Arconic/Elliott: lock them up
Obscure M&A clause has become an element of a proxy fight
The “Secret August Voting Lock-Up” is not an upcoming thriller at the cinema. Activist investment fund Elliott Management may soon pen that screenplay, however.
It is currently in a heated proxy fight hoping to dump Klaus Kleinfeld, chief executive of Arconic, the former Alcoa affiliate separated last November. Elliott’s intrigue-filled title spices up the situation, highlighting an odd corporate arrangement at Arconic.
A vagary of buying private companies is that payments owed to the seller can be complicated to settle.
When Alcoa bought aerospace parts business Firth Rixon from private equity firm Oak Hill in 2014, it agreed to settle the working capital levels in the business later. It turned out that Firth Rixon owed Alcoa on that working capital claim.
Last August, before the Alcoa separation and Elliott agitation, the parties settled. Per the compromise, Oak Hill agreed to vote its 2 per cent stake in Arconic in support of management’s candidates for the board for two years. Those votes could matter. Elliott is putting up its own candidates against the company’s.
The arrangement was only disclosed in Arconic’s recent proxy filing. Elliott refers to it as a “vote buying” plot and demands an investigation about who at Arconic/Alcoa knew what and when.
It makes sense for Elliott to appear as indignant as possible given the governance fight raging. Its underlying concern remains reasonable, however.
While the benefit of the voting agreement accrues to the incumbent board of directors, not shareholders, what was given to Oak Hill to secure those votes belongs to the company’s owners.
Arconic now says that it has waived the voting agreement. It also claims that the voting agreement was added only after the financial terms of the working capital adjustment were resolved.
No value was given to Oak Hill in exchange for their voting support it asserts. Private equity firms are, however, notorious negotiators so that would be an extraordinary achievement.
Still, there may be an innocent explanation for Arconic’s voting agreement which would add another plot twist. In the context of who should run Arconic it may simply be a sideshow.
Regardless, it would do well to offer a fuller explanation of the arrangement. Until then Elliott will write this damaging narrative solo.