One-proxy vote approach is well-established, but is it the best way?

Singapore

THE Securities Industry Council (SIC) has reminded all parties that the scheme of arrangement for the merger of Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) and ESR-Reit is a court-supervised process.

In a statement to The Business Times, SIC added that how a custodian votes on the scheme will follow a contractual agreement between the custodian and its clients - the beneficial owners of such units. "Beneficial unitholders who do not agree with the terms and conditions set out in the agreement with the custodian can choose to hold their units directly," SIC added.

On Wednesday, Sabana Reit's manager also issued a statement that there was "nothing unusual or improper" about one-proxy voting - a procedure adopted in the other Reit mergers in Singapore this year as well as prior Reit mergers.

Sabana Reit's and SIC's statements come after Quarz Capital and Black Crane Capital (Q&BC) - fund managers who have opposed the merger on the premise that it is a low ball offer for Sabana Reit, and who claim to represent 11 per cent of Sabana unitholders - voiced concerns over Sabana Reit's "one-proxy rule" for custodians or nominee companies.

They worry that custodians will be unable to reflect all unitholders' votes on the proposed merger, which would vault Sabana Reit from the smallest industrial S-Reit into the fifth largest by assets under management.

Q&BC said the suggestion not to use custodians and nominee accounts may not be practical.

"For institutional investors - due to financial sector regulations, client obligations on asset custody, and multiple accounts - it is next to impossible to move their units into CDP (Central Depository) accounts. Requiring the transfer of assets will significantly discourage voting (as most of these unitholders cannot undertake this) and deprive unitholders' their rights," Q&BC told BT in a statement.

These developments come ahead of pivotal back-to-back meetings to be held virtually on Friday. Sabana Reit is seeking approval at an extraordinary general meeting (EGM) to amend its trust deed. The amendment, if passed, will mean custodians can appoint only one proxy for the scheme meeting held immediately after. If the amendment is not approved, the scheme meeting will not be able to proceed. The deadline for voting via proxy forms was Tuesday.

The scheme resolution, meanwhile, requires "double-barrel" approval: at least 75 per cent in the value of votes cast, and at least 50 per cent of the total number (by headcount) of unitholders voting. This double-barrel condition is supposed to represent additional protection for minorities.

For clarity on whether each headcount votes for or against the resolution, schemes in Singapore have traditionally given each independent unitholder just one vote.

This is unlike typical resolutions at annual general meetings and EGMs, where there is no headcount requirement. Under such a scenario, nominee banks can indicate that they will vote some units in favour and others against based on their customers' instructions.

"Legally speaking, the headcount is based on the registered owner of the units. If you split into two (by allowing nominees to submit more than one proxy form), then the implications are that you are counting two heads or two registered unitholders. This will be open to challenge," said one M&A lawyer.

At the same time, he said, a fair point is being raised about disenfranchisement as not all unitholders' voices are accurately represented in the one-proxy approach. "If the custodian is aggregating the votes to come up with a single choice, some unitholders could miss out on the show of hand."

A Citi spokesperson said Citibank Nominees' process is to aggregate all authorised votes received from clients and sort them into three categories: for, against and abstain.

The direction of the vote will be determined by the category with the most votes. Assuming 100 units are held on behalf of multiple clients, with 60 units voting for, 30 against, five abstaining and five with no response, then a vote will be cast for the resolution.

The percentage of units voted, meanwhile, would depend on the rules of each custodian. In an offset, with 60 units for and 30 against, the custodian will record on the proxy form that 30 units voted for the resolution of the 100 units held.

As at March 2020, RHB Bank Nominees and Citibank Nominees were the largest unitholders of Sabana Reit with 19.05 per cent and 17.74 per cent, respectively, based on the Reit's latest annual report.

This is a matter that M&A experts say they struggle with, and one that is bigger than the Sabana-ESR Reit merger: Should the law punch deeper than nominees and to what extent?

Said a deals expert: "This is often an issue when it comes to proxy votes. There has to be a line drawn somewhere. The question is how far down the line should it go?

"Unitholders who choose to hold their investments through nominees must accept the consequences of that. But ultimately, if the economic owners of these units are not being provided true representation of their voice, there must be some ability to be flexible.

"Regulators need to approach this issue more progressively. Just because it's an established practice and issuers have ticked all the boxes, doesn't mean the process can't be held to scrutiny or be made more flexible".

Experts BT spoke to said that Sabana Reit's arrangement is well-established, but that it is not the only arrangement possible.

Robson Lee, a partner in Gibson Dunn's Singapore office, said: "This (one-proxy approach) is an accepted practice. It is, however, not the best way to structure the voting mechanics in a situation where the proposed scheme is objected to by holders holding a significant value of units in the Reit."