Readers may have seen articles in various media outlets this morning about the special treatment of Warren Buffett and Berkshire Hathaway, with regards to its purchase in Insurance Australia Group Ltd (ASX: IAG).
What's it all about?
In short, the ASX has permitted "'National Indemnity Company' ("NICO", a subsidiary of Berkshire) to maintain, by right way of a right to participate in any issue of shares or to subscribe for shares, its percentage interest in the issued share capital of the Company (IAG) in respect of a diluting event."
This means NICO is entitled to a percentage of any upcoming capital raisings or rights issues equivalent to its existing stake in the company, subject to a few limits.
But surely NICO would be entitled to participate in a capital raising anyway?
Yes, but depending on the circumstances of the capital raising, this 'anti-dilution' protection allows NICO to participate more fully than other investors.
If IAG were to issue say, one new share for every thirty held, this would normally dilute NICO who currently holds one share in every twenty (5%) on issue. However, as it has this anti-dilution protection, NICO will be entitled to buy one share for every twenty it holds.
If NICO happened to hold 10%, it would be entitled to 10% of the new shares to be issued.
There are several conditions; NICO cannot hold more than 14.9% of IAG under this agreement, it must pay an equal price or value to other shareholders who are participating, and the agreement will cease if NICO and IAG cease to be strategic partners.
Even so, doesn't this confer an unfair benefit to NICO?
Yep. One investor is being offered privileges that are not available to other investors.
Is there a compelling reason for this?
IAG requested the anti-dilution right because Berkshire/NICO are significant strategic partners of IAG, not just because they are a major shareholder. However, it is hard to justify this action.
Should a capital raising dilute NICO, would it be a less effective partner of IAG because it only owns – for example – 4% of the company's shares, instead of 5% previously? Given that the profit and liability-sharing terms of the strategic agreement have already been established, it's hard to argue that it would.
This is yet another case of one group of shareholders being given special privileges, made worse by the fact that it is sanctioned by the market operator, ASX, who is theoretically aiming to operate a fair and transparent exchange. Given management's role in requesting that the anti-dilution right be awarded to NICO, it also reflects a black mark on IAG's treatment of its shareholders.
