If ever there were a case study on why Australia needs a UK-style shareholder vote when companies propose a major acquisition, then Slater & Gordon is it.
Prime Minister Malcolm Turnbull, here is your opportunity to pin a long overdue Australian governance reform on poor practice by the ASX-listed company that is most aligned to the ALP.
When Rio Tinto madly splashed US$44 billion of cash on Alcan in 2007, shareholders voted overwhelmingly in favour (not everyone — listen here) at a special meeting in Melbourne because it is dual-listed in the UK.
No such shareholder approval was required when Slater & Gordon madly offered to spend $1.35 billion in cash buying the British legal business Quindell less than 12 months ago, although the investors who stumped up $890 million in the shotgun capital-raising after the deal was done effectively approved the transaction.
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When long-serving CEO Andrew Grech drove the unusual float of Slater & Gordon in 2007, he told the press that the first duty of the company’s lawyers would always remain to the court, not shareholders.
This seemed fine as the $1 float price soared to more than $8 last year, but since the staggering $958 million loss was announced on Monday, Slaters shares have tanked from 83 cents to a miserable record low of 26 cents last night.
Now that the banks are effectively in control of Slaters, we have a unique situation with regard to the $672 million of “work in progress” (aka unresolved cases), which is sitting on the balance sheet as the company’s most valuable asset.
If the banks collectively owed $789 million — NAB, Westpac and Macquarie — are going to recover much of their exposure, they will need to retain competent staff who can settle or win enough of these cases.
Shareholders have been wiped out, the banks are trying to avoid a haircut, but on each individual case, the court remains in charge of proceedings.
You can only imagine what judges are thinking as they assess costs applications after making a major decision where Slaters is involved. The situation is even worse with hard-nosed insurers in the UK who appear to be digging in over a stack of hearing-loss claims being run by the increasingly vulnerable Slaters.
Now that the key lawyers who work for Slaters have collectively seen hundreds of millions of dollars of their net worth disappear, how do you keep them motivated working for a banking syndicate?
“Salaries” is the obvious answer, but with Slaters burning through almost $20 million a month in the latest half, you have to ask yourself just how much more exposed the banking syndicate is prepared to be?
The world has never seen a group of lawyers in Melbourne buy out 48 other law firms and create the world’s biggest listed legal enterprise. Who else knows how to run it except CEO Andrew Grech, who has been in the job since 2000?
Ken Fowlie, Grech’s trusty sidekick, has been an executive director since 2003 and joined Slater & Gordon way back in 1995.
It’s worth going back and looking at the first top 20 shareholder list published by Slaters in the week it floated back in May 2007.
Current Western Bulldogs chairman Peter Gordon was the public face of the company and the second biggest shareholder behind Grech, with 10.45% after the IPO. However, in August 2009 he stopped being a full-time employee but remained deputy chairman. Then, in April 2010, he resigned as a director, departing with a holding of 5.94 million shares, but was retained as a consultant.
Then-chair Anna Booth said the following on his resignation:
“Peter Gordon is a Slater & Gordon icon whose contribution to the firm over 30 years is inestimable. He has also made an enormous contribution to the board over our critically important first few years as a listed company. We’ll miss Peter’s wise counsel at the board but we look forward to a long and successful continuing relationship with him.”
As his Wheeler Centre biography notes, Gordon also has pedigree when it comes to rescuing embattled icons. That’s what he did with the Footscray Football Club in 1999, but would he be prepared to step up in the hour of need for Slaters?
If anyone can salvage something from the wreck it is Peter Gordon, but is it worth even trying?
Another option for the financiers might be making the recently appointed audit committee chair James Millar a temporary executive chairman acting for the banks.
However, Millar, a former CEO of Ernst & Young, is already over-committed, sitting on other boards including Fairfax, Mirvac, Helloworld and the Smith Family.
I’ll be surprised if shares in Slater & Gordon are still trading by the end of April, but simply can’t predict how the banking workout will play given we’ve never been in a situation like this before.
Fingers crossed we also won’t see any more IPOs by law firms, which just don’t sit comfortably in the public company space.