18th January 2005
BAA shareholders should have say on investment plans
A shareholder resolution which would force the Board of Directors of BAA to obtain shareholder approval for investments whose total cost would involve spending more than half of shareholders’ funds will be tabled at the company’s AGM in July.
Described as the “50 per cent rule”, the resolution has been prepared by shareholders associated with the Stop Stansted Expansion (SSE) campaign who will use Section 376 of the 1985 Companies Act to compel the Board of Directors of BAA to allow shareholders to vote on the issue. If approved, the 50 per cent rule would be written into the company’s Articles which govern the way in which the Board of Directors manage the business and would mean that shareholders would have the final say on major investments such as the highly controversial proposal for a second runway at Stansted Airport.
The SSE shareholder group tabled a resolution at last year’s AGM using the same procedure and this led to BAA ending its longstanding practice of providing free car parking passes to MPs.
Explaining the purpose behind this year’s resolution, SSE Economics Adviser Brian Ross said: “The rationale behind the 50 per cent rule is simple: if BAA management wants to bet half the shop on a single throw of the dice, then shareholder approval must be obtained. It is, after all, shareholders’ funds that management would use as the stake money.”
SSE is writing to BAA shareholders seeking support for the resolution which, it insists, is not intended to unduly fetter the hands of BAA management but simply to ensure that shareholders are fully consulted and have the final say in relation to very large investment projects. BAA shareholders’ funds currently stand at £5bn and so the requirement for shareholder approval would only apply to individual projects costing more than £2.5 billion. [see Note 1]
SSE does not believe that this type of provision would be appropriate for the great majority of companies but there are particular reasons why the 50 per cent rule is considered appropriate in the case of BAA, notably that:
i. It would be a counterweight to Government pressure to invest in uncommercially viable projects at the expense of shareholders’ interests; ii. The scale of BAA’s investment programme over the next 10-15 years (up to £15bn) is such that a greater degree of shareholder scrutiny is warranted; iii. In the past, BAA management has consistently been over-optimistic with its financial projections for Stansted and shareholder value has suffered as a consequence; iv. Commercial confidentiality would not be a material consideration; v. It would help to ensure that shareholder interests are not overshadowed by the interests of other stakeholders.
[see Note 2]
Mr Ross concluded: “We are not asking BAA shareholders to support our campaign but there is a convergence of interest on this particular issue. It is not the role of BAA to do the Government’s bidding at the expense of shareholder value but management seems to be intent on doing precisely that, as they have done in the past in relation to Stansted. In view of Stansted’s dismal track record and the equally dismal independent financial projections for a second runway, the 50 per cent rule is fully justified as a safeguard to prevent good shareholders’ money chasing bad.”
- As at 31 March 2004, shareholders’ funds stood at £5,018 million (BAA Annual Report 2003/04, Page 57)
- Explanation of the five points:
(i) Counterweight to Government pressure
BAA management is coming under political pressure to deliver the Government’s policy objective of expanding UK airport capacity. The Government believes that this will result in substantial economic benefits for UK plc. There is, however, considerable evidence that certain elements of Government airport policy, especially major expansion of Stansted as the first priority, would damage shareholder value. Having been privatised in 1987, it is no longer the role of BAA to do the Government’s bidding. The duty of BAA management should be unambiguous to maximise shareholder value.
The Government believes it to be in the interests of the UK economy to build extra runways at Stansted, Heathrow and/or Gatwick rather than to concede business to airports on the Continent of Europe. However, investors should have the choice of where to invest and it may be more beneficial for them to become shareholders in (say) Frankfurt Airport if this seemed likely to generate higher returns rather than having BAA invest on their behalf at (say) Stansted. Investors should at least be asked to approve any major BAA investment project.
(ii) Scale of BAA’s future investment programme
BAA already has an £8bn investment programme over the 10 years to 2013/14. The development of new runways at Stansted and Heathrow on the timescales envisaged by the Government would increase this to about £15bn over the 15year period to 2018/19. These are extraordinarily large sums of money almost entirely focused upon expanding airport capacity in the south east of England. Even without building any additional runways in the south east, BAA will move from being a company with under £2bn debt and 35% gearing in 2003, to a projected £7bn debt and 90% gearing in 2009.
It is also worth highlighting the unusual characteristics of the investment decisions which will determine BAA’s future. BAA is at the opposite end of the spectrum from a company like, for example, Starbucks. In the case of BAA, investment decisions are small in number, large in magnitude and subject to long term payback periods. The risk profile as well as the fundamental importance of these major, long term infrastructure projects justifies a greater degree of shareholder involvement in the decision-making process.
A further factor to be taken into account with such long term decisions is the risk, medium to long term, of a break up of the BAA monopoly and the forced divestment of assets. It would be difficult for the company to avoid a write-down on the disposal of underperforming assets.
Finally (on this point) management describes BAA as “The World’s Leading Airport Company”. If BAA does have world class management skills, there should be an opportunity to leverage these skills by securing airport management contracts/franchises internationally (at low capital intensity) rather than focusing so heavily on capital expenditure in the UK alone.
(iii) BAA management got it wrong before in the case of Stansted
Fifteen years ago, when Stansted was last the subject of major investment again as part of Government policy BAA management provided firm assurances that the investment would be profitable. In the event, the development was loss-making for its first nine years of operation and, even now, it still cannot earn enough to cover its financing costs.
(iv) Commercial confidentiality is not a material consideration
In many companies there are legitimate reasons of commercial confidentiality for not providing shareholders with full details of major investment projects. However, in the case of BAA, these arguments barely apply given the company’s monopoly position, the extent to which investment plans are already in the public domain and the system of price regulation operated by the CAA as economic regulator.
(v) Shareholder interests must not be overshadowed by the interests of other stakeholders
BAA management places greats emphasis upon the importance of consulting “key stakeholders” (generally defined as its airline customers, local communities, the Government and the Company’s employees) about its future investment plans. However, it is shareholders’ funds that would be used to finance these plans and so it is not unreasonable to propose that shareholders should be consulted and should have the final say on any single project where the cost of the development would exceed 50% of total shareholders’ funds.
THE FULL TEXT OF THE SPECIAL RESOLUTION READS AS FOLLOWS:
The Company’s Articles of Association be amended by the insertion of new Article 84A to read as follows:
“84(A) (1) Notwithstanding the generality of Article 84, no planning application shall, without the sanction of an ordinary resolution passed at a general meeting of the Company, be submitted by the Company or any of its subsidiaries or by any third party on its or their behalf where the aggregate cost of the development pertaining to the planning application together with any subsequent phases of such development that are envisaged is expected to exceed 50% of consolidated shareholders’ funds.
(2) For the purposes of this article the expression “aggregate cost” means the total forecast cost of the proposed development at actual prices (after allowing for future price inflation) including, but not limited to: the cost of land acquisition, construction (including all labour and material costs), surface access infrastructure, compensation and mitigation, professional fees and internal project costs associated with such development.
(3) For the purposes of this article the expression “shareholders’ funds” means the aggregate of the Company’s called up share capital, share premium account, revaluation reserve, capital redemption reserve and profit and loss account, as shown in the Company’s latest consolidated balance sheet approved at general meeting.
(4) An explanatory circular shall be despatched to all shareholders entitled to receive notice of such meeting no later than fourteen days prior to the general meeting at which shareholders’ approval is to be sought, such circular to provide financial, market and other relevant information about the proposed development in sufficient detail to comply with the standard required for a Class 1 transaction as defined by the United Kingdom Listing Authority or its successors as amended from time to time.””