Fairfax Special Shareholders Meeting

[Vizi1]

Here is the circular - make an informed choice.

 

FFH__Soecual_IMeeting_Circular.pdf

[Cageyone]

So far there doesn't seem to be a lot of selling going on!

[petec]

I have a (genuine, not provocative!) question for the doubters:

 

I totally understand why multiple voting shares attract scepticism.  I had to think hard before I bought FFH about whether I could tolerate the structure.  Ultimately I decided I trusted Watsa.

 

However I don't really understand why increasing the multiple of votes on shares that are already multiple voting is a problem.  If you already own shares, you've already decided you're happy with Watsa maintaining control with fewer than 50% of the economic rights.  Why would this change your mind?

 

This isn't a change, it's a maintenance of the status quo.  That's my view, I think.

 

P

[giofranchi]

I totally understand why multiple voting shares attract scepticism.

 

I don’t. Actually, it is the right opposite for me: I look with skepticism at entrepreneurs who think they can keep control over their companies only thorough strong business results over a very long period of time. They are acting naively imo, instead I want to see great pragmatism in everything they choose and do.

 

Gio

 

[gfp]

"their companies"...

 

I totally understand why multiple voting shares attract scepticism.

 

I don’t. Actually, it is the right opposite for me: I look with skepticism at entrepreneurs who think they can keep control over their companies only thorough strong business results over a very long period of time. They are acting naively imo, instead I want to see great pragmatism in everything they choose and do.

 

Gio

[giofranchi]

"their companies"...

 

By now you all know very well what I think about the subject... Nothing else to add really! ;)

 

Cheers,

 

Gio

[petec]

My point, Gio, was that I understand those who argue that entrepreneurs should maintain control by owning >50% of the same shares that everyone else owns, like Buffet does.

 

I *do* think that companies with multiple share classes are, broadly speaking, less attractive than those with a single share class.  I prefer to own exactly the same shares as the controller. 

 

However, I am prepared to drop this requirement in exceptional circumstances - e.g. when someone's done as good a job as Watsa, and when a long study of his actions suggests I can trust him.

 

And that decision is based on trust, not on whether the multiple is 10x or 11x or 12x or 48x or 50x.  The multiple makes no difference to the fact that common shareholders do not have control.

 

What I am trying to understand is: what has changed here, in practical terms, that would make someone who was comfortable with the corporate governance become uncomfortable?

[Vizi1]

So far there doesn't seem to be a lot of selling going on!

 

I don't think that looking at a days trading is relevant to a corporate action whose effect will span potentially decades, depending how sensible Prem is with his new currency of diluted subordinated voting shares.  We are essentially giving him currency to spend which dilutes us, unless we keep our voting rights in line with pre-MVS restructuring levels

 

However I don't really understand why increasing the multiple of votes on shares that are already multiple voting is a problem.  If you already own shares, you've already decided you're happy with Watsa maintaining control with fewer than 50% of the economic rights.  Why would this change your mind?

 

petec - All questions are welcome.  I also struggled with the MVS when I bought my shares, and I continue to struggle with it.  This to me is different than most other MVS because what is being proposed to me is like adding another MVS structure into an already existing one via a re-weighting.  There have been many threads over the years questioning why he issued shares or pref shares when it didn't seem necessary.  Well, now we know he did it cause he figured whenever he needed to he could re-load on the MVS provided his record was favourable.

 

Ask yourself, would you be OK with the current ask prior to the CDS homerun.  I wouldn't be then and I'm not now, unless he is going to take me along for the ride for being a long time shareholder, which I've been lead to believe he/they value.  Well, there is no demonstration of the love under the proposal.

 

"their companies"...

 

Amen globalfinancepartners

 

I think FFH is relying on the greatest force in the universe to work in their favour - Inertia.

[petec]

 

petec - All questions are welcome.  I also struggled with the MVS when I bought my shares, and I continue to struggle with it.  This to me is different than most other MVS because what is being proposed to me is like adding another MVS structure into an already existing one via a re-weighting.  There have been many threads over the years questioning why he issued shares or pref shares when it didn't seem necessary.  Well, now we know he did it cause he figured whenever he needed to he could re-load on the MVS provided his record was favourable.

 

 

This might seem like a pedantic point, but this is not why he issued shares, even if it why he felt able to.  I like the idea that he feels able to issue stock when the price is right, without losing control.  I'd far rather that than have him not do good deals for fear of losing control. 

 

Ask yourself, would you be OK with the current ask prior to the CDS homerun.  I wouldn't be then and I'm not now, unless he is going to take me along for the ride for being a long time shareholder, which I've been lead to believe he/they value.  Well, there is no demonstration of the love under the proposal.

 

 

I'm not sure this is relevant - the CDS is part of their investing record and so are plenty of other big gains and losses.  The fact is, if I was happy with multiple voting control before CDS, I still should be.

 

To me there are two distinct questions here:

 

1. Do you mind having your voting power diluted?  I don't, because the class of shares I own didn't have control anyway.  I might, if FFH was only 5% of Watsa's net wealth, but it is 85%.  That means our interests are likely aligned.

 

2. Do you mind having your economic stake diluted?  I do, but this isn't happening.

 

In practical terms, nothing changes: Watsa can keep running the business his way, which has historically worked out well for us, even if he finds a lot of great deals for which he needs to issue equity.

 

Put it another way: when you first considered Fairfax, would you have been more worried by the MVS if they had had 50 votes?

 

[Jurgis]

+1 on what Petec said.

[Vizi1]

petec

 

1. Do you mind having your voting power diluted?  - Yes, but I'd be OK with it if I were being compensated for it.

 

2. Do you mind having your economic stake diluted? - I think our economic stake is diluted, not now, but going forward as he issues more subordinated shares without diluting his control.  Now its on me to go to pocket to maintain my economic stake going forward.  Which is my I feel we should be compensated.

 

And I think the timing of the request is quite relevant.  Based on the recent performance of the stock/management it makes sense to take advantage of the goodwill generated by a higher stock price.  He wouldn't have asked if he wasn't in a favourable performance window.

 

 

[petec]

petec

 

1. Do you mind having your voting power diluted?  - Yes, but I'd be OK with it if I were being compensated for it.

 

2. Do you mind having your economic stake diluted? - I think our economic stake is diluted, not now, but going forward as he issues more subordinated shares without diluting his control.  Now its on me to go to pocket to maintain my economic stake going forward.  Which is my I feel we should be compensated.

 

And I think the timing of the request is quite relevant.  Based on the recent performance of the stock/management it makes sense to take advantage of the goodwill generated by a higher stock price.  He wouldn't have asked if he wasn't in a favourable performance window.

 

1. If Watsa's control contributes to strong BVPS CAGR in the long term, you will be.

 

2. Yes, but only if he does deals.  If they are bad deals, complain loudly.  But if they are good ones, you'll get richer.  Which is what has been happening for the last 30 years.  Again, I don't think this proposal changes anything.  It just allows for a continuation of what's always been happening.

 

Re: the good performance window... I see your point as it relates to very recent share price action, although if that was the goal he might have done it after the CDS, not after 5 years of underperformance!

 

We may have to agree to disagree on this but thanks for taking the time to explain!

 

P

[Vizi1]

 

1. If Watsa's control contributes to strong BVPS CAGR in the long term, you will be.

 

2. Yes, but only if he does deals.  If they are bad deals, complain loudly.  But if they are good ones, you'll get richer.  Which is what has been happening for the last 30 years.  Again, I don't think this proposal changes anything.  It just allows for a continuation of what's always been happening.

 

Re: the good performance window... I see your point as it relates to very recent share price action, although if that was the goal he might have done it after the CDS, not after 5 years of underperformance!

 

We may have to agree to disagree on this but thanks for taking the time to explain!

 

P

 

petec

 

Always enjoy a good discussion  - this one is difference cause normally I'm a reader and not a participant.

 

To respond to your points:

 

1.  I would have gotten the  BVPS CAGR regardless of the MVS reweighting.  And if my compensation has an "if" in it like "If I get..." then I should be compensated up front for taking that risk.

 

2.  He is going for the MVS re-weighting so that he can go out and do other deals, WITHOUT LOSING CONTROL.  And while he has done some great ones, the has also really s*%t the bed on others.  And Im not worried about the past 30 years, that's already in the price, its the next 30 and who is going to have the MVS hammer over that time, cause I don't think its Prem for the entire period.

 

He didn't need to do this after the CDS win cause he still had enough of a margin in his MVS.  That margin has clearly gotten away from him in the past 5 years. 

 

Here's another thought:  If he saw his MVS margin shrinking, why didn't he buy up some more Subvoting shares in an attempt to keep that voting position?  I think he didn't cause this MVS reweighting has always been part of his plan for when the control question became an issue.

 

And we do agree to disagree.  I think we are arguing about how many angels fit on the head of a pin, cause this thing is already a done deal.  The only question I have to answer is if I hold or sell as I mentioned earlier.  This is the first time I've had to ask that question since I bought my first shares in 1994.

 

Cheers

[petec]

 

1.  I would have gotten the  BVPS CAGR regardless of the MVS reweighting. 

 

Not if the CAGR is dependant on Watsa having control, which is essentially what he is claiming (and is what I believe).

 

And if my compensation has an "if" in it like "If I get..." then I should be compensated up front for taking that risk.

 

 

My point is that you could have made exactly the same argument last week/year/decade about the 10x voting shares.  (And maybe you did, I don't know!)

 

2.  He is going for the MVS re-weighting so that he can go out and do other deals, WITHOUT LOSING CONTROL.  And while he has done some great ones, the has also really s*%t the bed on others. 

 

 

True!  I'd argue that he has learnt from those, in which case we should perhaps be less worried now than we were before.

 

I don't think its Prem for the entire period.

 

 

I agree entirely - although again, this point is valid whether the shares are 10x or 50x.

 

Here's another thought:  If he saw his MVS margin shrinking, why didn't he buy up some more Subvoting shares in an attempt to keep that voting position?  I think he didn't cause this MVS reweighting has always been part of his plan for when the control question became an issue.

 

 

Wouldn't it just have been easier to start at 50x?  He could have chosen whatever multiple he wanted at the start.  I think he just never thought FFH would get so big as to require more than 10x.

 

And what would he have bought the subvoting shares with?  He doesn't get enough cash out of FFH, doesn't have much other wealth he can sell, and I would not want him to borrow to buy shares because that skews his incentives.

 

I have to say well done to you for holding since 1994.  I fear I'd have been shaken out.  My advice, for what it is worth, is to stick with it.  FFH might finally be turning into an underwriting machine, and Watsa has learnt and is buying quality businesses not junk.  There's great downside protection, and the only difference vs. last week is that the MVS have a higher M.  Since the M has been higher than it needed to be for all of Fairfax's life until recently, raising the M well above where it needs to be merely means maintaining the status quo.

 

Good luck whatever you choose!

 

P

[Vizi1]

I'd be less concerned if he was going to helm the thing for the next 30 years, but he is essentially asking for another kick at the can but having someone else kick it for part of the next round.

 

I held it for 20 years knowing he was losing control, but so did he, but now he's asking for another go round.  And yes, he should have started at 50, but I doubt he would have gotten FFH off the ground at that ratio.

 

The argument is being made now cause he is resetting his bar but not the other existing shareholders.  The argument I had was 20 years ago when I first bought my shares, but I am surprised that Prem is pulling this after all the loyal shareholder long term holder spiel I've been listening to for all that time.  I guess at the end of the day Im disappointed that Prem isn't the guy I thought he was and really just another CEO looking out to protect his interest over his fellow shareholders.

 

The rising M doesn't preserve the status quo, it enhances his position.  Prior to the reweighting, there was a greater chance that FFH might get taken out a premium to current price, however unlikely, it is more likely pre reweighting than post, so he's essentially removed a potential takeout premium to the stock price with the reweight, and what did the SVS get, nothing, or at least that's whats being offered.

 

For the record petec. my first shares were bought at $414, and it took a long time to get the price back to those levels, but I believed we (FFH and I) were in the fight together, but really, we weren't cause now that the worst is over, the relationship changes.  Shame on my I guess.

 

I understand why he is doing it, I just don't agree with how he is going out about it.

 

 

[Jurgis]

Vizi1, you are spinning the whole thing as negatively as possible. Of course, it's up to you to think whatever you want, but it's pretty clear that for you it's not a discussion that weighs all the aspects of the situation, but just a defense of your preconceived opinion.

[Vizi1]

Not really spinning IMHO, just presenting a contrarian view.

 

I'm not looking for support, I'm comfortable in my reasoning and conclusions so far.  And I'm not looking to convince anyone, just looking to state the other side of the argument of "In Prem we Trust".

 

The AGM was two months ago, FFH could have raised it then.  The 60 page circular wasn't just put together.  Im sure it was making the rounds between FFH management and their counsel before the AGM.  Instead, the special meeting is being held a boardroom at the lawyers office.  I don't suspect they are anticipating the lovein that is the AGM.

 

But then again, maybe that's too dark a view of humanity.

[kevin4u2]

It has been making rounds for over a year now.  It might be worthwhile for you to actually read the circular, but then again, "[your] comfortable in [your] reasoning and conclusions so far."

 

This forum is broken.  So little discussion of facts anymore.

 

Not really spinning IMHO, just presenting a contrarian view.

 

I'm not looking for support, I'm comfortable in my reasoning and conclusions so far.  And I'm not looking to convince anyone, just looking to state the other side of the argument of "In Prem we Trust".

 

The AGM was two months ago, FFH could have raised it then.  The 60 page circular wasn't just put together.  Im sure it was making the rounds between FFH management and their counsel before the AGM.  Instead, the special meeting is being held a boardroom at the lawyers office.  I don't suspect they are anticipating the lovein that is the AGM.

 

But then again, maybe that's too dark a view of humanity.

[giofranchi]

"their companies"...

 

Amen globalfinancepartners

 

This is too naive…

 

The companies I am interested and I invest in are founded, managed, and made to grow by one person. To think otherwise is imo a mistake. The fact those people are able to surround themselves with very capable managers does not change that reality at all. Consequently, they are the ones who take all major decisions. No one can do anything they do not want nor agree to. Period. If something like that should happen, I would cease to be interested in those companies, and I would sell.

 

If they exercise such a control by ownership, by a double class share, or by other means specifically devised for such a purpose (a la Biglari), is nothing but theory. Practice is always the same: all other shareholders are spectators (albeit ones who become richer and richer in time!). And the choice they have is simple: to hold or to sell their shares.

 

You might like it or not. Personally, I like it very much: I am a liberal who loves dictatorship in business! (And my company works exactly this way!) But whether you like it or not doesn’t change how things actually are: no one has ever chosen nor done anything against Buffett’s will at Berkshire, no one will ever choose nor do anything against Buffett’s will at Berkshire as long as he is alive.

 

Imo the sooner we accept this, the better! ;)

 

Cheers,

 

Gio

 

[giofranchi]

My point, Gio, was that I understand those who argue that entrepreneurs should maintain control by owning >50% of the same shares that everyone else owns, like Buffet does.

 

I *do* think that companies with multiple share classes are, broadly speaking, less attractive than those with a single share class.  I prefer to own exactly the same shares as the controller. 

 

Pete,

As I have said in my previous post, imo that’s only theory.

In practice, instead, I don’t care how they maintain control over their companies… as long as they do what’s necessary to maintain it!

In practice, instead, what I would like to see is they maintain a large percentage of their wealth invested in their companies (for Watsa it is more than 85%!).

In practice, instead, what I would like to see is they maintain the desire to run their companies as effectively as they have done in the past.

And I am getting less and less interested in theory, while more and more interested in practice.

 

Cheers,

 

Gio

 

[petec]

I'd be less concerned if he was going to helm the thing for the next 30 years, but he is essentially asking for another kick at the can but having someone else kick it for part of the next round.

 

I held it for 20 years knowing he was losing control, but so did he, but now he's asking for another go round.  And yes, he should have started at 50, but I doubt he would have gotten FFH off the ground at that ratio.

 

The argument is being made now cause he is resetting his bar but not the other existing shareholders.  The argument I had was 20 years ago when I first bought my shares, but I am surprised that Prem is pulling this after all the loyal shareholder long term holder spiel I've been listening to for all that time.  I guess at the end of the day Im disappointed that Prem isn't the guy I thought he was and really just another CEO looking out to protect his interest over his fellow shareholders.

 

The rising M doesn't preserve the status quo, it enhances his position.  Prior to the reweighting, there was a greater chance that FFH might get taken out a premium to current price, however unlikely, it is more likely pre reweighting than post, so he's essentially removed a potential takeout premium to the stock price with the reweight, and what did the SVS get, nothing, or at least that's whats being offered.

 

For the record petec. my first shares were bought at $414, and it took a long time to get the price back to those levels, but I believed we (FFH and I) were in the fight together, but really, we weren't cause now that the worst is over, the relationship changes.  Shame on my I guess.

 

I understand why he is doing it, I just don't agree with how he is going out about it.

 

Also for the record, I appreciate the contrarian view.

 

I think where we differ is that I don't think he's protecting his interests any more than mine.  I believe in the culture at FFH, I believe it is there in significant part due to Prem's control, and I want him to sustain it...for me.  In other words, I believe this is in my interests.  I'd be deeply sceptical about holding FFH if every deal made its management more susceptible to short term market pressure.

 

The other option, of course, would be to never issue shares again.  That way we'd never get a takeout, and we'd never get a value-enhancing for-stock deal either.  Those are the only two options here which is why I describe changing the M as preserving the status quo.

 

The takeout side of things doesn't bother me at all.  Prem has consistently made it clear that he won't sell, and I don't want to sacrifice years of CAGR for a 20% premium on the day.

 

I also think Prem could have done 50x at launch.  10x must have seemed pretty outlandish - 50x wouldn't have made much difference then!

 

Anyway, informative discussion for me - thanks.

 

P

 

 

[petec]

My point, Gio, was that I understand those who argue that entrepreneurs should maintain control by owning >50% of the same shares that everyone else owns, like Buffet does.

 

I *do* think that companies with multiple share classes are, broadly speaking, less attractive than those with a single share class.  I prefer to own exactly the same shares as the controller. 

 

Pete,

As I have said in my previous post, imo that’s only theory.

In practice, instead, I don’t care how they maintain control over their companies… as long as they do what’s necessary to maintain it!

In practice, instead, what I would like to see is they maintain a large percentage of their wealth invested in their companies (for Watsa it is more than 85%!).

In practice, instead, what I would like to see is they maintain the desire to run their companies as effectively as they have done in the past.

And I am getting less and less interested in theory, while more and more interested in practice.

 

 

Cheers,

 

Gio

 

I largely agree with this, but I have also seen some controlling shareholders shaft minorities quite deliberately.  For example, how would you feel if ordinary voting shares at FFH did not have tagalong rights?  That would only be dangerous *in theory*...but I wouldn't touch it with a bargepole.

 

Ultimately I want my interests aligned.  Legally, that can only be achieved by owning the same share class.  Morally, it might be achieved if the controller is totally trustworthy.  But you can never be sure of that, so on balance I prefer the legal method.

 

For me the debate comes down to this: I want Prem to have control, although I also want my shares to have the same economic rights as his.  That's the case, so that's OK.  Then: do I want FFH's growth to be limited by internally-generated funding, or do I want it to be able to issue shares?  Answer: I want FFH to be able to issue shares, so that it can sell shares at 2x BV if the market ever accords it that valuation again, or can swap its shares for shares of another company trading at a lower % of intrinsic value. 

 

If I want Prem to have control and FFH to be issued shares, I have to allow him to increase the number of votes per share.  End of discussion (for me).

 

P

[giofranchi]

I largely agree with this, but I have also seen some controlling shareholders shaft minorities quite deliberately.  For example, how would you feel if ordinary voting shares at FFH did not have tagalong rights?  That would only be dangerous *in theory*...but I wouldn't touch it with a bargepole.

 

Ultimately I want my interests aligned.  Legally, that can only be achieved by owning the same share class.  Morally, it might be achieved if the controller is totally trustworthy.  But you can never be sure of that, so on balance I prefer the legal method.

 

Pete,

I understand… Yet, I have repeatedly witnessed that in business, if you rely on the legal method for things to work out well… well, things simply will not work out well!

There is no substitute for carefully judging and knowing whom you are partnering with. And basically what you want to see is a deeply rational human being. Everything else imo follows.

 

Gio

 

[petec]

I largely agree with this, but I have also seen some controlling shareholders shaft minorities quite deliberately.  For example, how would you feel if ordinary voting shares at FFH did not have tagalong rights?  That would only be dangerous *in theory*...but I wouldn't touch it with a bargepole.

 

Ultimately I want my interests aligned.  Legally, that can only be achieved by owning the same share class.  Morally, it might be achieved if the controller is totally trustworthy.  But you can never be sure of that, so on balance I prefer the legal method.

 

Pete,

I understand… Yet, I have repeatedly witnessed that in business, if you rely on the legal method for things to work out well… well, things simply will not work out well!

There is no substitute for carefully judging and knowing whom you are partnering with. And basically what you want to see is a deeply rational human being. Everything else imo follows.

 

Gio

 

Ha ha I can't disagree with that!  But I'm happiest with rational and legal!  And I won't tolerate anything where my economic rights are (legally) impaired. 

[Uccmal]

I dont hold any shares in FFh anymore.  Its not particularly relevant why. 

 

Last month Canadian Business Magazine, if I recall correctly, had a listing of the pay for the CEOs of the TSX 100 group of companies.  They included bonus, share awards, and everything else the CEOs got.  The list was in the order of dollar value, top to bottom.  At the very bottom of the list by a wide margin was Prem W.  FWIW.