After 18 years as a public company, shareholders in the Melbourne-based high rise flats developer Central Equity voted to take the company private this morning, but not before some feisty debate at the extraordinary general meeting.

The controversial aspect of the deal was the long-term management contracts enjoyed by the three founders and executive directors, chairman Eddie Kutner and the two former school teachers, John Bourke and Dennis Wilson.

Each receives a flat $2 million salary, regardless of performance, and Central Equity is contracted to pay this until 2012 under the terms of an agreement first entered into in 1992, when Eddie stepped down from three public company boards, wound back his accountancy practice and went full time with the developer.

The three founders control 55.6% of the company and only introduced outside directors a couple of years ago. They have now offered $2.15 a share to the minority shareholders and this fell within the $1.91-$2.41 valuation range by independent expert Lonergan Edwards.

Sure, it’s well up on the 20c float price and long-term shareholders have done well, but the independent expert valued the legally binding long term contracts at negative $37 million if the company was wound up. What sort of company has such ludicrously generous long-term management contracts with no performance criteria that are then used against minorities in valuing a large related party transaction? Without these contracts, the founders would probably have had to offer more to fall within the independent experts’ range.

A small private equity firm railed against the proposal and sent along Roland Burt to ask a few questions today. Chairman Eddie ducked and weaved and then managed to come up with some highly questionable claims, including that if the company had adopted more conventional salary packages, minority shareholders would have been diluted by up to 15% over the years.

I’ve got no issues with Eddie and have seen him socially, rented one of his apartments in South Melbourne back in 2003 and will be meeting him tomorrow afternoon to argue the point on the detail. But at this point in the EGM a few basic corporate governance points had to be explained:

  • Central Equity has always suffered a corporate governance discount from paying its executive directors too much and having no independent directors;
  • Minority shareholders would have voted down any highly dilutionary equity incentive schemes;
  • Shareholders never got to approve the management contracts, but would have done if they were non-executive directors;
  • By owning 55.6% of the company, the three founders already had a massive equity incentive scheme and didn’t need this guaranteed $2 million a year; and
  • Without these onerous contracts, minority shareholders would have received more.

In the end, the scheme went through with 95% support, partly because the stock would have dived below $2 if it had been rejected. Sure, shareholders have still done well, but this was still a case of bad corporate governance and Central Equity is now what it always should have been – a private company that can do what it likes.

Peter Fray

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