(Adds analyst comment, background)
By Silvia Aloisi
MILAN, April 14 Shares in Banca Popolare di Milano fell sharply on Monday after its shareholders unexpectedly rejected reforms designed to attract new investors three weeks before the Italian cooperative bank launches a capital increase.
The reform proposal, which would have given institutional investors a greater say and limited the power of employee shareholders and union representatives, fell short of a two-thirds majority needed for approval at a shareholder meeting on Saturday.
It was the latest failed attempt to change the bank's governance, which critics say amplifies the influence of employee shareholders and unions thanks to bylaws that give each shareholder the same weight regardless of the size of its stake.
"The rejection is a big surprise to us and confirms that the main issue for Popolare Milano remains its weak governance," Kepler Cheuvreux wrote in a note.
CEO Giuseppe Castagna, appointed in January, said on Saturday the reform setback was a missed opportunity and did not rule out consequences for the 500-million euro cash call the bank is set to launch on May 5.
Popolare di Milano's shares initially failed to start trading on Monday because they were down so sharply. They traded 8.3 percent lower at 0.6350 euros by 0840 GMT.
The share issue is meant to bolster the bank's core capital before the results of a health check of euro zone banks by the European Central Bank are published later this year.
The bank's Core Tier 1 ratio - a measure of a bank's strength - stood at 7.2 percent at the end of 2013, below the minimum 8 percent requirement set by the ECB.
The rejection of the reform proposal was all the more disappointing because it was a much less radical version than one put on hold a year ago. The latest plan had envisaged giving institutional investors the right to appoint six of the 15 members of the supervisory board from four now, and also hand them more powers.
The governance changes have been requested by the Bank of Italy as a condition for lifting extra capital requirements it has imposed on Popolare Milano.
A proposal to turn the bank into a joint-stock company was dropped last year due to union opposition, prompting major investor Andrea Bonomi to sell his entire 8.6 percent stake on the market.
After Bonomi's departure in January, Popolare Milano was hit by another big defection this month when French bank Credit Mutuel said it sold its 6.9 percent stake in the bank, having first taken a stake in 2004.
(Reporting by Silvia Aloisi, editing by Valentina Za and Jane Merriman)
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