Important highlights from upcoming meetings, provided by Glass Lewis’ global research team
APA Group
Australian Securities Exchange – October 25
With a takeover led by Hong Kong-based CK Infrastructure Holdings Limited (“CK Group”) looming, the timing of a correction notice concerning APA Group’s MD/CEO’s termination arrangements is certainly raising eyebrows amongst the media and investment community. The initial announcement of CK Group’s unsolicited proposal was made in June 2018, with both parties entering into a formal implementation agreement on August 13, 2018.
APA lodged an ASX announcement clarifying the MD/CEO’s employment arrangements on September 24, 2018. As it transpires, the company had been understating the MD/CEO’s entitlements in annual reports for the past five years. Under the clarified arrangements, Mr. McCormack is entitled to a payment in lieu of notice equal to 100% or 105% of his fixed remuneration for the period not worked plus 100% or 105% of his STI and LTI opportunities (pro-rated for the period not worked). The real kicker lies in the paid restraint period, which also entitles Mr. McCormack to a payment on the same scale as the notice period (at full vesting). Oftentimes restraint periods do not involve any payouts and when there is a paid restraint, it typically is limited to fixed remuneration.
In a “worst case” scenario for investors, the MD/CEO could theoretically receive a total payment of approximately A$10,025,000 at target values (or approximately A$10,526,250 at the 105% potential rate). With the wheels in motion for the CK Group takeover and the high probability that Mr. McCormack’s role at APA will be impacted by the change in ownership, potentially triggering “good leaver” entitlements, shareholders may be reconsidering their support of the company’s remuneration report this year.
Clariant AG
SIX Swiss Exchange – October 16
This time last year, Clariant was pursuing a merger with Huntsman Corporation. But since that deal was abandoned, much has changed. In January 2018, Clariant announced that SABIC – a Saudi Arabian industry peer and joint venture partner – had entered into an agreement to purchase the entirety of the shareholdings of dissident shareholders White Tale and 40 North. This agreement gave SABIC 24.99% of Clariant’s issued share capital, making it the largest shareholder.
Last month saw the final regulatory approvals for the agreement, and the company announced that it had entered into a Memorandum of Understanding with SABIC and had updated its strategy and outlook. In particular, Clariant and SABIC intend to combine their business activities in the field of High Performance Materials and Clariant intends to divest its remaining Plastics and Coatings business by 2020. Further, the company announced that it had entered into a governance agreement with SABIC, which is intended to “determine the principles of Clariant’s future governance”, with the convocation of an EGM to seek shareholder approval of the necessary appointments and amendments to implement this agreement.
Pursuant to the agreement, it is being proposed that the board of directors be expanded from ten to twelve members, with SABIC able to nominate four of the board candidates. Further, CEO Hariolf Kottmann will resign from his position effective October 16, 2018 with it being proposed that he assumes the role of board chair; Ernesto Occhiello has been named as Mr. Kottmann’s successor, effective from the date of this EGM. Current board chair Rudolf Wehrli and NED Peter Chen have also resigned from their positions on the board effective from the EGM. It’s all change, and the upshot is a board that’s largely dominated by SABIC (four of twelve seats) and another 14% shareholder (two seats), leaving less than half the directors independent.
Origin Energy Limited
Australian Securities Exchange – October 17
Origin Energy has become one of the most popular kids on the block for ESG activism in Australia. Shareholders may recall that the integrated energy company copped four shareholder resolutions at its 2017 AGM last October. The resolutions failed to gain more than minor support, with opposition ranging from 83% to 95% of all votes cast. This has not discouraged further shareholder resolutions being raised for this year’s AGM, and this year’s batch covers familiar ground.
The shareholder resolutions were lodged by the Australian Centre for Corporate Responsibility (“ACCR”). As submission of non-binding advisory shareholder resolutions is not an automatic shareholder right under Australian law, the first resolution is a constitutional amendment that would, if approved, open the door to further resolutions. As with last year, the constitutional amendment resolution is accompanied by three advisory shareholder resolutions, two of which relate to climate change. One seeks to set emissions targets aligned with the Paris Climate Agreement, while the other seeks a report on the company’s support for industry associations that have lobbied against climate change regulations. The remaining resolution seeks a review of whether free, prior and informed consent of Aboriginal traditional land owners has been established in relation to potential exploration sites in the Northern Territory. Origin Energy has recommended shareholders vote against all four resolutions, but ACCR is campaigning hard for support and is appealing directly to members of Australian superannuation funds to lobby the funds to support their campaign.
On financial matters, Origin Energy disclosed A$160 million of electricity hedge premiums in a FY2018 results presentation that had been excluded from underlying earnings in FY2018 and earlier years. The costs surprised the market, with a ~15% share price drop following thereafter. As the costs remain outside of underlying earnings for the current year, they had no impact on the CEO’s STI KPI targets for underlying EPS and EBITDA in which stretch targets were achieved with the board unwilling to move the goalposts. Nonetheless, the CEO felt the impact of the share price drop to the tune of at least A$2.7 million of unrealised losses on shares, deferred equity rights, unvested equity grants and options.
dormakaba Holding AG
SIX Swiss Exchange – October 23
There are some hard and fast rules in life, but in most cases a thorough explanation can warrant an exception. That’s certainly the hope of dormakaba’s board, which raised eyebrows in June when it announced its intention to appoint CEO Riet Cadonau as chair. While such a dual mandate used to be common market practice in Switzerland, the board chair position is increasingly being held by an independent non-executive director.
In a letter to shareholders published in September 2018, dormakaba outlines the safeguards that the board will introduce and provides insight into the board’s rationale for the proposed appointment. It turns out the board had already been considering having Cadonau stay on as chair once he steps down as CEO. With Cadonau expecting that to occur as soon as 2020, the board wanted to avoid a short-term chair appointment, and saw this as an opportunity to “ensure a seamless transfer of responsibility as well as continuity.” As far as safeguards, independent non-executive Hans Hess will be appointed as vice chair and Lead Independent Director, and Mr. Cadonau will not serve on any board committees while he holds the dual role. Whether that’s enough to win shareholders over remains to be seen.
Qantas Airways Limited
Australian Securities Exchange – October 26
Qantas have received attention from ESG activists for human rights issues concerning the deportation of refugees and asylum seekers. Most recently, this attention took the form of two shareholder resolutions co-filed by the Australian Centre for Corporate Responsibility (“ACCR”) and Refugee Advice and Casework Service (“RACS”).
As at Origin and other Australian issuers, Qantas received a binding resolution to amend the constitution to allow for the submission of non-binding advisory shareholder resolutions. Contingent on the constitutional amendment, a further advisory resolution asks the airline to commit to a heightened due diligence process of potential forced deportations, and to commission a human rights review to align Qantas’ deportation practices with the UN Guiding Principles on Business and Human Rights. Importantly, the proposal asks Qantas to cease any removal or involuntary transportation activity prior to completion of the review. Qantas currently undertakes deportations of refugees and asylum seekers as a service provider to the Australian Department of Home Affairs.
On financial matters, Qantas adjusted their Underlying Profit Before Tax (“Underlying PBT”) by excluding A$162 million of “transformation costs” (FY2017: A$142 million). This is the fifth consecutive year the airline has adjusted for “transformation costs”, which is unusual given the transformation program had a three-year timeline when it commenced back in 2014. As such, these costs are starting to look a lot like business-as-usual costs, especially when around half relate to fleet turnover. One potential knock-on effect of the exclusion relates to STI payouts, which saw partial vesting in 2018 based in part on Underlying PBT. However shareholders will have to wait and see whether the adjusted financials will lead to adjusted payouts, as the company does not disclose Underlying PBT targets.