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A Christmas pantomime – Staude Capital’s open letter to Third Point Investors

Staude Capital’s Global Value Fund has published an open letter to the ordinary shareholders of Third Point Investors Limited, which has been reproduced below.

 

7 January 2022

 

Dear Fellow Ordinary Shareholders of Third Point Investors Limited (‘TPIL or the ‘Company’),

A Christmas pantomime

It was a piece of spin to put a smile onto the face of the most hardened market pundit. In declaring that the vote to remove Joshua Targoff from the board of Third Point Investors Limited had been ‘defeated’ on 1 December 2021, TPIL directors (Directors) took it upon themselves to recite a line from Asset Value Investors’ (AVI) public letter dated 11 November 2021.

“…if our proposals were not backed by a majority of independent Shareholders, we would happily move on”.

In a wonderful piece of Trumpian theatre, the Directors then used this line to state that given the results of the vote, they expected those requisitioning the meeting to cease their attempts to impose a ‘self-serving agenda’. What a terrific rebuke to the requisitioners. If only it were true.

For the best part of a year we have worked tirelessly, and without theatrics, to demonstrate to the Directors what the overwhelming majority of independent ordinary shareholders[1] wish to see at their company. How do we know what ordinary shareholders want? Because we, along with our fellow requisitioners, have spent hours engaging with them on the matter. We have made this engagement directly. There have been no paid advisors intermediating this process and no voice given to what the opinions of Third Point LLC (Manager) might be. Just ordinary shareholders, like ourselves, discussing the challenges TPIL faces, and thinking through what real-world solutions might actually work.

This engagement provided us with the foundation to put forward a set of proposals that we believe have an excellent chance of addressing the Company’s persistently poor market rating, and, most importantly, would have the support of a majority of the ordinary shareholders in the Company. (The arguments behind our proposals were ably put forward by AVI in this letter).

Twice we sought to call a vote on these proposals to demonstrate to the board what ordinary shareholders’ wishes were. Twice the board denied shareholders this opportunity on technical legal grounds. Given the board’s position, we took advice from a leading QC. Without waiving privilege, that advice leads us to believe the directors of TPIL were acting unlawfully in rejecting our August requisition.

Given our aim all along has been to demonstrate to the board what ordinary shareholders actually want, we decided to call a proxy vote on the matter. To us, this seemed a more genteel option than taking the Directors to court.

From the outset, the vote we called to remove Joshua Targoff from the TPIL board was clearly framed as a proxy vote for our original proposals. What we have been labouring to do to date, has been to prove to the board that our proposals have the overwhelming support of the independent ordinary shareholders of the Company. Our belief was that, when presented with this evidence, any independent director acting properly would surely begin to enact the changes ordinary shareholders wished to see.

The result: a clear victory! 52% of the ordinary shares voted backed our proxy resolution. Moreover, if we remove from the vote the ordinary shares held by the Manager, an entity that has a clear conflict of interest when voting on this matter, the result was a landslide: 75% of the vote supported our resolution.

That the board has tried to frame this result as anything other than an overwhelming show of support for our proposals is staggering. To us, it is yet more evidence of the board capture that has taken place at our Company.

A company of the shareholders, by the shareholders, for the shareholders

To recite what is surely clear to all involved, the ordinary shareholders of TPIL are the only shareholders with an economic stake in the Company. They are the shareholders who pay the Directors’ salaries and pay the Manager’s fees. It is their shareholder capital alone that has been placed under the Directors’ duty of care.

So, how have the Directors claimed victory in the face of defeat? At the time of TPIL’s IPO it was necessary to put in place a structure to mitigate the risk that it might lose its ‘foreign private issuer status’. This is a regulatory technicality that affects only non-US funds that have a substantial number of US shareholders and a US manager. The risk is that such entities may be treated as a US domestic issuer under US federal securities law.

The structure the Directors chose to deal with this apparent regulatory wrinkle was the creation of ‘VoteCo’, an entity that would hold ‘Class B’ shares in TPIL[2]. In the Company’s IPO prospectus, ostensibly under the title of ‘Shareholder Protection’, the Directors state that the purpose of VoteCo is to ‘address jurisdictional regulatory issues in the US’, and that the Class B shares would be voted in the ‘best interest of shareholders taken as a whole’.

Class B shareholders have contributed no investment capital to TPIL. They have no economic exposure to the Company’s success or failure. Their holders suffer none of the consequences of TPIL’s continued poor market rating. Their clear stated purpose was to be a regulatory workaround that enabled the Manager to offer its services from the United States without TPIL being treated as a ‘foreign private issuer’. And yet, in our proxy vote, the Class B holders voted all of their shares against the will of a majority of the ordinary shareholders in TPIL. They voted against the wishes of the actual investors in the Company.

The IPO prospectus claims that VoteCo has no affiliation with the Manager or the Master Fund, however, in private correspondence between AVI and the board of VoteCo, they failed – on three separate occasions – to answer whether any contact had been made between themselves and any of the Directors, or any employees or affiliates of the Manager. Why has such a simple request been ignored?

Indeed, we believe very few people in the market were surprised by the votes cast by the Class B shares. Why? Because on an investor conference call held 2 February 2021, Dan Loeb, the CEO of the Manager, indulged himself in an extraordinary outburst. He stated that the purpose of the B shares was to put in place voting protections. Protections that existed to protect the interests of some shareholders at the expense of others. That existed to prevent a reduction in the amount of capital the Manager had to invest.

Could there ever be a more flagrant repudiation of the purpose that VoteCo was actually set up for? Has there ever been a more important time in TPIL’s life for the independent Directors to make their voices heard? Yet, instead of a stinging rebuke of the Manager, and a reaffirmation of the principles of VoteCo as set out in the IPO prospectus, shareholders were met with deafening silence from the Directors. Meanwhile Dan Loeb’s outburst was edited out of a replay of the investor presentation that was later circulated to investors.

That ‘VoteCo’ voted its Class B shares against the will of a majority of the ordinary shareholders in the Company shines a searing spotlight on the corporate governance structure currently in place. Is it really in the best interests of shareholders taken as a whole, for VoteCo’s ‘Class B’ shares to be able to block the wishes of a majority of the ordinary shareholders in the Company? Is that really within the spirt of what was envisaged in the Company’s IPO prospectus? In what manner have the Class B votes protected TPIL from being designated a ‘foreign private issuer’?

Sunlight has always been the best disinfectant

When we met with Steve Bates on 15 December 2021, we set out a clear argument. For the best part of a year we had endeavoured to demonstrate to the board what an overwhelming majority of the independent ordinary shareholders of the Company wished to see happen. That our belief had been that once the board was finally presented with this clear fact, the unhelpful rhetoric would be put to one side and TPIL’s directors would act accordingly. However, if the board, when finally presented with an unambiguous message from ordinary shareholders, chose to ignore this, then, in our view, the challenges facing TPIL would cease to be one of finding a solution to the Company’s discount problem, and instead become one of corporate governance. The arguments going forward would rightfully turn on the fitness of the Company’s independent directors to serve on the board.

That directors should be held accountable if they ignore the wishes of a majority of ordinary shareholders is an argument we would gladly take up with any market participant. In the context of the UK listing regime, we do not believe it rates as an argument at all.

For the case that we put to Steve Bates to be construed as a ‘threat’ implies two things. Firstly, that Steve and the other directors of TPIL should be involved in something they would be embarrassed to publicly defend. And secondly, that we have at our disposal some assortment of nefarious tools. Did we challenge the TPIL directors to a meeting behind the school toilets at recess? Did we threaten to avail ourselves of their lunch money? No. We made the plain case that, within the UK, directors would be held accountable for their corporate governance track records, and that if the Directors were to ignore the wishes of their ordinary shareholders, we would shine a bright light on their behaviour.

We were very sad to see Steve Bates resign from the board. However, we cannot help but think it is instructive that he chose to resign instead of defending the TPIL board’s position.

The argument we put to Steve Bates we now put publicly to Rupert Dorey, Huw Evans and Claire Whittet.

Are the directors of TPIL really willing to stand in the way of a clear majority of the Company’s ordinary shareholders, and an overwhelming majority of its independent ordinary shareholders?

To Claire Whittet we ask: do you believe that if ordinary shareholders were provided a simple vote on our original proposals – proposals that would just see TPIL investors given similar terms to those already available to other Master Fund investors – that a clear majority of ordinary shareholders would not support this?

To Huw Evans we ask: did the directors of TPIL draft the board’s announcement of 1 December 2021, or was this press release written by the Manager? Do you stand by its assertion that Class B shareholders should be able to overrule the wishes of the Company’s ordinary shareholders, when ordinary shareholders are the actual investors in TPIL?

For Rupert Dorey we save what we believe to be the most important question of all. The statements Dan Loeb made on 2 February 2021 are, in our view, nothing short of scandalous. As an independent director of the Company, an officer charged with representing shareholders and not the Manager, do you really have nothing to say in response to Mr Loeb’s claims as to VoteCo’s true purpose?

Simple truths, plainly spoken

The UK regime is rightfully held out by many to be the gold standard when it comes to listed public companies. The pillar that underpins this high standard has long been the principle of ‘one share, one vote’[i]. When it comes to the dynamic universe of closed-ended funds listed on the London stock exchange, there is clear daylight between the principles of corporate governance, and what investors expect, when compared to similar vehicles listed in the United States. It would be shameful if the structures put in place at TPIL were actually designed to provide a backdoor route for US corporate governance practices to make their way into the London market, as the Manager has claimed they are. Regardless of whatever structure the Manager believes is in place, we feel highly confident in making the assertion that UK investors will expect the directors of TPIL to respect the wishes of the ordinary shareholders of the Company. Or that a failure to do so will hang over them in all their future dealings within UK capital markets.

That TPIL has faced an unacceptable discount problem over the course of its 14-year life is undisputed by all parties. If the market rating of a company dispassionately reflects investor’s views of the likely effectiveness of a board’s current strategy, then TPIL’s current discount to asset backing is, in our view, a clear indication of how ineffective shareholders believe the board’s current plans will be.

It is not too late for the independent directors of TPIL to stop covering their ears and listen to what a clear majority of ordinary shareholders are saying. We very much hope they do. We remain willing to engage constructively with them in any format to that end.

Yours sincerely,

Miles Staude
Director, Global Value Fund

Disclaimer The views stated in this letter are those of Global Value Fund only. All data, estimates and Company statements referred to have been sourced by Global Value Fund and are accurate to the best of our knowledge. Enquiries: miles.staude@globalvaluefund.com.au emma.davidson@globalvaluefund.com.au

i Very recently the FCA has removed the prohibition on dual share class structures on the London premium market for a narrow subset of companies for a limited period. The premise of these changes was to attract fast growing founder-controlled companies, typically technology business, to consider a London premium listing. Notably, the new Dual Class Share Structures (DCSS) that are permitted last for a maximum of five years post IPO, while, amongst their many investors-friendly restrictions, they are prohibited from being used to stop ordinary shareholders appointing or removing directors.

Global Value Fund Limited c/o Mertons Corporate Services Pty Ltd Level 7 330 Collins Street Melbourne Victoria 3000
ACN: 168 653 521 Telephone +61 3 8689 9997 www.globalvaluefund.com.au
Share Registrar Boardroom Pty Ltd Telephone 1300 737 760 Enquiries@boardroomlimited.com.au
Investor Relations ir@globalvaluefund.com.au

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