Shareholdersi Shareholder rights and powers
The Corporations Act grants powers to shareholders of listed companies to influence a board in a number of ways, particularly by granting shareholders the power to call or require the calling of shareholders meetings and propose members' resolutions.
In most instances, the shares held in Australian listed companies are all of the same share class (usually ordinary class shares) and generally the only difference between shareholders is the number of shares held. Therefore, the powers and rights of each shareholder largely derive from the number of shares held.
The right of shareholders to require or call meetings is enshrined in Sections 249D and 249F of the Corporations Act. Shareholders who hold at least 5 per cent of the votes that may be cast at the general meeting can request the directors of a company to call and hold a general meeting of shareholders.98 The Corporations Act imposes a number of requirements on the form of this request. Directors must call the meeting within 21 days of the request being given to the company and the meeting must be held no later than two months after the request is given to the company. Additionally, shareholders who hold at least 5 per cent of the votes that may be cast at a general meeting may directly call and arrange to hold a general meeting.99 As shareholder activism gains favour in Australia, use of this right to call a meeting by shareholders is becoming more prevalent.
Shareholders with at least 5 per cent of the votes that may be cast on the resolution or at least 100 members who are entitled to vote at a general meeting may also give a company notice of a resolution that they propose to move at a general meeting.100 The Corporations Act sets out various requirements relating to the form of notice and to whom the notice must be directed. If a company has been given notice of a resolution under Section 249N of the Corporations Act, the resolution is to be considered at the next general meeting that occurs more than two months after the notice is given.
Shareholders also have a variety of other rights and powers. To change or repeal its constitution, a company must pass a special resolution, which requires at least 75 per cent of the votes cast by shareholders at a general meeting to be in favour.101 Companies may also reduce their share capital by way of a share capital reduction or a share buy-back. A selective buy-back scheme, in which identical offers are not made to every shareholder, must first be permitted by a special resolution, which requires at least 75 per cent shareholder approval by votes cast.102 A selective reduction of capital must also be approved by a special resolution.103ii Shareholder duties and responsibilities
Shareholders are not subject to the duties outlined in the corporate governance regulatory framework. Rather, shareholders, regardless of share class or number, may exercise certain rights and powers afforded to them by the Corporations Act, within the bounds of the company's constitution. However, shareholders cannot act in an unfettered manner.iii Shareholder activism
Shareholder activism has evolved during the past decade from an occasional disruption to a real risk to be anticipated and managed by the board. Activist shareholders are typically institutional shareholders, including superannuation funds, hedge funds, private equity investors and, increasingly, specialist activist funds (e.g., Manikay Partners' intervention in the MYOB Group scheme of arrangement (2019), Mittleman Brothers' intervention in the Village Roadshow Limited scheme of arrangement (2020) and Andrew Forrest's intervention in the Huan Aquaculture scheme of arrangement (2021)).
Shareholder activism can generally be classified under the following categories (or some combination thereof):
- M&A activism – persuading the board to respond positively or negatively to a takeover proposal or other control transactions or to spin-off divisions to unlock hidden value, divest non-core businesses to eliminate a perceived conglomerate discount or initiate a process to sell the company or put it into play;
- balance sheet or financial engineering activism – persuading the board to increase the gearing of the company to what is perceived to be a more optimal ratio, return excess capital to shareholders, reduce costs and focus on maximising return on invested capital; and
- governance activism – highlighting corporate governance lapses or invoking corporate governance best practices. Sometimes this may be with a view to changing the composition of the board so that the new directors nominated by the activist can pursue M&A activism or balance sheet activism.
Shareholder activists may initially try to engage privately with boards to effect change. If this fails, they may seek to take public action. Australia is a relatively friendly jurisdiction for shareholder activists owing to a large number of shareholder protections enshrined in the Corporations Act and the risks and potential liabilities faced by directors. The techniques that can be used by shareholder activists include:
- putting forward proposed shareholder resolutions – shareholders of Australian listed companies who either alone or with other shareholders hold 5 per cent or more of the shares on issue can put forward shareholder resolutions for consideration at forthcoming AGMs;
- calling an extraordinary general meeting to spill the board – shareholders who meet the 5 per cent threshold described above can request the company to call a meeting to consider and vote on a board spill resolution. Alternatively, these shareholders may call and arrange to hold the meeting themselves; however, they are then responsible for the associated expenses;
- voting down remuneration reports at two consecutive AGMs – if 25 per cent of shareholders of an Australian listed company vote down the remuneration report at two consecutive AGMs, a board spill resolution is triggered and the shareholders will vote on the spill resolution at that second AGM; and
- applying pressure in the lead-up to voting a resolution by:
- buying further shares;
- lobbying shareholders to vote in favour of (or against) a resolution;
- applying to a court for an order to inspect company books and records; or
- requesting access to details of proxy votes in advance of the meeting.
Change of control in public and listed companies in Australia is primarily affected by takeovers and schemes of arrangement. A scheme of arrangement is a court-based process that requires the support of the target company board to implement. Accordingly, the only practical way for a hostile bidder to obtain control of a public company is by way of a takeover bid.
In a takeover bid, a target company has 15 days from when the bidder's statement is sent to shareholders to send a target's statement to shareholders. However, practically there may be more time to prepare a target's statement as a bidder may take up to two months from a proposed off-market bid to send its bidder's statement to shareholders.
In managing hostile takeovers, boards can employ pre-emptive and reactive strategies. Pre-emptive strategies that might be used include:
- monitoring the company's share register;
- maintaining current internal valuations so a board can objectively assess the merit of any takeover approach;
- maintaining template market announcements, shareholder communications and target statements that can be quickly adapted and released; and
- using convertible securities to create entrenched capital structure.
Reactive strategies employed by boards include:
- persuading target company shareholders to reject the hostile bid;
- persuading the hostile bidder to improve its offer to a price at which the target's board is prepared to recommend the offer to shareholders;
- seeking a better offer from a third party, either by engaging with a 'white knight' competing bidder, or creating an auction for control between the two independent bidders; and
- making an application to the Takeovers Panel, the primary forum for disputes relating to takeover bids in Australia until a bid period is ended.
The Takeovers Panel has broad powers, the primary of these being to declare unacceptable circumstances in the context of a takeover bid. If the Takeovers Panel has made such a declaration, it can make remedial orders to rectify the circumstances.v Contact with shareholders
Shareholder communications are an integral part of the corporate governance framework in Australia as they not only enable boards and officers to gauge the shareholders but also provide a channel of communication with the broader shareholder base.
For public companies (listed or unlisted), these communications are typically facilitated through the forum of the AGM. Listed public companies are required under the CGPR to typically have an investor relations programme that is designed to facilitate effective two-way communication with the shareholders, involving scheduled and ad hoc interactions with institutional investors, retail investor groups, sell-side and buy-side analysts, proxy advisers and the financial media.104 In response to the covid-19 pandemic, temporary modifications were made to the Corporations Act to facilitate the holding of meetings (including AGMs) via technology that allows members to participate remotely by online or other electronic means (virtual technology).105 These modifications extend to relief from dispatching hard copy notices of meetings and other shareholders materials to shareholders that have not otherwise elected to receive hard copy materials. In addition, given the potential for continued uncertainty posed by covid-19 or other extraordinary circumstances, ASIC has been granted a permanent power to permit entities (or classes of entities) to hold a wholly virtual meeting in circumstances where it would be unreasonable to hold a physical meeting.