Australia's minority shareholders face fight for influence as Asian business dynasties eye local acquisitions

3 September 2018 3:11pm
Sydney Opera House

23 August 2018. By Laurel Henning and James Panichi.

A multibillion-dollar bid for Australian natural-gas pipeline operator APA Group by a Hong Kong-led consortium is set to place the Asian city's dynastical business model at center stage Down Under, and minority investors may not like what they see.

The CK Infrastructure Holdings consortium's planned A$13 billion ($9.6 billion) acquisition may mark the opening up of corporate Australia to tightly-knit shareholder blocs that could drown out the voices of minority shareholders.

The deal’s potential impact on competitive processes involving future gas pipelines means it will require clearance by the Australian Competition & Consumer Commission. And the influx of foreign capital will prompt the involvement of the country's Foreign Investment Review Board.

Just as importantly, because the acquisition involves critical infrastructure — a network of gas pipelines — it will also attract the attention of Australia’s Critical Infrastructure Centre, which is run by the Department of Home Affairs.

But the challenge for smaller investors will be more cultural than regulatory. Founding families often run Asian companies for generations with little or no opposition to their decisions.

CK Infrastructure Holdings and the consortium that is behind the APA takeover bid are controlled by the family of Hong Kong billionaire Li Ka-shing, the city's richest man.

Victor Li Tzar-kuoi, one of Li's sons and an heir to Hong Kong’s biggest family fortune, chairs CK Infrastructure. He leads the boards at CK Hutchison Holdings, which owns the infrastructure group, and CK Asset Holdings, which is 31 percent owned by the family trust.

If CK Infrastructure opts to keep APA public — and not all observers think it will  — such family-based arrangements should prompt reflection among minority shareholders at a time when the tide is turning in Asia against family-controlled corporate behemoths.

Family shareholder blocs are the main headache in Asia that confront activist investors trying to agitate for change at publicly-listed companies. Yet at the same time, those very same ownership structures are making them more frequent targets for activists' campaigns.

According to research by JP Morgan Chase, 31 percent of all non-US campaigns took place in Asia in 2017, up from 12 percent the previous year.

As recently as four months ago, Paul Singer’s Elliott fund targeted South Korean conglomerate Hyundai over a restructuring plan that the fund said would benefit the parent group’s controlling family at the expense of its shareholders.

The pressure was sufficient to prompt Hyundai to scrap a vote on the planned restructuring, although it is expected to put the plan to shareholders again later this year. Pressure is what minority shareholders always have on their side.

In Australia, any investor with a stake of at least 5 percent in a business can call a shareholder vote on company directorships, and a “two strikes” voting rule on executive pay can render an entire board vulnerable to a shareholder revolt.

Those provisions represent critical leverage for shareholders, who in Australia face a requirement of 75 percent support for any vote to change company strategy, making any such changes of course nigh on impossible to achieve. Hong Kong family-controlled companies won’t be likely to allow support for such votes even to take root.

With that in mind, Australia’s protections of minority shareholder rights may be partly behind the confidence of APA’s top investors, which include Rare Infrastructure, a Sydney-based fund that is reportedly supporting CK Infrastructure's offer.

Yet calling meetings and votes only gets investors so far if a company's controlling party holds a blocking stake.

Just this month, Australian wagyu beef producer The Australian Agricultural Company saw a 42.5 percent stakeholder essentially reinstate its chairman, Donald McGauchie, by holding more than half of the 80.8 percent register that voted.

One way of avoiding shareholder demands altogether, of course, is to take a company private. According to some observers, that possibility should be taken seriously. It's exactly what CK Infrastructure did in 2014 with Envestra — now renamed Australian Gas Networks and one of the country's largest gas distributors.

Hong Kong families are in it for the long term, the argument goes. They want to build up value over decades. Yet that strategy is exactly what frustrates activist investors hankering to create value within a few years rather than generations, suggesting that going private is an easy way around any objections to a slower approach to value creation.  

Whatever the outcome of the APA Group deal, it seems odd that in Australia a massive investment by a company under the control of a family dynasty wouldn’t be a cause for concern among minority shareholders, especially at a time when Asia's family-run conglomerates are in the crosshairs even at home.

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