Woodside Petroleum's proposed $US2.68 billion buyback of shares from Royal Dutch Shell is on a knife edge as evidence grows that large super funds are prepared to join fringe investors and vote against the proposal rather than sacrifice good corporate governance principles.
The selective buyback, which gives Shell alone access to Woodside's pile of franking credits, goes before a shareholder vote at an extraordinary general meeting in Perth on Friday.
With Shell unable to vote and a history of low turnout for Woodside shareholder votes, it is expected a no vote of only 10 to 15 per cent would be enough to block the buyback plan, which requires 75 per cent approval with at least 50 per cent of shareholders voting.
Junior shareholder Plato Investment Management has made clear its opposition to the buyback since it was announced last month and it has now emerged that some larger pension funds are intending to vote against the plan that would set a precedent of not treating all shareholders equally.
''There seems to be a governance principle being sacrificed at the altar here,'' said Gordon Hagart, chief executive of the Australian Council of Superannuation Investors, which advises about $400 billion of Australian super funds.
''Our members have to weigh up the sacrificing of a principle against their beliefs in what the company is saying.
''They have different views on whether or not the investment pros outweigh the governance cons. There are certainly some pretty strong opinions on the issue of principle and not sacrificing that.''
It remains unclear what percentage they hold in Woodside but ACSI members own about 9 per cent of the average ASX-300 stock.
Proxy votes on the buyback were due on Wednesday morning Perth time. A Woodside spokeswoman would not comment on the proxies received so far.
The Australian Shareholders Association's Stephen Mayne urged Woodside to either disclose the results of the proxy votes on Thursday morning or suspend trading in its shares for Thursday and Friday.
That would avoid the situation faced by Westfield investors, which saw significant volatility in trading on speculation about the shareholder vote on the merger between Westfield Group and Westfield Retail Trust in late May.
But Dean Paatsch at Ownership Matters said revealing the proxies early could also be misleading for the market, given they represent only voting intentions that could be changed on the day.
''There is a lot of power to the argument about sticking to the existing custom, which is to disclose on the morning of the meeting,'' Mr Paatsch said. ''There may be exceptional circumstances that require a different view but I wouldn't think Woodside is one of them.''
Alphinity Asset Management portfolio manager Stephane Andre said his firm would support the selective buyback despite it contravening one of the key principles of corporate governance: that shareholders holding the same class of shares should be treated equally.
''The terms of the buyback are attractive: they are EPS [earnings per share] accretive and DPS [dividend per share] accretive,'' Mr Andre said.
''It does not take away franking for future dividends, nor does it affect their policy because the company is continuing to generate a lot of profit and is continuing to generate franking.''
Woodside chairman Michael Chaney has voiced confidence the proposal will attract the necessary support, insisting last Sunday that it was in the best interests of all shareholders.
He and chief executive Peter Coleman have emphasised the resulting uplift in dividends shareholders would enjoy and the strategic advantages for Woodside in gaining full independence from the oil giant. An independent expert hired by Woodside has also deemed the buyback is ''fair and reasonable'' to non-Shell shareholders.
But two major proxy advisers, ISS and Ownership Matters, have recommended their clients vote against the buyback, saying it disadvantages shareholders other than Shell.
A third proxy adviser, CGI Glass Lewis, acknowledged the concerns but recommended shareholders support the plan, arguing it was in the overall long-term interests of both the company and its shareholders.
Shell declined to comment but its worries about the move potentially being blocked are understood to have receded in recent days after Mr Chaney and Mr Coleman have more actively worked to sell the advantages of the buyback plan to the market.
Woodside shares powered through the uncertainty on Wednesday, adding 0.6 per cent to $42.88, their highest close for more than three years.
The recent strength in Woodside shares is seen by some as evidence that management's concerns about the ''overhang'' created in the market by the Shell stake are unjustified.
Although Woodside management has said that is not considered as a fallback option, Macquarie Equities said it would be ''difficult'' not to go down that path if shareholders block the selective buyback on Friday.
Macquarie's energy equities team led by Adrian Wood has been critical of the Shell buyback plan, countering all of the six reasons put forward by Woodside for investors to support it.
It calculates that the selective buyback effectively allows Shell to sell Woodside stock at up to $48.50 a share, 20 per cent higher than the consensus of market valuations.
Macquarie also points out that a ''no'' vote on Friday would add to management's frustrations after the failure of the James Price Point LNG plan for Browse gas and the collapse of the $US2.5 billion Leviathan gas investment in Israel. It would therefore add to existing pressures on the floating LNG plan for Browse gas, which Macquarie regards as ''marginal at best''.
Mr Andre said he was not worried about swings in the Woodside share price over the next two days.
''We are not concerned about the volatility for a few days. We are taking a longer term view and we think it's the right thing to do,'' he said.
The buyback is the second part of a sell-down by Shell in Woodside, after an institutional sale last month that cut its stake from 23.1 per cent to 13.6 per cent. If the buyback proceeds, Shell's holding would fall to below 5 per cent, allowing it a low-key full exit at a later stage.
Weighing on some investors' minds is the possibility that Woodside would offer an open access buyback to all shareholders should the Shell buyback be blocked.
