Company response strategies

Preparation

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.

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 undergo 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 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. As discussed in question 18, the most effective way in which companies can combat shareholder activism is proactive shareholder engagement.

Reports on 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 MAR, as described in question 16.

Private 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’ nominee(s) 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.

As discussed in question 4, 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 is at odds with the more long-term focused investment horizon of the typical institutional investor.