Shareholder activist strategiesStrategies
What common strategies do activist shareholders use to pursue their objectives?
Generally, activist strategies begin with private discussions directly with the subject company to negotiate changes in line with the activist’s value strategy. These may then develop into public campaigns, media campaigns and greater pressure from a broader shareholder base.
Shareholder resolutions and proxy contests are generally a last resort.
There is no set playbook and examples differ depending on the company’s specific situation, its shareholder agendas and share register.Processes and guidelines
What are the general processes and guidelines for shareholders’ proposals?
Clause 9(1) of the First Schedule of the Companies Act provides that any shareholder can put up a resolution at a shareholders’ meeting by giving written notice to the board, notifying the proposal or text of the proposed resolution.
Provided that the shareholder offers the notice well in advance, the company is required to bear the subsequent cost of including the information in the notice of meeting. The shareholder is also permitted to include an explanatory statement of not more than 1,000 words on the resolution, together with his or her name and address.
There are limited rules that operate to exclude only a few types of resolutions. The board may only refuse to include a shareholder-proposed resolution in the notice of meeting if the directors consider the resolution to be defamatory (within the meaning of the Defamation Act 1992). The board may only refuse to include an accompanying statement if it is defamatory, frivolous or vexatious.
Instead, the rules focus mainly on timing and who bears the cost of putting the proposal. Specifically, where the notice is received at least 20 working days before the last day for giving notice of the meeting, the board must give notice of the proposal and text of the resolution at the company’s expense. If the notice is received between five and 20 days before the last date, the shareholder is required to bear the cost. If the notice is received less than five days before the last date, putting that proposal to shareholders is at the board’s discretion.
Shareholder resolutions can have the effect of appointing and removing directors or changing the constitution. Section 109(2) of the Companies Act provides that notwithstanding anything in the Act or constitution, a meeting of shareholders may pass a resolution relating to the management of a company. However, section 109(3) goes on to provide that unless the constitution provides that the resolution is binding, it is not binding on the board. Therefore, an ordinary resolution that relates to the future direction of the company will generally be advisory only. It would nonetheless be a brave board that ignores such a steer from shareholders when the same voting thresholds would ordinarily apply to effect a change in the directors who sit on the subject board.
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?
The NZX Listing Rules specifically require the board of the company to call for nominations from shareholders and impose director rotation requirements. To properly inform shareholders, the company will invariably include any requested biography and other reasonable explanatory statement provided by the candidate for election, at the company’s cost.
The procedures referred to in relation to question 7 also naturally apply to shareholder-proposed resolutions for the election of directors.
May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?
Under section 121 of the Companies Act, a shareholder or group of shareholders commanding at least five per cent of the company’s voting rights have the ability to require the board to call a special meeting of shareholders. While the board or the court can only convene a meeting if it is in the interests of the company, shareholders are not limited in this way and are free to do so if this simple percentage threshold requirement is met.
Neither the Companies Act nor the NZX Listing Rules specify any specific timeframe within which the board is required to convene a meeting upon receiving valid notice from shareholders.
Case law has also been limited on the duties of the board to convene a meeting. However, proceedings requiring the board to convene a meeting under section 121(b) of the Companies Act can be brought seeking injunctive relief, which requires the courts to take into account the balance of convenience and the overall justice of the matter. Accordingly, courts commonly accept the principle that a meeting must be called within a ‘reasonable time’. What is reasonable must be assessed against the particular circumstances presented before the court.
Under section 109 of the Companies Act, the chairperson at a meeting of shareholders must allow a reasonable opportunity for shareholders to question, discuss or comment on the management of the company as part of the general business at a meeting.
Shareholders may also act by written resolution. However, this is extremely rare in a public company context. Generally, a resolution in writing signed by not less than 75 per cent of the shareholders entitled to vote on that resolution who together hold not less than 75 per cent of the votes is as valid as if it had been passed at a meeting of those shareholders.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?
The Companies Act provides a number of statutory remedies for minority (and, in some cases, majority) shareholders. These include rights to:
- apply for relief on the ground that the company’s affairs or acts are ‘oppressive, unfairly discriminatory, or unfairly prejudicial’;
- apply for the company’s liquidation on the ground that ‘it is just and equitable’ to do so;
- apply for an injunction restraining the company or a director from breaching the constitution or provisions of the Act;
- apply for a compliance order requiring a director or the company to take any steps required to comply with the constitution or the Act;
- bring an action against a director or the company for breach of a duty owed to the shareholder personally; or
- bring a statutory derivative action with the leave of the Court.
While derivative actions are not particularly common, section 165 of the Companies Act gives the court the ability to grant leave to a shareholder or director of a company to bring proceedings in the name and on behalf of the company or intervene in proceedings to which the company is a party for the purpose of continuing, defending, or discontinuing proceedings on behalf of the company. In essence, the section facilitates the enforcement of directors’ duties owed to the company where the company has failed to take the necessary enforcement steps.
While the section does not expressly limit the remedy to minority shareholders, the prevailing view is that a shareholder with a controlling interest should not generally be permitted to use the derivative procedure. There are a number of requirements the court must consider before granting leave to allow derivative actions, including:
- Being satisfied that the company does not intend to bring, diligently continue or defend, or discontinue the proceedings. In this regard, the party proposing to bring derivative proceedings must inform the court as to the extent of their effort to convince the company to take action against the directors.
- Being satisfied that it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole. This may be appropriate in instances of deadlock, cessation of trading and wrongdoer control, where the court considers that it would be in the best interests of the company to sidestep its internal processes for making decisions.
The court must also consider the following four mandatory factors under section 165(2):
- the likelihood of the proceedings succeeding;
- the costs of the proceedings in relation to the relief likely to be obtained;
- any action already taken by the company or related company to obtain relief; and
- the interests of the company in the proceedings being commenced, continued, defended, or discontinued.
Under section 178 of the Act, a shareholder may request that a company disclose ‘information’ held by the company to the shareholder. The company must either provide the information or refuse to provide the information and specify the reasons for the refusal. A company is entitled to a reasonable time period to provide the information and may impose a reasonable charge for the service. Without limiting the reasons for which a company may refuse to provide information, a company may refuse to provide information if:
- the disclosure of the information would, or would be likely to, prejudice the commercial position of the company;
- the disclosure of the information would, or would be likely to, prejudice the commercial position of any other person, whether or not that person supplied the information to the company; or
- the request for the information is frivolous or vexatious.
A shareholder who is dissatisfied with a refusal by a company to supply information may appeal that decision to the court. The courts have held that a request for information, when it is possible that such information may be used as part of a due diligence exercise for a takeover offer, may be declined.