Shareholder activist strategiesStrategies
What common strategies do activist shareholders use to pursue their objectives?
The activist’s toolbox is diversified and has many ways to increase pressure on the company to comply with the activist demand.
For example, an activist may act to publish a position statement on general meeting agenda items, or to request the company to call a special meeting, usually in order to change the composition of the board of directors or to ask the company to add an additional item on the agenda of a general meeting.
Under the Companies Law, shareholders are entitled to review various company documents, including general meeting minutes. Such documents assist activists in their campaigns. For further information regarding shareholders rights to receive information, see question 26.
Some activists use the media, which has shown interest in shareholders’ activism - for example, headlines regarding the replacement of office holders in a public company or a letter to the board containing severe statements on the operation of the company’s management. These publications create interesting media publications of struggle and drama, which are like music to the ears of the press. Such publication obviously influences the company and its directors and officers.
Some activists may also approach the Israeli Securities Authority with a detailed complaint against the company or its office holders to increase pressure on the company.
Additionally, some activists engage directly with the board or the management following a thorough analysis of the company and the market in which it operates. In such cases, the activists present either a comprehensive document or presentation, which includes inter alia vulnerabilities of the company’s strategy and the advantages of the strategy proposed by the activist. Such a document may sometimes be sent in advance to the company’s major shareholders and might persuade them to support the activist’s position.
The specific choice of strategy is dependent on the identity of the activist, his or her objectives, the identity of the leaders of the company, its corporate governance quality and the company’s maturity to handle shareholder activism.
Processes and guidelines
What are the general processes and guidelines for shareholders’ proposals?
One or more shareholders holding at least 5 per cent of the issued capital and at least 1 per cent of the voting rights in the company, or one or more shareholders holding at least 5 per cent of the voting rights in the company, is/are authorised to require the board to assemble a special meeting whose agenda will be determined by him or her/them. The board is obliged to schedule the meeting within 21 days of the demand being submitted to it. Insofar as the board fails to call the meeting, the shareholders are authorised to call the meeting by themselves and the company is required to reimburse them the reasonable expenses incurred in connection with this.
One or more shareholders holding at least 1 per cent of the voting rights at the general meeting is/are authorised to request the board to include an item in the agenda of a general meeting to be held in the future, provided that the board determines that the item is appropriate for discussion at the general meeting. Such a shareholder’s request as stated should be conveyed to the company between three to seven days after the summon for the meeting has been sent, depending on the type of meeting. A shareholder’s request to include in a general meeting agenda nomination of a candidate as a director should include various particulars of the candidate as well as a declaration of the candidate’s competence to serve as director, in accordance with the provisions of the Companies Law.
Any shareholder is authorised to submit a position statement to the company up to 10 days before the meeting is held, expressing his or her opinion in connection with the meeting agenda items. The position statement must be drafted in a clear and simple language and contain up to 500 words on each agenda item. A shareholder submitting a position statement, acting in concert with others for the purpose of voting at the general meeting on all or one of the items on the agenda, shall indicate this in the position statement, specifying the cooperation understandings and the identity of the shareholders party to the collaboration. In the event that the shareholder or some other person collaborating with him or her has a personal interest in the outcome of the vote at the general meeting, the nature of this personal interest shall be indicated.
The company must publish this position statement on the Tel Aviv Stock Exchange and the Israeli Securities Authority distribution websites.
The party submitting the position statement will bear sole legal responsibility for its content.
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 are authorised to recommend directors for election to the board of a company in the general meeting by submitting a request for scheduling a meeting or adding an item to the agenda, as specified in question 7.
May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?
Shareholders may call a special meeting following the process set out in question 7. There is no legal procedure in public companies, as opposed to private company, in reaching all resolutions in a written manner in lieu of holding a general meeting.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 three main types of common shareholders’ litigation:
- A derivative action, which is filed on behalf of the company;
- A class action, which is filed on behalf of a certain class, such as a class of shareholders; and
- An appraisal claim, which is filed following a full tender offer that includes a compulsory acquisition.
A derivative action can be filed by a shareholder or a director or a debtor pursuant to the conditions detailed in the Companies Law, including initial application having been made to the company (except, among other situations, under particular circumstances where the board is affected by a personal interest) requesting the company to file such claim. Insofar as the company rejects to file such claim, then plaintiff is allowed to submit a derivative action application on behalf of the company. The court will tend to certify the derivative action application if it determines mainly that there is prima facie evidence that there are merits to such claim and that the claim is to the benefit of the company and that the plaintiff is not acting in bad faith.
A derivative action may be filed in respect of any matter or issue, including a claim for compensation or disgorgement against directors and officers, third parties, other shareholders who has harmed the company, including the controlling shareholders and so on.
The Companies Law allows the Israeli Securities Authority to fund a derivative action, if requested by the plaintiff. If the Israeli Securities Authority is satisfied that the derivative action has a public interest and that there is a reasonable chance that the court will certify it as a derivative action, it may bear the costs of the plaintiff.
Whoever is authorised to file a derivative action is entitled to request the court, prior to or following submission of the application for approval of the claim, to instruct the company to disclose documents relating to certain issues of the company where there is a suspicion of wrongdoing by others that resulted in a loss to the company. This legal procedure is for the purpose of examining the merits of a potential derivative action. The court is authorised to approve this motion for disclosure if it is convinced that the applicant has provided an initial prima facie evidence for this preliminary stage and that the applicant is acting bona fide with respect to the motion.
Another litigious course of action is a class action. An application for approval to file a class action may be submitted in accordance with the Class Action Law, 2006. The Class Action Law specifies in its endorsement on what cause of action and against whom a class action can be filed.
According to the endorsement, a class action can be filed by a party having ‘an interest in certain security’, that is, allegations relating to securities must be involved. There are four preconditions, which the court must examine in order to certify a claim as a class action:
- the claim gives rise to substantial questions of fact or law common to the entire class and they are reasonably likely to be settled in favour of the class;
- the class action is the most efficient and equitable way of resolving the dispute other than by means of a regular claim;
- the court is persuaded that all members of the class are adequately represented; and
- the court is persuaded that the affairs of the members of the class will be managed in good faith.
Courts will tend to certify a class action where a wrongdoing has been demonstrated prima facie.
The Securities Law allows the Israeli Securities Authority to fund a class action, if requested by the plaintiff. If the Israeli Securities Authority is satisfied that the class action has a public interest and that there is a reasonable chance that the court will certify it as a class action, it may bear the costs of the plaintiff.
A person wishing to acquire shares of a public Israeli company and who would as a result of such acquisition hold over 90 per cent of the target company’s voting rights or the target company’s issued and outstanding share capital (or of a class thereof) is required by the Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company (or the applicable class). If:
- the shareholders who do not accept the offer hold less than 5 per cent of the issued and outstanding share capital of the company (or the applicable class) and a majority of the offerees that do not have a personal interest in the acceptance of the tender offer accepted the tender offer; or
- the shareholders who did not accept the tender offer hold less than 2 per cent of the issued and outstanding share capital of the company (or of the applicable class), all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law.
A shareholder who had his or her shares so transferred may petition the court within six months from the date of acceptance of the full tender offer, regardless of whether such shareholder agreed to the offer, to determine whether the tender offer was for less than fair value and whether the fair value should be paid as determined by the court. A petition of this sort may also be filed as a class action. However, an offeror may provide in the offer that a shareholder who accepted the offer will not be entitled to appraisal rights as described in the preceding sentence, as long as the offeror and the company disclosed the information required by law in connection with the tender offer. If the full tender offer was not accepted in accordance with any of the above alternatives, the acquirer may not acquire shares of the company that will increase its holdings to more than 90 per cent of the company’s issued and outstanding share capital (or of the applicable class) from shareholders who accepted the tender offer.
The Supreme Court ruled in the case of Atzmon v Bank Hapoalim Ltd that the value of the target company in an appraisal claim followed by a full tender offer will be determined in accordance with the discounted cash-flow method.