Shareholder activist strategies

Strategies

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

No matter what form of activism is used, the final goal is to effect change, whether at a management, operational or strategic level. Activism in Ireland often takes the form of private informal intervention in the pursuit of corporate change. Often the most successful activist campaigns in the Irish market are fought and won in a more subtle private engagement with the board. There is certainly a view among many activists that the most successful campaigns are the ones you never read about.

There is also a clear cost benefit to engaging in a round of meetings and telephone calls rather than a costly and protracted proxy solicitation campaign. Moreover, boardrooms are increasingly aware of the importance, both legally and optically, in listening to the views of shareholders. There is growing awareness that maintaining dialogue between activists and boardrooms is key and that often compromise is the best form of defence to a particular activist. Usually, it is only when the board reacts negatively to a request, or a series of requests, that the situation becomes more confrontational.

Clearly an effective tool for an activist is the use of the public domain as a forum for trying to initiate change. That can take the form of PR battles, open letters or press releases but more often consists of requisitioning general meetings, proposing resolutions and, in particular, directors changes, at the AGM or voting against resolutions.

In contrast to the United States, litigation is not generally regarded as a key tool for activist campaigns in the Irish market given the costly and relatively unpredictable nature of litigation proceedings. One exception to this was Petroceltic International’s largest shareholder, Worldview Capital Management, initiating legal proceedings against it before it went into examinership.

Processes and guidelines

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

The Companies Act reserves various decisions for the approval of shareholders. An ordinary resolution is passed by a simple majority of the shareholders and a special resolution is passed by at least 75 per cent of the shareholders. As is the case in the United Kingdom, these thresholds are determined by reference to those shareholders who vote at the meeting so often can be passed by a far smaller percentage of the aggregate shareholder base.

Ordinary resolutions are usually required to carry out routine, less contentious, business. This includes matters such as authorising directors to allot shares and ratifying board decisions. In contrast, special resolutions are required for more significant matters such as altering a company’s constitution, disapplying pre-emption rights, varying share capital or reducing share capital.

If a shareholder wants to make a proposal, it can requisition an extraordinary general meeting (EGM) if at least 5 per cent of the shareholders with voting rights approve such proposal. Where shareholders hold 3 per cent or more of the total voting rights, there is now also a statutory right to put forward items on the agenda for consideration and approval at general meetings. There are, however, a number of important conditions that must be satisfied in order to permit shareholders to exercise these rights. These include: (i) a justification for the inclusion of the item or a draft resolution to be adopted at the general meeting; and (ii) circulation in sufficient time to ensure the relevant matter is received by the company at least 42 days before the meeting to which it relates.

Under Irish law, shareholders of a listed company currently have no ‘say on pay’ right to vote on the directors’ remuneration report or remuneration policy unless such right is provided for in the particular company’s constitution. However, once the Shareholders’ Rights Directive (the Directive) (which came into force on 9 June 2017) is transposed into Irish law, shareholders will be able to vote on director remuneration where the company is listed on an EU-regulated market. First, they will be entitled to vote on the remuneration policy and, second, they will be entitled to vote on the remuneration report. The vote on the remuneration policy is likely to be binding. The vote on the remuneration report will be advisory. The Directive must be transposed into Irish law by 10 June 2019.

The vast majority of Irish companies on Euronext Dublin proposed resolutions to approve a remuneration report in 2018. Each of those companies classified the resolution as a non-binding advisory resolution only.

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 may nominate directors for election to the board by requisitioning the directors of that company to convene an EGM for that purpose or by tabling a resolution for consideration at the AGM. The procedure for doing this is set out in questions 7 and 9.

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

All general meetings, other than the AGM, are deemed to be an EGM. Notice must be given of each general meeting to every shareholder, director and the secretary of the company. The different categories of resolutions are referred to in question 7.

In respect of listed companies, shareholders holding 5 per cent or more of the company’s share capital have the power to compel the directors to convene an EGM. The requisition must state the business to be transacted at the meeting. Where an EGM has been validly requisitioned, the directors must convene that EGM within 21 days to be held within two months of the requisition. Where the board of directors fail to convene the EGM within 21 days, the persons who have requisitioned the EGM may convene the meeting themselves.

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?

Under Irish law, duties that relate to the conduct of a company’s affairs, such as director duties, are generally owed to the company itself rather than to individual shareholders. Shareholders are therefore not generally permitted to bring an action on behalf of the company as the proper plaintiff in an action in respect of an alleged wrong done to a company is the company (ie, the Irish Courts apply the rule in Foss v Harbottle).

There are a limited number of exceptions to that principle and where such exceptions can be relied upon, shareholders may be permitted to institute a derivative action. It is important to remember that, much like the UK, a derivative action is not an action by a shareholder in its own capacity but rather on behalf of all the other shareholders.

The ability to bring a derivative action is dependent on the company itself having a claim and obtaining the leave of the Irish courts to commence the derivative action. In making a determination, the court is likely to consider whether the action should be brought by the shareholder personally and to seek the views of the other shareholders. These requirements effectively serve as defence measures to reduce the likelihood and frequency of derivative actions.

The wrongdoing will usually have to relate to: (i) an act that is illegal or ultra vires; (ii) an irregularity in the passing of a resolution; (iii) an act purporting to abridge or abolish the individual shareholder’s rights; or (iv) an act that constitutes fraud against the majority and the wrongdoers are in control of the company.

There is also an onus on the plaintiff shareholder to demonstrate they have a realistic prospect of success in establishing the company was entitled to the remedy and that they fell within one of the four exceptions noted above.

There is no framework in Ireland to formally facilitate class actions. The closest procedures under Irish law to class actions or multi-party law suits are ‘representative actions’ or ‘test cases’. A representative action is where one claimant or defendant, with the same (as opposed to similar) interest as a group of claimants or defendants in a particular action, institutes or defends proceedings on behalf of that group. Any relevant judgment or order will usually bind all claimants or defendants represented.

The more common option in Ireland for multi-party litigation is usually a test case. A test case can arise where numerous separate claims arise out of the same circumstances. For example, in 2008, the Irish Commercial Court was faced with more than 65 separate claims related to the fraudulent investment operations run by Bernie Madoff. The Irish Commercial Court decided to take forward two cases from individual shareholders and two by fund shareholders and stayed the remaining cases pending resolution of the four test cases.

There is no such action as a strike suit under Irish law but minority shareholders are afforded protection under section 212 of the Companies Act. Under this provision, a shareholder may apply to the court by petition for relief where the affairs of the company are being conducted, or the powers of the directors are being exercised, in a manner that is oppressive to the shareholder or in disregard of the shareholder’s interests. If the court is of the opinion that the shareholder’s action is well founded, it may make such orders as it sees fit, including: (i) directing or prohibiting any act or cancelling or varying any transaction; (ii) the purchase of the shares of any shareholders by other shareholders or by the company itself; or (iii) compensation. The court may also grant interlocutory relief. The nature of conduct required for conduct to be held oppressive or in disregard of the shareholder’s interests will be judged by objective standards and there is no requirement to prove bad faith. It is also possible under section 569(f) of the Companies Act for a shareholder to apply to the court for the winding up of the company for the same reasons as above, that is, where the affairs of the company are being conducted, or the powers of the directors are being exercised, in a manner that is oppressive to the shareholder or in disregard of the shareholder’s interests.