Our engagements with a local company
Companies use various sources of funding to finance their operations, including debt and ordinary share capital. As asset managers entrusted with investing on behalf of our clients, we assess a business’s capital structure to determine its financial risks and solvency.
A common fundraising method that companies use is issuing more shares to the market. We believe that each time a business issues more shares, it should explain how it intends to use the funds raised. In this way, investors can assess the merits of the case before deciding whether or not to support the resolution. This is key, given the impact that issuances can have on overall shareholder value. However, companies do not always hold the same view, and there have been instances where we needed to engage with them to try to reach common ground. We look at an example of such a case locally, with one local fast-moving consumer goods business.
In June 2024, the company sought to issue additional shares to fund future acquisitions and to reward existing management. The request was for blanket approval for these future-based scenarios. We prefer to receive separate requests for each instance. In keeping with this, we recommended that our clients vote against the proposed resolution. This was not the first time the company had requested blanket approval, nor was it the first time we had shared our views on blanket approvals with them.
Before we voted against the resolution, we communicated our concerns through meetings and written correspondence. The feedback from the management team was that they require general approval for these issuances for efficiency reasons – to enable quick turnarounds whenever they need to deploy the shares. Although we understand the need for efficient operations, our opinion is that the time needed to convene a meeting requesting shareholder approval is reasonable and would not hinder the company from executing its mandate. We shared this viewpoint with the company; however, at the annual general meeting (AGM) in June 2024 it became clear that our engagements had not yielded the desired outcome when the entity included their proposed resolution, despite our recommendation against it. The resolution was later withdrawn shortly before the meeting, after voting had been submitted, and we await further insight on whether the company has taken our recommendation on board.
We continue to engage with the company on our recommended changes pertaining to other matters going forward and anticipate reaching resolutions that will benefit shareholders while helping to safeguard the company’s long-term prospects.
How we approach share issuance recommendations
It is possible for a business to change their capital structure by either issuing more shares or buying them back from the market. Both actions can impact shareholder value.
Companies issue ordinary share capital for various reasons, including:
- Engaging in a corporate action, such as purchasing another entity, in part or entirely
- Financing participation in a proposed project or purchasing assets like the entity’s existing assets (for example, a property company purchasing a property to be added to its existing portfolio)
- Paying down debt
As in the case study above, our view is that management must seek permission to issue shares to protect shareholder interests. This can take place either at an AGM or a meeting called specifically for that reason, with the resolution being passed or rejected by a simple majority vote. Each proposed share issuance must be considered on its own merits. Shareholders should only approve issuance that will ultimately lead to value creation.
Without these checks and balances, management teams may show a propensity to engage in empire-building activities, such as takeovers and inter-market expansions without fully considering the impact on shareholder wealth. It therefore becomes even more important for us as asset managers to assess the suitability of each proposed usage. Our assessment focuses on the valuation of the asset that the share issuance is being used to finance:
- If the asset is cheap enough to create value for the entity, we are likely to approve the issuance.
- If strategic considerations align with existing policies and operations, we are likely to approve the issuance.
While the first consideration is self-explanatory, the latter consideration is just as important as a lack of fit can prove to be value destructive over the long term. This is why it is crucial to provide oversight in both regards prior to recommending for or against issuances.
Our view on share buybacks
The key reason to embark on a share buyback is if the company’s shares are trading meaningfully below their intrinsic value and the anticipated return is more attractive than other internal or external uses of the company’s cash or resources.
It is possible for a buyback to be initiated at a price that is detrimental to shareholder interests, resulting in the destruction of shareholder value. We believe it is important for each proposed buyback to be assessed independently to ensure that it is the best use of company resources.
The value held in a business by shareholders is represented by the entity’s ordinary shares. Safeguarding the value of these shares is one of our core responsibilities. In our view, assets must be deployed in a manner that is aligned with company and shareholder interests. As such, we will continue engaging the businesses that our clients hold shares in to ensure continued alignment between company actions and shareholder value.