Companies can plan for the direct challenges posed by some investor groups
Levels of shareholder activism have increased significantly in recent years, with investors in public companies increasingly willing to seek to intervene directly in the management of companies in which they hold shares. A survey by Activist Insight in 2015 found that more than 300 companies worldwide were targeted by activists last year, up from fewer than 150 in 2010.
Reasons for this increase vary but much of it has been attributed to the huge increase in assets under management held by so-called activist hedge funds. For UK companies, the lowering of the threshold for shareholders to requisition a general meeting (to 5% - see below) has also been a factor.
This article looks at some of the strategies utilised by activists and measures companies can adopt in response. Recent examples of shareholder activism amongst UK-listed companies include:
CPP Group plc (AIM)
In March 2016, Schroders Investment Management issued a requisition supported by the founder and former chairman of this financial services business, and 42% shareholder, Hamish Ogston, seeking to replace four out of five of the company’s board of directors. The company initially sought an injunction to prevent Mr Ogston from voting, but subsequently withdrew its application. At the requisitioned general meeting, each of the proposed board removals and appointments were approved by shareholders.
Asa Resource Group plc (formerly Mwana Africa plc ) (AIM)
In 2015, a small group of private shareholders requisitioned a general meeting seeking, principally, to approve changes to the non-executive directors on the Board. At the resulting general meeting, the company’s major shareholder, which was itself engaged in litigation against the company, voted with the requisitionists and the majority of the resolutions were passed.
The requisitioned general meeting is only one of the tools activist shareholders have at their disposal, which can range from using social media to lobby for change through to, at the most extreme end, litigation.
Charles Russell Speechlys advised Mwana Africa in connection with this requisitioned general meeting.
Public criticism and social media
The use of electronic and social media, such as Twitter, YouTube, blogs and dedicated websites, as a tool for activism has increased markedly in recent years. This can be an effective way of getting the attention of a board or rallying shareholder support.
Requisitioning a general meeting
Shareholders with 5% of the voting share capital of a UK company can require the directors to call a general meeting, at which the shareholders may propose their own resolutions. By doing so, shareholders can force a board to address their concerns in a very public forum. The requisition threshold was reduced to 5% in 2009 (from 10%) as part of the UK implementation of the Shareholder Rights Directive, and this has not proved a high hurdle for activist shareholders to clear.
Removing a director from office
One of the ultimate shareholder sanctions is to remove directors from office. Shareholders can do this by voting against the appointment or re-election of a director at a company’s AGM or by requisitioning a general meeting proposing board changes. In UK companies, the appointment or removal of directors by shareholders requires simple majority approval.
Action for unfair prejudice
A shareholder may petition the court for relief where it considers the company’s affairs are conducted in a manner that is unfairly prejudicial to their interests. In practice, such claims can be costly and time consuming and are rarely brought against listed companies.
Shareholder activism is increasing and directors need to continue to improve lines of communication with their shareholders and to be seen to be responding to shareholder concerns, which in turn may prevent shareholders from taking some of the more drastic steps described above – steps which often, unsurprisingly, destroy value. Below are some hints and tips for boards faced with activist, or potentially activist, shareholders.
Actively engage with shareholders on a regular basis. Concerns may then be picked up and addressed early on.
Companies should seek to ensure they operate as transparently as possible, and that information is always readily accessible to shareholders.
Directors, and in particular the chairman, should be fully briefed ahead of any shareholder meeting so they can respond to questions and, where necessary, intervene to control the meeting. For a UK company, significant power is vested in the chairman in controlling a contentious general meeting, for example in adjudicating on whether parties are eligible to attend, or to vote on particular resolutions, where this is disputed.
Managing a controlling shareholder
Controlling shareholder agreements are an important tool for managing a company’s relationship with a major shareholder or shareholder group. These agreements, typically entered into with shareholders holding a 20% interest or greater, secure various commitments from the shareholder with regard to maintaining the company’s independence, and can provide important protections in the event of disagreement with the major shareholder.
Actively engaging with shareholders, transparency and good governance can all be utilised to ensure shareholder and company interests are aligned. Failure to do this can lead to reputational damage and potentially costly legal action. The challenge is not going away and, as shareholder activism continues to increase, companies must continue to develop their own strategies for managing relationships with shareholders.