Coca-Cola Europacific Partners plc
(CCEP or the Company)
10 May 2024
Dear Shareholder of Coca-Cola
Europacific Partners plc:
We are asking for your support in
voting "FOR" all resolutions, as
recommended by the Board of Directors, at our upcoming 2024
Annual General Meeting on 22 May 2024.
We are writing to provide additional
context regarding certain resolutions set out in our notice of
meeting dated 4 April 2024 (the Notice of Meeting). Specifically,
we would like to supplement information in Resolution 23 (Waiver of
mandatory offer provisions set out in Rule 9 of the Takeover Code)
and Resolutions 4 (regarding the re-election of Manolo Arroyo) and
Resolution 6 (regarding the re-election of José Ignacio
Comenge).
We received proxy advisory service
reports from Glass, Lewis & Co. (Glass Lewis) and Institutional
Shareholder Services (ISS). While Glass Lewis recommend a "FOR"
vote in respect of each resolution, ISS recommend voting "AGAINST"
Resolutions 4, 6 and 23.
We are firmly committed to good
governance and transparency for our shareholders. We believe the
information provided below will assist you in better understanding
our recommendations.
Unless stated otherwise, defined
terms used in this letter have the same meaning as in the Notice of
Meeting.
Resolution 23 (Waiver of
mandatory offer provisions set out in Rule 9 of the Takeover
Code)
As set out above, the report from
Glass Lewis recommends a vote "FOR" Resolution 23, whilst the
report from ISS recommends a vote "AGAINST" Resolution 23. Both
Glass Lewis and ISS have recommended voting "FOR" Resolutions 26
and 27 (Authority to purchase own shares).
Resolution 23 is a standing item at each Annual General
Meeting of the Company to enable CCEP to give effect to Resolutions
26 and 27. Therefore, a share repurchase cannot occur unless
Resolution 23 is approved and a vote "AGAINST" Resolution 23 will
have the same effect as a vote "AGAINST" Resolutions 26 and
27.
Resolution 23 seeks approval from
the Independent Shareholders of a waiver under Rule 9 of the
Takeover Code. Rule 9 applies when any entity holds 30% or more of
the voting rights of a company. When a company purchases its own
voting shares, any resulting increase in the percentage of shares
carrying voting rights will be an acquisition for the purpose of
Rule 9. CCEP currently has one shareholder, Olive, which owns
approximately 36.1% of the issued share capital of CCEP and so any
share repurchase would automatically trigger Rule 9 and result in
an obligation on Olive to make a general offer to shareholders for
all the remaining equity share capital of CCEP.
Rule 9 of the Takeover Code acts as
a safeguard to shareholders and the Panel
has already reviewed and agreed, subject to the Independent
Shareholders' approval, to waive the application of Rule
9.
However, ISS is still recommending
against Resolution 23, as it has every year for the past eight
years. The ISS Proxy Voting Guidelines (PLSA) for United Kingdom
& Ireland states, "In line with the Pensions and Lifetime
Savings Association, ISS will usually recommend a vote against Rule
9 waivers."[1] However, beginning in 2020,
the PLSA changed its policy on Rule 9 waivers to remove language
explicitly stating that shareholders would normally vote against
Rule 9 waiver resolutions made in connection with share buybacks.
The 2019 PLSA Stewardship and Voting Guidelines for resolutions
seeking share buybacks stated, "Shareholders would normally vote
against the resolution proposing a waiver of Rule 9 of the Takeover
Code."[2] However, updated PLSA Guidelines
state, "Investors should consider voting against a resolution for
share buybacks if: "the resolution proposes a waiver of Rule 9 of
the Takeover Code [and] the buy-back is not deemed
a prudent use of the company's cash resources, is not supported by
cash flows of the underlying business and introduces excessive and
unsustainable leverage"[3] (emphasis
added). This PLSA policy is still in effect,[4] yet we understand that ISS has still not updated
its own policy to reflect this change.
CCEP is comfortable that it would
only effect a share buyback under the authority sought if the
buyback was supported by the Company's cash flows and would not
introduce excessive and unsustainable leverage.
We believe ISS continues to
recommend against our request because of a rigid outdated policy
that does not take into account any of our stated rationale or
Olive's stated intentions, which have not changed since Olive
entered into the Shareholder Agreement with us.
In the Notice of Meeting, Olive has
confirmed that it has no intention of changing its approach with
respect to CCEP as a result of any increase in its shareholding due
to any share repurchase. It has no intention to seek any change to
the general nature or any other aspect of the Company's
business.
Currently, Olive holds approximately
36.1% of the issued share capital of CCEP. If CCEP were to
repurchase all the Ordinary Shares for which it is seeking the
Buyback Authorities, Olive's maximum potential shareholding would
increase to approximately 40.1% in 2024.
Additionally, regardless of the
outcome of these resolutions, Olive's shareholding would not carry
more than 50% of such voting rights, and any further increase in
its shareholding will be subject to the provisions of Rule 9 of the
Takeover Code.
Given Olive's stated position, as
well as the regulatory safeguards the Panel already has in place,
we believe that ISS's concerns over "creeping control" are
therefore unfounded, and that ISS's recommendation against
Resolution 23 is unwarranted.
Glass Lewis agrees with our
recommendation. The report from Glass Lewis states:
·
"We believe the
terms of this proposal are reasonable. The Takeover Code was
instituted as a shareholder safeguard in the event that a major
shareholder sought a larger stake in the Company, possibly to the
detriment of other shareholders.
·
In this case, we
note that following a repurchase of shares or exercising of
options, the concert party may increase their ownership stake in
the Company but may not gain control of it without triggering a
full takeover bid. Further, we note that the waiver will not apply
to an acquisition of ordinary shares.
· We do not believe that this
proposal is connected with any sort of takeover attempt by this
party, and thus, we do not believe this proposal should warrant
shareholder concern at this time. We will, however, monitor the
concert party's beneficial ownership in the event that a takeover
attempt becomes more likely."
The CCEP Board and management firmly
believe these resolutions are in the best interests of Shareholders
as they provide the ability to return cash to Shareholders,
enabling CCEP to continue to deliver long-term shareholder value.
Accordingly, the Board and management of CCEP recommend voting
"FOR" Resolutions 23, 26 and 27, consistent with the
recommendations of Glass Lewis.
Resolution 4 (re-election of
Manolo Arroyo) and Resolution 6 (re-election of José Ignacio
Comenge)
The report issued by Glass Lewis
recommends voting "FOR" Resolution 4 (the re-election of Manolo
Arroyo) and Resolution 6 (the re-election of José Ignacio Comenge).
The report generated by ISS notes that its policy requires
remuneration committees to be comprised solely of independent
directors. It therefore recommends a vote "AGAINST" the re-election
of Mr Arroyo and Mr Comenge as non-independent members of CCEP's
Remuneration Committee.
The ISS 2024 Benchmark Report for
CCEP states that a vote AGAINST the re-election of Manolo Arroyo
and José Ignacio Comenge is warranted because "potential
independence issues have been identified and they currently sit on
the Remuneration Committee, and the composition of this Committee
does not adhere to UK best practice recommendations for a company
of this size."[5] According to ISS's own
calculations, our Remuneration Committee consists of 60% of
independent directors.
Both Mr Arroyo and Mr Comenge are
shareholder representatives. Mr Arroyo is Executive Vice President
and Global Chief Marketing Officer at The Coca-Cola Company, the
parent company of European Refreshments Unlimited Company, which
owns 19.01% of the Company's issued share capital. Mr Comenge is a
director of Olive.
The CCEP Board and the Remuneration
Committee Chairman, John Bryant, are of the opinion that the
re-elections of Mr Arroyo and Mr Comenge are nonetheless
appropriate because:
·
Their re-election would be compliant with the
terms of reference of the Remuneration Committee, which stipulate
that the committee must be composed of a majority of Independent
Non-executive Directors (INEDs), including for quorum requirements
(notwithstanding the presence of Mr Arroyo and Mr Comenge, the
Remuneration Committee comprises a majority of INEDs).
·
Although Mr Arroyo and Mr Comenge are not
independent, they do not have any conflicts of interest and it is
avoiding such conflicts that is the main purpose of prescribing
that the members of the Remuneration Committee should be
independent - in particular, to avoid any executive director being
involved in decisions where a conflict of interest
exists.
·
As members of the Remuneration Committee, both Mr
Arroyo and Mr Comenge can be expected to act to drive the long-term
success of the Company for the benefit of all Shareholders, in the
same way as the INEDs.
The CCEP Board and management firmly
believe this resolution is in the best interests of Shareholders
and recommend voting "FOR" Resolutions 4 and 6, consistent with the
recommendation of Glass Lewis.
We would be glad to discuss our
recommendations in relation to Resolutions 4, 6, 23 or any other
resolution further with you, should you wish. If you have any
questions, or need assistance in submitting your proxy to vote your
shares, please contact us at shareholders@ccep.com.
Thank you for your
support.