Proxy contests are extremely rare in Italy, but this past week a shareholders’ meeting resulted in a surprising upset in the fight to gain control of Impregilo, one of the leading construction companies in Italy. The fight has developed into a highly contentious match between two determined opponents.

What does this mean for institutional shareholders? In short, this rare victory against an entrenched controlling shareholder group demonstrates that monumental change can be accomplished when shareholders collaborate on strategic votes – a concept which, until recently, was unimaginable in Italy. Additionally, the case will test uncharted legal waters in Italy, setting the course for similar action in the future.

The Contenders: The Salini and Gavio families each own just under 30% of the Company’s share capital through Salini S.p.A. and Igli S.p.A., respectively. At the request of Salini a special meeting was called to remove the board of directors, controlled by the Gavio family.

The Match: Salini asserted that replacing the current board was necessary based on a variety of factors such as decreased profitability and lack of future development strategies for the company. Salini proposed to reconstitute the board and initiate a business plan that would significantly restructure the Company. The Gavio family argued that there was no legal justification for removing the entire board and that the proposed business plan lacked sufficient detail. Each family spent months trying to rally the support of minority shareholders, and in a last-minute upset Salini gained the support of Amber Capital, the Company’s third-largest shareholder, to win a narrow 51% to 49% victory – far from a technical knockout.

The Corners: The contenders have now returned to their respective corners to regroup. After his early win, Mr. Salini has expressed a desire to focus Impregilo in the construction sector through sale of its non-construction assets and to push through a merger with his own company, Salini Costruttori. On the other side of the ring, the Gavios are shouting for disqualification. They are challenging the validity of the vote, claiming that Salini failed to disclose essential information and acted in concert with Amber Capital, thus requiring them to make a full bid for the company.

Split Decision: The judges are divided after Round One. Some have argued that this is an early victory for small investors in that it has removed a board associated with the Gavio family which is connected to the Mediobanca conglomerate, a major player in the Italian corporate arena. Glass Lewis recognized the veracity of some of Salini’s points, such as the fact that Impregilo trailed its European peers in recent years; however, we also recognized that Salini failed to present sufficient detail regarding the new business strategy and uncertainty surrounding a legally required just cause for the board’s removal.

Upcoming Rounds: The battle between the two shareholders has increased the Company’s share price by more than 30% since January and the fight is by no means over. A court is scheduled to hear the Gavios’ case for invalidating the vote on August 22, 2012. In the meantime, Mr. Salini intends to implement his proposed strategies, including the merger with his own company in the near future. Mr. Salini stated at the meeting, “

[g]rowth is an obligation. Without it Impregilo cannot make investments.” However, his ambitions could be thwarted by the Gavio family as the merger would require the support of at least two-thirds of the Company’s shareholders and turnout at the most recent meeting was 81%, essentially leaving the Gavios with a blocking stake. The Gavios, through a press release by Igli, stated, “[w]e will not hesitate to demonstrate our total determination to stop destructive plans and we will do it in every venue – board meetings and shareholders meetings – every time that it will be necessary.” The Gavio family has not expressed a desire to relinquish its current stake and Mr. Salini has also dismissed the idea of a buyout. It appears that no one is throwing in the towel just yet and that there will be much more to come in Round Two.

Article by Melinda Hanzel