“AGL shareholders who participate in securities lending programs should take care to recall their shares to ensure that their voting rights are reclaimed on the program’s voting record date,” wrote Simon Connal. in the footnote.

“They may want to consider the price at which they are lending their AGL shares in the interim in the context of higher demand for borrowed shares.”

A lot of questions

This analysis of the highly opaque financing agreement, suggesting that voting rights at the time of the meeting could be enhanced by guaranteeing borrowed shares, adds to concerns expressed by Mr Hunt at the Macquarie conference last week that Mr Cannon-Brookes was speaking for stocks he might not own.

Mr Hunt said many shareholders were “baffled and unhappy” with the way Mr Cannon-Brookes had built his stake and was now able to influence the vote on the split without owning them entirely. AGL’s analysts and retail investors have also questioned whether the complex set of swaps and derivatives it has in place means it doesn’t have full trading exposure to a potential drop in the price of the action.

A provocateur, Mr Cannon-Brookes, said Mr Hunt was ‘running out of straws to grab hold of’.

“There’s no financial magic to trying to be a sham or trying to fake it here,” he said. The Australian Financial Review. “There is a literal way to achieve this amount of participation, and I am under contract to ensure that it will be paid.”

Mr Cannon-Brookes said it ‘couldn’t be clearer’ that he was investing more than $650 million in AGL and that he intended to stay and invest the full amount as it went along. as the derivative contracts were entered into.

‘He knows nothing of my funding, far from what he claims to be doing,’ he said of Mr Hunt.

“I am registered in 17 different publications. I’m investing over $650 million in this thing because I think it can do a lot better than it does right now, and I’m talking 11.28%.”

But those comments might not appease all observers given the complexity of the Mr. Cannon-Brookes arrangement and the revelations to date that suggest an arrangement to buy more shares, and the revelations that most of the stock under his control are on loan.

The Ownership Matters report was sent to clients before the spin-off plan booklet was distributed to investors ahead of the June 15 vote, and the company has yet to assess its merits or decide whether keeping AGL intact – as Mr. Cannon-Brookes wishes – is the best. option.

Dean Paatsch, of Ownership Matters, said the proxy advisory firm was “neither for nor against his campaign”, but was concerned that there might be an uninformed market, given that 11 .3% of the register was spoken.

“There is a market forming for these stocks today based on statements made outside of formal disclosures that are not true as any [borrowed shares] can be recalled with three days notice,” he said.

Cheap loans

Mr Paatsch said the cost of borrowing AGL shares under a so-called general guarantee agreement was as low as 19 basis points a year. This meant that the annual cost of borrowing $350 million worth of stock was about $665,000, or less than $100,000 to borrow the stock in the six-week period before the important vote on the split.

This, he said, was too cheap, given that there was a market player looking to exert control and determine the outcome of the ongoing vote on the split.

“Any securities lender should revalue its loans to reflect the risk that they will be used to increase Cannon-Brookes’ voting rights ahead of its economic interests,” he said.

Disclosures last Monday showed that Galipea and JPMorgan entered into a total return swap and tunnel loan agreement that gave Galipea a relevant 11.3% stake in the company.

The documents suggested that 90% of the funds were provided by JPMorgan, which meant that Mr Cannon-Brookes could deposit as little as $51 million to take control of the shares via a collar structure valued at more than $550 million. .

I speak for these actions, I vote for these actions. The coins that I currently have purchase contracts over time, I will buy them over time.

— Mike Cannon Brookes

Meanwhile, revelations later in the week showed that JPMorgan, as part of the complex transaction, held a 9.99% stake in AGL Energy for 67.2 million shares.

The majority of that amount, 40 million shares, was held through stock lending programs in which existing shareholders allow other market participants to borrow their shares for a fee.

Of these borrowed shares, 41 million were provided by JPMorgan’s Australian unit and the rest were obtained through JPMorgan’s London and US units.

The Ownership Matters report noted that the historically low turnout for AGL – about 40% of shares were voted on at the last annual general meeting compared to an average of 50% – meant that the quantum of shares loaned had the potential to affect the outcome. More than 50% of AGL’s shares are held by retail investors, who are generally less likely to vote.

For the split to take place, more than 75% of voting shareholders must approve it.

Assuming a 50% turnout, about 84 million people would be needed to vote against the proposal, the proxy adviser said.

Mr Cannon-Brookes said he had a large team working on the transaction and spoke of contracts which, when resolved, would give him the control he represents.

“I speak for these actions, I vote for these actions,” he said. “Parts that I currently have purchase contracts for over time, I will buy over time.”

Asked if he would pay the full $650 million consideration at the time of the June 15 shareholder vote, he said the date of the vote was unknown before closing the arrangement.

“The vast majority of them will be resolved on the date of the shareholder vote, but I’m still entitled to vote for the other actions – let’s be clear,” he said, adding that he would “resolve” those actions. in circulation after the vote.

“It’s not like ‘the shareholder vote is over, great, I’m going to go’. No, I don’t know how to financially dispel this myth that he’s [Mr Hunt] put it there because it’s not a real myth.

Over the counter

The controversial campaign and the way it is being carried out raises questions about the opaque market in OTC securities lending.

Mr Paatsch said JPMorgan was in an “interesting position” as its disclosure last week revealed it was acting as a securities lending agent while also funding Mr Cannon-Brookes.

As a securities lending agent, he said, JPMorgan had a duty to act in the interests of the shareholders whose securities it lent for a fee, and as there was additional demand before the vote , it should consider the context and adjust lending rates appropriately.

“JPMorgan are the financiers of Cannon-Brookes, but they also have a duty to get the best price [for securities-lending clients] and also not to expose that end customer to any downside risk associated with loans that could be used to thwart corporate action,” he said.

JPMorgan declined to comment on the transaction. Sources close to the bank said institutional clients had full discretion in determining the terms of the securities lending agreement, such as the amount and cost of shares available to borrow.

the Financial analysis contacted three major institutions that hold AGL shares and are known to lend their shares, to find out how they had loaned shares and, if so, intended to recall their shares to vote.

All three said they could not comment.