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Funds get voting rights in F1 but CVC stays in control

NEWS STORY
18/06/2012

According to Bernie Ecclestone, Formula One is on track to float on the Singapore stock exchange by the end of this year. The brakes are on the plan at the moment due to the turmoil on the world's stock markets but it hasn't stopped the ownership of the sport changing. However, its ultimate controller has not changed at all and guess who it is.

Over the past six months three investment funds, Waddell & Reed, BlackRock and Norges, have bought a 28.3% stake in F1 from its biggest shareholder, the private equity firm CVC. It has led to CVC's stake falling by nearly half to 35.5% and it is no longer F1's majority owner. It was understood that this did not change the status quo in the sport since there were no voting rights attached to the shares owned by the funds. This was reported by the Financial Times and by Pitpass' business editor Christian Sylt and the upshot was that CVC's voting rights remain equivalent to its previous 63.4% share. According to recently filed company documents, it seems that this is not correct but nevertheless, CVC is indeed still in control of F1. As ever with the business dealings connected to the sport, it is as clear as mud.

Saying that the funds have invested in F1 doesn't do it justice. Combined, their stake is well over three quarters the size of the one owned by CVC and Waddell & Reed alone owns 20.9% of F1 which is more than one and a half times as big as the stake owned by Ecclestone and his family trust Bambino. Waddell & Reed is F1's second biggest shareholder and, in fact, it now owns such a large stake in the sport's parent company Delta Topco that it is entitled to appoint a director to its board.

This is because, according to Delta Topco's Articles of Association (the terms it is governed by) "each investor... whose investor group holds ordinary shares representing 15 per cent or more... shall be entitled to appoint one person as a director." So you read it here first - Waddell & Reed has the right to appoint a director to Topco's board. The question is, does it have any control?

There is no doubt that, contrary to the claim in the Financial Times on Saturday, CVC is certainly not "the majority owner of F1." And according to a document (link to pdf) recently-filed by Delta Topco it seems that CVC might not own the majority of F1's voting rights. The document required the signature of all of Delta Topco's shareholders and although a CVC representative signed it on behalf of the funds, it states that he was "exercising the voting rights attached to the shares of the company held by the following members." The names of the funds are listed below it.

At first glance this would seem to suggest that CVC no longer has control of F1 since the funds have not just reduced its stake in F1 to 35.5% by buying 28.3% of the sport but they have got voting rights with it. However, in fact, this is irrelevant thanks to an ingenious mechanism which CVC put in place to safeguard its interest in F1 when it took over the sport in 2006.

The trick under CVC's bonnet is that it has what are known as 'I Directors'. As Sylt revealed in 2008, "the I Directors will always have sufficient votes to pass any resolutions of the board." They are now coming into their own because although CVC no longer owns the majority of the shares in Delta Topco, and may well not own the majority of its voting rights, its 'I Directors' can pass any resolutions of the company's board regardless of how many directors vote for or against them. Lo and behold, the Delta Topco document states that the CVC representative who signed on behalf of the funds did so in his capacity "as I Director."

It means that CVC is still without a doubt F1's controlling shareholder just as it was when it owned the majority of its shares. This is important for two reasons.

Firstly, since CVC throws its weight behind Ecclestone, it means that decisions made by Delta Topco's board follow his lead which is far better for the sport than it being run by investment funds who may know little about it.

The second reason that it is important CVC has remained F1's controlling shareholder lies in a clause in what is known as the 'Umbrella Agreement' between the Swiss division of F1's governing body, the FIA, and Delta Topco's subsidiary SLEC. As Pitpass has reported, under the Umbrella Agreement the FIA gets a single share in SLEC's subsidiary Formula One Asset Management (FOAM). Although the FIA's share does not give it a right to income or to vote at board meetings, it does "confer rights of veto over certain operating and financial policies."

It is understood that the Umbrella Agreement outlines the rights of veto attached to the FIA's share including that it can prevent a change of control of F1. Since CVC has remained F1's controlling shareholder there is nothing it could do to prevent the share sales to the funds and it is all thanks to the I Directors.

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