The methods used by activist shareholders to change company behaviour.

This article was first published in Shares Magazine, and the original article can be found online here.

Shareholder activism continues to be a strategy pursued by investors seeking to realise value by influencing or changing company behaviour.

Hedge fund Elliott Advisors in May commenced legal action in the Dutch courts to force chemicals group Akzo Nobel to convene a general meeting of shareholders to vote on a resolution to remove the chairman of the company as part of a strategy to engineer a takeover by PPG.

The position of Akzo Nobel was complicated by the inclusion in its constitution of provisions enabling certain directors to make binding nominations to its board.

In the UK, any such a provision would be contrary to the provisions of the Companies Act 2006 with respect to the appointment and removal of directors. However, a UK company having a separate class of shares with enhanced voting rights in friendly hands might be able to defend itself against the unwanted appointment or removal of directors.

Frowned upon

In practice such arrangements are not favoured by institutional investors and may be seen to undermine the principles of good governance and accountability to shareholders.

In the UK, the Companies Act 2006 allows shareholders representing at least 5% of the paid-up voting shares to require a company to call a general meeting and to propose a resolution which can be properly moved at the meeting.

In order to achieve their aims activist shareholders might therefore propose a resolution to remove one or more directors and to appoint one or more others in their place.

If having received a valid requisition, the company does not within 21 days convene a meeting; the requisitioning shareholders may themselves convene it without having to go to court. In this respect the UK is considerably less protectionist than a number of other jurisdictions.

Takeover rules

In seeking changes to the board of a UK public company, activists do need to be mindful of the provisions of the City Code on Takeovers and Mergers so as not to inadvertently trigger a mandatory bid for the company under Rule 9 of the City Code.

This applies to acquisitions resulting in a person or persons acting in concert having an interest in shares which carries 30% or more of the voting rights of the company).

While shareholders voting together on a particular resolution are not normally presumed to be acting in concert for the purposes of Rule 9, there is a presumption that shareholders who requisition or threaten to requisition a meeting to consider a board control-seeking proposal are acting in concert.

A mandatory bid obligation could then be triggered as a result of any member of the group subsequently acquiring an interest in shares that causes a relevant Rule 9 threshold to be crossed.