Activist funds opposed to Sabana-ESR merger slam one-proxy rule
Singapore
AHEAD of voting on the controversial merger between Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) and ESR-Reit, the deal's key opponents Quarz Capital Management and Black Crane Capital have raised concerns that the voting process involving custodians and nominee banks may be stacked against their interests.
Activist funds Quarz and Black Crane, which have for months publicly opposed the merger as a "panic-sell" of Sabana Reit at a substantial discount, have written a letter to the Monetary Authority of Singapore (MAS).
The letter, dated Nov 30 and signed off by Quarz chief investment officer (CIO) Jan Moermann and Black Crane CIO Peter Kennan, raised concerns over potential "voting irregularities" as a result of Sabana Reit's "one-proxy rule" for custodians or nominee companies - typically banks or brokers - submitting the vote of unit-holders who are their clients.
In the letter, seen by The Business Times, the fund managers claimed that Sabana Reit's restrictions that custodians can only submit one proxy form would mean custodians will not be able to fully represent all unitholders' votes at the scheme meeting.
Quarz and Black Crane's grouse is related to a seemingly innocuous amendment to Sabana Reit's trust deed. Approval for this amendment is being sought at Friday's extraordinary general meeting (EGM) and, if approved, will be applicable on the same day for the scheme meeting at which unitholders will vote on the merger.
The amendment allows for the appointment of only one proxy for the scheme meeting (versus two proxies for any meeting of the Reit) by custodians.
In itself this amendment is not unusual. But given the controversy surrounding this deal, it could be a sore point for some minority investors.
In their letter to MAS, Quarz and Black Crane said certain custodian banks were determining their proxy vote using either an "offsetting" or a "simple majority" rule.
One major custodian bank, in client communications seen by BT, said it will collate all clients' instructions and indicate a vote based on the collective majority choice.
Assuming investors A and B held Sabana Reit units via this custodian bank, and A submits three votes in favour while B submits two votes against, under the simple majority rule, the custodian would submit three votes in favour but would submit no votes against the merger.
Meanwhile, under the offsetting rule, which at least one other bank will use, the same situation as described above would see the custodian submit only one vote in favour. The votes against would be offset by the votes in favour.
"This is a standard process and usual practice... and does not deviate from the norm," said an executive from a custodian bank.
A spokesman from Sabana Reit's manager said: "There is nothing unusual or improper about the voting process, and it applies to all unitholders. It is in line with precedent Reit mergers in Singapore."
Quarz and Black Crane are urging custodians to "properly submit" both approving and dissenting votes and calling on them to publicly disclose their practice and share the actual underlying vote of unitholders.
When contacted for comment, corporate governance watcher Mak Yuen Teen of NUS Business School described the single proxy rule as "unsatisfactory" and not in line with the practice for companies, which typically give custodians and nominee companies multiple proxies.
He added: "We don't know if the different custodians are adopting different rules. It would seem the whole voting process becomes a bit of a lottery at the very least. Further, this latest twist has come to attention rather late given the voting deadline."
Indeed, time has nearly run out. The EGM and scheme meeting will take place virtually on Dec 4, and voting will only be permitted via proxy forms submitted by Tuesday (Dec 1).
Robson Lee, a partner in Gibson Dunn's Singapore office, said: "In the spirit of good corporate governance in addition to complying with the legal requirement of having the requisite majority support to approve the scheme, custodians should be entitled to collate and submit separate proxy forms setting out the approving and dissenting votes of unitholders.
"The proposed scheme must receive an order of the Court sanctioning the scheme. Before sanctioning a scheme, the Court must be satisfied that the respective scheme meetings have received the requisite support of a majority in number and not less than 75 per cent in value of the units held by the unitholders of the respective Reits who have voted in person or by proxy."
