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CVC to lose control of F1's board in float

NEWS STORY
26/05/2012

Earlier this week it came to light that CVC, the private equity firm which took over Formula One in 2006, had sold a 21.3% stake in the sport to three investment funds for £1bn. The sale took CVC's share in F1 down to 42.5% but Pitpass' business editor Christian Sylt revealed that it had little material effect on the running of the sport since the funds had not bought any voting rights. It means that, at the moment, CVC controls F1 and, as we all know, it throws all its support behind the sport's boss Bernie Ecclestone. However, we all also know that CVC is planning to float F1 on the Singapore stock exchange and if this happens the status quo will change dramatically due to a key agreement becoming void.

Before continuing, there is an important distinction to make. This is between the running of F1 on a daily basis and the bigger picture decisions affecting the business which owns the sport. Following the float Ecclestone will stay F1's chief executive and the daily running of the sport will remain his responsibility. This involves everything from signing deals for new races right down to giving his consent to new cameramen being hired to film F1. However, whilst Ecclestone alone has the power to change the future of the sport, he cannot make decisions which have a significant material effect on the company which runs it. These decisions need to be approved by the board of the company.

For example, if F1 wanted to buy its US rival IndyCar the board would need to approve the deal. If F1 wants to pay its shareholders a dividend from its profits then this also needs to be approved by the board. Likewise, if Ecclestone wants to increase prize money paid to the teams or wants to commit to new terms in the Concorde Agreement, the contract at the heart of F1, then the board will also need to give its approval. This hasn't posed any problems since CVC has owned F1 because it has complete control of the board and, as it has publicly stated, it throws all its support behind Ecclestone.

There are two measures which ensure that CVC controls the board of F1's ultimate holding company Delta Topco. The first is through having a majority of votes on it. Before the sale to the funds CVC owned 63.4% of Delta Topco and its board votes matched this. Although it sold 21.3% of F1 to the funds CVC still has board votes equivalent to its previous 63.4% stake. Accordingly, whenever there is a decision put before the board, CVC can ensure that it is made in its favour as it has a majority of votes. Since Ecclestone has CVC's complete support this means that the F1 boss indirectly has the power to make the board decisions which he wants.

As Sylt revealed in 2008, CVC also has directors on the board of F1 who are known as I Directors and they have one more vote than those of all the other directors. As it states in the F1 Group's articles of association (pdf), which are the rules governing the business, this is "to ensure that the I Directors will always have sufficient votes to pass any resolutions of the board." Again, since Ecclestone has CVC's complete support this also means that his board decisions get made. It may not be so easy if F1 floats.

Both of these measures are set out in what is known as the Investors and Shareholders' Agreement, affectionately known by CVC as the ISA. This was signed by F1's shareholders on24 November 2006 and if F1 floats this will become void thereby handing control of the company purely to its board . The board's decisions will depend on a majority vote and CVC alone will not be able to pull this off.

The board will consist of at least 16 people. Alongside Ecclestone, there will be two others who are involved with the daily running of F1. They are the sport's 44 year-old Chief Financial Officer (CFO) Duncan Llowarch, who was appointed in 2002, and its 43 year-old Chief Legal Officer (CLO) Sacha Woodward-Hill who was appointed in 2000. They each own stakes of around 1% in Delta Topco.

There will also be five independent non-executive directors including F1's chairman Peter Brabeck-Letmathe. He is the chairman of Nestle and will get a 0.2% stake in F1 to add to the 0.3% he already owned. The other non-execs include Jean-Marc Huet, chief financial officer of Unilever, Martin Sorrell who is boss of advertising company WPP, and two Singaporeans. They are Liew Mun Leong, chief executive of real estate company CapitaLand, and Kwa Chong Seng, independent deputy chairman of wealth fund Temasek.

In addition, there will be three team representatives - Ferrari chairman Luca di Montezemolo, Red Bull boss Dietrich Mateschitz and an executive from McLaren. With so many people on the board it could be useful for Ecclestone if McLaren's seat is taken by his ally the Crown Prince of Bahrain, who represents the Mumtalakat fund which owns 50% of the team, rather than its chairman Ron Dennis who is the more logical choice but is one of his long-standing opponents.

Before McLaren decides who to appoint it may first be waiting to see if F1 actually floats. When F1 was due to float in the late 1990s the team was offered something more valuable than a director's seat - a stake in the business. However a European Commission investigation into F1 prevented the float and McLaren never got its share so it can be forgiven for not rushing to name who will get its board seat this time round.

The final members of the F1 board are connected to CVC. They are three of its co-founders, Donald Mackenzie, Hardy McLain and Rolly van Rappard, as well as its UK managing director Nick Clarry, and Carl Hansen, a director of the CVC fund which owns F1. It was originally understood that Ecclestone's Bambino family trust would have a director on the F1 board but it seems that this will not be the case.

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