Company response strategies

Preparation

What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?

Directors are not required to consider an activist proposal in a different manner to other board decisions.

The Companies Act sets out the fiduciary duties that directors owe to the company. These duties include a duty to act in good faith and in the interest of the company, to act honestly and responsibly, and to avoid conflicts of interest. These duties are owed to the company and the company alone. Directors appointed by shareholders may in the performance of their duties have regard to the interests of the shareholder but this will be subject always to the overriding fiduciary duties owed to the company.

While directors may be very unwilling to deal with an activist shareholder, they will ultimately need to decouple their personal opinions and ask themselves: is the proposed action in the best interests of the shareholders?

What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?

It is more important than ever for Irish boards to be ready to deal with shareholder activism. While activism along with issues such as Brexit, cybersecurity, regulatory challenges and reputation risk are occupying the minds of Irish boardrooms, the time invested by boards in considering and preparing for it varies widely.

Responding effectively to activist shareholders requires advance preparation and active investor engagement on issues of importance to investors. It is no longer sustainable for companies to ‘just say no’ to an activist campaign. While some activist attention can be unwanted, companies and their boards should not respond dismissively to activist proposals.

Companies should focus carefully on regular shareholder communications and be prepared to respond to activist campaigns by assessing, on at least an annual basis, how susceptible the company is to an activist campaign, by whom and in what particular areas. Companies need to focus on communicating a consistent and clear corporate strategy and proactively deal with earnings shortfalls or other adverse developments. Shareholder engagement on an ongoing basis can help lay the vital groundwork for better investor relations to ensure a company has support from a wide cohort of the shareholder base.

Other advice includes monitoring the share register, adhering to corporate governance best practice, maintaining a unified board consensus and being prepared for all eventualities at the AGM.

Defences

What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?

Structural and other defences are not common in Ireland. A target board must ensure at all times they observe their fiduciary duties to act in the best interests of the company. The Irish Takeover Rules dictate that directors of a relevant target must act only in their capacity as directors and not have regard to their personal interests. At any time during the course of an offer, or when the board has reason to believe that an offer may be imminent, the Irish Takeover Rules (General Principle 3 and Rule 21) prohibit companies from taking any action that would or might frustrate an offer or deprive shareholders from the opportunity of considering an offer. Unless the consent of the Irish Takeover Panel is obtained (and, in some circumstances, shareholder approval), putting in place structural defences such as poison pills during the offer period is not permitted under the Irish Takeover Rules as they could be deemed to constitute frustrating actions. Frustrating actions include issuing new shares or options, disposing or acquiring material assets, or entering into non-ordinary course contractual arrangements.

A number of Irish holding companies with listings in the United States have, however, adopted automatic shareholder rights plans that, in general terms, work by imposing a significant penalty upon any person or group that acquires 10 per cent or more of the outstanding ordinary shares of the company without the prior approval of the board of directors.

Staggered boards are not a feature of Irish companies. Directors of Irish companies can be removed by an ordinary resolution under section 146(1) of the Companies Act. As noted above, the Code also applies to companies listed on Euronext Dublin and provides that directors of relevant companies should be elected or re-elected annually.

Reports on proxy votes

Do companies receive daily or periodic reports of proxy votes during the voting period?

The registrars of Irish companies have the ability to provide daily proxy update reports to the company ahead of any general meeting. As a large number of proxy votes tend to be made in the week leading up to the general meeting, daily updates reports are more common during this period.

Prior to proxy votes being cast, companies may engage with shareholders and, in particular, institutional shareholders or investor protection committees, to seek them to vote in favour of resolutions.

Proxy votes are typically granted in favour of the company chairman and are confidential in the lead up to the general meeting.

Private settlements

Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?

It is very common for companies to engage with activist investors privately in the first instance as a means of avoiding public and more costly action at the outset. This remains the preferred course of action in Irish shareholder activist scenarios. If an activist succeeds with its regulations, it typically results in either an announcement from the company that it is considering a particular course of action such as a strategic review or a shareholder proposal being tabled at the next AGM.