Author: Malcolm Godfrey
Little detail was given as to how the merger might take place and what the resultant entity might look like, but there has been significant talk in the market about the issues that surround the proposed merger.
The more detailed proposals are due to be published prior to the membership vote on 27 May 2022, and so until then, we can focus our analysis on two key issues which relate to the wider implications of the proposal.
1. Voting procedures
As we understand it, the procedures for each club’s membership voting, in relation to the proposal(s) to effect the merger, are somewhat different in detail but similar in principle.
75% of the members at the AGM board meeting are required to vote in support of a motion for it to pass. This is on a one vote per member basis. Failing that, North of England rules provide that, on a poll, mutual shipowner-members get one vote per ship entered, up to a maximum of 30 votes per member.
Standard Club rules provide for one vote for each mutually entered vessel in excess of 1,500 GT. A 75% majority of members voting is also required to pass the motion.
Therefore it is quite likely that the necessary decisions could be passed by a small number of larger shipowners, an observation further reinforced by the evident support for the proposal by the shipowner boards of each club, which will tend to comprise shipowners with larger fleets.
We understand that the full voting and adoption mechanisms are to be set out clearly in advance of the votes later next month.
2. Wider implications
Setting aside the impact of this particular arrangement in the membership of Standard and North, there is a wider issue to be considered in looking at this proposal. Should the merger go ahead, then the number of clubs will fall to twelve, where two clubs would be responsible for approximately 40% of pool claims.
The effect on the competition in the market, and hence shipowners choice, is likely to be marginal – in fact it could be argued that creating an entity with the capital strength and premium volume to compete with the current market leader, Gard, might be a positive for shipowners, and enhance effective competition.
However, a wider issue remains in play in regards to how the rest of the market reacts to this merger. Will we see further consolidation as other clubs and their managers seek partners from amongst their peer group? Will, for example, the North Standard liaison trigger a further two or three mergers? Could we see a future market comprising four or five super-clubs plus the existing specialist clubs? Those keen to pursue this line will surely have to move quickly to ensure that they marry up with their partner of choice.
What then of the future for those clubs who are not part of these discussions? Can they continue as independent smaller units without becoming specialised, and can these clubs find that specialist niche which allows their survival? Moreover, will traditional owners feel comfortable moving away from the historical mutual club set up?
We can imagine that these questions will be on the agendas of all clubs over the coming months – if they haven’t already been. The landscape of the future of the market is shifting, and we may see a domino effect across the market as more mergers follow. What is a certainty, however, is that club managers and boards will use up much bandwidth during the exercise, all at a time when in recent history there has scarce been so much in flux.
What would this new landscape likely mean for shipowners?
- Financially stronger clubs – but it can be argued that clubs are already over-capitalised and that the surplus capital is increasingly redundant;
- Greater diversity – but is this what members truly want, or is it more of a desire of aspirational club managers?;
- Cost savings – longer term this can happen but service culture is central to the concept of mutuality and so potential for cost cutting is limited;
- Member involvement – fewer, bigger clubs will necessarily mean a greater detachment between the club and its members in terms of board involvement and decision making;
- Competition – reduced numbers of clubs give shipowners less choice and more of a “one size fits all” option. Split fleeting opportunities are limited.
Speculating a little further forward, where does this leave the International Group? This may, by then, comprise a small number of clubs, each of which may have the financial strength, reinsurance purchasing power and mitigated volatility to buy their own excess reinsurance programmes - and thus remove the need for pooling. How long before manager ambition leads to a breakaway? Such a move could then lead to a major shift in the way large claims are handled, security is posted, charterparties are worded and so on. The maritime industry needs the stability afforded by the common approach of the International Group, but the fewer and bigger the components of the group are, the greater the instability.
Conjecture is all well and good but, fundamental to all of this, and should the North / Standard proposal be passed and further mergers planned, is how this will be viewed from a regulatory standpoint. More specifically, where this landscape would leave the International Group in relation to the EU Competition Directorate: DG (COMP).
On the face of it members of Standard and North are being asked to make a simple “domestic” decision, but the underlying consequences of that decision may be market changing and far reaching. To go one step further, could the votes at the end of May even be seen as a preliminary vote on the future viability of the International Group as a whole?
In the Gallagher Marine P&I team, we are strong supporters of the International Group and the spirit of providing maximum cover at the lowest cost. Should a series of mergers impact on the ongoing viability of the Group to function, can all of this be guaranteed? For those members that may not want to be part of this or indeed any other possible future merger, should they not also be given the option to move their vessels freely to another Club without hindrance?
The landscape is changing, or so it would seem, but clarity and detail on what members are actually voting for remains critical, with the bigger picture needing careful consideration.