On July 23, 2015, Fiat Chrysler Automobiles (FCA) Group NV, filed a Form F-1 Preliminary Prospectus for the listing of its Ferrari business unit on the New York Stock Exchange (NYSE) at an as-of-yet undetermined date. The Company, currently called New Business Netherlands NV and to be renamed Ferrari NV., will be incorporated in the Netherlands, listed on the NYSE under the rules for foreign private investors and the MTA of the Borsa Italiana, and have its fiscal residency in Italy; thus, subject to the Italian tax regulations.
Although the Form F-1 is only an initial filing and does not represent the final IPO prospectus, the information contained therein does shed some light on how Ferrari’s governance structures will likely be set up immediately before and after the public offer. Many publications have discussed the importance of companies looking to list shares on a stock exchange to not forget about the governance structures and best practice standards to which they are expected to adhere.
Shareholding Structure
As per Form F-1, FCA is looking to spin off the Ferrari unit through several transactions that will conclude in fall 2016. The planned offerings will allow Piero Ferrari, the son of founder Enzo, to retain his 10% stake in the Company and Exor, the largest shareholder in FCA, to hold approximately 24% of Ferrari’s common shares. The free float in Ferrari will be 66%.
Just like FCA and CNH, Ferrari will operate a loyalty voting program under which shareholders holding their shares from at least three years will receive special voting shares which essentially give these holders double voting rights. Following Ferrari’s separation from FCA, the only two shareholders eligible for the special voting shares are Exor and Piero Ferrari. Accordingly, Exor will hold approximately 35.8% of the Ferrari voting rights and Piero Ferrari 14.5% of the voting rights. The result is that the Agnelli family and Piero Ferrari will together be able to dictate proceedings at Ferrari immediately after the spin-off, including the ability to block a third-party takeover of the Company.
Sergio Marchionne overboarded?
The current chairman of Ferrari S.p.A. is CEO of FCA Group, executive chairman of CNH Industrial, executive director of Exor, independent director of Philip Morris International (as well as a member of its audit, remuneration, governance and nominations committees), and nonexecutive director (and former CEO) of SGS Société Générale de Surveillance. This adds up to Mr. Marchionne being an executive director at three listed companies and a non-executive director at two listed companies with Ferrari NV becoming a sixth listed company board, well over generally accepted global best practice limits.
According to the Dutch Corporate Governance Code, a management board member (or executive director) should be limited to two supervisory board memberships (equivalent to being a non-executive director on two one-tier boards) at listed companies; however, none of the external non-executive board membership can be a chairmanship. Group company memberships are exempt from this tally. In FCA’s 2014 annual report, the Company explains that FCA and CNH Industrial have a historical affiliation and, therefore should not be counted as separate positions. We presume the same explanation will apply to his position at Ferrari NV after its listing. This, however, does not address his executive position at Exor, the largest shareholder in each of FCA, CNH and Ferrari.
Mr. Marchionne’s board memberships have raised concerns in past re-elections he faced. At the 2014 annual meeting for Philip Morris, he received a 20.45% vote against his candidacy, at the 2014 annual general meeting of SGS SA he only garnered the support of 50.59% of the total votes cast (although his support increased to over 73% in 2015). Support for his reelections at FCA and CNH were strong though with 99% and 93% favorably votes, respectively at the 2015 annual meetings. While the current total number of board memberships of Mr. Marchionne adds up to six (with chairmanships considered equivalent to two board memberships), he seems to have been able to successfully juggle these responsibilities by attending all requisite board and committee meetings in the past, at least on paper.
How does Ferrari stack up? In a December 21, 2014 article in Ethical Boardroom, Darrin Hartzler, Global Manager of the Corporate Governance Group at the International Finance Corporation (IFC), was quoted saying: “Establishing good corporate governance ahead of an IPO holds the key to attracting outside investors.” Ernst&Young, in its publication “Charting the right course: Insights on board governance for US IPO-bound companies,” recommends that companies looking to IPO should be cognizant of investors’ increasing expectations on corporate governance practices and transparency even if some investors could allow newly-listed companies some time to adjust their governance practices.
It should be noted that Ferrari does not represent the typical pre-IPO company as it is spun off from an already established conglomerate and benefits from a well-established management structure. As noted earlier, Ferrari NV will be set up in a similar fashion as its sister companies, FCA and CNH Industrial. Nevertheless, there are similarities between Ferrari’s structures and other recently NYSE-listed companies. A study conducted by Davis Polk & Wardwell (Davis Polk) found that all of the companies that listed on the NYSE between 2009 and 2013 had implemented an established shareholder rights plan, also known as a poison pill, to protect themselves from a hostile takeover. While Ferrari does not intend to implement a poison pill takeover defense, it has implemented a loyalty share program which allows Fiat’s founding family, Agnelli, and Piero Ferrari, the son of Ferrari’s founder, to hold a controlling number of voting rights which will essentially have the same effect of keeping a third-party takeover attempt at bay.
In terms of board composition, Ferrari thus far only identified Sergio Marchionne, the Company’s chairman and Amedeo Felisa, the Company’s CEO as board members immediately following the IPO. According to the Davis Polk study, only 22% of the newly listed companies did not have an independent chairman. Should Sergio Marchionne continue to the Ferrari NV’s chairman, being linked to the Company and its major shareholder, Ferrari will be part of that minority.
On the positive side though, Ferrari’s board members will face reelections on an annual basis which, according to Ernst & Young’s publication only 25% of the 2013 IPO companies implemented. Additionally, Ferrari has indicated that all the members of its audit committee will be independent according to NYSE and Dutch standards. The adoption of a fully independent audit committee is in line with the 83% of the 2013 IPO companies analyzed by Davis Polk.
What now?
Based on the initial prospectus filed for the new business, Ferrari NV will have the same setup used by FCA Group NV and CNH Industrial NV, the other Fiat entities controlled by the founding Agnelli family through its Exor S.p.A. investment vehicle: they are all listed on the NYSE and the MTA of the Borsa Italiana, with a similar shareholding and board structure.
The impact of the appointment of Sergio Marchionne as chairman of the board of Ferrari remains to be seen. Such an appointment will increase his commitments to eight board memberships. We look forward to the Company’s explanation of Mr. Marchionne’s responsibilities in its 2015 annual report or the final prospectus.
Another governance implication of Mr. Marchionne’s chairmanship given his strong link to the Company and its largest shareholders is the effectiveness of oversight provided by the yet-to-be identified other board members and in particular the independent members. Undoubtedly, potential investors will hope to see the Company nominate a strong lead director to the board by the time the final offer prospectus is filed.