Australia: Collective action back in focus

The global wave of shareholder activism has prompted ASIC to revise its guidance on investor engagement. The new proposed guidance, although generally supportive of investor engagement, is restrictive in practice and will potentially cause difficulties for collective action by investors in this market.

ASIC's existing policy on collective action has its genesis in the battle for control of the board of Coles Myer in 1995. The "Yannon Affair" exposed the potential for institutional investors to influence a company's governance and the lack of specific regulation around the issue.

In response to these issues, ASIC introduced the current Regulatory Guide 128 – Collective action by institutional investors (Regulatory Guide) and Class Order 00/455 – Collective action by institutional investors (Class Order).

Ten years on, in the context of growing activity by shareholder activists, ASIC is revisiting its somewhat unwieldy and little used policy on collective action by investors.

SHAREHOLDER ACTIVISM IS INFLUENCING COMPANIES TO MAKE CORPORATE GOVERNANCE CHANGES

The rise of the activist interjector means institutional investors are being forced to engage in more intense debates about strategy with companies and activists. Since institutional support is vital for any activist campaign, the boundaries of how the actors should interact are extremely important for all involved and the market.

You may not like it but as the Economist put it, "Sometimes ill mannered, speculative and wrong, activists are rampant. They will change American capitalism for the better."

Hedge fund activism has emerged as an influential corporate governance mechanism in the US, with new research suggesting activism can bring about operational, financial and governance reforms to a corporation with long term benefits to shareholders (see Goodwin).

Share price movements generally show that markets react positively to involvement by activists and rely on them to identify ways to unlock value in undervalued companies.

As shareholder activism grows, funds managers will also become more engaged. Activists, particularly those with relatively small stakes in a company, rely on cooperation with other shareholders in order to effect corporate governance changes.

ASIC'S PROPOSED AMENDMENTS

ASIC's new draft Regulatory Guide outlines the types of collective action investors may engage in without contravening the takeover and substantial holding provisions of the Corporations Act.

The policy reflects the inherent conflict between collective investor engagement as an effective means of corporate governance, and the risk of investors acquiring control over an entity inappropriately.

In the draft Regulatory Guide, ASIC has set out examples of conduct where collective action is unlikely or more likely to trigger an associate relationship or result in the acquisition of a relevant interest prohibited under Chapter 6 of the Corporations Act (see diagram below).

Where there is ambiguity, ASIC will consider whether the conduct has a control purpose or effect, rather than promoting good corporate governance. But there are some danger signs. For example, advocating for board changes is a common tool in the shareholder activist toolkit which under this Regulatory Guide will attract ASIC scrutiny and needs to be approached with extreme caution.

As a general comment we think the Regulatory Guide is probably a little restrictive in its interpretation. The UK Panel seems to be more permissive of collective action. Panel Practice Statement 26 suggests the UK Panel will not normally regard shareholders voting together on a particular resolution as objectionable. But like ASIC, the UK Panel does see issues with shareholders who requisition or threaten to requisition a general meeting to change the board.

Unsurprisingly given its almost non-existent use, ASIC also proposes to revoke the Class Order and instead offer individual relief. Relief will be offered where conduct is caught by the takeover provisions but where it is not concerned with the acquisition of a substantial interest in or control over the entity.

Overall, the draft updated Regulatory Guide is a timely response to the rise of collective action by investors and acknowledges that investor engagement can be positive for the financial market.

ASIC is inviting interested parties to comment on the Consultation Paper by 20 April 2015. An updated Regulatory Guide is expected in June or July 2015.

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