Altice : nine reasons to oppose the cross-border merger proposal

Altice SA intends to effect a cross-border merger between a newly formed Dutch entity, Altice N.V., as the acquiring company, and Altice SA, as the company ceasing to exist.

Prior to this merger, Altice will transfer substantially all of its assets and liabilities to a newly incorporated subsidiary Altice Luxembourg SA. The result of the transfer, followed by the merger, will be to list the shares of a Dutch law governed public company on Euronext Amsterdam instead of the shares of a Luxembourg law governed public limited liability company.

1° Preferential right in the nomination process

NEXT will be considered as the “nominating shareholder”. The Executive Board members will be appointed by the General Meeting at the binding nomination of the Nominating Shareholder (NEXT).

In comparison, in a normal company, the nomination committee is responsible for conducting the selection process for new Board members and the General Meeting can elect them without this type of veto right for the controlling shareholder.

2° Unusual dismissal process

Commonly, any Board member can be dismissed by the General Meeting of shareholders at the absolute majority (50% + one vote). In the new Altice company, it will only occurre if the dismissal is proposed by the nominating shareholder (NEXT, controlled by Patrick Drahi). If not, the General Meeting can only resolve upon the dismissal of such Board member by resolution adopted by a majority of at least two thirds of the votes cast.  Here again, there is a preferential right offered to the dominant shareholder Patrick Drahi.

3° Half of the votes at Board meetings are in the hands of the President

The President will have more votes than the other Board members. Indeed, according to the article 21.5 of the by-laws, each Board member shall be entitled to one vote, except for the President. The President is entitled to cast a number of votes that equals the number of votes of the other members entitled to vote (present or represented). Consequently, the President (most likely Patrick Drahi) will be entitled to cast 50% of the votes at Board meetings.  This poor corporate governance practice is quite rare in Europe and will provide Patrick Drahi a veto right on any Board agenda item. In order to counter his vote, the other Board members would need to oppose unanimously which is quite unlikely given the nomination process referred to above.

4° Likelihood of anti-takeover device

It is reported under § 2.7 of the cross-border merger proposal that a new Warrant plan is envisaged. The Warrant Plan which has been in place at Altice SA (Luxembourg) offers NEXT the capacity to subscribe to new shares if a new significant shareholder arrives. This type of Warrant Plan must be analyzed as an efficient poison pill aiming at avoiding a change of control.

5°  Risk of suspension of voting rights

 In addition to the Dutch legal requirement, a stricter statutory shareholding notification threshold is implemented at the level of 1% of the company’s shares.  While it can be complex to fulfill this obligation in practice, shareholders face the risk of suspension of their voting rights in case of late disclosure.

6° Dilution risk

The Board will be authorized to withdraw preemptive rights over the next 5 years up to the maximum authorized capital (including ordinary and preference shares).

Moreover, the issuance could be made at a very low price (nominal value) which would greatly dilute the existing shareholders.

7° Lack of independence and Board composition

Under § 3.5 of the cross-border merger proposal, it is reported that the composition of the Board of the new company will be defined prior to the completion of the merger. Consequently the existing shareholders of Altice SA will not elect the future Board and the lack of disclosure from the group creates some uncertainty regarding the future governance.

8° Possible issuance of preference shares

Under § 3.11 of the Cross-border merger proposal, it is reported that the new company may issue preference shares as of or after the merger. Such issuance of preference shares would imply a possible change in voting rights or rights to profit. Proxinvest already raised concerns about the distortion in profit rights implied by the huge stock-options plan occurred at the time of the IPO.

Furthermore, such preference shares would have some preferential rights in the event of dissolution and liquidation of the company, especially the repayment of an amount equal to the paid-up nominal value.

9° Control Enhancing Mechanism: implementation of a Dual class of shares

Shareholders will be remitted 3 ordinary shares A and one ordinary share B for any ordinary share of Altice SA. Ordinary shares A and B will have the same economic right but ordinary shares B will cast 25 voting rights.

It is reported that ordinary A shares will become more and more liquid (future capital increase).  It is worth noting that holders of ordinary B shares will have the right convert them against 25 ordinary A shares (article 14 of the By-Laws). On the contrary ordinary A shares will not be convertible into ordinary B shares. Consequently, over time, ordinary B shares will be more and more illiquid but will concentrate all the voting powers. It is likely that some investors will sell their B shares at a discounted price to avoid the illiquidity risk and to clarify their ownership (administrative burden due to the ownership and administration of dual class of shares).  The merger has been built to provide the ordinary B shares around eight times the voting power of ordinary A shares.

Patrick Drahi, through his holding NEXT, is proposing until the 7th of August to any shareholder to exchange any ordinary share B against one ordinary share A. This proposal is quite scandalous and not respectful of minority shareholders. Indeed, the article 14 of the new bylaws authorizes a conversion at a far better exchange ratio (1 ordinary B share against 25 ordinary A shares). A real trap for minority shareholders!

It is clear that over time, Patrick Drahi will concentrate the ordinary B shares and all the voting powers associated to them. Dual classes of shares are always used as a Control Enhancing Mechanism and are a clear breach of the one share = one vote principle.

CONCLUSION

The new articles of association fail to implement an equality of treatment between shareholders. Indeed, they include significant preferential rights for the majority shareholder, NEXT (registered in Jersey) and its founder Patrick Drahi, which is clearly a poor corporate governance practice.

These changes are very risky for the minority shareholders and far from the best shareholding democracy. There is absolutely no interest for minority shareholders to abandon so many shareholder rights and protection to the profit of Patrick Drahi and his holding, NEXT. There is an evident and outrageous lack of respect for minority shareholders. We strongly recommend opposition.