This summer’s proxy contest at Eurotunnel featured a number of larger-than-life personalities and an eleventh hour reversal of fortune more typical of a Hollywood blockbuster than your average annual meeting. In the end, Eurotunnel’s management foiled Nicolas Miguet – a dissident trying to unseat the current chairman – the old-fashioned way: by communicating with shareholders and motivating a large body of multinational investors to side with senior management.
In international proxy contests, even something as basic as finding out who your shareholders are can be an ordeal. France and England are separated by only 31 miles of water, but the differences between the investing populations run deep. The proxy contest at Eurotunnel – the operator of the Channel Tunnel infrastructure and its shuttle services – illustrates the difficulties of reaching out to international shareholders, especially when complicated issues arise.
The outcome of Eurotunnel’s proxy contest belies how close the race was for much of the time. ‘In the final vote, more than 98 percent of the shares that voted supported Jacques Gounon, the company chairman,’ says Nicholas Bell, senior managing director of the Altman Group, a proxy solicitation firm retained by Eurotunnel. But it wasn’t until the meeting, when Miguet realized he didn’t have the support to oust Gounon, that he reversed course and backed management. ‘It was a cliffhanger right up to the meeting when everyone went to vote,’ recalls Bell.
Xavier Clément, who became Eurotunnel’s IRO in January 2004, attributes management’s success at the June 17 annual meeting to ‘knowing your shareholders’. He believes personally explaining the situation to Eurotunnel’s institutional investors was critical for gaining their allegiance.
Explaining the basics
Eurotunnel’s structure is unusual. One share of Eurotunnel stock provides both a registered share of Eurotunnel plc (the UK entity) and a bearer share of Eurotunnel SA (the French entity). Shareholders are therefore entitled to vote at both annual meetings, a fact often misunderstood even by institutional holders. What’s more, when Miguet began touting the stock in his financial newsletter, Eurotunnel’s retail shareholder base ballooned to roughly 800,000, accounting for 80 percent of the float, while many institutions took profits and exited, making the task of communicating with shareholders even more complicated.
For Eurotunnel, the first challenge was simply to explain the facts. Miguet, whom Bell describes as ‘a well-known, albeit controversial figure in France’, began buying Eurotunnel stock in early 2004; at the 2004 AGM he successfully cleaned house, replacing management and the board with his own dream team. Miguet’s handpicked team soon disintegrated, however, and, in February 2005, the board appointed Gounon as chairman. As Bell notes, ‘Gounon and Miguet did not see eye to eye on how the process of negotiating with creditors should go forward. Miguet decided he was going to solicit support from his followers with the intention of becoming chairman of the company.’
Unlike in the US, where a dissident shareholder must file with the SEC and distribute his or her own materials and proxies to shareholders, in Europe ‘the dissidents solicit proxies using management’s cards,’ explains Bell. It was therefore relatively easy for Eurotunnel shareholders to deputize Miguet to represent them at the annual meeting, creating a considerable threat to Gounon.
War room
A month before Eurotunnel’s annual meeting, Bell moved to Paris to work side-by-side with Clément and Gounon in an attempt to shore up institutional support for management.
‘Our first challenge was identifying the investors,’ recalls Bell. He and Clément followed their initial e-mail correspondence with phone calls, contacting around 200 institutions altogether. ‘We focused on the institutions because that was the core of management support,’ says Bell.
Clément believes the subsequent personal contact with the fund managers was what turned the tide. ‘As I do not have a lot of institutions in my holdings, I needed to know them very well, to meet with and motivate them,’ he says. ‘My role was to let my shareholders know about being shareholders in two companies.’ He points out that Eurotunnel would have lost crucial votes if this poorly understood aspect of the company wasn’t clarified.
Next, Clément and Bell had to persuade institutions to side with management. ‘The argument was that if the dissident came in, it would mean starting from square one,’ Bell says. ‘And the company didn’t have the luxury of starting again. It needed to continue the negotiations and finalize them as quickly as possible.’
A proposal to expel management always involves personalities, so the credibility of the individuals on both sides matters. Clément describes Miguet as a mélange du jour, bouncing from his role as journalist to dissident to politician. ‘He’s trying to benefit from crises in French firms,’ says Clément. ‘It’s very dangerous.’ Bell notes that Miguet has a criminal record, which prevented him from serving on Eurotunnel’s board until the time period for this restriction passed this year.
Clearly, Eurotunnel’s case was persuasive. Richard Singleton, director of corporate governance at F&C Asset Management, an institution with holdings in Eurotunnel, says, ‘We see the firm as having very considerable difficulties, and anything that interfered with the kind of processes currently in place could prove fatal.’
Singleton appreciated being contacted by Eurotunnel’s IR team. ‘Often, we’re on top of things, particularly if we have significant holdings,’ he explains. ‘In this case, though, we have small holdings and it’s a complex issue. It’s useful to talk to the IR person.’
For a company with a complex structure like Eurotunnel’s, it’s essential that every pro-management vote be counted. Simply talking to the buy side isn’t enough; a company must also contact the various other parties instrumental in overseeing how votes are cast. ‘There’s a lot more to a proxy battle than just calling your institutional investors,’ emphasizes Bell.
While Bell and Clément began by contacting the fund managers at various institutions, they later called the individuals who actually execute the fund manager’s instructions. To make sure no votes went awry, Eurotunnel’s team also forged relationships with the global custodians and the sub-agent banks in the local markets, while working closely with Crédit Agricole, the company’s transfer agent and proxy tabulator, to ensure the votes of all institutional shareholders were received and recorded.
F&C’s experience illustrates the importance of these additional steps. ‘While we understood that we were entitled to vote at both meetings, it was quite difficult to persuade the custodians who hold the stock for us and execute the votes that we actually had this right,’ points out Singleton. ‘Eurotunnel laid the groundwork but some custodians were still unwilling to vote at the French meeting, believing that they couldn’t.’
Important contacts
In addition, Eurotunnel communicated with the proxy consultants advising institutions on how to vote. Marian Collins, director of corporate governance at Barclays Global Investors in the UK, says she relies more heavily on proxy consultants for firms outside her own country because she doesn’t have the same opportunity to communicate directly with the corporate secretary or directors at non-UK companies.
Clément was impressed by how well the proxy advisers understood Eurotunnel’s situation. Although he doesn’t know the extent of their influence, he says meeting with them was part of his ‘cover all bases’ strategy. Rrev, a UK proxy adviser jointly owned by Institutional Shareholder Services (ISS) and the National Association of Pension Funds (NAPF), supported Eurotunnel’s management. There were also efforts on the retail side. Bell estimates that Eurotunnel contacted 30,000 retail investors through a call center in France, where the vast majority of the individual investors reside.
In discussing Eurotunnel’s recent proxy contest, Clément repeatedly returns to the importance of motivating institutions. Many of Eurotunnel’s large institutional holders are index funds, which lend out shares in their portfolios, thereby sacrificing their voting rights. Clément and Bell had to convince managers at the index funds to go the extra mile by first reclaiming the shares currently on loan and then voting for management at both the French and British annual meetings. Bell applauds the institutions: ‘When they understood the severity of the situation, they were willing to help.’
In some cases, misperceptions had to be addressed before institutions would step up to the plate. For instance, Singleton notes that continental European companies typically practice share blocking, which prevents shareholders from trading if they plan to vote at the annual meeting. While Eurotunnel’s French shares were not blocked, Clément says the misperception presented its own problems because share blocking is such a powerful disincentive to voting. Once again, he emphasizes that communicating one-on-one with investors is the best way to dispel false notions.
The future
Although winning at the annual meeting was a major coup, Eurotunnel’s problems have not disappeared. ‘The saga continues,’ says Bell. ‘If the company is not successful in its negotiations with creditors, Eurotunnel is going to go bankrupt and the rights of the tunnel will revert to the French and British governments. Shareholders have a lot riding on the creditors’ conversations with Gounon.’ But Bell is confident Eurotunnel’s chairman will prevail. ‘Gounon pulled out all the stops for this meeting to get a mandate from shareholders to continue negotiations,’ he notes. ‘I believe he can do it.’
That said, Clément doesn’t discount the possibility that another gadfly like Miguet will emerge and threaten Eurotunnel’s future. ‘When you have financial issues, there are always dissidents around. It could happen again,’ he says. But he emphasizes that Eurotunnel is now far better prepared for this eventuality than it was a year ago: ‘I think that in 2004 the company didn’t know the investor bases. Now it knows its shareholders and has a lot of strong relationships.’
