Once a fairly niche investment strategy of concern to US-listed businesses, shareholder activism is an increasingly global phenomenon. Estimates suggest that assets under management by activist funds increased by more than 1,000% over the past decade, with most growth occurring after the global financial crisis. Globally, activists' assets under management stand at over $175 billion, but the real volume is undoubtedly greater, as that figure excludes assets of multi-strategy funds and other types of investor which may be active in this space. Recent market trends suggest that we will see more occasional activism in future against an increasingly international range of targets.
A marked increase in non-US activity was witnessed in 2016 (particularly in the United Kingdom and Asia, where activity was up 35% and 48% on 2015, respectively), with activists focusing on mid and smaller-cap targets as markets performed better than expected and larger businesses (particularly in the United States) proved increasingly adept at defending against activists. The success of established players in creating shareholder value has inspired new entrants, including not only multi-strategy managers, but also proactive shareholders hoping to address perceived poor performance by longer-term holdings.(1)
Further, the development of digital and alternative media has afforded activists increased influence relative to their ownership stake. It is common to find activists with a shareholding of 1% or less announcing campaigns, particularly in the case of large-cap stocks.(2) For example, Third Point's campaign against Nestlé was announced when the fund acquired a 1.3% stake for $3.5 billion and saw the Swiss group's market value jump by $10 billion overnight. As the resignation of Uber's founder and chief executive officer demonstrates, venture capitalists are also increasingly active in pushing for change in private companies.
As the world's leading incorporation vehicles, BVI companies are listed on exchanges and conduct business around the world and may therefore expect to be occasionally involved in activist campaigns or other challenges from shareholders.(3) However, many investors and their advisers may be less familiar with BVI company law than their domestic legislation.
An essential first step for any investor acquiring a stake in a BVI company is to consider carefully with BVI counsel the provisions of the company's memorandum and articles of association. Fortunately, a BVI company's memorandum and articles of association can be obtained via a public search for a modest fee. Shareholders of a BVI company also have a statutory right to inspect its memorandum and articles of association.
The default provisions of the Business Companies Act are subject to the provisions of each company's memorandum and articles of association to a greater extent than may be the case in other jurisdictions. Therefore, the memorandum and articles of association are a key point of reference in determining the legal scope for shareholders to bring about change should softer approaches (eg, open or private letters to the board) fail. In the case of listed companies, the memorandum and articles of association often include protective provisions (eg, multiple share classes with specific voting rights or supermajority voting provisions) to defend the company against hostile bidders or persons acquiring minority stakes, which may be relevant to an activist's strategy.
Reviewing a company's list of shareholders is another key step in identifying potential support for an activist's agenda, particularly if a proxy battle is likely.
A BVI company's share register and register of directors are not publically available unless the company has elected to file the relevant register publicly, which is seldom the case with listed companies. Broadly, shareholders of a BVI company have a statutory right to inspect such registers and the company's minute book. However, subject to the company's memorandum and articles of association, the directors may refuse or limit access if they are satisfied that inspection would be contrary to the company's interests. While shareholders can apply to the court to seek access in such cases, this is a relatively costly process and the court may be reluctant to make an order permitting inspection provided that the directors can demonstrate bona fide commercial justifications for restricting access.
In practice, the utility of a BVI company's share register may be fairly limited since it shows only legal title of record; therefore, details of ultimate beneficial ownership may not be disclosed (eg, where investors hold their shares through clearing systems, depositories, custodians or nominees). Listed companies may be required under applicable listing rules to disclose publicly any shareholders with holdings over a specified threshold and/or directors' interests.
Shareholders in a BVI company have no automatic rights under the Business Companies Act to inspect the company's financial records, but the memorandum and articles of association should be checked for any express requirements to provide financial information to shareholders. In practice, such requirements are uncommon – particularly if the company must publish accounts and other financial or inside information under applicable listing rules.
Where other approaches prove unsuccessful, an activist may seek to force the company to hold a shareholders' meeting to consider its proposals. Under the Business Companies Act, there is no requirement for a company to hold an annual general meeting, although this may be required under the memorandum and articles of association or applicable listing rules.
Pursuant to the Business Companies Act, directors of a BVI company must convene a shareholders' meeting upon written request by shareholders entitled to exercise at least 30% of the voting rights in respect of the matter for which the meeting is requested, unless the memorandum and articles of association specify a lesser percentage. In practice, a lower percentage is often specified. A minimum of no less than seven days' notice of a shareholders' meeting is required under the act, although the memorandum and articles of association may specify a longer notice period. Written shareholder resolutions are also generally permissible, which may be of use where the activist can establish sufficient support among other shareholders.
If the directors fail to convene a meeting which has been properly requested by shareholders, the court has the power to order a shareholders' meeting on application by any director or shareholder. The court has broad discretion as to the costs of such applications, including the power to order that these are borne by the company.
Quorum and voting requirements are usually set out in the memorandum and articles of association, but – in the absence of express provisions – the default position under the Business Companies Act is that:
- a shareholders' meeting is quorate if at its commencement shareholders entitled to exercise at least 50% of the votes are present in person or by proxy; and
- unless the memorandum and articles of association specify a high percentage, a resolution is passed if approved by a 50% majority of shareholders entitled to vote and voting on the resolution.
The Business Companies Act generally permits voting proxies and voting agreements between shareholders. However, the company's memorandum and articles of association should be reviewed carefully, as these often include express provisions regarding the use of proxies at meetings.
Gaining board representation to advance an activist's agenda is another common strategy. Studies indicate that this is a feature of approximately 25% to 30% of all campaigns and, outside the United States, it is relatively common to find activists agitating for the removal of the chief executive officer or another board member.(4)
Subject to the company's memorandum and articles of association, a director may be appointed by the shareholders or removed by the shareholders through:
- a resolution passed at a shareholders' meeting called for the purpose of removing the director or for purposes including the removal of the director; or
- a written resolution to which 75% of the company shareholders who are entitled to vote have consented.
Unless provided for by the memorandum and articles of association, there is no requirement for directors to be re-elected on a regular basis. Further, in the case of listed companies, defensive provisions are often designed to defend the board against hostile shareholder action (eg, a staggered board or 'golden parachute' protections for the chief executive officer or other key personnel). Accordingly, the memorandum and articles of association should be carefully reviewed, as these will determine shareholders' ability to bring about change at the board level.
M&A activity is another area where shareholders are increasingly making their voices heard – either to push for business combinations, disposals or spin-offs, or to scrap or change the pricing or other terms of proposed deals.(5) In addition to the considerations outlined above, shareholders scrutinising a proposed deal involving a BVI company should be aware of the rights granted to dissenting shareholders under the Business Companies Act.
Shareholders in a BVI company are entitled to payment of the fair value of their shares upon dissenting from:
- a merger involving the company, unless it is the surviving company and the shareholder continues to hold the same or similar shares;
- a consolidation involving the company;
- certain significant disposals (broadly, any disposition of more than 50% in value of the assets or business of the company made outside the ordinary course of business, subject to some exceptions), unless the relevant provisions of the Business Companies Act are disapplied under the memorandum and articles of association;
- a redemption of their shares pursuant to the Business Companies Act's squeeze-out provisions; or
- a plan or scheme of arrangement, if permitted by the court.
A dissent must be in respect of all shares held by the relevant shareholder. A statutory timetable for shareholders objecting to the proposed action and – if the action is taken – electing to dissent then applies, whereby the company must make a written offer to each shareholder to purchase the relevant shares at a price that it determines to be fair value. Failing an agreement on price within 30 days of such offer, fair value is determined by a board comprising three appraisers. The company and the dissenting shareholder each appoint an appraiser and the two designated appraisers then appoint a third.
A comprehensive overview of shareholder remedies under BVI law is beyond the scope of this update. However, activists and companies should be aware of the following points.
Directors should be mindful of their duties (in particular, the duty to act in the best interests of the company) when considering an activist investor's position. However, directors' duties are owed to the company and, as a result, the company is usually the proper claimant in the event that such duties are breached. Nevertheless, on the application of a shareholder, the court may permit the shareholder to bring or intervene in proceedings in the name of the company (a derivative claim). In practice, derivative actions are most likely to be relevant where there has been:
- some irregularity in the internal governance of the company;
- a fraud on the minority by the controllers of the company; or
- an infringement of the shareholder's rights.
However, activists should note that the court must take into account – and may be expected to give weight to – the directors' views on commercial matters and it will be for the shareholder bringing the derivative claim to demonstrate mismanagement if this is alleged.
Shareholders may also apply to the courts for an order directing the company or its directors to comply with, or refrain from action that contravenes, the Business Companies Act or the memorandum and articles of association. In practice, derivative actions and restraining or compliance orders are likely to be relevant where there has been a clear fraud on the minority. Again, the court must take into account – and may be expected to give weight to – the directors' views on commercial matters and it will be for the shareholder bringing the derivative claim to demonstrate mismanagement.
Shareholder claims and representative actions
If the company has breached a duty that it owes to a shareholder (eg, by breaching its memorandum and articles of association), the shareholder may bring an action in his or her own name. Where other shareholders have the same or substantially the same interest, the court may appoint one shareholder to represent all or some of the others.
Shareholders may apply to the court for relief from oppressive or unfairly discriminatory or prejudicial conduct by the company or in relation to the company's affairs. The court has extremely broad discretion to order as it thinks fit, although a typical remedy for unfair prejudice is to order a buy out of the relevant shareholders' shares at fair value – as determined by the court, in the absence of any methodology agreed by the parties in settlement.
The memorandum and articles of association may contain arbitration clauses or other alternative dispute resolution provisions. These will not generally preclude shareholders from enforcing their rights under BVI law (subject to the need to apply to the courts where the remedy sought is not within the tribunal's power to grant), but may be relevant when considering the anticipated cost, time period and forum for pursuing legal action.
The sustained growth of shareholder activism and, in particular, the spread of activists beyond the United States and traditional pure-play funds is changing the way that companies engage with shareholders. Investors and advisers considering a BVI company should involve BVI counsel at an early stage in the engagement process, as the inherent flexibility and unique features of BVI company law make a close reading of the company's constitutional documents essential in establishing a clear picture of the scope for bringing about the desired changes in the company.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact Joshua Mangeot at Harneys by telephone (+1 284 494 2233) or email (firstname.lastname@example.org). The Harneys website can be accessed at www.harneys.com.
(1) Some of the earliest activist campaigns were led by value investors (eg, Benjamin Graham (against Northern Pipeline in the 1920s) and Warren Buffett (against Sanborn Map Company in the 1950s)), J Gramm, Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism (New York, 2015).
(3) This article is primarily concerned with listed companies; however, the same legal points are relevant to investors in unlisted BVI vehicles, since the British Virgin Islands draws no legal distinction between private and public companies.