Recent years have seen the level of shareholder activism increase significantly. Investors are increasingly seeking to intervene in the management of public companies, both in the UK and abroad, to progress their own agendas, such as procuring a return of shareholder capital, pursuing a special interest or influencing the outcome of a takeover. Whilst procuring board changes appears to be commonly the principal aim of activist shareholders, a survey carried out by Activist Insight, a provider of information on shareholder activism worldwide, found that 96% of those surveyed expect M&A activism to increase.
In order to achieve their aims, activist shareholders adopt a variety of strategies, including the use of social media, requisitioning and influencing decisions taken at general meetings and threatening or bringing legal action. Below we consider some examples of shareholder activism in practice:
- Cyprotex plc (AIM) - Shareholders requisitioned a general meeting in an attempt to remove the whole board. The requisitionists sought to procure the acquisition of a company which the board had rejected a couple of years before. The action was ultimately unsuccessful as the requisitionists had tried to remove the whole board, which did not have the support of the majority of shareholders. The requisitionists also set up a parallel website in order to generate support for their position and anyone searching for Cyprotex on the internet would have been led to this website.
- 3i Group plc (Main Market) - Laxey Partners requisitioned two resolutions at 3i Group’s AGM to halt new investments and to return capital to shareholders. The resolutions were defeated at the AGM and Laxey abstained from voting on the basis that 3i Group had, in the interim, put forward a new strategy which sought to address the concerns raised in Laxey’s resolutions.
- Dell Inc. (formerly NASDAQ) – In 2013, prolific activist Carl Ichan launched a campaign to oppose a management buy-out of Dell Inc., which was led by its CEO Michael Dell and his private equity partner, Silver Lake Partners. With his Twitter account, which has over 250,000 followers, Carl Icahn posted updates of his battle with the company, with links to press releases and letters to Dell shareholders. Although the campaign failed to affect the outcome of the management buy-out, the Twitter campaign brought the matter to the attention of the both other Dell Inc. shareholders and the public in general. Carl Ichan has since utilised his Twitter account to further his agenda with numerous companies, including, Apple Inc. and Talisman Energy.
In addition, companies which this firm has advised in connection with activist shareholder campaigns, aimed principally at securing board changes, include AIM-listed Mwana Africa plc, London Asia Capital plc and Insetco plc.
The general view is that shareholder activism is set to continue increasing across Europe and particularly the UK. The Activist Insight survey found that more than 300 companies were targeted by activists already in 2015, up from fewer than 150 in 2010. This article looks at the strategies utilised by activists (under the Companies Act 2006 (“2006 Act”) and otherwise) and measures companies can take in their defence.
TOOLS AVAILABLE FOR THE ACTIVIST SHAREHOLDER
Public criticism and social media
The use of electronic and social media, such as Twitter, YouTube, blogs and dedicated websites, as a tool for activism has been increasing significantly in recent years. The use of such media can be a very effective way of getting the attention of a board or mustering support amongst shareholders.
Posing questions and voting at general meetings
Shareholders have the right to speak at general meetings of a company, and may use this opportunity to pose questions to the board. Shareholders can also use their voting rights to vote against resolutions put forward by the board at general meetings. If able to muster sufficient support, activist shareholders may be able to block special resolutions (which require a majority of at least 75% of the shareholders voting to be passed) or ordinary resolutions (which require a simple majority to be passed).
Requisitioning a general meeting
Shareholders representing at least 5% of the paid-up voting share capital of a company can require the company to call a general meeting. This threshold was reduced to 5% from 10% on 3 August 2009 as part of the UK implementation of the Shareholder Rights Directive. The change has been significant, and 5% has not proved a high hurdle for activist shareholders to reach. Tactically, requisitioning a general meeting can be used to put the directors of a listed company under considerable pressure, forcing them to address issues in the public domain that they would often prefer to tackle privately. When responding to a shareholder requisition, directors should always be wary of the so-called washing of dirty linen in public and the potential for harm to a company’s reputation in engaging publicly with disgruntled shareholders. In addition, the general meeting will provide shareholders with a forum to air their views and potentially to pass resolutions to effect change.
The resolutions to be proposed at a requisitioned general meeting must be capable of being properly tabled and, if they are not, the directors of the company may decline to do so. A proposed resolution does not need to be tabled if it would be ineffective as a result of it being inconsistent with the company’s memorandum and articles of association, is defamatory, or is vexatious or frivolous. Even where there may be grounds for rejecting a resolution, the directors of a company must consider whether strategically this is the right course to take. For example, if a resolution will in any event have no effect if passed, the directors may decide to let such resolution be put to shareholders as it may help to placate the disgruntled shareholders.
On receipt of a valid requisition request, the board of the company must call a general meeting by the circulation of a notice to shareholders within 21 days. During this period it is likely that the company will seek legal advice to confirm the validity of the requisition. The general meeting itself must then be held on a date not more than 28 days after the date of the notice of meeting. In the event that the directors of the company fail to call the meeting in time, the requisitionists may themselves call the meeting and the company will be required to reimburse the requisitionists for their reasonable expenses.
Removing a director from office
One of the ultimate shareholder sanctions is to remove directors from office. Where shareholders are seeking to effect board changes they may:
Vote against the appointment of a new director or the re-election of an existing director. If a listed company is complying with corporate government guidelines in the UK, then each of the directors should be put up for re-election by shareholders at the first annual general meeting after their appointment, and then to re-election at intervals of no more than three years, or on an annual basis for Main Market companies.
Requisition a general meeting and seek to pass an ordinary resolution (i.e. a simple majority of those voting in person or by proxy at the general meeting) to remove such directors. In practice, this is the most common tool used by activist shareholders to apply pressure on a listed company. Special notice of 28 days must be given to the company of the intention to propose a resolution for the removal or replacement of a director.
Viewing the company’s shareholder register
Any person may view or request a copy of a company’s register of members. This right is particularly useful for activist shareholders who may benefit from identifying the company’s shareholders. A request to view a company’s register of members may only be made for a “proper purpose” which would preclude an intention to intimidate or cause harm to any shareholders of the company. However, canvassing support for a proposed resolution should constitute a proper purpose.
Action for unfair prejudice
A shareholder may petition the court to make an order for relief where the affairs of the company are being conducted in a manner that is unfairly prejudicial to the shareholder's interests as a shareholder or an actual or proposed act or omission of the company is or would be so prejudicial. In practice, where a claim is successful, the most common order made by a court is for the shares of the petitioning shareholder to be bought by other shareholders or by the company. However, the shareholder may seek orders for a wide range of things, including with regards to the operation of the business going forward or preventing the company form taking a particular action. It should be noted, however, that such claims can be costly and time consuming to pursue and are rarely brought against listed company.
DEALING EFFECTIVELY WITH SHAREHOLDER ACTIVISM
While the list above may seem a long one, the important thing for companies and directors to remember is that where they can engage with the activist shareholders and respond to their concerns. They may be able to prevent shareholders from taking some of the more drastic steps such as making wholesale board changes, as the directors of 3i Group did when it developed a new strategy acceptable to its activist shareholders. We set out below some steps which companies and incumbent boards can take in order to defend themselves against activist shareholders:
Engage with shareholders regularly
Actively engaging with shareholders on a regular basis enables a company to understand and address the concerns of shareholders early on – i.e. before the stage where a shareholder will be looking to employ the sort of strategies detailed above.
Transparency is vital to maintaining good shareholder relations. Companies should ensure that they operate in a manner which is as transparent as possible, ensuring that information is readily accessible by shareholders on their website (such as its strategy, corporate governance policies, financial reports and accounts and all press announcements).
Always be prepared
The directors should ensure that they are fully briefed ahead of any shareholder meeting and able to effectively deal with questions that shareholders may pose. Directors should monitor the shareholder register, in particular in the run up to shareholder meetings. Significant changes in shareholdings can often be a sign that a shareholder is unhappy. The acquisition of shares by an entity which is known for being an activist, such as an activist hedge fund, should also be a red flag to directors.
The directors should have a Q&A crib sheet prepared addressing matters which may arise at the meeting and may consider whether shareholders should be asked to provide questions in advance.
The role of a chairman is crucial in adjudicating contentious shareholder meetings. It may fall on the chairman, for example, to decide on whether a particular matter is fit to be put to the vote at a general meeting or whether certain persons are eligible to vote. Under English law, the chairman is given broad discretion (subject to constraints under the 2006 Act and a company’s articles) to exercise his supervisory role at general meetings, and the courts have often been reluctant to overturn decisions made by a chairman in good faith.
Managing the relationship with a controlling shareholder
Controlling shareholder or relationship agreements are increasingly an important tool by which a listed company can manage its relationship with a major shareholder or group of connected shareholders.
These can be, and often are, entered into with shareholders holding interests of below the 30% benchmark traditionally regarded as a controlling interest in a listed company. Securing commitments from a shareholder beyond the bare minimum, such as a hard commitment to use its votes to maintain a prescribed minimum number of independent directors, can be amongst the most important protections a company can have in the event of disagreement with a major shareholder.
The Takeover Code also offers some protection, for example in applying the concert party rules and mandatory bid obligation to groups of shareholders who conspire to effect major board changes in a listed company. However, the Code restrictions only bite where the concert party group hold a 30% or greater interest in the listed company.
Shareholder activism is on the increase and the strategies deployed by activists continue to grow. Companies therefore must likewise continue to develop their strategies for preventing and responding to shareholder activism. Failure to engage successfully with disgruntled shareholders can lead to costly legal battles and reputational damage. Actively managing shareholder relationships, transparency and good governance can all be utilised to try and ensure that the interests of a listed company and its shareholders are aligned. If the situation escalates and shareholder activists seek to employ one or more of the strategies set out above, companies should continue to engage with shareholders but should also seek professional advice as soon as possible on how best to respond.