Shareholder activist strategiesStrategies
What common strategies do activist shareholders use to pursue their objectives?
Shareholder activism normally starts with building up a relatively small stake of shares avoiding triggering the disclosure obligations pursuant to the FMIA (especially the first threshold of 3 per cent). Prior to increasing its stake, a common activist will make private contact with the company’s executive management or board representatives in order to present and discuss its ideas and specific demands. These private negotiations are also the reason why it is believed that almost 50 per cent of all activist campaigns never become public. However, attention should be paid to the duty of equal treatment of all shareholders and the duty of ad hoc publicity.
If the private negotiations fail, an activist may launch a public campaign to divulge the key requests towards the company and, by doing so, obtain the support of other shareholders (since shareholders do not have a right to access the share register, the only way of reaching out to other shareholders holding less than 3 per cent is through the media). As psychology plays an important part in the fight for control, gaining the support of the public opinion is a crucial element in winning the battle. The share price is likely to increase following the publication of the key elements of the campaign as it is likely to attract new investors. In the run-up to the shareholders’ meeting, the composition of shareholder base of the target company may change towards increased support of the activist’s campaign. Based on the public support and also depending on the support from professional proxy advisers, the activist shareholder may be in a position to find an attractive compromise with the board.
Fruitless settlement attempts may lead to proxy fights at and outside the shareholders’ meeting (including the enforcement of the information rights, freezing entries in the commercial register and challenging allegedly non-compliant shareholders’ resolutions) or even result in litigation (eg, liability claims) and criminal charges.
Ahead of the shareholders’ meeting the activist shareholder may decide to form a group with one or more other key shareholders. According to the FMIA, any person who reaches, exceeds or falls below 3, 5, 10, 15, 20, 25, 33.3, 50 or 66.6 per cent of the voting rights of the target company must notify the target company and the stock exchange (the SIX Disclosure Office for SIX listed companies). The activist may use such disclosure as signal of determination to the company and financial markets. It typically also triggers an additional round of media reports.
Although irrelevant to win a proxy fight but helpful to the communication strategy, the activist shareholder often uses the shareholders’ meeting to speak publicly and reiterate their requests for improved performance.Processes and guidelines
What are the general processes and guidelines for shareholders’ proposals?
All shareholders have the right to attend shareholders’ meetings, the right to vote and to request information and inspect documents (to the extent company interests requiring confidentiality do not prevail). The right to information is regularly used by activist shareholders to increase pressure prior to shareholders’ meetings. The board is obliged to respond to such questions during the shareholders’ meeting. All shareholders have the right to propose motions and counter-motions (eg, regarding board elections) at shareholders’ meetings and may request a special audit or a special expert committee to investigate certain facts and behaviours of the board or management.
Furthermore, any shareholder (or group of shareholders) representing shares of a par value of at least 1 million Swiss francs (the articles of association may contain a lower threshold) is entitled to demand that certain agenda items be tabled at the next shareholders’ meeting. Any shareholder (or group of shareholders) representing 10 per cent of the share capital (again, a lower threshold may be contained in the articles of association) may request that an extraordinary shareholders’ meeting be convened. According to the predominant legal doctrine, these thresholds should be regarded as alternative criteria (ie, shareholders representing 10 per cent of the share capital are also entitled to put forward an agenda item and shareholders representing shares of a par value of at least 1 million Swiss francs may call an extraordinary shareholders’ meeting).
The current draft for a revision of Swiss corporate law suggests the thresholds for shareholders to benefit from certain minority rights (eg, to request items to be added to the agenda) should be lowered. The revision has not yet been passed into law.
In cases where a shareholder demands that an agenda item be tabled for the next shareholders’ meeting, the respective deadline for such submissions is contained in the articles of association and ranges typically between 40 and 55 days prior to the meeting. The company is obliged to include the item and the shareholders’ motion relating thereto in the invitation to the shareholders’ meeting. The board will add its own motion to such item.
Shareholders representing at least 33.3 per cent of the voting rights may block special resolutions (capital transactions, mergers, spin-offs, etc), shareholders holding at least 50 per cent of the voting rights may force ordinary resolutions (eg, appointment of a director) and shareholders representing at least 66.6 per cent of the voting rights may force special resolutions (eg, amendments to the articles of association). As these thresholds typically relate to the total votes represented at the shareholders’ meeting and given that shareholder representation typically ranges between 45 and 65 per cent, the shareholdings required to pass the aforementioned thresholds are much lower.
Under the CO and OAEC, a number of corporate decisions such as the amendment of the articles of association, capital increases, the approval of the annual accounts and resolutions on the allocation of the disposable profit, the election of board members, the chairman and the members of the compensation committee as well as board and management compensation fall into the mandatory competence of the shareholders’ meeting. According to the OAEC, elections (or re-elections respectively) of board members must take place annually and elections must take place individually. Therefore, activist shareholders aiming at deselecting members of the board of directors are not required to request an extra agenda item for this purpose, but may simply vote against the re-election tabled by the company.
Except for the request for an extraordinary shareholders’ meeting or a special audit and the appointment of an auditor at the request of a shareholder, it is not possible to request that additional agenda items be tabled during the shareholders’ meeting. However, any shareholder may make motions relating to any agenda item during the shareholders’ meeting. This is particularly relevant with respect to any election items as additional persons may be proposed for election. Against the background that a significant number of shareholders cast their votes via the independent proxy without giving specific instructions as to ad hoc motions (or by instructing the independent proxy to follow the board’s recommendation in such case), ad hoc motions generally have a low likelihood of succeeding.
Other than with respect to the number of votes or percentage of the capital, Swiss law does not distinguish processes depending on the type of shareholder submitting a proposal.
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?
Any shareholder is entitled to nominate a director for election to the board, usually as a motion within the agenda item ‘election of the members of the board of directors’. In this context, if the motion is filed with the company in a timely fashion, the board is obliged to publish the shareholder’s motion in the company’s invitation to the shareholders’ meeting at the company’s expense. However, shareholders may not directly access the share register and divulge their requests via a special proxy access tool.
Activists typically use the media or a dedicated web page for their campaigns once their intentions are publicly disclosed.
May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?
Any shareholder - individually or acting in concert - representing 10 per cent of the share capital (or, according to the predominant legal doctrine, representing shares of a par value of at least 1 million Swiss francs; see question 7) has the right to call an extraordinary shareholders’ meeting. Certain companies have introduced lower thresholds in their articles of association. The required threshold may also be reached by several shareholders acting in concert. The request to call an extraordinary shareholders’ meeting must be submitted in writing to the company’s board and must contain the requested agenda items including the activist’s motions thereto.
Shareholders may not act by written consent in lieu of a meeting, but they can be represented by issuing written voting instructions to either the independent proxy or (depending on the articles of association) to another shareholder or a third party.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?
Shareholders may in principle not file lawsuits on behalf of the corporation or on behalf of all shareholders. However, they may file liability actions against directors and members of the executive management where the payment of damages is directed to the company. In addition, any shareholder may challenge shareholders’ resolutions made in violation of the laws or the articles of association with effect for the entire company. Also, certain post-M&A appraisal actions under the Swiss Federal Merger Act have erga omnes effect (ie, all shareholders in the same position as the claimant receive the same compensation). The cost of such proceedings must generally be borne by the company (ie, the defendant).
In general, class actions are not specifically addressed in the Swiss civil procedure. Nevertheless, it allows for a joinder of plaintiffs or defendants: several parties may join their lawsuits in case the same court has jurisdiction and all claims are based on the same set of facts and questions of law. This approach reduces costs and avoids conflicting judgments, but increases complexity. Another corporate litigation tactic worth noting is launching a single litigation test case in order to have a precedent for multiple actions involving the same set of facts and questions of law.
Shareholders are not able to directly prevent the company from accepting a private settlement with an activist shareholder. They may only challenge the board’s settlement resolution on the grounds that such decision was void or bring liability actions against the directors should the board have breached their directors’ duties and should they have caused damage to the company by doing so.
Every shareholder has the right to request information and to inspect documents (to the extent company interests requiring confidentiality do not prevail). The right to information is regularly used by activist shareholders to increase pressure prior to shareholders’ meetings. The board is obliged to respond to such questions during the shareholders’ meeting (see question 7).