What are the primary sources of laws and regulations relating to shareholder activism and engagement? Who makes and enforces them?
Shareholder activism and engagement is governed by a range of UK and EU legislation. Some of the primary sources include:
- the Companies Act 2006 (the Companies Act);
- the Listing Rules;
- the Disclosure Guidance and Transparency Rules (the DTRs);
- the EU Market Abuse Regulation (MAR);
- the City Code on Takeovers and Mergers (the Takeover Code); and
- the UK Corporate Governance Code (the UKCG Code).
The Companies Act is an Act of Parliament and applies to all UK incorporated companies. It is a key source of law for shareholders engaging in an activist campaign. For example, a shareholder holding at least 5 per cent of a company’s issued share capital has the ability to requisition a general meeting of a company (section 303), or request specific resolutions to be tabled at a company’s annual general meeting (section 338).
Both the Listing Rules and the DTRs are made and enforced by the Financial Conduct Authority (the FCA). The Listing Rules apply to companies with a listing on the Official List, and prescribe the specific requirements that must be met to be eligible for listing, the admission and application process, and the continuing obligations to which listed issuers are subject. The DTRs seek to ensure there is adequate transparency of, and access to information in, UK financial markets, and Chapter 5 (Vote Holder and Issuer Notification Rules) is often of particular interest to activist shareholders.
MAR is an EU Regulation that, by virtue of the Withdrawal Act 2018, will continue to have direct effect in the UK until the end of the transition period (as at the time of writing scheduled to be 31 December 2020). At this point, the provisions of MAR will be subsumed into UK law – and will, therefore, be able to be amended by UK lawmakers. However, given the role of the United Kingdom in formulating the provisions of MAR, it is not expected that the UK market abuse regime will materially deviate from MAR going forward.
The Takeover Code contains rules made by the Takeover Panel under the Companies Act. It has been developed to reflect the collective opinion of those professionally involved in the field of takeovers as to appropriate business standards and as to how fairness to target shareholders and an orderly framework for takeovers can be achieved. It applies to companies incorporated in the United Kingdom, the Channel Islands or the Isle of Man that either: (1) have any of their securities admitted to trading on a regulated market or multilateral trading facility (eg, AIM) in those jurisdictions; or (2) are public companies (or certain types of private companies) incorporated in, and with their central place of management and control in, any of those jurisdictions.
The UKCG Code applies to all companies with a premium listing in the United Kingdom (regardless of whether they are incorporated in the United Kingdom or elsewhere). The UKCG Code is not a rigid set of rules and is based around a set of principles and supporting provisions. This regulatory approach is often referred to as ‘comply or explain’ and is a trademark of the corporate governance framework in the United Kingdom.Shareholder activism
How frequent are activist campaigns in your jurisdiction and what are the chances of success?
Shareholder activism has continued to become more prevalent in the UK – both in the frequency of campaigns, and the publicity they attract. Approximately 40 UK companies were subjected to activist demands in the first half of 2019, a record high for this jurisdiction. US hedge funds and alternative investors have continued to spearhead this activity, with a weaker pound perhaps increasing the sense of opportunity for activism.
In the United Kingdom, changes in boardroom structure remain a principal feature of recent campaigns and activists have continued to gain board seats, influence live M&A situations and advocate for spin-offs. However, activists are increasingly adopting long-term strategies, focusing on rising environmental, social and governance concerns and exposing diversity issues.
How is shareholder activism generally viewed in your jurisdiction by the legislature, regulators, institutional and retail shareholders and the general public? Are some industries more or less prone to shareholder activism? Why?
In some quarters, a negative perception of shareholder activism may remain. Among the general public and retail shareholders, that perception is perhaps derived from the reputation of shareholder activism in the United States – which has traditionally been seen as adversarial, hostile and opportunistic. However, there is a growing appreciation of the benefits of shareholder activism, and continued shareholder engagement is seen as a key facet of good corporate governance. In many jurisdictions there has been a growing trend for greater transparency, accountability and scrutiny of listed companies, and the UK is no different. Organisations such as the Investor Forum have been effective at facilitating collective shareholder engagement to meet these aims. This attitude has also been reflected in regulatory policy statements. For example, the Takeover Panel published Practice Statement 26 to allay investor’s concerns that collective shareholder action could trigger the Takeover Code’s provisions on mandatory offers.
In the United Kingdom, no particular industry is more susceptible to activism than others. Typically, poor stock performance, inefficient use of capital deployment, poor corporate governance and the uneven performance of a company’s divisions are all factors that can increase a company’s likelihood of being targeted by activists.
What are the typical characteristics of shareholder activists in your jurisdiction?
Activist shareholders in the United Kingdom have typically been composed of hedge funds and other alternative investors, many of whom are based in the United States. The goals of activist shareholders are becoming increasingly varied; they can be financial, aimed at increasing value for shareholders, and non-financial, such as the adoption of environmentally or ethically favourable policies, or reactions to diversity issues. Activists are also increasingly prepared to take long-term positions to achieve these goals. An interesting recent development has been the reaction of institutional investors to activist campaigns. In the public sphere, institutional investors have traditionally been neutral and reluctant to air their grievances about management or strategy. However, some have taken a more proactive stance in recent activist campaigns, increasingly taking to public forums to lend their support (or opposition) to activists.
This shift in attitude among institutional investors is reflective of how shareholder engagement is growing in importance. Activist shareholders often provide a useful channel for a wider group of investors to air their dissatisfaction when they feel their concerns are not being appropriately recognised by management.
What are the main operational governance and sociopolitical areas that shareholder activism focuses on? Do any factors tend to attract shareholder activist attention?
Shareholder activism tends to focus on myriad areas. In 2019, a record 47 per cent of activist campaigns were M&A driven, with a sale of the company being the most common M&A objective. In comparison, M&A focused efforts accounted for roughly 35 per cent of all campaigns from 2014 to 2018. In the United Kingdom, such activity has historically been driven by dissatisfaction with strategy and a desire to shake up board composition. Executive remuneration and corporate governance failings can also be hot topics – with institutional investors teaming up with activists to push through change.
In recent times, perceived poor performance with respect to the environment (lack of preparedness for climate change), corporate social responsibility and political lobbying have attracted the attention of activists. The introduction of ‘say-on-pay’ legislation has sharpened the focus on compensation practices, while significant media or analyst criticism about a regulatory action or problematic product launch can result in discomfort in the shareholder base.
Shareholder activist strategiesStrategies
What common strategies do activist shareholders use to pursue their objectives?
Activist shareholders may pursue a range of both legal and non-legal strategies to achieve their objectives. The legal framework for activist strategy has not changed to any significant degree in recent years but the use of the tools has evolved. Given the more collaborative approach to shareholder engagement in the United Kingdom, the starting point for activists is often private engagement with a company’s board.
If private engagement is unsuccessful, under the Companies Act, an activist can request a copy of the company’s shareholder register – allowing them to solicit support from other investors should they think collective action would be more effective. If they hold the requisite number of shares, activists could requisition a general meeting or request certain resolutions to be proposed at the company’s the next AGM. The success of this strategy, of course, depends on the levels of support the activist has managed to solicit from other large shareholders. However, for many resolutions, only a majority of those shareholders present and voting at the meeting is required, so a low level of turnout can be helpful.
Activists can also show their dissatisfaction by voting against resolutions proposed by the company – for example, voting against directors’ remuneration (which is voted on annually at each AGM), the remuneration policy (which must be voted on at least every three years) or even the re-election of the directors themselves. Activists can intervene in M&A situations to block a takeover, both by threatening to vote against a deal or by simply expressing their views on the takeover in public.
Lastly, activists will often turn to public announcements, websites and social media to reinforce their campaigns, particularly if they feel a company is ignoring them. The benefits of such tactics are obvious, but the risk of falling foul of regulations such as the City Code on Takeovers and Measures mean activists considering such a strategy must tread carefully.Processes and guidelines
What are the general processes and guidelines for shareholders’ proposals?
The starting point for the processes and guidelines for shareholders’ proposals is the Companies Act. Under the Act, certain actions by a company require shareholder approval. In giving that approval, shareholders may pass two types of resolutions: ordinary resolutions (which are passed by a simple majority) and special resolutions (which are passed by a 75 per cent majority). These thresholds are calculated on the basis of those shareholders present (either in person or by proxy) at the general meeting – meaning that the number of votes may be a small percentage of the overall shareholder base. Ordinary resolutions are more common than special resolutions, which are reserved for more serious matters, such as amending a company’s constitution.
One of the ways under the Companies Act by which shareholders who hold at least 5 per cent of the paid-up share capital that carries voting rights may propose a resolution is by requiring the company to call a general meeting (section 303). The request may be in hard copy or electronic form and must be authenticated by the person or persons making it. It is usual to address the request to the directors of the company. The request should be sent in accordance with the Companies Act’s requirements for communications to the company, and care should be taken to check for any applicable provisions of the company’s articles of association. In practice, the requests are normally sent in hard copy form and by a method that enables tracking of receipt. The courts have held that any communication that members send seeking support for their proposal should give a fair, candid and reasonable explanation to members and should not be misleading. If a valid requisition request is made, the general meeting must be called within 21 days, the meeting itself must be held not more than 28 days after the date of the notice of the meeting and the company must bear the cost of convening the meeting.
Alternatively, shareholders may wish to propose a resolution to be voted on at the next AGM (section 338). The resolution must be one that may properly be moved, and is intended to be moved at that meeting. Resolutions that may not be properly moved at an AGM are those that, if passed, would be ineffective or those that are defamatory, frivolous or vexatious. The right to requisition a resolution under section 338 is open to those shareholders representing at least 5 per cent of the total voting rights or at least 100 shareholders holding the right to vote and who hold shares in the company on which there has been paid up an average sum, per member, of at least £100. Shareholders must ensure that the resolution is received by the company not later than six weeks before the AGM or, if later, circulation of the AGM notice. Unlike requests to convene general meetings, where shareholders wish to circulate a resolution under section 338, they must bear the cost of doing so (other than where they have submitted their requisition notice before the end of the immediately preceding financial year). In doing so, they must deposit with, or tender to, the company a sum reasonably sufficient to meet the company’s expenses of circulating the resolution.
In addition, shareholders can require the company to circulate a statement to shareholders in relation to any matter to be dealt with at a general meeting. The statement is limited to 1,000 words, and the company must send it to every shareholder entitled to receive notice of the meeting.
In extreme cases, an activist shareholder may decide to exercise its right under the Companies Act to take legal action against the company, such as bringing a derivative claim in the name of the company against its directors or an unfair prejudice petition. These claims remain quite rare in the United Kingdom in relation to listed companies.
May shareholders nominate directors for election to the board and use the company’s proxy or shareholder circular infrastructure, at the company’s expense, to do so?
Shareholders have the ability to nominate directors to the board by either requisitioning a resolution to be proposed at the company’s next AGM or by requisitioning a general meeting.
If the shareholders wish to requisition a general meeting, the cost of convening the general meeting is borne by the company. Alternatively, subject to limited exceptions, shareholders who requisition the company to circulate a resolution to be proposed at an AGM must cover the company’s costs of doing so.
May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?
Shareholders have the ability to call a shareholders’ meeting under the Companies Act, using the process described in the first answer under 'Processes and Guidelines'.
In the United Kingdom, there is no statutory mechanism for shareholders of a public listed company to pass written resolutions in lieu of a meeting. However, a document signed by all shareholders of a public company may not be wholly ineffective. The courts have held that where all shareholders, who would have a right to attend and vote on a matter at a general meeting of the company, unanimously assent to that matter by signing a written resolution, then an insistence on adhering to the prescribed procedural formalities for making the decision is not always necessary.
Notwithstanding the above, public listed companies that want to pass written resolutions would encounter some obvious practical difficulties. It would be difficult to secure the individual written consent of each shareholder if there are a large numbers of shareholders. In addition, taking certain decisions by unanimous consent would appear to be inconsistent with provisions of the Company Law Codification Directive, which require a number of resolutions relating to the maintenance and alteration of capital to be taken by a public company in a general meeting. The constraints contained in the Directive were the reason given for not extending the statutory written resolution procedure under the Companies Act to public companies.Litigation
What are the main types of litigation shareholders in your jurisdiction may initiate against corporations and directors? May shareholders bring derivative actions on behalf of the corporation or class actions on behalf of all shareholders? Are there methods of obtaining access to company information?
There are various types of litigation that a shareholder may initiate against a company or its directors. Some common examples include:
- a personal claim designed to uphold the ‘statutory contract’ created by the company’s articles or to activate certain rights given to members under the Companies Act;
- an unfair prejudice petition under section 994 of the Companies Act by which a member might seek to contend that the company’s affairs have been conducted in a manner that is unfairly prejudicial to the interests of the member or membership that includes the member. Such claims generally seek a personal remedy for the benefit of the petitioner, commonly in the form of a share purchase order;
- a winding up petition under section 122(1)(g) of the Insolvency Act 1986, the ‘just and equitable ground’ under which a member may, in certain scenarios, be able to secure an order for the winding up of the company and the distribution of its assets in the ensuing liquidation; and
- a derivative claim (whether under statute or, in limited circumstances, common law) that provides a mechanism by which a member may seek to secure a remedy for and on behalf of the company itself.
Derivative claims are said to be derivative in that they derive from rights belonging to the company and, if successful, provide only an indirect benefit to members as shareholders in the company. Statutory derivative claims may be brought for negligence, default, breach of duty or breach of trust by a director, a third party or both. The claim may be brought by a member of the company, and the expression ‘member’ has been extended beyond its normal meaning in company law for the purposes of statutory derivative claims. It includes not only the registered holder of shares but also a person to whom shares in the company have been transferred, or transmitted by operation of law, but who has not been registered as a member of the company. Outside of claims in the Competition Appeal Tribunal, class actions on behalf of shareholders are not as common in the United Kingdom as they are in the United States.
In terms of obtaining information, any person may inspect a company’s register of members. A member of the company may inspect the register for free, but any other person must pay a prescribed fee. Additionally, any person may request a copy of the register of members, but must pay a prescribed fee, regardless of whether they are a member or not. Members can request (either for inspection or by providing copies of entries) a register of interests in the company’s shares that have been disclosed to the company. Certain documents (such a company’s articles of association) must be filed with the registrar of companies, and these documents are easily accessible on the Companies House website. Should a member wish to commence proceedings against the company, certain information will have to be disclosed as part of the disclosure process, to the extent that it is not legally privileged.
Shareholders’ dutiesFiduciary duties
Do shareholder activists owe fiduciary duties to the company?
In the United Kingdom, shareholder activists owe no fiduciary duties to the target company.
Notwithstanding the absence of any fiduciary duty, there have been increased efforts in the United Kingdom to promote effective shareholder engagement, such as the development of the Financial Reporting Council’s UK Stewardship Code (the Stewardship Code), the establishment of the Investor Forum and the publication of best practice guidelines by bodies such as the Pension and Lifetime Savings Association. The Stewardship Code applies on a ‘comply or explain’ basis, and a revised edition has been published and took effect from 1 January 2020. The new code sets high expectations of those investing money on behalf of UK savers and pensioners. There is a strong focus on the activities and outcomes of stewardship, not just policy statements. There are new expectations about how investment and stewardship is integrated, including environmental, social and governance issues. The Code also asks investors to explain how they have exercised stewardship across different asset classes.Compensation
May directors accept compensation from shareholders who appoint them?
It is possible for directors to be employed by a shareholder and receive compensation from them, but it would be unusual for directors not to be compensated directly by the company for their services. Director compensation will be determined by the company’s remuneration committee in line with the remuneration policy. The level of director compensation can be a contentious issue for shareholders, especially when they are afforded the chance to approve the remuneration policy at a company’s AGM. It is normal for executive directors to be remunerated in line with the terms of their service contract with the company, while non-executive directors will be compensated as per the terms of their appointment letter.
If directors do receive payment from shareholders who appoint them, the arrangements would be likely to raise questions about conflicts of interest under the Companies Act, and the director would still have to be re-elected annually at the company’s AGM in line with the UK Corporate Governance Code.Mandatory bids
Are shareholders acting in concert subject to any mandatory bid requirements in your jurisdiction? When are shareholders deemed to be acting in concert?
For the purposes of the Takeover Code, persons are deemed to be acting in concert when, pursuant to an agreement or understanding (whether formal or informal), they cooperate to obtain or consolidate control of, or to frustrate the successful outcome of, an offer for a company that is subject to the Takeover Code. The Takeover Code lists nine categories of person who will be presumed to be acting in concert with one another. These include a company, its parent, subsidiaries and their associated companies, and a company with its directors (together with their close relatives and the related trusts of any of them). These presumptions may be rebutted, following consultation with the Takeover Panel.
A mandatory bid is required to be made under Rule 9 of the Takeover Code where: (1) shareholders and any person acting in concert with them acquire shares carrying 30 per cent or more of the voting rights of a target company; or (2) if a shareholder, together with its concert parties, holding not less than 30 per cent but not more than 50 per cent of the voting rights, increases its holding. Rule 9 requires a mandatory offer to be made in cash or be accompanied by a cash alternative.
Following concerns in the market that the concert party provisions and mandatory bid rules in the Takeover Code were acting as a barrier to collective shareholder action, the Takeover Panel published helpful guidance for activists in the form of Practice Statement 26 (Shareholder activism). This confirmed that relevant provisions of the Takeover Code were not intended to constrain collective shareholder action.
According to the Statement, shareholders will be subject to the Takeover Code’s mandatory bid requirements when:
- those shareholders requisition a general meeting to consider a ‘board control-seeking’ proposal or threaten to do so; and
- after an agreement or understanding is reached between the shareholders that a board control-seeking resolution should be proposed or threatened, those shareholders acquire interests in shares such that the shares in which they are interested together carry 30 per cent or more of the voting rights in the company (or, if they are already interested in shares carrying 30 per cent or more of such voting rights, they acquire further interests in shares).
This means that even if a board control-seeking proposal were to be proposed by a group of shareholders, no mandatory bid obligation would be triggered if, at the time that any such agreement or understanding on the matter is reached, the shareholders do not hold the requisite number of shares.Disclosure rules
Must shareholders disclose significant shareholdings? If so, when? Must such disclosure include the shareholder’s intentions?
There are certain circumstances in which a shareholder must disclose the level of its shareholding. Under Disclosure Guidance and Transparency Rule 5, a person must notify the issuer of the percentage of voting rights they hold as a shareholder (or holds or is deemed to hold through his or her direct or indirect holding of financial instruments) if, as a result of an acquisition or disposal of shares or financial instruments, the percentage of those voting rights exceeds or falls below the following thresholds:
- in the case of UK issuers, 3 per cent and each whole percentage threshold above 3 per cent; and
- in the case of non-UK issuers, 5, 10, 15, 20, 25, 30, 50 and 75 per cent.
In relation to UK issuers, the deadline for making the notification is within two trading days of the acquisition or disposal. For non-UK issuers, the deadline is within four trading days. In each case, the company must then disclose the notification to the market. Certain types of shareholder (primarily in the investment manager sector) are only required to make a disclosure under DTR 5 when they exceed or fall below the 5 per cent threshold of a UK issuer.
Under the Takeover Code, a person interested in 1 per cent or more of the securities of any relevant party to the offer must make an Opening Position Disclosure after the commencement of the offer period or an announcement is made that first identifies a non-cash bidder. An Opening Position Disclosure must be made within 10 business days. Subsequently, such a person must make a Dealing Disclosure if they deal in securities of any relevant party to the offer not later than 3.30pm on the business day following the date of the dealing.
There is no requirement under UK law for any disclosure by a shareholder of its intentions in respect of its shareholding.
Do the disclosure requirements apply to derivative instruments, acting in concert or short positions?
Holding derivative instruments can give rise to disclosure requirements under the DTRs. Under DTR 5.3, a person must make a disclosure notification in respect of any financial instrument that gives them a long economic position in respect of the company’s shares. Many derivative instruments track the price of an underlying share exactly and simply pass through the economics to the derivative holder – meaning such instruments fall within the disclosure requirements of the DTRs. In calculating the thresholds, both shares and financial instruments are counted for the purpose of establishing the relevant threshold.
In making an Opening Position Disclosure or Dealing Disclosure, the question of whether someone is ‘interested’ in the securities of an offer party is widely defined and covers both options and derivative positions. Under the Takeover Code, the person making the disclosure may also have to include details of their concert parties’ interests.
The Financial Services and Markets Act 2000 (Short Selling) Regulations 2012 were introduced in the United Kingdom to implement the EU Regulation on short selling. Under these regulations, a person must publicly disclose details of any net short position it has in relation to relevant shares:
- when the position reaches 0.5 per cent of the issued share capital of the company (the Initial Public Disclosure Threshold);
- at each additional 0.1 per cent above the Initial Public Disclosure Threshold (a Subsequent Public Disclosure Threshold); and
- when the position decreases below either the Initial Public Disclosure Threshold or a Subsequent Public Disclosure Threshold.
This disclosure must be made by 3.30pm on the trading day following which the person reaches, falls below or passes through the relevant Initial Public Disclosure Threshold or Subsequent Public Disclosure Threshold, as applicable.Insider trading
Do insider trading rules apply to activist activity?
Depending on the nature of the activist activity, insider trading rules may apply. It is important that activists are aware of the possible implications their actions may have under the market abuse and insider dealing regimes.
Activist activity will often entail private communications with a company’s board. In the course of those communications, it is possible that inside information about the company could be divulged to the activist. Under the Market Abuse Regulation (MAR), inside information is defined as information that is:
- of a precise nature;
- has not been made public;
- relates, directly or indirectly, to one or more issuers, or to one or more financial instruments themselves; and
- if made public, would be likely to have a significant effect on the price of those financial instruments or related derivative instruments.
Once the activist possesses inside information, should they use it to deal in financial instruments to which the information relates, they would commit an insider dealing offence under MAR. It is possible that the activist’s strategy itself constitutes inside information. The position under the general approach of MAR and the Financial Conduct Authority (FCA), however, is that it may not be abusive to the market if the activist is simply carrying out investments on the basis of their own knowledge and resources. However, it is clear that activists should be cautious in these situations.
If an activist discloses inside information to another person, other than in the proper course of the exercise of his or her employment, profession or other duties, that would constitute an unlawful disclosure of inside information under MAR. However, it is not just the activists themselves who should be concerned. If another shareholder engages in dealing on the basis of their knowledge of the activist’s intentions and strategy, that could be deemed to be market abuse. In general, all shareholders should be mindful to ensure that they do not make any comments that give rise to false or misleading signals about financial instruments, as this can constitute market manipulation under MAR.
There is a level of overlap between the civil regime of MAR and the criminal regime under the Criminal Justice Act 1993. The FCA has discretion to pursue a criminal prosecution or take civil action in respect of the same behaviour.
Company response strategiesFiduciary duties
What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?
Directors are under no different standard of duty when considering an activist proposal than when they are making any other board decision.
Directors’ fiduciary duties are derived from equity and have been codified in the Companies Act. They include the duty to:
- act within their powers;
- promote the success of the company;
- exercise independent judgement;
- avoid conflicts of interest;
- not accept benefits from third parties; and
- declare an interest in a proposed transaction or arrangement.
Directors owe the same fiduciary duties to the company regardless of whether they are also a shareholder or have been appointed by a shareholder. In contrast, activists acting solely in their capacity as shareholders owe no fiduciary duties to the company.Preparation
What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?
Shareholder activism continues to grow in prevalence in the United Kingdom, so effective shareholder engagement is becoming an even more important issue in the boardroom. Just as the nature of activist campaigns has evolved, so too have the tactics of boards in response to those campaigns. The key change in recent times is the increasing willingness of companies to be proactive and engage with shareholders on the issues they raise.
Companies can adopt a variety of strategies in preparation for an activist campaign. As a matter of best practice, companies should monitor their register of members regularly and maintain an open dialogue with shareholders. It is important that companies undertake self-evaluation exercises to identify areas to strengthen and to mitigate potential vulnerabilities – getting ahead of investor concerns. Companies should have a plan in place for how to react to an activist campaign that includes dealing not only with the activist but also other external stakeholders. Finally, companies would be well advised to take a less reactive posture to an activist attack and seek opportunities to control the narrative, increase leverage with key shareholders and understand investor views beyond the activist.Defences
What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?
Any company can be the target of shareholder activism and, outside of good governance and continued shareholder engagement, companies do not have many defences to avoid being the subject of an activist campaign. Structural or ‘poison pill’ defences do not feature in the United Kingdom. Indeed, invoking such a defence could constitute a breach of a director’s fiduciary duties to the company. Activists typically focus on companies that are experiencing (or are perceived to be experiencing) financial underperformance, so financial outperformance relative to its peers is one of the best defences available to a company.
In respect of a takeover offer for a public company governed by the City Code on Takeovers and Mergers (the Takeover Code), the target directors must abide by certain rules. One of the key principles of the Takeover Code is that the target board must not deny shareholders the opportunity to decide on the merits of the offer. As part of that principle, they must obtain shareholder approval for any act that may result in any offer or bona fide possible offer being frustrated. The most effective way in which companies can combat shareholder activism is proactive shareholder engagement.Proxy votes
Do companies receive daily or periodic reports of proxy votes during the voting period?
Companies can elect to receive updates on proxy votes as often as they like during the voting period. The proxy totals will normally be confidential and often will only be communicated to key individuals at the company and its advisers. Disclosing proxy numbers improperly could constitute a market abuse offence under the Market Abuse Regulation.Settlements
Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?
The use of private settlement agreements to end activist disputes is becoming increasingly popular in the United Kingdom, just as the nature of activist campaigns has continued to evolve. Settlement agreements provide a means to avoid the significant drain on resources that a protracted public proxy battle may entail. Typically, such agreements will include an agreed set of actions to be taken by the company, such as the appointment of the activists’ nominees to the board. In return, there may be a standstill agreement in relation to the activist’s shareholding in the company. One notable example in the United Kingdom was the settlement agreement entered into between Elliott Management and Alliance Trust. Under the terms of that agreement, Alliance Trust undertook to appoint two non-executive directors, nominated by Elliott. In return, Elliott agreed to support the board on all other resolutions and not to agitate publicly against the company until after its next AGM.
Institutional investors in the United Kingdom are becoming much more proactive with regard to activist campaigns than they would traditionally have been. As a result of this heightened engagement, investors are increasingly aware (and vocal) about the dangers of a company settling with an activist too soon. It is sometimes the case that the short-term, event-driven strategies of some activists are at odds with the more long-term focused investment horizon of the typical institutional investor.
Shareholder communication and engagementShareholder engagement
Is it common to have organised shareholder engagement efforts as a matter of course? What do outreach efforts typically entail?
Once considered a perfunctory matter, shareholder engagement is now a key facet of good corporate governance in the United Kingdom and companies are alive to its importance. This has been driven, in part, by the development of best practice guidance. For instance, the Investor Forum, which was established in October 2014, aims to position stewardship at the heart of investment decision-making by facilitating dialogue, creating long-term solutions and enhancing value for UK-listed companies and investors alike. Similarly, in 2017, the Chartered Governance Institute and the Investment Association published guidance on how company boards should engage with their key stakeholders when making strategic decisions.
Not all shareholders are alike. The topics on which they want to engage and their appetite for doing so will vary depending on the level of their investment, their particular resources and interests and other reasons. Typically, institutional investors invest on a long-term basis, and so they often prefer to drive organic change rather than seeking shorter-term changes. Private engagement efforts are often initiated by the investor, reflecting the more collaborative approach to shareholder activism in the United Kingdom.
Are directors commonly involved in shareholder engagement efforts?
It is not unusual for directors to be involved in shareholder engagement efforts. Shareholders are not homogenous, a fact to which boards are sensitive and they will tailor their engagement practices accordingly. Large institutional shareholders will almost always demand engagement with board members. Retail shareholders are less likely to meet with directors outside of the company’s AGM. As a matter of best practice, it is recommended that all directors are involved in shareholder engagement efforts, a principle that has been codified in the UK Corporate Governance Code Code.Disclosure
Must companies disclose shareholder engagement efforts or how shareholders may communicate directly with the board? Must companies avoid selective or unequal disclosure? When companies disclose shareholder engagement efforts, what form does the disclosure take?
Although there is no legal obligation to do so, as a matter of good corporate governance, companies should ensure that there are effective measures in place to facilitate direct communication between shareholders and the board. It is normal for companies to disclose details of such communications in their annual reports.
When companies are making disclosures to shareholders, they must be careful not to breach the rules surrounding inside information and market abuse. Listed companies are obliged to disclose to the market inside information that a reasonable investor would use when making investment decisions. Such disclosures must be made as soon as possible and are typically done through a Regulatory Information Service (RIS). In certain circumstances, these disclosures can be delayed, namely where an immediate disclosure would likely prejudice the issuer’s legitimate interests; delay of disclosure is not likely to mislead the public; and the issuer is able to ensure the confidentiality of the information.
Inside information may be disclosed selectively when the person to whom the information is being disclosed owes the company a duty of confidentiality to the company and needs the information for proper reasons. The Market Abuse Regulation (MAR) requires companies to keep up-to-date insider lists of persons who have access to information. It is an offence for a person to trade on the basis of inside information.
The Investment Association, a trade body for UK investment managers, maintains the Public Register, which monitors shareholder dissent in UK-listed companies. The Register records where votes against a particular resolution amount to 20 per cent or more, and where companies have withdrawn a resolution between announcement of the Notice of Meeting and conclusion of the AGM. Under the UKCG Code, where there has been a vote against a resolution of 20 per cent or more:
- when announcing voting results, a company should explain what actions it intends to take to consult shareholders to understand the reasons behind the result;
- an update on the views received from shareholders and actions should be published no later than six months after the shareholders' meeting; and
- the board should provide a summary in its next annual report on what impact the feedback has had.
What are the primary rules relating to communications to obtain support from other shareholders? How do companies solicit votes from shareholders? Are there systems enabling the company to identify or facilitating direct communication with its shareholders?
Where an activist is seeking to obtain support from other shareholders, they should be mindful of the market abuse regime. The communication could constitute inside information if it disseminates non-public, price-sensitive information. Under MAR, the scope of what can amount to inside information includes information about a third party’s trading strategy. Accordingly, activists may choose to publish details about their plans at the outset of their campaign, perhaps by way of an open letter. In these circumstances, the activist must be careful to not make false or misleading statements.
Due to a greater emphasis on shareholder engagement in the United Kingdom, companies will often have private conversations with their major shareholders. Quite often, large institutional investors may hold positions in both the company and the activist. In such circumstances, it is important that the investor has appropriate internal safeguards to control the receipt of any inside information appropriately.
The Companies Act contains provisions to allow a public company to investigate who has an interest in its share capital by issuing a section 793 notice to any person whom it knows to be, or has a reasonable cause to believe is, interested in its shares or to have been so interested at any time in the preceding three years. The notice may require the recipient to state whether it has an interest in the company’s shares and to give details of those holdings. Public companies will typically use an RIS announcement to communicate directly with their shareholders.Access to the share register
Must companies, generally or at a shareholder’s request, provide a list of registered shareholders or a list of beneficial ownership, or submit to their shareholders information prepared by a requesting shareholder? How may this request be resisted?
Under the Companies Act, shareholders can request to inspect or receive a copy of the company’s register of members. They are entitled to inspect the register without charge. When a copy is requested, shareholders must pay the prescribed fee. If the company wants to resist the request (either to provide a copy of the register or to allow a member to inspect it), it must apply to court and demonstrate that the request has not been made for a ‘proper purpose’. There is no statutory definition of what constitutes a ‘proper purpose’. The Institute of Chartered Secretaries and Administrators has published a non-binding, non-exhaustive list of examples, and the courts have held that the phrase should be given its ordinary, natural meaning.
The register of members will only display the legal owners of the shares. However, shareholders also have the ability to request (either for inspection or by providing copies of entries) a register of interests in the company’s shares that have been disclosed to the company. Such disclosures will have been made when the company issued a section 793 notice. As with its register of members, the company may only resist a request with regard to its register of interests if that request has not been made for a proper purpose.
Update and trendsRecent activist campaigns
Discuss any noteworthy recent, high-profile shareholder activist campaigns in your jurisdiction. What are the current hot topics in shareholder activism and engagement?
Globally, 2019 was the biggest year on record for activist campaigns as asset managers grew ever more willing to take public stands against management, and hedge funds continued to explore new ways to boost returns. According to data published by investment bank Lazard, while the number of companies targeted fell 17 per cent to 187, more shareholders than ever opposed company decisions or policies, with many doing so for the first time.
In the United Kingdom, Cat Rock Capital targeted Just Eat for its first activist battle, pushing for a proposed merger with rival Takeaway.com (an entity in which it also held a stake). Eminence, a top-10 Just Eat shareholder without any stake in Takeaway.com, launched a public campaign of its own in opposition to the proposed merger – yet another example of how activists can shape M&A activity by reference to their own investment strategies.
Elsewhere in the United Kingdom, driving M&A activity remained a core goal of activist campaigns. Ferguson, a FTSE 100 plumbing and heating supplies merchant, decided to demerge its UK arm to focus on its larger North American business, representing a victory for the US hedge fund Trian Partners. Activists also continue to demand board seats in light of perceived underperformance by management. Sherborne’s attempt to have its founder, Edward Bramson, appointed to the board of directors of Barclays to implement change at Barclays’ investment bank gathered much media attention. This campaign was particularly notable given the size of the company, signifying that activists are not afraid to target large companies, including in highly regulated industries.
Environmental, social and governance (ESG) issues continue to be the focus of increased investor scrutiny. This reflects a common trend from recent years; in 2018, Legal & General voted against the election of 3,864 directors globally, citing climate change, diversity or other governance factors. In 2019, State Street introduced what it calls a ‘responsibility factor’ – a scoring system that measures how well companies do on various ESG metrics. It will be interesting to see how the incoming 2020 proxy season is impacted as companies with perceived ESG failings are scrutinised by State Street and others.