Shareholder activist strategies

Strategies

What common strategies do activist shareholders use to pursue their objectives?

Activist shareholders may pursue a range of both legal and non-legal strategies to achieve their objectives. The legal framework for activist strategy has not changed to any significant degree in recent years but the use of the tools has evolved. Given the more collaborative approach to shareholder engagement in the United Kingdom, the starting point for activists is often private engagement with a company’s board.

If private engagement is unsuccessful, under the Companies Act, an activist can request a copy of the company’s shareholder register - allowing them to solicit support from other investors should they think collective action would be more effective. If they hold the requisite number of shares, activists could requisition a general meeting or request certain resolutions to be proposed at the company’s the next AGM. The success of this strategy of course depends on the levels of support the activist has managed to solicit from other large shareholders. However, it is important to remember that, for many resolutions, only a majority of those shareholders present and voting at the meeting is required so a low level of turnout can be helpful.

Activists can also show their dissatisfaction by voting against resolutions proposed by the company - for example, voting against directors’ remuneration (which is voted on annually at each AGM), the remuneration policy (which must be voted on at least every three years) or even the re-election of the directors themselves. Activists can intervene in M&A situations to block a takeover, both by threatening to vote against a deal or by simply expressing their views on the takeover in public.

Lastly, activists will often turn to public announcements, websites and social media to reinforce their campaigns, particularly if they feel a company is ignoring them. The benefits of such tactics are obvious but the risk of falling foul of regulations such as MAR and the Takeover Code mean activists considering such a strategy must tread carefully.

Processes and guidelines

What are the general processes and guidelines for shareholders’ proposals?

The starting point for the processes and guidelines for shareholders’ proposals is the Companies Act. Under the Companies Act, certain actions by a company require shareholder approval. In giving that approval, shareholders may pass two types of resolutions: ordinary resolutions (which are passed by a simple majority) and special resolutions (which are passed by a 75 per cent majority). As referred to in question 6, these thresholds are calculated on the basis of those shareholders present (either in person or by proxy) at the general meeting - meaning that the number of votes may be a small percentage of the overall shareholder base. Ordinary resolutions are more common than special resolutions, which are reserved for more serious matters such as amending a company’s constitution.

One of the ways under the Companies Act by which shareholders who hold at least five per cent of the paid-up share capital which carries voting rights may propose a resolution is by requiring the company to call a general meeting (section 303). Such a request may be in hard copy or electronic form and must be authenticated by the person or persons making it. It is usual to address the request to the directors of the company. The request should be sent in accordance with the Companies Act’s requirements for communications to the company and care should be taken to check for any applicable provisions of the company’s articles of association. In practice, such requests are normally sent in hard copy form and by a method that enables tracking of receipt. The Courts have held that any communication that members send seeking support for their proposal should give a fair, candid and reasonable explanation to members and should not be misleading. If a valid requisition request is made, the general meeting must be called within 21 days, the meeting itself must be held not more than 28 days after the date of the notice of the meeting and the company must bear the cost of convening the meeting.

Alternatively, shareholders may wish to propose a resolution to be voted on at the next AGM (section 338). The resolution must be one that may properly be moved, and is intended to be moved at that meeting. Resolutions that may not be properly moved at an AGM are those that, if passed, would be ineffective or those that are defamatory, frivolous or vexatious. The right to requisition a resolution under s.338 is open to those shareholders representing at least five per cent of the total voting rights or at least 100 shareholders holding the right to vote and who hold shares in the company on which there has been paid up an average sum, per member, of at least £100. Shareholders must ensure that the resolution is received by the company not later than six weeks before the AGM or, if later, circulation of the AGM notice. Unlike requests to convene general meetings, where shareholders wish to circulate a resolution under section 338 they must bear the cost of doing so (other than where they have submitted their requisition notice before the end of the immediately preceding financial year). In doing so, they must deposit with, or tender to, the company a sum reasonably sufficient to meet the company’s expenses of circulating the resolution.

In addition, shareholders can require the company to circulate a statement to shareholders in relation to any matter to be dealt with at a general meeting. The statement is limited to 1,000 words and the company must send it to every shareholder entitled to receive notice of the meeting.

In extreme cases, an activist shareholder may decide to exercise its right under the Companies Act to take legal action against the company, such as bringing a derivative claim in the name of the company against its directors or an unfair prejudice petition. These claims are discussed in more detail in question 10 but remain quite rare in the United Kingdom in relation to listed companies.

May shareholders nominate directors for election to the board and use the company’s proxy or shareholder circular infrastructure, at the company’s expense, to do so?

Shareholders have the ability to nominate directors to the board by either requisitioning a resolution to be proposed at the company’s next AGM or by requisitioning a general meeting, as described in question 7.

If the shareholders wish to requisition a general meeting, the cost of convening the general meeting is borne by the company. Alternatively, subject to limited exceptions, shareholders who requisition the company to circulate a resolution to be proposed at an AGM must cover the company’s costs of doing so.

May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?

Shareholders have the ability to call a shareholders’ meeting, using the process described in question 7.

In the United Kingdom, there is no statutory mechanism for shareholders of a public listed company to pass written resolutions in lieu of a meeting. However, a document signed by all shareholders of a public company may not be wholly ineffective. The Courts have held that where all shareholders, who would have a right to attend and vote on a matter at a general meeting of the company, unanimously assent to that matter by signing a written resolution, then an insistence on adhering to the prescribed procedural formalities for making the decision is not always necessary.

Notwithstanding that, public listed companies that want to pass written resolutions would encounter some obvious practical difficulties. It would be difficult to secure the individual written consent of each shareholder if there are a large numbers of shareholders. In addition, taking certain decisions by unanimous consent would appear to be inconsistent with provisions of the Company Law Codification Directive, which require a number of resolutions relating to the maintenance and alteration of capital to be taken by a public company in general meeting. The constraints contained in the Directive were the reason given for not extending the statutory written resolution procedure under the Companies Act to public companies.

Litigation

What are the main types of litigation shareholders in your jurisdiction may initiate against corporations and directors? May shareholders bring derivative actions on behalf of the corporation or class actions on behalf of all shareholders? Are there methods of obtaining access to company information?

There are various types of litigation that a shareholder may initiate against a company or its directors. Some common examples include:

  • a personal claim designed to uphold the ‘statutory contract’ created by the company’s articles or to activate certain rights given to members under the Companies Act;
  • an unfair prejudice petition under section 994 of the Companies Act by which a member might seek to contend that the company’s affairs have been conducted in a manner that is unfairly prejudicial to the interests of the member or membership that includes the member - such claims generally seek a personal remedy for the benefit of the petitioner, commonly in the form of a share purchase order;
  • a winding up petition under section 122(1)(g) of the Insolvency Act 1986, the ‘just and equitable ground’, under which a member may, in certain scenarios, be able to secure an order for the winding up of the company and the distribution of its assets in the ensuing liquidation; and
  • a derivative claim (whether under statute, or in limited circumstances, common law) that provides a mechanism by which a member may seek to secure a remedy for and on behalf of the company itself.

Derivative claims are said to be derivative in that they derive from rights belonging to the company, and if successful, provide only an indirect benefit to members as shareholders in the company. Statutory derivative claims may be brought for negligence, default, breach of duty or breach of trust by a director, a third party or both. The claim may be brought by a member of the company and the expression ‘member’ has been extended beyond its normal meaning in company law for the purposes of statutory derivative claims. It includes not only the registered holder of shares but also a person to whom shares in the company have been transferred, or transmitted by operation of law, but who has not been registered as a member of the company. Outside of claims in the Competition Appeal Tribunal, class actions on behalf of shareholders are not as common in the United Kingdom as they are in the United States.

In terms of obtaining information, any person may inspect a company’s register of members. A member of the company may inspect the register for free, but any other person must pay a prescribed fee. Additionally, any person may request a copy of the register of members, but must pay a prescribed fee, regardless of whether they are a member or not. As discussed in question 26, members can request (either for inspection or by providing copies of entries) a register of interests in the company’s shares that have been disclosed to the company. Certain documents (such a company’s articles of association) must be filed with the registrar of companies, and these documents are easily accessible on the Companies House website. Should a member wish to commence proceedings against the company, certain information will have to be disclosed as part of the disclosure process, to the extent that it is not legally privileged.