Citigroup lacks funds quorum for Legg deal

New York firm will continue to press for shareholder votes on $3.7 billion swap

October 22, 2005|By LAURA SMITHERMAN | LAURA SMITHERMAN,SUN REPORTER

Citigroup Inc. couldn't persuade enough mutual fund shareholders to weigh in on its business swap with Legg Mason Inc., a key step in closing the $3.7 billion deal, forcing the financial services firm to continue the costly solicitation of votes in the coming weeks.

The companies agreed to the exchange in June, and Citigroup has asked shareholders to approve new management agreements needed to transfer the funds. But the balloting didn't reach a quorum, or 50 percent of shares in each fund that must be cast for the process to be valid, in dozens of cases yesterday when the votes were to be tallied.

Citigroup, which held a series of shareholder meetings in New York, said in a statement that the company still plans to close the deal in this year's fourth quarter.

The company added that it's "pleased with the acceptance the transaction is receiving" so far.

Spokeswoman Mary Athridge said a quorum was reached in many of the funds, and those shareholders approved the transfer.

The Citigroup spokeswoman said more details weren't available.

Another day of shareholder meetings will be held in November. In the meantime, Citigroup intends to mail additional materials to shareholders that would explain the importance of the vote.

Citigroup and Legg Mason could leave funds out of the deal if more time is needed beyond next month to garner the necessary votes, according to mutual fund consultants.

As part of the swap that will remake Legg Mason into the fifth-largest money manager in the world, $437 billion in Citigroup assets are being transferred, including $151 billion in 170 mutual funds. In exchange, Citigroup is getting Legg's brokerage business.

The mutual fund shareholder votes are just one step in a series the companies must take to close the deal.

The companies have obtained regulatory approval from the Securities and Exchange Commission and other agencies, and a target closing date of Dec. 1 has been set.

Officials decided this month to push back the closing date from Nov. 1, anticipating difficulties with the shareholder balloting.

Biggest problem

The biggest problem in getting out the vote may have been shareholder apathy over a matter that's more arcane than is involved in other kinds of corporate elections, such as selection of board members or voting on corporate takeovers, according to industry analysts.

"Shareholders get these lengthy documents full of legalese, and they have to decide: Do you sit down and read it for two hours and vote, or do you file it and assume everyone else will vote," said Chris Traulsen of Morningstar Inc., which tracks mutual funds. "It can be hard for funds to get quorum for very routine things as well."

A ruling by the New York Stock Exchange also complicated Citigroup's efforts to solicit votes.

The exchange decided that brokers couldn't cast ballots on behalf of fund shareholders without first getting instructions from those clients. Brokers often side with management and turn in large blocks of ballots.

Proxy fights

At the same time, two investment firms launched proxy fights in six of the funds that fell short of a quorum, urging shareholders to reject the transfer until Citigroup addresses unrelated concerns over the value of their holdings. They own closed-end funds, which are traded on an exchange like stock, and sometimes the share price of those types of funds doesn't reflect the full value of a fund's investment port- folio.

The investors, which hold large stakes in the funds, could have the votes needed to reach a quorum.

For instance, Elliott Management Corp., a hedge fund and one of the dissidents, owns 6 percent of the Salomon Brothers Fund.

"We remain prepared to meet with the board during this period in an effort to have the board implement a strategy to eliminate or nearly eliminate the discount," said Scott Tagliarino, an Elliott spokesman.

laura.smitherman@baltsun.com

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