no big shareholders,’ he explains. ‘It took a bit of time and involved several mailings. Simply because of the structure of our shareholder base – primarily smaller retail shareholders – we knew it wouldn’t be easy.’
The first two votes failed because not enough German shareholders voted. Contact with them seemed to stop at the broker or other holder of the shares, so contacting the actual shareholders was a tough task.
‘The arguments for reincorporation received very little resistance; it was more a case of getting to the shareholders,’ explains Grace. ‘But it was also a question of timing. We were soliciting over the Christmas period and interest was very low. A lot of people just could not be bothered with it. I think that was the key lesson we learned – you have to get the timing right.’
The whole process took several weeks longer than anticipated – especially because German shareholders had to receive individual mailings. The scars of such sweat and toil are now fading with Starnet’s move to the UK already approved, and its stock market listing as World Gaming is finalized.
Delaware bound
A much easier move was made by US aviation company Pemco, though even its small shareholder base required a thorough approach to the entire IR process, as PR manager Doris Sewell can attest. The aircraft modification and maintenance company reincorporated in May 2000 from Colorado to Delaware. The whole process was viewed as a clean break with the past, spawning a new company name, new logo and new management team.
‘Shareholders were notified in a proxy and they voted on it at our annual shareholder meeting last May,’ says Sewell. ‘In the US, Delaware is the form of choice – it’s a lot cleaner and the state actually understands corporate law much better than most of the states. We put out a very long explanation of the benefits of the move and tried to be very forthcoming to ensure shareholders understood. The less you tell them the more questions you get, so if you go ahead and fully disclose everything they can make up their minds very easily. One of the key goals is to avoid any hiccups at your annual meeting.’
Pemco’s was a smooth transition but it required careful planning from the IR perspective, despite the fact that the company only has around 1,000 shareholders and most of these are institutional investors. Contrast that with the process faced by multinational auto company DaimlerChrysler.
Sticky times
Chrysler faced a challenge during its merger with Daimler because the US-incorporated company had to change its place of domicile to Germany. Advising Chrysler at the time was Richard Wolff, who explains that, in such cases, the issues can get ‘very sticky’.
A worldwide director of Golin/Harris Financial, Wolff says such a reincorporation from the US often requires a major company to exit America’s all-important S&P 500 index. This proved to be a problem with many US institutional investors following the company, and not just index investors. Wolff explains: ‘How do you mitigate the impact on the stock knowing there is going to be a negative effect from selling pressure by some very large institutions? It’s a question of positioning a short-term negative impact on the stock and explaining the longer-term benefits,’ he explains.
From an emotional perspective alone, the country and the communities left behind may feel disaffected and worried about factory closures and job cuts. Some shareholders may be swayed by these emotive issues – especially employees who have already exercised their share options. While a company will have to handle such sentiment as it bids farewell to one home, it must also prepare the ground in its new place of abode.
‘A company moving from the US to Europe in a reincorporation is forced to target those institutions most likely to be in Europe. You have to go ahead of the curve before any actual stock dumping occurs in the US,’ advises Wolff.
Uproar goes quietly
Another obstacle may be a rule against delisting. Alex Mackey, managing director at GCI Financial, explains that some stock exchanges like Euronext and South Africa make it difficult for a company to leave, though Austria’s Uproar found a solution. The online gaming provider – recently acquired by Flipsode, a subsidiary of Vivendi Universal Publishing – was originally listed on the Vienna stock exchange, though most of its shareholders were in the US. Uproar arranged a dual listing on Nasdaq and there was a simple migration of stockholders to the US-based trading platform. The company was eventually able to point out that, with less than 5 percent traded in Vienna, there was no market for the stock there and it could delist.
Mackey agrees with Wolff that a company with a larger number of retail shareholders may face a bigger task. ‘If the stock price has dramatically underperformed and retail shareholders cannot trade so easily in a foreign overseas-traded stock, it’s much harder to convince them of the merits of such a move,’ he says. ‘By and large it’s probably better to go for a dual listing and then delist, because the dual listing is cheaper and easier.’
He suggests that IR managers faced with such a challenge should conduct a thorough analysis of the share register to uncover the precise balance of funds, the location of funds, the contribution of retail shareholders and the constituencies involved. ‘You need to take some fairly accurate soundings of investors. The last thing management wants to do is stick its head up above the parapet and have its four biggest fund managers say no,’ Mackey says.
But it’s not just shareholders who have to be persuaded to accept the move. ‘Be aware that the gestation period can be quite long – not least because the bourse you are currently listed on will not make it a simple process. Most exchanges do not like to see companies delist and you generally have to make a fairly compelling case for the reasons why you wish to do so,’ Mackey adds.
From the experiences of different companies – with different degrees of success – it’s clear that changing domicile can be more tortuous and troublesome than staying put. But with some good housekeeping in the IR department, they can happily find themselves in a better neighborhood.
