Guide to shareholder activism
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Shareholder activism
Shareholder activism describes the tools and tactics used by shareholders to try to influence the decisions taken by the board of a company. Shareholder activism can apply to any company – large or small, public or private. Activist shareholders can be driven by different agendas – from aiming to maximise returns to promoting environmental, social and governance (ESG) issues.
We know shareholder activism is an ever-present issue for listed companies. Sometimes, it’s in the background. Sometimes, it comes to the fore. But it’s always there. That’s why we’ve created this interactive guide to help companies navigate their way through the motivations of activists, the tools available to activists, and strategies for dealing with shareholder activism.
So please click away, follow links to the firm’s website, or contact one of our experts to discover how we can support your company.
1. Strategic change
Some activists look to put pressure on the board to change the company’s strategy. They might be seeking to persuade the company to:
• Pursue acquisitions (this might be the case if there is substantial cash on the balance sheet)
• Dispose of non-core assets or parts of the business
• Return value to shareholders, eg through dividends or buy-back programs
2. Board performance
Activists might be dissatisfied with the performance of the board – either individual directors or collectively. If they are concerned with the performance of the business, they might seek to remove the CEO or the CFO, or both. If their concerns are governance related, they might look to remove the chair or the senior independent director. In extreme circumstances, activists might seek to remove and replace the entire board.
3. Executive remuneration
Executive remuneration is often a live topic. The directors of companies listed on the Main Market of the London Stock Exchange have a duty to prepare: (i) a directors' remuneration report for each financial year; and (ii) a remuneration policy at least every three years.
The remuneration report is subject to an annual advisory vote at each AGM. As an advisory vote, it will not affect contractual entitlements. However, the result of the vote will send a strong signal to directors about the level of support among shareholders and could affect the company’s reputation.
There must be a binding shareholder vote on the remuneration policy at least every three years. If the remuneration policy is not passed, the company will need to continue to operate according to the remuneration policy last approved by shareholders until it can get a revised policy approved.
Listed companies can see large shareholder revolts on these resolutions at the AGM. These revolts tend to generate adverse media coverage and can, ultimately, force a company to go back to the drawing board on executive remuneration.
4. Block a transaction
Some transactions require shareholder approval:
• Fundraisings of a certain size (eg a fundraising which would require a non-preemptive issue of shares beyond the limits of existing share authorities in place)
• Acquisitions of a certain size (eg an acquisition which would amount to a reverse takeover)
• Disposals of a certain size (eg a disposal which would represent a fundamental change in business)
• Takeovers implemented via a scheme of arrangement
Shareholders may cooperate to launch a coordinated campaign to block any such transaction.
5. ESG issues
This is a growing area of shareholder activism, encompassing a wide range of issues. Shareholders may have concerns relating to governance – for example, the balance of independent to non-independent directors on the board or the diversity of the board (eg gender diversity and ethnic diversity).
There are non-profit organisations – for example, ShareAction – which aim to improve corporate behaviour on environmental, social and governance (ESG) issues through shareholder activism. These organisations often look to lead a coalition of institutional investors to requisition resolutions at AGMs.
What tools do activists use?
Click each circle to discover more
AGM
Public companies are required to hold an AGM every year. Shareholders could:
• Vote against the re-election of directors
• Vote against approval of the remuneration report and remuneration policy
• Vote against resolutions granting directors permission to allot shares and disapply pre-emption rights on share issues
• Requisition resolutions (on subjects ranging from strategy to ESG matters) – this could be done either:
(i) by shareholders holding at least 5% of the total voting rights; or
(ii) by at least 100 shareholders with the right to vote on the resolution at the AGM and each holding, on average, at least £100 of paid-up share capital (a shareholder could therefore split their holding up and transfer the shares into the names of nominees to satisfy this test).
Requisitioning a General Meeting
Shareholders holding at least 5% of the total voting rights can require the company to call a general meeting. A requisitioned meeting can be used to pose difficult questions of the company’s management and also to table resolutions to be voted upon by shareholders. Requisitioning a general meeting can generate significant adverse publicity for the company.
Director removal
An activist could seek to remove a director by requisitioning a general meeting and proposing an ordinary resolution under section 168 of the Companies Act 2006. An ordinary resolution only requires >50% approval. There is nothing to prevent the director in question from voting against such a resolution. Several additional procedural requirements will apply (including the giving of “special notice”).
Stakebuilding
The range of tools available to an activist depends on the size of their shareholding in the company. The bigger their stake, the more tools they have at their disposal and the greater their ability to influence the company.
An activist must avoid acquiring 30% or more of the total voting rights as this will trigger an obligation to make a mandatory offer for the entire issued share capital of the company under the Takeover Code.
Analysing the register
An activist could request a copy of the company’s register of members under section 116 of the Companies Act 2006. In doing so, an activist will hope to find out more about the key shareholders in the company with a view to persuading those shareholders to support its actions. However, given the fact that the majority of shares in public companies are held through a nominee structure, the register itself might not be very informative. An activist may therefore engage a “proxy solicitation agent” who will analyse public information (for example, announcements made under DTR 5 and disclosures in the annual report) to give more detail on the shareholder base.
Click here for a summary of the different rights available at different thresholds.
Media
An activist could voice its concerns through the media – either through traditional print media or through social media platforms. Many activists use stock discussion forums or “bulletin boards”. Users of bulletin boards are often anonymous, which can make it more difficult for a company to pursue potential defamation claims.
Bringing an action for unfair prejudice
The remedy of unfair prejudice allows a shareholder to petition the court to make an order for relief where:
• the affairs of the company are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or some part of its members; or
• an actual or proposed act or omission of the company is or would be so prejudicial.
Unfair prejudice petitions are typically pursued where there has allegedly been a breach of directors’ duties, inequitable conduct and/or serious mismanagement. If a petition is established, then the court has a wide discretion to grant remedies, which may include for example: an order for sale of the petitioner’s shares; an order requiring the company to refrain from a particular act or acts; or an order to regulate the conduct of the company’s affairs in the future.
Pursuing a derivative claim
If a shareholder can show that a director (or former director) has been negligent, in default or committed a breach of their duties or a breach of trust, they could consider bringing a derivative claim against the director on behalf of the company. However, before the claim could be pursued, the court would first need to grant shareholders permission to continue the claim on behalf of the company. In addition, any remedy sought would be for the benefit of the company (rather than the shareholders bringing the action).
Claims under section 90/90A of the Financial Services and Markets Act 2000
Sections 90 and 90A of the Financial Services and Markets Act 2000 (FSMA) provide statutory routes for shareholders of listed companies to seek compensation for loss suffered as a result of untrue, incomplete or misleading statements contained in prospectuses or listing particulars published in the context of an IPO or rights issue. In the case of s90A, this also applies to other "published information" produced by a company, such as annual reports and accounts.
Notable examples have been the s.90 FSMA claim brought against the directors of RBS in respect of a £12 billion rights issue in 2008, the s. 90A FSMA claim in respect of the financial performance of Autonomy and the s. 90A FSMA claim in respect of the financial statements of Tesco.
While such claims have proven challenging to establish in practice (typically due to the need to evidence some form of dishonesty by directors and a link between the disclosure and losses), they nonetheless create significant publicity, disruption and expense for companies, sometimes in circumstances where other criminal and regulatory action is ongoing.
Petition to wind up the company on just and equitable grounds
As a last resort, and usually absent any other remedy, shareholders might petition to wind up the company on just and equitable grounds. This is an option that is understandably used sparingly and, as with other similar remedies, is subject to the discretion of the court.
Prevention strategies
1. Engage shareholders
Pro-active and frequent engagement with key shareholders and effective communication of the company’s strategy. This should be a key part of the chair’s role.
2. Good corporate governance
Foster a strong culture of good corporate governance. Ensure compliance with the provisions of the corporate governance code which the company has chosen to adopt. Where there is non-compliance, engage with shareholders to communicate the reasons for any non-compliance.
3. Horizon scanning
Monitoring the market for emerging trends in shareholder activism, with a particular focus on potential issues relevant to the industry / sector in which the company operates – is the company’s environmental footprint likely to be a concern? Does the company have operations / use contractors in countries where working practices may be a concern? Does the company produce products which are potentially damaging to human health (eg sugary food products, alcoholic drinks, gambling products)? Is there a general consolidation taking place within the sector or an increasing number of PE-backed take-private transactions?
4. Identify risk areas
Conducting review of potential risk areas – eg financial performance, underperforming parts of the business, “non-core” parts of the business, underperforming share price.
5. Monitor for “red flags”
Under DTR 5, a person must notify a listed company of the percentage of voting rights that it holds as shareholder if, as a result of an acquisition or disposal of shares, the percentage of those voting rights reaches, exceeds or falls below 3% and each 1% thereafter. These disclosures should reveal the beneficial owner (unlike the shareholder register which may just reveal a nominee). Companies should actively monitor these disclosures, looking for any stakes held by known activists or unknown investors.
5. Monitor for “red flags”
Shareholder rights under the Companies Act 2006
5% or 100 members
requisition a resolution or a members’ matter at an AGM (s.338 and 338A)
