An extract from The Shareholder Rights and Activism Review, 5th Edition
Key trends in shareholder activismi Profile of activist investors
In broad terms, it is possible to distinguish between economic activists and governance activists. Economic activists in South Africa primarily comprise institutional investors (such as asset managers, collective investment schemes, hedge funds, insurers, retirement and pension funds) whose activism is often event-driven and is generally directed at extracting greater shareholder value. Governance activists typically seek to influence board composition and company policy, and to improve corporate governance.
Recently, non-profits and NGOs, such as Just Share, the Raith Foundation and the Centre for Environmental Rights, have actively pursued ESG agendas. A number of prominent individual activists also regularly query companies on corporate governance, ESG and related issues.
Of course, many investors regard shareholder activism as integral to their investment strategies and will pursue both economic and governance activism. Examples of investors who have pursued both economic and governance activism include Allan Gray, Sygnia Asset Management, Value Capital Partners and Foord Asset Management. The Public Investment Corporation (PIC) – an investment management company owned by the South African government, which manages the assets of the Government Employees Pension Fund and other social security funds – holds significant stakes in a number of JSE-listed companies and exercises considerable influence as a shareholder, particularly in M&A contexts. As at 31 March 2019, the PIC reported having assets under management worth 2.131 trillion rand.ii Companies targeted by activist investors
Activism in South Africa has not been restricted to any particular industries, or by company size or performance. These factors are only a few among many, endogenous and exogenous, that might render a company a more vulnerable target of an activist campaign.iii Activist campaigns
The objectives of activists vary, and activists will use different tactics and strategies in pursuit of their objectives. Shareholder engagement is more often than not private, 'behind closed doors', but may play out in public. Institutional investors are very influential, particularly when acting collaboratively.
Historically, most campaigns in South Africa have focused on executive compensation and board composition.
On remuneration, following the introduction of 'say-on-pay' rules, certain JSE-listed companies have had to reconsider their remuneration policies following significant shareholder opposition to such policies or implementation reports.
On board composition, campaigns have forced companies to take steps to change the make-up of their boards or pushed for the resignation of the CEO. A noteworthy example of this was in 2014, involving PPC, a cement manufacturer, where activists sought to remove the entire board. Additionally, JSE-listed engineering firm PSV Holdings experienced a dramatic turn of events at its November 2019 AGM, when the recently ousted CEO managed to secure enough shareholder support to regain control and vote down resolutions for the election of four directors to the board.
In the M&A context, the influence of shareholder activism is gradually increasing. Shareholders have intervened to block or force certain M&A activity. Recent examples of the former include shareholder opposition to a proposed takeover of PPC, and Prudential's opposition to an attempted takeover of poultry producer Sovereign Foods by Country Bird Holdings. An example of the latter is Grand Parade Investment's (GPI) disposal of its interests in certain franchises (described in Section IV).
Recent campaigns, for example that against La Concorde (described in Section IV), also demonstrate the potential for shareholders, in certain statutorily prescribed circumstances, to delay potential M&A transactions by requiring a company to obtain court approval before implementation or to exit their investments for fair value by exercising their appraisal rights.iv Outcomes and the path to resolution
Recent campaigns relating to climate-related matters, particularly in the banking sector, demonstrate that activists can use a variety of different approaches to pursue the same ends, with varying degrees of success and a range of possible outcomes. Outcomes also depend to a large extent on the approach adopted by the target company in responding to an activist campaign: responses vary from summary dismissal, to collaborative engagement, to active opposition.
As noted above, shareholder activists who hold even nominal stakes in companies are afforded relatively strong rights and protections. Companies should focus on good corporate governance and proactively participate in appropriate levels of shareholder engagement, with particular focus on unlocking shareholder value. This includes abiding by the disclosure and engagement recommendations of the King Code, particularly in the context of listed companies.
In preparing for increased shareholder activism in South Africa, companies should continually and carefully monitor their shareholder portfolios for activists, assess potential vulnerabilities, and anticipate and prepare for campaigns on a case-by-case basis. Boards and companies that can demonstrate value creation over time, adherence to principles of good governance, including careful stakeholder engagement and responsible corporate citizenship, are less likely to find themselves vulnerable to activism. They are also more likely to have anticipated and planned for activism, and to be able to successfully communicate a well-articulated, carefully prepared and strategic response to particular instances of activism.
Recent shareholder activism campaignsi GPI
In November 2018, GPI, a franchisee of Burger King, Dunkin' Donuts and Baskin-Robbins, was the subject of activism by a consortium of disgruntled minority shareholders. The consortium requisitioned an extraordinary general meeting (EGM) to overhaul the board and appoint four of its own non-executive directors. It sent a letter to GPI detailing its grievances: doubts about the competency, skills and independence of the board; large bonuses paid to executive directors despite a collapsing share price and dwindling dividend; poor capital allocation decisions; and an exodus of key executives. After GPI failed to abide by a JSE directive ordering it to notify investors of the letter, the JSE issued the letter to shareholders directly.
An investor presentation preceded the EGM, during which GPI's interim CEO threatened 'war' against the activists, branding them 'short-termists' and 'usurpers'. At the EGM, the consortium gained sufficient shareholder support to appoint two of its preferred nominees to the board as non-executive directors. Days later, the CEO resigned, shortly before a vote on her appointment at the company's AGM, and shortly after Value Capital Partners, a turnaround specialist, acquired an influential stake in GPI.
In February 2019, GPI announced that it was exiting its interests in the Dunkin' Donuts and Baskin-Robbins franchises. The consortium had long pushed for GPI to exit the chains, given their track record of underperformance – since their launch in 2016, the South African outlets struggled to gain traction, incurring cumulative losses of over 96 million rand.ii Standard Bank
In 2019, activist Theo Botha and the Raith Foundation, a non-profit, requisitioned two climate change-related resolutions to be considered at Standard Bank's 2019 AGM. The resolutions sought to require Standard Bank to (1) report to shareholders by November 2019 on the company's assessment of greenhouse gas emissions resulting from its financing portfolio; and (2) adopt and publicly disclose a policy on lending to coal-fired power projects and coal mining operations. Standard Bank provided a detailed response to the proposed resolutions, explaining why the board recommended that the shareholders vote against the resolutions. The board did not consider the proposed resolutions as providing shareholders with any more meaningful understanding of the company's climate change risk exposure and risk management. Moreover, given the uncertainty as to how the group would practically comply with the proposed resolutions, it did not believe them to be in the best interests of the group at the time. The first resolution did not achieve the majority vote required for approval, but nonetheless received significant shareholder support (38.18 per cent for, 61.82 per cent against, with 6.29 per cent abstaining). The second was approved (55.09 per cent for, 44.91 per cent against, with 3.95 per cent abstaining). Following this campaign, in March 2020, Standard Bank became the first major South African lender to release a coal-lending policy.
This year, prior to Standard Bank's AGM, the Raith Foundation and Just Share sought to table a resolution to require the bank to adopt a policy on lending to carbon-intensive, fossil fuels activities, and to commit to a deadline for enhanced disclosures related to climate risk. The board of Standard Bank declined to table the resolution at its AGM, on the basis that the proposed resolution did not meet the statutory requirement of being a matter on which the proposing shareholders were entitled to vote. The resolution would, in effect, usurp the role of the board, which has primary responsibility for managing the business and affairs of Standard Bank, and ignored the significant work already being undertaken by the bank in these areas.
After the bank declined to table the resolutions, Just Share and other NGOs publicly called for shareholders not to elect or re-elect five of Standard Bank's board members on the basis that the directors are conflicted on climate-related matters due to their ties to the fossil fuels industry. Standard Bank recommended the re-election of the directors on the basis that the directors concerned are all nonexecutive directors who inevitably serve on different companies' boards and, in any event, the Companies Act has mechanisms in place to deal with conflict of interest issues. Shareholders overwhelmingly voted to approve the election and re-election of the directors concerned at Standard Bank's AGM on 26 June 2020.iii Sasol
In April 2018, Theo Botha and the Raith Foundation combined to propose a resolution at the AGM of Sasol, a JSE-listed energy and chemical company. The proposed resolution sought to have Sasol, currently one of the largest contributors to greenhouse gas emissions in South Africa, prepare an annual report detailing its plans for addressing climate-related 'transition risks'. Sasol declined to table the proposed resolution on the basis that it addressed matters falling solely within the purview of board and management, and therefore did not meet the statutory requirement of being a matter on which the proposing shareholders were entitled to vote.
The following year, six major South African institutional investors – Old Mutual, Sanlam, Abax Investments, Coronation, AEON Investment Management and Mergence Investment Managers – tabled a shareholder resolution for the Sasol AGM in November 2019. The six had rejected Sasol's climate change plan on the grounds that the plan was not comprehensive enough and did not align with the Paris Climate Agreement. The resolution therefore sought 'greater transparency from the company on how its long-term greenhouse gas emission reduction strategy and executive rewards align with the Paris Climate Agreement'. It sought to require Sasol to publish its annual climate risk reports from 2020 onwards and its quantitative greenhouse gas targets aligned with the Paris Agreement. The board, however, declined to table the resolution on the basis that the matters raised by the shareholders 'have been addressed and there is no longer any necessity to consider the legality of those resolutions for the upcoming AGM'.
Shortly after the campaign Sasol pledged further action on climate-related issues (it had already pledged to reduce greenhouse gas emissions by at least 10 per cent by 2030), and in May this year invited bids from independent power producers for the supply of renewable energy to its local operations.iv La Concorde
In June 2018, the High Court considered the issue of whether a dissenting shareholder in a holding company is entitled to exercise appraisal rights (mentioned above) in respect of a subsidiary's disposal of all or the greater part of its assets or undertaking. Individual activist Albie Cilliers exercised his appraisal rights in respect of a sale of assets by a wholly owned subsidiary of La Concorde. After rejecting La Concorde's initial offer of 13.47 rand per share, Cilliers applied to court for a declaration that the valuation did not represent fair value. La Concorde countered by challenging Cillier's entitlement to appraisal rights at all, arguing that Section 164 of the Companies Act granted such rights to shareholders of the disposing company only (i.e., the subsidiary, not the holding company).
Notwithstanding that Cilliers did not hold shares in the subsidiary that was disposing of the assets, the High Court found in his favour, adopting a purposive approach to the appraisal right. The Court held that the appraisal right was introduced to protect minority shareholders, particularly where they are unable to effectively influence company direction or pursue private actions. To treat dissenting shareholders in a holding company any differently from those in a subsidiary, the Court reasoned, would undermine the objective of protecting minority shareholders. Correctly interpreted, the relevant provisions of the Companies Act gave appraisal rights to both sets of shareholders. Therefore, Cilliers, as a minority shareholder in the La Concorde holding company, was capable of exercising a shareholder appraisal right in relation to the subsidiary's disposal of assets.