Levels of shareholder activism have grown 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. A number of these were listed companies in the natural resource industries, miners included. This article looks at some of the strategies used by activists and measures companies can adopt in response.
Recent examples of shareholder activism among UK-listed miners include:
- Asa Resource Group (formerly Mwana Africa1) (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, itself engaged in litigation against the company, voted with the requisitionists and the majority, although not all, of the resolutions were passed.
- Minera IRL (AIM) – Also in 2015, Minera received a requisition to convene a general meeting from two shareholders. The requisition proposed a series of resolutions, principally the removal of the existing directors of the company and their replacement with proposed new directors. The requisitionists were again partially successful and four of their resolutions were passed. The chairman of the board was removed as a director and two new directors were appointed.
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.
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 paid-up 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 is proving a low 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 annual general meeting 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 are often, unsurprisingly, value-destructive. 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 is 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%-30% interest, 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 used 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.
This article was originally published in the Mining Journal, 12 February 2016.