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The Millner family regard Brickworks and Washington H. Soul Pattinson as family companies and their cross shareholdings in each amount to “ghost equity”, the Federal Court has heard.
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In the first day of the case before Justice Jagot in Sydney, it was suggested that a nil premium merger would unlock $454 million for shareholders of both companies.

Brickworks and Soul Patts, the court was told, also went to great lengths to block the nomination of an independent director, Robert Fraser, to the Soul Patts board in 2011 including attacking the performance of Perpetual’s funds.

Investor Perpetual backed Mr Fraser’s appointment but the nominee was ultimately unsuccessful.

Tony Bannon, SC, representing Perpetual, argued that the cross-shareholding structure was originally devised primarily to thwart a takeover bid. But it also gives the Millner family-led boards effective control in any general meeting, the court heard, at the expense of minority shareholder interests.

“We submit that the maintenance by these boards by use of that cross-shareholding to maintain the cross-shareholding which serves to entrench management’s position is not in the interests of shareholders generally,” Mr Bannon said. ‘Old school connections’

Current Soul Patts chairman Robert Millner is also the chairman of Brickworks; Brickworks and Soul Patts own roughly 40 per cent of each other’s equity.

Mr Millner, who has not sworn an affidavit, enlisted a plant at the Soul Patts AGM of 2011 to “populate the audience with old school connections”, it was heard.

“To suggest that management should not be subjected to the votes of shareholders almost expresses a fear of management if they are exposed to the general will of the meeting they may be removed,” Mr Bannon said.

He continued: “The key reason the cross-shareholding unravelling attempts have been blocked or resisted is the recognition the current board, Millner influenced as they are, will lose control.”

Mr Bannon reflected that the Millners would argue the cross-shareholding has worked well to date, and both companies have prospered. Historically it was akin to a “father knows best mentality”. Recruiting company

In the lead-up to the AGM of December 2, 2011, when Soul Patts shareholders were also asked to vote for the re-election of Michael Millner, David Fairfull and Thomas Millner to the board, the senior Mr Millner asked Bruce Bagley to stand up at the meeting and “say some things about the Fraser motion”.

Mr Millner also asked Mr Bagley to make some remarks about how the best way to find director talent was via a recruiting company. On November 24, Mr Bagley responded: “only too pleased” and “can you let me know the names of one or two recruiting companies you would use?” He also inquired as to whether he should “talk about Tom”, being Thomas Millner.

A public relations firm, Gavin Anderson, provided a media strategy that included closing part of the meeting to cameras so as not to reveal any potentially agitating expressions, Mr Bannon said, and Soul Patts’ insistence on attacking Perpetual’s track record was “playing the man and not the ball”.

But at one stage, there was an indication that Brickworks would vote its proxies in favour of Mr Fraser.

The court was told of an email from Alex Payne, Brickworks’s chief financial officer, responding to an inquiry around whether Brickworks would be voting in support.

“This is very, very confidential. You are correct though,” he is said to have responded.

“As it turns out you’ll see they didn’t vote for,” Mr Bannon said.

In October and November of that year, Perpetual’s then head of equities Matt Williams was communicating with Mr Millner with the intent to convince him to appoint Mr Fraser to improve governance. Public statements

Mr Millner was unmoved, it was argued, and apparently displeased with the public statements made by the fund manager. Mr Williams is expected to appear in court on Wednesday; he now works at Airlie Funds Management. Mr Williams had the support of other shareholders too.

Referring to the composition of the boards of the two companies, “Whether by blood or other connections, the connections with the Millners run deep”, Mr Bannon said.

One means to resolve that would see Brickworks and Soul Patts merge, and the cross-shareholdings cancelled. A nil premium merger would give ownership of the two companies back to the shareholders who are not the cross shareholders, and reduce the shares on issue of the merged company by 30 per cent, it was argued.

The combined assets would be worth $4.25 billion. Of the $454 million estimated to be unlocked, $143 million is attributed to Brickworks shareholders and $311 million to Soul Patts shareholders.

The case continues.

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