My colleague Steven Davidoff has a new Deal Professor column discussing the unusual voting procedure in the Xstrata-Glencore proposed merger:
The initial deal required that the merger and retention package be approved together. But in a clever move bound to have its shareholders’ heads spinning, Xstrata claims it has decoupled the two issues by separating the vote.
The first question is a vote to approve or disapprove the retention pay package. The second, however, is in two parts. Shareholders are being asked to vote to:
Part I: Approve the merger and accept the compensation package.
Part II: Approve the merger and reject the compensation package
Shareholders can vote yes or no on the first question and also yes or no for both parts of the second question. Critically, Xstrata is letting shareholders vote yes to both parts of Question 2.
This is important because if the first question (whether to approve the compensation package) is approved, then any votes made to approve the merger and reject the compensation package are disregarded and only votes to approve the merger and accept the compensation package are counted. If the first question is not approved, then any votes made to approve the merger and accept the compensation package are disregarded and only votes to approve the merger and reject the compensation package are counted.
According to Xstrata, the voting structure was designed to give shareholders a way “to vote against the resolution to approve the revised management incentive arrangements in the knowledge that a vote against the revised management incentive arrangements is not necessarily a vote against the merger.” Steve notes a problem with this mechanism, however:
The problem is that if you want the merger to go through but don’t want the incentive package, you are faced with a quandary. If the retention package is approved and you vote no on the merger and retention package, your vote won’t count toward the 75 percent of shares needed to approve the merger.
The result may be that a merger you want does not happen because the necessary vote cannot be achieved.
This is a diabolical game of the prisoner’s dilemma. As Institutional Shareholder Services wrote in a note to its clients this week, the only viable strategy if you want the merger to succeed is to vote yes for both parts of Question 2. Otherwise, you could be left with no merger and no compensation package. But such a vote almost ensures the passage of the retention package with the merger
Read the whole thing here.