Shareholder activism in the UK
Recent activist campaigns and the legal and regulatory framework 2023
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Contents
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An introduction to activism
Recent activist campaigns in the UK
The legal and regulatory regime in the UK
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1 An introduction to activism
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Laura Ackroyd
Gavin Davies
Greg Mulley
Mark Bardell
Antonia Kirkby
Brian O'Malley
Introduction
Shareholder activism continues to be a key feature of global markets.
While shareholder activism is by no means a new concept, the profile of investors taking an activist stance and the outcomes they seek to achieve continues to evolve alongside wider market developments.
The tactics that an activist uses on a campaign will to some extent depend on the tools available to it under the relevant legal and regulatory regimes. In the UK, shareholders have a range of specific rights under the Companies Act which they can implement to help achieve their goals. These include:
the right to get a copy of the register of members of the company
the ability to requisition a resolution at an AGM or requisition a shareholder meeting and
the power to remove or appoint directors.
Activists must also be aware of a number of other legal and regulatory issues when conducting a campaign to make sure they don't fall foul of restrictions or obligations.
In this guide we:
look at what activism is and some of the common objectives of activist campaigns
highlight some recent interesting activist campaigns
provide a snapshot of the key thresholds for shareholders' rights under the Companies Act 2006 and some of the other legal and regulatory requirements and restrictions in the UK that will have to be considered in the event of an activist campaign.
For further information on any of these issues, please ask your usual Herbert Smith Freehills contact.
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What is shareholder activism and who are the activists?
What is shareholder activism?
Who are activist shareholders?
Shareholder activism is a generic term used to describe an approach by a shareholder or shareholder group to a company's board, and if necessary to its fellow shareholders, seeking to effect change within a company.
An approach by an activist can take many different forms and seek to achieve a variety of outcomes, which are considered in more detail below. Broadly speaking, activism may be driven by a specific event that presents an opportunity to quickly increase the value of the company, such as acquiring or disposing of a business, or it may be driven by longer-term strategic or operational issues, where activists intervene as a result of a problem, or opportunity, they see in a company's business strategy or structure.
The term "shareholder activist" covers a broad spectrum of investors, with activism no longer being the solo pursuit of pure activist funds.
Instead, we are seeing campaigns by private equity investors (such as KKR), institutional investors (such as BlackRock), new activist investors (such as Bluebell Capital) and even traditional investors who have joined forces with activists.
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Common areas of focus for activists
Shareholders taking an activist stance may do so for a number of reasons, from seeking to tackle a specific issue to encouraging complete overhaul. Their focus may include:
Transactional opportunity
Shareholders may seek to influence corporate activity, such as calling for the company to enter into an M&A transaction or to dispose of a non-core part of the business in order to maximise value.
Strategy
Shareholders may feel that the strategy of the company does not align with long-term goals and company purpose or they may feel that the company is heading in the wrong direction strategically.
Business performance
Shareholders may perceive there to be a problem with company performance for example in terms of financials.
Share capital
Shareholders may be unhappy with the company's capital structure, and so may be looking for a return of capital or share buyback.
Governance
Shareholders may take issue with the remuneration policy or leadership, and ultimately may seek to appoint and remove directors.
ESG
Shareholders are increasingly targeting companies' approach to environmental and social issues, most notably around climate change.
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2 Recent activist campaigns in the UK
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M&A and activism
M&A continues to be a key focus for shareholder activists, with 41% of the campaigns seen in 2022 featuring an M&A related goal (whether the activists were opposing M&A, pushing for M&A or seeking an increase in price known as "bumpitrage").
Private M&A
Activist shareholders in private M&A may be able to block a deal, or force the company to renegotiate it, if the company needs shareholder approval to proceed. Situations where shareholder approval will be required include where:
the transaction is a Class 1 or related party transaction or a reverse takeover under the Listing Rules; and/or
shares are to be issued in order to finance an acquisition and shareholder approval is needed for authority to allot shares or disapply pre-emption rights.
Conversely, shareholders may encourage the company to acquire or dispose of a business. For example, the shareholder may feel that the company's business has become too diversified or that a certain aspect of the business does not align with the company strategy or purpose and that disposing of it would increase the value of the company.
Recent examples Capricorn Energy
(2022/2023): Its proposed merger with Tullow Oil was terminated following shareholder opposition. It then announced a new deal which has also drawn opposition from shareholders, including a requisition to replace seven directors. Royal Dutch Shell plc and Third Point (2021): The company is facing pressure from Third Point to break itself up. Glencore and Bluebell Capital (2021): Bluebell Capital encouraged the company to sell its coal assets. Elementis (2018): Elementis entered into an agreement to acquire Mondo a transaction which required shareholder approval. Shareholders required a renegotiation of the purchase price post announcement
Public M&A
On a takeover, it is the shareholders who determine whether the offer is accepted or rejected. Whilst a recommendation from the target board carries significant weight, the target board cannot determine whether an offer is successful it is the shareholders that have the final say.
In the course of a bid, activist and active shareholders may seek to influence the outcome of the offer in a number of ways:
Encouraging M&A: They may call for the company to put itself up for sale.
Affecting M&A: They may seek to force the bidder to increase its offer price, for example by threatening to hold out against the bid or stating that they will not accept an offer below a specified value (known as bumpitrage). The bidder may decide to declare its offer final in order to deter the use of this tactic.
Threatening M&A: They may seek to block a takeover, either by voting it down or seeking to challenge a scheme in some other way at the court sanction hearing. Ultimately, the activists have to consider if a deal being blocked is actually what they want to achieve.
Recent examples
Encouraging M&A Merlin Entertainments (2020):
ValueAct published an open letter urging the Merlin board to seek a buyer to take the company private. The company was taken over shortly afterwards by a consortium including Blackstone and KIRKBI Volga Gas a 59% shareholder in the company agreed to pay the bidder up to US$200,000 towards its costs if the offer did not proceed.
Affecting M&A Kaz Minerals (2020): Nova
Resources (a 39% shareholder) announced an offer for Kaz Minerals by way of scheme. Two other large shareholders urged other shareholders to vote against the scheme unless the offer value was increased. Nova switched from a scheme to an offer and increased the offer price twice before declaring it to be final.
Threatening M&A Spire Healthcare (2021) and
Playtech (2022): Schemes to approve the takeover of Spire and Playtech were voted down by shareholders.
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ESG and activism
Activist shareholders are paying increasing attention to safeguarding the long-term value of the companies in which they are invested, scrutinising strategy and performance against ESG considerations, such as climate change. In its Annual Review of Shareholder Activism, Lazard noted that "2021 saw the rapid proliferation of ESG as a key plank in activists' platforms".
This shift in focus reflects wider market trends and the increased drive for sustainability and corporate transparency. A clear example of this is the introduction of rules requiring companies to report in line with the Task Force on Climate-related Financial Disclosure (TCFD) Recommendations and the TCFD Recommended Disclosures and the growing ability of shareholders to measure a company's performance against a range of metrics.
This area in particular may be where companies face a greater risk of a claim being brought against. Whilst shareholder litigation in the UK is rare, this may become the exception to that rule.
Recent examples: CatcRtChhomoolaeimemyotcnapiupnotlanEasmDntnuaspyuifreftatatiohsccngiaihyAeas'nscibSnattrbhstpe2toteera0acemlc0llrpihd6ppma.toloriacnafftgtedadiointirrroneidescfbckCottr.oorilCnrirtesgshli'neefadtonEunrdtteEafeieatrartsizirlvhietnuahr(gnto2iesd0ttoecr2calro2pantn)rihms:oteietteianocgdntaintihngest hbSeaascinofsimlebeduarayc'scspreepdclciitaealdnreadssoSalhuLatiiorveninAcgcatWliloinangge(f2oE0r 2mS2ap)il:noSsybehura.rrye'As ctotion Tw(ipsnwteriveothshemdecdsurmortecoaibtarwnisoyngnndfTifflreoeoionsfdlmlcvuoaoenwhshpcienteroaoogamlrptlesthmohniselyigetartapdelpgrfdroboeodrtymdouTuSeceschntessttacst.w)rotTa.eihttrAohgecertrtheteiseodstunococlo(uei2mnti0tcohp2rnaee1naw)y:saeTshseales
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3 The legal and regulatory regime in the UK
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Key thresholds under Companies Act 2006
Shareholder right
Shareholding required
Comment
Companies Act reference
Inspection and copy rights for the register of members and any register of Any shareholder may beneficial interests following a section request 793 request
By getting a copy of the register of members, an activist can find out the identity of other shareholders which can then be used to gain support for the shareholder's cause. The request must be made for a "proper purpose". Canvassing support for a meeting/resolution should constitute a proper purpose.
The shareholder register will only show the legal owner of shares. As many shares will be held through nominees, any register of beneficial interests and disclosures about major shareholders, including under DTR 5, should also be reviewed.
Sections 116, 809 and 811
Attend and speak at a general meeting
(e.g. to ask awkward questions or state an opinion). The right can be exercised
Any shareholder
via a proxy or representative.
A shareholder can require an answer to questions relating to the business of the meeting; although the board is not required to answer if it would involve disclosure of confidential information or not be in the interests of the company.
Sections 319A and 324
Requisition a general meeting Requisition a resolution at an AGM
5%
A resolution is not treated as having been properly requisitioned if it would be ineffective if passed because it is inconsistent with the company's articles or is defamatory or vexatious.
Section 303
5% or 100 members
The comments above in relation to requisitioning a meeting apply here too. A shareholder with less than 5% could split its shareholding, transferring shares to 99 other affiliates/nominees to meet the 100 member threshold (the same applies to the following two rows).
Section 338
Have a statement of up to 1000 words
circulated at the company's expense in relation to any resolution or business to
5%
or 100
members
be dealt with at a general meeting
In practice, activist shareholders would normally publish and circulate their own statements on any resolution they have proposed or strongly oppose. This right is more likely to be relevant to highlight grievances or perceived corporate governance issues more generally.
Section 314
Request an independent report on a poll taken on a vote at a general meeting
5% or 100 members
As any vote of a listed company is likely to be conducted through a poll which is supervised by an independent registrar, exercising this right is unlikely to achieve much and making the Section 342 request could be seen as excessive by other shareholders.
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Key thresholds under Companies Act 2006
Shareholder right
Shareholding required
Comment
Block a special resolution (e.g. a resolution to disapply pre-emption rights on an issue of shares by the company or a resolution to cancel the company's listing)
25% plus one vote (of those attending and voting)
Block an ordinary resolution
50% (of those attending and voting)
Pass an ordinary resolution
50% plus one vote (of those attending and voting)
Companies Act reference
Section 283
Appoint a director
50% plus one vote (of those attending and voting)
This is usually provided for in the articles. The articles typically include additional notice requirements where an individual is not proposed by the board. Listed companies now typically reappoint all directors at their AGM. A director can be appointed (or removed) separately without affecting the appointment of the other directors.
Remove a director Pass a special resolution
50% plus one vote (of The right to remove a director under this section overrides any contractual provisions
those attending and (although the individual may be entitled to compensation from the company for loss of
voting)
office/employment). Special notice of 28 days must be given of any such resolution.
75% (of those attending and voting)
Section 168
Section 283
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Legal and regulatory issues in activist situations
While the legal and regulatory framework in the UK affords activists the tools with which to launch and progress a campaign, it also sets boundaries within which they must operate.
Disclosure obligations (DTR 5)
Shareholders in a listed company are required to notify the company if their interests reach, exceed or fall below specified thresholds. The relevant thresholds are 3% (5% for fund managers) and then every 1% change thereafter (DTR 5.1.2). This will be relevant for shareholders seeking to build their stake in the company.
Removing and appointing directors to the board
The Companies Act 2006 contains additional requirements as regards notice and information when a shareholder is looking to remove a director from a board and/or have someone appointed as director.
If an activist does not comply with these requirements, a company may look to reject the requisition as defective.
National Security and Investment Act
Related party and controlling shareholder rules (LR 11)
If the target company operates in one of the 17 sectors specified in the National Security and Investment Act, or the acquisition of a stake in the company may otherwise raise national security concerns, the acquisition of the stake may have to be notified and approval for the transaction obtained. It is possible the acquisition of a stake of 15% may trigger the regime.
Where a shareholder has a stake of 10% or more, it is deemed to be a related party of the company. Transactions between a listed company and the shareholder will then have to be disclosed, and shareholder approval may be required for transactions.
If a shareholder has 30% or more of a premium listed company, a relationship agreement must be put in place.
The Takeover Code
Regulated entities
Validity of resolutions
The Takeover Code may be engaged if shareholders are seeking to implement a "board-control seeking" proposal.
The Takeover Code also imposes disclosure obligations on shareholders with a 1%+ stake in a company that is in an offer period.
If the entity in which the activist is investing is regulated by the FCA or PRA, the activist may need approval to acquire a stake of 10% or more in the company.
If the activist does not construct its requisitioned resolutions properly, the company may challenge their validity and decline to put them to a meeting.
Market abuse (MAR)
It is not just the company that needs to be monitoring for inside information.
Shareholders need to consider MAR and the inside information/insider dealing provisions, as well as the rules on market manipulation, when they are discussing their strategy and looking to build a stake in the company.
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Further information
For further information on the nature of activists their objectives and tactics and strategies for preparing and dealing with an
activist campaign see our 2023 Activism Guide, available on our Herbert Smith Freehills activism hub.
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