The financial press (see, e.g., this FT article) reported last week that Qatar Holding, a Qatari sovereign fund, is demanding better terms in the Xstrata/Glencore merger. Bloomberg reports:
Qatar Holding LLC, which built an 11 percent stake in Zug, Switzerland-based Xstrata since February at a cost of about $4.3 billion, wants the agreed offer raised to 3.25 Glencore shares for each of Xstrata’s, compared with the current offer of 2.8 times, according to a statement yesterday.
The move from Qatar’s sovereign wealth fund pressures Glencore to sweeten the bid or walk away as it takes those dissatisfied with the terms to about 14 percent of Xstrata shareholders. That’s close to the 16.48 percent threshold that has the power to block the offer because U.K. takeover rules prevent Glencore from voting its shares in Xstrata.
The move from QH surprised some observers because Gulf SWFs have tended to be passive investors. I am currently at work on an article on SWFs in corporate governance, and my view is that what QH is doing falls comfortably within both external constraints on SWF activity (rules such as the US’s FINSA) and internal best governance practices. Briefly, I see Qatar exhibiting what could be called “restrictive” governance–like a restrictive covenant in a contract is used as an accountability mechanism, the idea here is that an appropriate governance stance by SWFs is neither passive nor active in the same sense as, say, an activist hedge fund. Instead, a restrictive governance position implies stepping in to hold the board and management accountable and to prevent loss of value, as QH is doing here. The SWF is acting as a residual claimant. There is no attempt to affect the day-to-day business policy, and there is no effort to, say, encourage the portfolio company to engage in a particular transaction that might create private benefits for the SWF but not for the other portfolio company shareholders. The SWF is simply using its voting rights as an accountability mechanism.
What stops the SWF from using its shares to move beyond accountability efforts and into activism? As I explain in my paper Sovereign Wealth Fund Investment in the Shadow of Regulation and Politics, SWFs recognize that overreaching in governance matters of a particular company will not only increase scrutiny of that investment by host country regulators, but will also increase transaction costs in other investments as regulators in other host countries increasingly scrutinize the SWF’s activities.