Fresh ruckus over Orient-Express

Mumbai, Aug. 4: After a six-month lull, a fresh war of words has erupted over the contentious ownership structure of Orient-Express, the Bermuda-based luxury hotel chain which rebuffed an overture from the Tatas for an alliance last December.

David E. Shaw and Steven Cohen — two hedge fund financiers who together hold 14 per cent of the Class A shares in the luxury hotel chain — have signalled their desire to call a special shareholders’ meeting to discuss whether the company’s corporate governance structure needs to be overhauled.

Shaw and Cohen specifically plan to contest the super-voting Class B shares and a poison pill mechanism that allows the existing management to stonewall holders of the Class A shares, which are listed on the New York Stock Exchange.

The move to call a shareholders’ meeting was taken after Paul White, president and CEO of Orient-Express Hotels (OEH), rejected Shaw and Cohen’s contention in a July 24 letter that the circular ownership structure through the super-voting Class B shares violated the provisions of the Bermuda Companies Act.

“The company strongly disagrees with the suggestion…that the company’s corporate governance structure is not permissible under Bermuda law,” White said in a terse letter.

White’s response prompted a second letter addressed to OEH’s board of directors today in which Shaw and Cohen said, “We believe that, as board members, you should welcome the opportunity to ascertain the views of the company’s shareholders on such a fundamental issue. We expect that the board will not frustrate the convening of such a meeting and will call it at the earliest possible opportunity.”

“We regret being forced into taking this step. We naturally reserve all of our rights as shareholders to pursue other available courses of action,” said the letter that was sent by Shaw’s eponymous D.E. Shaw Valence Portfolios LLC and Cohen’s firm C.R. Intrinsic Investments LLC.

The Tatas have maintained a studied silence on the issue since White’s stinging rebuff last December.

David Shaw — who earned the sobriquet King Quant on Wall Street because of his penchant for using quantitative trading models to predict market behaviour — set the stage for the latest round in the absorbing year-long battle with the July 24 letter which argued that the circular ownership structure wasn’t legally sustainable.

“The company (Orient-Express Hotels) is both the subsidiary and holding company of OEH Holdings, and OEH Holdings is both the subsidiary and holding company of the company, an ownership structure that is certainly not authorised by or compatible with the (Bermuda Companies) Act,” the earlier letter said.

“The real purpose behind the company’s Class B super-voting structure … is to entrench and perpetuate the existing board and enable it to avoid any accountability to the company’s Class A shareholders,” the letter added.

“Our US counsel conducted a review of all Bermuda companies whose shares are publicly traded in the US and could not find another company that controls itself through the artifice of its own subsidiary,” the letter said.

The letter went on to add that since October 17, 2007, the company’s Class A common shares had fallen in value by 47 per cent.

The Tatas — who have invested about $300 million to pick up a 11.5 per cent stake in the company — had started buying the stock in August last year and had paid as much as $60 per share in December, just before White’s rude rebuff. The OEH stock is now trading at just under $33 a share.

“We are particularly concerned that as members of the company board of directors … continue to support a corporate governance structure that immunises yourself and management from being answerable to the company’s shareholders,” the letter added.

The hedge fund financiers claimed that in any other Bermuda company, the shareholders could influence management through their ability to vote for directors and ultimately hold the board accountable for the performance of the stock.

They said the OEH board had chosen to “utilise this flawed structure to perpetuate their positions of authority and privilege at the expense of those with actual economic interests in the company.”

Shaw has been fighting the cause of the Class A shareholders ever since he picked up a stake in the company at the beginning of this year.

In February, he fired off a letter to OEH chairman James Hurlock in which he asked the company to “publicly clarify the rights of the company’s super voting class B shares and (explain) how it intends to use these shares in the event (that) a fair and equitable offer for the company as a whole is received.”

In June, Shaw and Cohen joined forces ahead of a crucial shareholders’ meeting but the anticipated showdown didn’t take place.

The showdown may take place now but the aggrieved shareholders may have to use other methods to force a change in the corporate governance structure since the management holds an overwhelming 81.2 per cent of the voting rights in the company.