Shareholder activism is an increasing trend in business, and may be causing you, your members or your business some concern. This article explains what shareholder activism is, what can be done to prevent and protect against it and what to do when it arises.
- What is shareholder activism and why is it important?
- Types of shareholder activism and their effects
- Is shareholder activism good or bad?
- What are the benefits and disadvantages?
- Examples in the UK
- Preparing for shareholder activism
- Responding to shareholder activism
- Trends in rising shareholder activism
- Legal and regulatory tools used by activist shareholders
What is shareholder activism and why is it important?
Shareholder activism involves extreme actions taken or proposed by shareholders of a company to further their agenda. This agenda is usually at odds with the motivations and strategy of the company and its directors. This action can result in disputes or conflicts with a company’s management. Shareholder activism takes a number of different forms, including shareholders using their legal rights, public pressure and information gathering.
Shareholder activism is important because even though on the one hand it can be seen as a block to the efficient running of a company, it is a movement that demonstrates that the owners of a company can have a key role in shaping operational decision-making. It also reminds directors that the shareholders of the company are watching what they are doing and how they are doing it, so it is important for directors to make sure that they are promoting good corporate governance and are meeting all of the company’s compliance requirements, particularly in areas such as anti-bribery and anti-corruption. In the long term, shareholder activism can influence or change the way companies are run, so it’s important to be aware of the trend and the direction in which it is moving.
Types of shareholder activism and their effects
Shareholder activism in the United Kingdom can take a number of forms, and will depend on whether the company is a private or public company and the status of its shares. Shareholder activism can take the form of:
- A manipulation of a shareholder’s shareholding
Shareholders (typically investment funds) buy more shares in a company to increase voting power and therefore increase influence over how the company is run and ultimately who it may be sold to.
- Changing the board composition of a company
Shareholders can push for the removal of a director using their statutory voting rights.
- Public announcements
Using social media, press announcements or other media, shareholders make public the concerns they have about how a company is acting or is proposing to act.
- Rallying other shareholders
A shareholder brings about a united shareholder movement intended to change the company strategy or the company’s management by requesting the company circulates a statement, gathering other shareholders’ information from the company or through social media platforms.
- Holding a private meeting with the board of directors
Shareholders will set up a meeting with the board of directors to let them know about the concerns that shareholders have and to tell them about the action that is required by the shareholders going forward.
- Forcing a general meeting to effect change
A shareholder may force a general meeting to make sure that there is a platform to consider actions such as removing a director or to veto a strategic decision. This involves the company taking the time to give notice of the meeting and to hold the meeting in accordance with the requirements of the Companies Act 2006.
- Taking legal action
There are a number of statutory options available to shareholders who wish to evoke a court order against the company and its directors.
All of these types of shareholder actions are likely to have some effect on the operations of a company and will cause various levels of disruption and speculation. In turn, that commotion will require the company to spend time and administrative resources that could otherwise be used to run the company.
On one side of the scale, public announcements will not necessarily be particularly financially burdensome to the company. On the other side of the scale, statutory actions such as unfair prejudice petitions or derivative claims, if successful, could result in a fundamental change forced upon a company by court order, dictating how it should be run. These statutory claims can also be costly, particularly if the court decides that the company is to bear the costs of the proceedings.
Is shareholder activism good or bad?
Shareholder activism can be both good and bad – your opinion will largely depend on who you are.
In general, shareholder activism is good for shareholders (and other stakeholders in a company) that want to make sure that the company is being run in a way that they agree with. However, this assumes the shareholders that are raising the grievances are acting in a way that is reasonable and for the good of the shareholders as a whole.
On the other side, the company is unlikely to think that shareholder activism is a good thing, particularly when it interrupts the running of the company or circumnavigates the normal processes in place for the company to address shareholder concerns. Again, this assumes that the directors of a company are acting in its best interests rather than trying to avoid scrutiny in order to follow their own agenda.
What are the benefits and disadvantages?
|Increases efficiencies and may make more money for the company – if seasoned investors are more involved with the decision making, the more likely that their experience will positively influence the strategy of the company||Likely to cause disruption to the running of the company|
|Increases the need for the board of directors to be self-reflective and assess how they are running the company||Likely to cause expense to the company|
|May result in changes to governance and other internal compliance policies that mean that the company is more transparent and accountable||May result in market speculation of the company resulting in reputational damage or even a lower share price|
|Gives potential investors more information about the company||May undermine the power of the directors to manage the company|
Examples in the UK
Traditionally, most disputes between shareholders and directors in businesses in the UK would be handled in a private forum – it has only been in the last decade or so that shareholder activism in the UK has increased, with more investors of different types starting to try to actively influence how the company that they are investing in is run, and how and to what extent it turns a profit.
Recent examples of such shareholder activism in the UK have happened as recently as January 2019, when Whitbread plc sold its Costa Coffee business to The Coca-Cola Company after pressure from its fund shareholders to break up its business. Also, in February 2019, following discussions with its largest shareholders, the board of directors of Premier Foods plc decided to conduct a review of its strategic options for increasing shareholder value.
Preparing for shareholder activism
How do you know if your shareholders are preparing for activist behaviour? Often you can get an indication of unrest or a brewing dispute by communicating with the shareholders as a group at a general meeting or directly on an informal basis.
It may even become apparent by tracking company-related social media sites and pages. An unhappy shareholder will often be vocal in general meetings and an activist shareholder will almost certainly be. In a public company, under statutory law the board can be required to answer all questions posed by shareholders that relate to the company’s business.
Ultimately, the best preparation is preventative action – as a director, you want to maintain an open channel of communication with the company’s shareholders to make sure that shareholders feel they have some influence over the company’s strategy and a forum to voice any concerns they may have. Being transparent in your actions as a director and explaining the rationale behind decisions can take you far in keeping shareholder activism at bay, particularly if the company has recently engaged in unusual trading activity or more heavy duty borrowing.
Responding to shareholder activism
In responding to shareholder activism, it is helpful for directors to view themselves as custodians of the company for its owners (the shareholders) and position themselves accordingly. If a director were to find themselves in the middle of an activist event, they would need to try and take the position that their role is to facilitate the progress of the company and to approach the shareholders in a conciliatory and helpful way rather than to instigate a dispute or any further bad will at this stage.
The key is to make it clear to the shareholders (and if necessary, the public) why the directors decided to act or not act in a certain way and to back up this announcement with as much justifiable evidence as is available.
Where shareholders have forced the convening of a general meeting or have proposed a resolution to be considered at a general meeting (or an annual general meeting if the company is a public company), it is for the directors to present a clear and well-reasoned case as to why the decisions proposed are not reasonable or suitable for the company to pass.
This may involve enlisting the assistance of the company’s auditors or financial advisers to support the directors’ argument. The directors should make sure that the meeting is convened and run in accordance with the statutory rules set out in the Companies Act 2006 and the company’s articles of association (the company’s rule book). This can also be a good way of eliminating any shareholders who are not technically entitled to vote at or attend the meeting from doing so.
How the directors respond to an activist event can have an impact on the company’s reputation and the perceived trustworthiness of the board. It is better if the board can demonstrate to the shareholders that they have a desire to understand the causes for concern that the shareholders have voiced. At the same time, the company will want to make it known publicly that it’s response is reasonable and proportionate. This can be disseminated through news stories, social media platforms and other publicity.
Trends in rising shareholder activism
Shareholder activism in the UK has been in and out of the news over the last decade or so, as it’s been on the rise ever since the financial crisis hit around 2007. At a time when people were increasingly uncertain about the nature of their investments, there was a call to take a closer look at how companies (public or listed companies in particular) were being run and to investigate suspicious actions.
The public were keen to criticize ‘big companies’ and this distrust filtered through the UK market affecting both public and private companies. HSBC, Vodafone, Tesco and Cadbury Schweppes all made the news as a result of shareholder activism, where shareholders were campaigning against a variety of topics that affected how the companies were being operated and the decision-making process behind company strategy.
The trends that have become apparent show a shift towards shareholders increasingly becoming interested in influencing, directly or indirectly, the financial and strategic agenda. Shareholders are looking at the transactions that a company is involved in and the revenue and profit that such transactions generate. They can do this by buying enough of a shareholding to put pressure on the board, to veto or push through decisions that will fundamentally affect the company (and often increase the share price of the company), such as the buying and selling of shares or the sale of the company’s assets.
Legal and regulatory tools used by activist shareholders
There are a number of legal and regulatory tools available to shareholders to facilitate activism. They include:
- Unfair prejudice petition
Sections 994 and 996 of the Companies Act 2006 give a member of a company the right to make a petition to the court if it thinks that the business of the company it is invested in is being run in an unfairly prejudicial way against them as a member. The court can make whatever order it thinks fit and may even order the petitioning shareholder to be bought out by the other shareholders.
- Derivative claim
Also under the Companies Act 2006, members of a company, trustees or personal representatives holding shares in the company, can bring a claim (called a derivative claim) against a director on behalf of that company because of something that the director actually did or did not do, or proposed to do or not do and that meant they were negligent, in default, in breach of their duties, or in breach of trust in respect of their actions and responsibilities towards the company.
Both the unfair prejudice petition and the derivative claim procedures are complicated and can be costly. They will both ultimately rely on the wide discretion of the court, and as such a shareholder is not guaranteed to get their desired or expected outcome
- General shareholder rights
A shareholder can have statutory rights of veto over decisions that the company wants to make as a result of the powers attached to the number of shares that they hold in the company. If a shareholder holds at least 5% of the voting shares of a company, it can require that a general meeting of shareholders be called. If a shareholder holds at least 25% of the voting shares of a company, it may be able to block a special resolution.
- Information rights
Shareholders in both public and private companies have information rights as members to have copies of reports and accounts, general meeting notices and circulars.
- Removing a director
Under the Companies Act 2006, shareholders in private companies can try to remove a director by passing an ordinary resolution in general meeting. In public companies, regulation has been created to state that all directors of FTSE 350 companies should be subject to annual election by shareholders and then re-election at intervals of no more than three years.
- UK Stewardship Code
The UK government has also responded to shareholder activism and has indicated its desire to support active shareholders in their monitoring of the companies that they invest in, particularly those institutional shareholders that have a lot of experience in making investments (‘institutional investors’). The government has introduced the UK Stewardship Code, a code that creates some responsibilities for institutional investors to improve the governance of the listed companies that they have shareholdings in to ultimately increase confidence in the market.