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?

Structural strategies preventing or hindering shareholder activism are:

  • issue additional securities to increase the costs of a takeover offer; and
  • stagger terms of members of the supervisory board.

Requiring a change to the articles of AoA or shareholder resolution:

  • higher voting thresholds or additional voting requirements compared to the statutory voting requirements;
  • right of certain shareholders (holders of registered shares) to nominate supervisory board members;
  • decrease of the threshold for the attainment of a controlling interest leading to a mandatory takeover bid;
  • voting caps; and
  • issuing of dual-class stocks whereby a maximum of one-third of shares can be issued without voting rights (preference shares); and
  • delisting.

Of course, such defences do not protect the company against the exercise of minority rights with the intent to levy pressure on the management. They, however, make the formation of minority shareholder groups or the accumulation of shares in the hands of the activist share-holders less likely.

Structural features making a company more likely to come under the influence or be targeted by activist shareholders are:

  • a large number of free-floating shares;
  • passive institutional shareholders;
  • low attendance in shareholders’ meetings;
  • depressed or discounted stock price; and
  • takeover or restructuring situations (supporting or rejecting takeover bids or blocking of shareholder resolutions).

In respect of takeover situations, the board neutrality rule has to be observed. Once the target company gains knowledge of a bidder’s intention to launch a bid (‘relevant date’), the company must not take measures that could impair the shareholder’s opportunity to make a free and informed decision on the offer and, further, the target company’s management (as well as the supervisory board) must obtain the consent of the shareholders’ meeting for any measures (other than seeking alternative bids) that could impair the takeover bid, such as issuing of securities that could prevent the bidder from acquiring control of the target company, sale of material assets (‘crown jewels’), purchase of other companies or businesses or material changes to the financing structure. No shareholders’ meeting consent is required for the implementation of board decisions:

  • in the ordinary course of business that were taken prior to the relevant date;
  • that have been (at least partially) implemented by the relevant date; or
  • for any measures the board is already obliged to take at that time.

What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?

Although shareholder activism has increased in recent years, it is still a rather new phenomenon in Austria and does not have the same impact as in other jurisdictions. To be prepared for shareholder activism, companies should analyse their business model and their shareholder structure from the perspective of an activist shareholder.

The following measures should be considered:

  • engage in an active dialogue with institutional shareholders on the company strategy in particular on potentially contentious measures;
  • establish a process to supervise the media, rumours and the shareholder structure in order to be prepared for quick reactions
  • appoint an ‘action team’;
  • prepare investor and public statements (response strategy) in particular on any items likely to be addressed by activist shareholders;
  • implementation of a ‘one-voice policy’;
  • decrease the threshold for disclosures of significant shareholdings to 3 per cent (change of the AoA); and
  • extend the suspension of voting rights attached to the shares on all voting rights of a shareholder infringing disclosure rules for significant shareholdings (change of the AoA).
Defences

What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?

The following defence measures should be considered:

  • engage in an active dialogue with institutional shareholders on the company strategy in particular on potentially contentious measures;
  • establish a process to supervise the media, rumours and the shareholder structure in order to be prepared for quick reactions;
  • appoint an ‘action team’;
  • prepare investor and public statements (response strategy) in particular on any items likely to be addressed by activist shareholders;
  • implementation of a ‘one-voice policy’;
  • decrease the threshold for disclosures of significant shareholdings to 3 per cent (change of the AoA); and
  • extend the suspension of voting rights attached to the shares on all voting rights of a shareholder infringing disclosure rules for significant shareholdings (change of the AoA).

If the company has become the target of the activist shareholder, the following procedure is recommended:

  • elaboration of a coordinated communication or reaction of the company;
  • careful preparation of rapid responses to avoid uncertainty among market participants;
  • avoid the impression that the activist shareholder is pursuing a new strategy in the interests of shareholders and society as a whole;
  • countering with facts and reasonable, economically and legally sound answers; and
  • strong and positive business development as best defence reaction.
Reports on proxy votes

Do companies receive daily or periodic reports of proxy votes during the voting period?

There is no statutory proxy voting outside the shareholders’ meeting. Shareholders may participate in shareholders’ meetings by way of electronic communication if the company’s AoA provide for such participation. If a proxy voter is nominated, voting instructions given to the proxy voter are often kept confidential and, in general, there is no exchange between management and shareholders on such instructions submitted prior to the shareholders’ meeting.

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?

In general, it is not common to enter into a private settlement. If a settlement is considered, the management is obliged to examine and assess activist shareholder’s requests in detail. An unconditional advance commitment is inadmissible in any case.

In particular, the management has to examine whether the activist shareholder’s proposal is in the interests of the company, the other shareholders and the enterprise. A settlement with respect to individual proposals of the activist shareholder (eg, disinvestment of participations, change of dividend policy, proposals for appointments to the supervisory board, etc) is permissible if the proposals are in the best interests of the company and the agreement is made subject to change of circumstances.