Elliott demands Kabel for special audit of Vodafone deal

On the 20th of March 2015, at the request of Cornwall 2 GmbH & Co. KG which acts as the representative of the American hedgefund Elliott, the Holiday Inn in Munich will be hosting an Extraordinary General Meeting for Kabel Deutschland and its shareholders.

The circumstances surrounding this legitimate request are unusual. Back in October 2013 a special audit report had been ordered to evaluate the measures taken prior to the 31st of March 2013 by the Management and Supervisory Boards regarding a possible acquisition by Vodafone and eventually to assess the effects of those measures on the actual deal.

On the 2nd of August 2013, less than two months after Vodafone publicly announced its intention to by the company, both Boards had supported Vodafone’s offer of 87 euros per share and, based on fairness opinions from Morgan Stanley & Co. International plc. and Perella Weinberg. Partners, had recommended outstanding shareholders to accept it.

Elliott, which owns 13.5% of Kabel’s shares together with Conwall, conducted its own appraisal through the audit firm Rödl & Partner and estimated that only a payment between 225 and 275 euros could be considered fair. It therefore initiated the legal action (so-called Spruchverfahren) previously mentionned in order to assess the integrity and the extent of the bodies’ work.

The special audit found that Kabel’s internal business valuation estimated 127.5 euros per share to be a fair starting price. This means that not only was the offer not acceptable but the boards failed to mention it to their shareholders.

In light of these elements, Elliott is requesting the constitution of an other special audit in order to uncover possible breaches of duty and violations of stock corporation law. Among other things, the auditors will examine measures, actions and communications of both Boards before and after March 31, 2013 as Kabel argued that the findings of the previous auditors were of limited relevance due to being restricted to events prior to that date.

It was also argued that the first auditor was denied access to important documents and information and was therefor unable to determine the true extent of potential breaches.

Mr Martin Schommer, auditor at Constantin GmbH, who already performmed the first special audit will likely be in charge of the second.

In its analysis, ECGS concluded:

“ECGS recommends to support the special audit request. We consider it important that the actions concerning the takeover of Kabel Deutschland by Vodafone are cleared up. This is especially true with regard to potential breaches of duty by the boards and with regard to the internal business valuation prepared by Kabel Deutschland that obviously resulted in a significantly higher business valuation than that prepared by Vodafone.”

In addition, the American hedgefund requests another special audit led by Mr Thomas Schrotberger, lawyer at Grützmacher Gravert Viegener, because it believes the first special audit was subject to impediments and obstructions and the shareholder wishes to uncover the true circumstances surrounding the audit.

ECGS believes that German law gives a special auditor extensive rights with regard to revealing all facts the AGM has appointed him to be informed about and that a limitation of these rights during the first special audit by the boards of Kabel Deutschland would result in a breach of German Share Law and could lead to criminal liability of members of the boards.

It is obviously necessary to assess the actions of the Boards again as possible breaches to shareholder rights may not be tolerated.