...as they may take control of a company and leave minority shareholders out in the cold
Thursday 24 May 2018 Author: Daniel Coatsworth

The perils of having dominant shareholders have come to the forefront once again with various small cap companies on the
UK market. Minority shareholders have effectively been shunted to one side and in one case not given a fair say in important matters which is unjust.

For example, several companies say they will leave the stock market and in doing so will leave investors owning shares they cannot sell.

Another example has seen two shareholders accounting for 47% of Quarto’s (QRT) stock manage to get themselves and two other individuals elected as directors at the book seller’s recent AGM without having made a proposal in advance of the meeting.

They side-stepped the normal requisition process because Quarto is registered as a Delaware company and is subject to different rules than UK-registered firms.

The two shareholders simply had the resolutions to appoint themselves and two other individuals added to the schedule at the start of the AGM.

It meant that anyone who couldn’t attend the meeting and who was reliant on a proxy vote by post didn’t know about the motion to replace four non-executive directors and so couldn’t vote on the matter. What’s also odd is that the two shareholders holding 47% of the stock were allowed to vote for their election.

MAKING A REAPPEARANCE

The aforementioned shareholders are Laurence Orbach who was ousted as Quarto’s chief executive in 2012 by then-29% shareholder Harwood Capital; and Chuk Kin Lau who is a
big Quarto customer.

Fifteen years ago Orbach fought a battle with asset manager JO Hambro which put in a tender offer to take its stake from 26% to 51% after losing faith with management. Quarto’s Delaware company status meant JO Hambro didn’t have to make
a full takeover bid.

In a twist of irony given the latest events, Quarto at the time said the tender offer violated fundamental principles of the Takeover Code (which does not apply to Quarto as a Delaware corporation) by ‘failing to treat all shareholders equally’.

Fund manager Paul Mumford of Cavendish Asset Management is one of the annoyed shareholders who has come forward to complain about the latest events. He is also frustrated by the way Quarto last year failed to put a takeover approach to shareholder vote.

‘This represents an egregious case of minority shareholder interests being steamrollered on the sly. A cynical person would look at this and call it a takeover on the cheap, with an in-built conflict of interest as the cherry on the cake,’ says Mumford.

‘Looking at the new board makeup, it seems inevitable that minority shareholders will now find their interests sidelined. On the other hand given that the company’s performance is less than stellar, it is good to see some shareholders playing an active role.’

MORALLY WRONG

One could argue that Orbach’s latest move was the fastest way to regain a seat at the table of the business he clearly loves, having spent 36 years in charge. But morally it doesn’t seem right. It comes across as self-serving and not in the spirit of good corporate governance.

While there is clearly more of this story to be told, it doesn’t excuse the poor manner in how minority shareholders have been treated now and in the past. (DC)

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