Echo receives curveball from James Packer: How to manage an EGM

Crown Casino chairman James Packer today launched the latest grenade at rival Echo Entertainment Group, calling for an extraordinary general meeting to oust Echo chairman John Story.

In a statement to the ASX, Crown said it would use the meeting to push for former Victorian Premier Jeff Kennett to replace Story.

As a competitor to Echo, Crown’s shareholdings in the company are legally capped at 10%, meaning Packer has to convince at least 40% of Echo’s shareholders to heed his call to oust Story.

Echo’s management aren’t the only ones to face disgruntled shareholders at an EGM lately. Paperlinx chairman Harry Boon recently survived a motion calling for his resignation at one such meeting. For listed companies, an EGM is a concerning and potentially damaging turn of events.

Sometimes EGMs are called by a company’s management, prompted by the need for a vote on a merger or takeover activity, says Gerry Bullon of Insor Investment Relations.

“But often they are about shareholder criticism, and are called by dissident shareholders.”

These “hostile EGMs” present an opportunity as well as a risk for boards, says Ian Pope, director of MAGNUS Investor Relations.

“They’re a huge distraction, and require immediate engagement from the board, but many would also see them as an opportunity,” he says.

“When an EGM is called… what’s at stake is the credibility of the management team. So it positively impacts their credibility if they show they’re engaged with the issue, have clear messages and are prepared to act quickly. Despite the negative connotations, they are an opportunity.”

In Australia, any shareholder or group of shareholders who own 5% or more of a company can issue a binding demand, or “requisition”, an EGM.

A company’s management then has 21 days from this to announce the date and location of the meeting. The meeting must be convened within two months from the shareholder requisition.

Pope says there are three overarching areas boards need to address when facing a call for an EGM from disgruntled shareholders: the first is position, the second is consistency, the third is control.

Position

Position refers to what position the company’s board takes in relation to the claims being levelled against them. For example, in Echo’s case, Packer has in a letter to shareholders accused Story of displaying poor leadership that was harming Echo’s business, as well as a failure to manage regulatory risk.

Boards need to address the merits of the other side’s claims quickly, Pope says. They need to figure out what’s their position in response to these claims, reiterate their corporate strategy, underline their record (and any mitigating factors) and outline their future plans and objectives for the company.”

“It really goes to the credibility of the management team,” Pope says, which is why it’s important for them to quickly and clearly respond.

Consistency

When establishing their position, boards have to be consistent with their past communications, as well as those they make in the future. “They need time to think of their key messages, and figure out what they’ll go to market with, as that’s what they should be repeating,” Pope says.

Control

And thirdly, boards need to retain control of the agenda.

Lobbyist Jody Fassina says he expects in the next few weeks the war between Crown and Echo will escalate in a bitter, public clash.

“This will now play out in the media. The respective sides of the debate will try to use the media as a platform to mount their arguments, while behind the scenes they lobby the institutional shareholders. Packer’s criticised staff management under John Story, so it wouldn’t surprise me if stories come to the press put out by the other side in regards to Mr Packer’s management of companies, including One.Tel, where he lost hundreds of millions along with [Lachlan] Murdoch. It’s going to get nasty.”

Pope says this is far from best practice. “Boards should try not to engage in the propaganda and the rhetoric. If the other side is making public comment, they should try to avoid the compulsion to engage and respond, because that fuels the issue and lends credibility to the other side’s claims.”

Part of controlling the agenda is being cautious of engendering information fatigue. “You’ve got to be careful with investors,” Pope says. “They’ll read the soundbites, the claims from other shareholders, but there are limits to how much information they can receive and digest.”

He says many companies are coming up with creative ways to communicate with shareholders outside the usual releases to market and investor briefings. “For example, some companies have used postcards mailed to shareholders. They’ll have a very tight message that clearly outlines their top two or three points and their position.”

“That’s a very clear, effective way to get their message across.”