Investors wary of too much director discretion

FUND managers and other investors in listed property companies are increasingly voting against company resolutions that enable directors to issue new units at their own discretion.

This practice by directors has drawn criticism because some argue it gives directors too much power and can help them to dilute the unit-holding of a would-be rival or predator.

Companies often have to issue new units as part-payment for a property transaction or to facilitate black economic empowerment deals. But leaving the issue of new units to directors’ discretion could create a situation where company directors issue new units because of a perceived threat of a takeover by another party.

It could also dilute unit-holdings of fund managers who want to maintain a certain percentage of units in a company.

Increasingly, fund managers and unitholders are asking for an opportunity to consider every request for the issue of new units.

Angelique de Rauville, MD of Investec Listed Property Investments, says her company likes to consider each new issue of units.

“Sometimes you can issue shares to acquire property and reduce borrowings, but we want to see a motivation behind every issue of new units in order to determine whether it makes business sense for the company.”

She says there seems to be a trend towards many listed property companies seeking to pass resolutions requesting unitholders to support directors in issuing new units at their discretion.

“One needs to question the motive behind these resolutions. We would prefer that the issue of new units is always done subject to unitholder approval, particularly in a very active mergers and acquisitions environment.”

In such an environment, the motives can often be to dilute potential predators’ stakes in the companies and are not necessarily in the best interest of unitholders “as merger and acquisition activity can often unlock value for unitholders”, says De Rauville.

She says there is a growing trend of fund managers, as well as other investors, voting against such resolutions. “Investec Listed Property Investments generally votes against these resolutions.”

Macquarie First South property analyst Leon Allison says he thinks fund managers and investors have become “more active in terms of corporate governance issues”.

“I think the trend recently has been to not give directors unlimited discretion in terms of issuing new units. Maybe in the past it was less of an issue and directors had a lot more discretion,” says Allison.

He says this discretion on the part of directors creates a risk that company management may issue units for reasons that may not always be in the best interest of unitholders.

Andre Stadler, MD of Catalyst Fund Managers, says that as a general principle, Catalyst Fund Managers opposes the issue of new units because of the potential dilutionary effect it could have on distributions for each unit.

“We would prefer to see management making use of existing capital resources to enhance returns. In our view, issuing new units should be the last resort in terms of sourcing capital as in our opinion it is the most expensive source of capital.”