3/31/2025
Opinion: Rio Tinto Shareholders Should ‘Trust, But Verify’ Their Board
Bloomberg Opinion (03/31/25) Blas, Javier
Bloomberg Opinion columnist Javier Blas writes, "Rio Tinto (RIO) has a message to its shareholders: Trust us — we know better. Facing an activist investor calling for an end to its dual-listed structure, the mining company wants to preserve its status quo. At the next annual general meetings, shareholders should rebuff the board. Instead of taking the directors at their word, shareholders should adopt the Russian proverb that US President Ronald Reagan popularized during the final years of the Cold War against the Soviet Union: 'Trust, but verify.'" Blas says "the best way to verify whether the board is right is to support the activist’s resolution, pressing for an independent review. The board believes this appraisal would be 'highly duplicative and unnecessary' because it conducted its own in 2024, which — it says — found no reason for change. 'There is no basis for expecting that an additional review, including an independent expert report, would lead to a different conclusion,' the board has told shareholders. It added that Rio Tinto would probably lose money due to taxation rules if it ended its current structure. Perhaps the directors are right, but then there’s truly little risk, other than a few bruised egos and some trivial costs to hire bankers and lawyers, to allow the independent review. After all, the activist is just asking for one. And the money at stake is so vast that even if there’s a small chance the investor is right, it’s worth the try. Granted, if the review finds that terminating the dual listing would be beneficial, then the board would have a big decision to make: The activist, Palliser Capital, believes that Rio should become a wholly Australian company with a primary listing in Sydney and secondary one in the UK. That would be a massive blow for the London Stock Exchange and its FTSE 100 blue chip index, where Rio is the fifth-largest constituent by market capitalization. The potential end of the dual-class structure of Rio Tinto would be a setback for the UK if it moves its primary listing to Australia." Shareholders have a reason to be suspicious of the board’s reasoning: Other companies with similar dual-listed structures have made similar arguments before. And, ultimately, it became clear that not only was it possible — and easy — to end those archaic arrangements, but over time, a simpler setup was in the interest of investors. Rio Tinto should take the activist seriously. Palliser may not have the reputation of Elliott Investment Management, but some of its top people cut their teeth precisely at the aggressive activist. While the size of its stake in Rio Tinto is trivial, the miner could consider the case of giant Exxon Mobil Corp., which in 2021 was defeated by tiny activist Engine No. 1. Size isn’t what matters — it’s the idea. The starting point is complicated: Rio Tinto today has a convoluted configuration that was created nearly 30 years ago. It’s made up of two listed entities that together form the group. One entity, formally known as Rio Tinto Plc, is incorporated in the UK and listed in London, accounting for about 77% of the shareholders. The other, known formally as Rio Tinto Ltd., is incorporated in Australia and listed in Sydney; it accounts for 23% of the shareholding. The British side holds most of the international assets, like its copper mines in Latin America. The Australian entity holds lucrative iron ore mines. Because of different tax rates on dividends, the London-listed shares trade at a discount to the Australian stock (typically, about 15% to 20%). The review is likely to yield a mixed picture, according to Blas, with neither an unequivocal yes, nor an unambiguous no. "Ending a dual listing involves significant guesses about future tax liabilities and the cost of potential all-share deals. It also involves significant conjecture about what investors in very different geographies would do. The board would need to take a cost-benefit view; not everyone is likely to agree with it. Still, an independent review at least presents a starting point to debate. As such, Palliser’s proposal makes sense. Unsurprisingly, two influential shareholders advisers, ISS and Glass Lewis, also support it. I do have a problem with the proposal, however: It calls for forming a committee composed of Rio Tinto’s 'most recently appointed independent directors' with a 'shareholder representative in attendance.' From a governance perspective, the presence of a shareholder sets a worrying precedent that could, in extremis, create a system of board tutelage for every important decision. Even more importantly, if Palliser were the investor representative, it would be effectively 'judge and jury' on a matter in which the fund isn’t an innocent bystander. Palliser should trust other shareholders to do the job and recuse itself. When I asked the fund about it, the activist said, via a spokesperson, it felt it had no choice but to call for the inclusion of an external shareholder due to Rio Tinto’s opacity. But it indicated it was ready to remove itself from contention: 'We would be open to working more constructively with the company on what form this takes, including having a mutually agreed third-party shareholder.'"
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