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Fairfax Special Shareholders Meeting


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http://www.stockhouse.com/news/press-releases/2015/06/12/fairfax-calls-special-shareholders-meeting-to-consider-amendment-to-terms-of

 

"As a result of the gradual dilution of the percentage of votes represented by the multiple voting shares from their original 85.2% in 1986 to the current level of 41.8%, Fairfax has reached the limit of its ability to issue subordinate voting shares to continue its acquisition-related growth without reducing Mr. Watsa's effective controlling interest to a level at which the preservation of Fairfax's culture and governance can no longer be assured."

 

Hopefully we get to attend and see what's going on...

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I love the Fairfax guys, but can someone explain why this isn't a bad thing for shareholders?

 

I'd rather they maintain control by either keeping the votes from outside loyal shareholders (there's got to be tons for FFH) or stop issuing shares.  But that isn't going to happen it appears.  Same thing as the recent Google actions. 

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On a corporate governance perspective, it is terrible HOWEVER this is my largest investment in my portfolio due to Prem so I am fine with him having full control of the company.  Prem has also pledged to remain as CEO until 2025 which is amazing so it gives him a very long stretch to turn Fairfax into the next Berkshire which will compound for decades to come. 

 

Thanks,

Shahed

 

I love the Fairfax guys, but can someone explain why this isn't a bad thing for shareholders?

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I love the Fairfax guys, but can someone explain why this isn't a bad thing for shareholders?

 

I'm kind of with you Norm. 

 

Its great that Prem keeps keeps control, but what do I get as a subordinated shareholder (sine 1994) other than basking in his greatness?  And a Keg gift card aint gonna cut it....

 

Heres an idea, if you are going to bump your voting rights, why not offer me some kind of kicker for going along.

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For the returns and success Fairfax and Prem has generated (and that is no disrespect to the other executives because I understand it was a TEAM effort) I feel that Prem should have control over his baby. I think that Fairfax will outgrow Prem and exist long after he's gone and with this control his family can still assert the values of Fairfax in potential successors. If it was my own company I would do the same.

 

I think if you look at any of the wealthiest or greatest capitalists you can almost always find that most of them own or have significant control over the enterprises they create or run.

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I'm not quite sure that I understand why 41.8% control represents a problem for Prem.  By my arithmetic, any group wishing to oppose Prem through a proxy fight or some other means would require 50/58.2 of the non-Watsa votes.  Basically, you'd need 86% of the non-Watsa shareholders lined up against Prem to out-vote him. 

 

Frankly, if somebody is able to secure 86% of the non-Watsa votes on a particular corporate governance issue, then Prem should step back and ask himself what the hell he's doing wrong to have so many of his partners lined up against him....

 

 

SJ

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I'm not quite sure that I understand why 41.8% control represents a problem for Prem.  By my arithmetic, any group wishing to oppose Prem through a proxy fight or some other means would require 50/58.2 of the non-Watsa votes.  Basically, you'd need 86% of the non-Watsa shareholders lined up against Prem to out-vote him. 

 

Frankly, if somebody is able to secure 86% of the non-Watsa votes on a particular corporate governance issue, then Prem should step back and ask himself what the hell he's doing wrong to have so many of his partners lined up against him....

 

 

SJ

 

X2

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I'm not quite sure that I understand why 41.8% control represents a problem for Prem.

 

41.8% is probably not a problem. The problem is that this will continue to drop if they continue issuing shares. So this is a proactive change, not a reactive change.

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Well, guys, I have the habit of increasing the number of shares in order to satisty my apetite for acquisitions, but I'm not happy about one of the normal consequences associated to it. So I have issued a press release at Friday and the special meeting of shareholders to be held on July 21. You can understand that by these little details, I want all the shareholders to be informed about that change and I create some very favorable conditions to get the maximum number of shareholders possible at that special meeting...

 

Get your popcorn. Here's a terrific episode of Fairfax corporate governance.

 

 

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I'm not quite sure that I understand why 41.8% control represents a problem for Prem.

 

41.8% is probably not a problem. The problem is that this will continue to drop if they continue issuing shares. So this is a proactive change, not a reactive change.

 

 

So do some sensitivity analysis.  Hypothetically add 2 million shares which would raise $1 billion.  Even if that occurred, what percentage of non-Watsa shareholders would need to oppose him to overturn something that he would want to do?  It would still take a large majority of non-Watsa shareholders to counteract one of his decisions.  And, again, if somebody is able to put together a large majority of non-Watsa votes, then Prem needs to step back and reflect on why so many of his partners disagree with him.

 

But, you are right, this is a prospective change.  This is all about giving his son long-term control of FFH.  It is all very well and good that Prem has such confidence in his son, but the rest of us have no reason to entrust him with long term control.  One could argue that Prem has *earned* our trust and might merit such a dilution of our voting power, but his son has done nothing that would make me want to dilute my voting power to give him long-term control of FFH.

 

Sometimes Prem is just a little too slick.

 

 

SJ

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This is all about giving his son long-term control of FFH.

 

Possibly. If Prem stays as CEO until 2025, I don't care until then. If Prem dies tomorrow, I'm gonna sell my FFH shares no matter what anyway.

 

So sure this might not be the best thing to happen, but Prem goes out of his way to make it as shareholder neutral as possible. He freezes his salary, he promises to stay until 2025, he promises no special benefits for supervoting shares in all scenarios. I think these are adequate promises for me to accept what he asks for. Other investors can decide for themselves.

 

If Prem's press release does not persuade you to accept this, then I won't be able either. :) So I won't even try. ;)

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I will vote "yes" and hope this passes.  I think Fairfax's ability to focus on the long-term -- unlike most companies and money managers -- is one of the fundamental reasons it has managed to increase shareholder's equity at well above market rates.  This helps that and there is no real downside I see based on the protections for all shareholders and Prem's 30 year track record.

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I think it's extremely important that Prem retains control (e.g. I wonder what would have happened at BRK in 1999 when Buffet was under pressure to buy tech, if he hadn't had control).

 

I'd also argue that if this is bad corporate governance, it's bad because there are super-voting shares at all, not because they want to change just how super they are.

 

On balance, I think a guy who takes a lot less pay than many similar CEOs, and does a great job, asking to be allowed to continue to do a great job without interference from activists, isn't a bad thing.  Ultimately I wouldn't invest in FFH if Prem didn't have control, so I can't really complain.

 

But it does look odd, especially the son inheriting control.

 

P

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Even if you offered Prem a market compensation package but didn't allow the change to the multiple voting shares (MVS), he wouldn't take the market comp cause that's not what he's interested in.  So to me that argument or justification for the boost in the MVS is ridiculous.

 

As for Prem holding it, if he dies tomorrow, or more accurately, after he gets the MVS boost, the Watsa family gains control, so now we've surrendered more voting control to a group that is NOT AT ALL Prem.

 

Being a capitalist, tell me what I'm getting out of this, cause right now, I don't see it.

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This vote is about maintaining the Fairfax "culture" which has been paying dividends recently.  We've seen some accretive deals which are due, in some part, to fair dealing (fair-and-friendly acquisitions) a premise which Fairfax has gone to great pains to project over 30 years.  Ben Watsa, Prem's son, will not control Fairfax.  The board has instructions about what to do in case of catastrophe.  Prem has eliminated any premium he or his family could get from the voting control.  We are voting on whether to extend flexibility going forward.  In some cases, issuing shares to raise capital may make sense if it can be allocate for the benefit of shareholders.

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Even if Ben doesn't control it, in case something happens to Prem, Prem doesn't control it which is why he is looking for maintain control, so that he can maintain the stewardship of the company as he has since 85.

 

As well, don't let the recent past cloud your judgement, there were a lot of years where the Faifax "culture"/strategy did NOT pay dividends.

 

Regarding succession plan, I'd like to know more about what that looks like.  Most the of brain trust is well into their 60s.  The succession risk goes far beyond just Prem.

 

And I am back to my point, if he is looking for continued "rope", he should be willing to pay for it as it does have value.

 

There is no free lunch.

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If you are forced to have that share structure to maintain the so-called "culture", then there is a bigger problem. It would mean that you have the intention to dilute the shareholders ownership significantly over time and you don't have a shareholder base that share your long term view. Markel didn't need to that, neither Leucadia, Berkshire, Bidvest, etc.

 

 

 

 

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I have to say this is the first time I have had to seriously question my holding FFH in 20 years.

 

I always understood that FFH and Prem were always unconventional, but this recent ask is too much.  Partner24 has it right, many of the other greats against which FFH is mentioned haven't had to resort to this.  This is the first significant move by FFH that I really don't agree with.

 

That being said, I don't think FFH would have launched this meeting without having the votes in the bag, so I think we are tilting at windmills.

 

The only move I have left as a long time shareholder is to either hold or sell my position.

 

Either way, the fact that we have gotten to a place where Prem needs this to solve his problem, yes, his problem, is just shameful and reeks of arrogance.

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Obtuse_investor asked me via twitter what I think about this… Since I have still to figure out how to use twitter (how can you reply with only 140 characters at your disposal?!), I’ll write what I think here:

 

If you follow the discussion about BH, you know very well how I think about business: imo BH is Biglari’s business just as much as FFH is Watsa’s business, all other shareholders (or at least the great majority of them, with the possible exception of Barnard, Bradstreet, and the like) are only watching, enjoying the show, and getting rich without the slightest effort…

 

Therefore, what I often repeat about BH imo holds true for FFH too: watch what Watsa is doing, if you like it hold your shares, if you don’t sell them. Period.

 

I am holding mine! ;)

 

Cheers,

 

Gio

 

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