With campaigns by active shareholders frequently making headlines, companies should have a plan in terms of how to respond in the event that an active shareholder comes knocking. In this article, we explore the rights of shareholders and the steps companies can take to respond to an exercise of these rights.
Search "activist shareholder" on the website of the Financial Times or the Times (other media outlets are available), and you'll generate a list of news stories from a very diverse group of sectors and jurisdictions. US clothing retailers, UK hospitality providers, global energy companies, and Japanese pharmaceutical giants all have recent experience of handling activist shareholders – and earlier this year, the "Saba Seven" were in the spotlight with Saba Capital requisitioning shareholder meetings at seven investment trusts seeking to replace the incumbent boards (see box 'Saba Seven').
Whilst the specifics differ from case to case, the underlying aim is invariably the same – convincing the board to change tack and adopt a strategy supported by the activist shareholder (either on a specific issue or more generally), which may be coupled with a proposal to appoint one or more nominees of the activist shareholder to the board who are supportive of the activist's strategy (and possibly remove one or more incumbent board members). This approach goes against the usual management/ownership split, where the board is responsible for the strategy and management of the company on behalf of the shareholders who have contributed to the company in the hope of receiving a good return on their investment. Indeed, Principles A and B of the Governance Code state: "A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders......The board should establish the company's purpose, values and strategy.....".Shareholders are encouraged to engage with companies and indeed institutional investors are expected to be active stewards of the investments made (see for example the standards expected under the Stewardship Code). This stewardship role however still plays out within the confines of the management/owner relationship.
If a shareholder disagrees with the direction the board is taking, there are effectively two options they can take – firstly they could sell their shares in the company, or secondly if they are unable to sell, or where they believe in the potential of the company, they could seek to effect change by engaging more actively with the board. Where a shareholder takes this second approach, as noted above, the relationship between the board and the investor will shift and the board will need to consider how it interacts with that shareholder, and the wider shareholder base.
Given how quickly issues can flare up, boards should be well-versed in the steps that an activist shareholder may take and the response the board may take to these steps. There are four main areas which the board needs to examine in order to engage effectively with an active shareholder:
- What are the aims of the active shareholder?
- Who are the shareholders of the company?
- What legal rights does the active shareholder have to effect the change they are seeking?
- What steps can the company take in response?
- What are the aims of the active shareholder?
In order to be able to engage effectively and respond appropriately to the demands of the activist, it will be fundamental for the board to understand what the shareholder is trying to achieve. Whilst the broad objective of the activist will be to effect change, activism may be driven by a specific event that presents an opportunity to increase quickly the value of the company or it may be driven by longer-term strategic or operational issues, where activists seek to intervene as a result of a problem, or opportunity, they see in the company's business strategy or structure. Understanding the driver for the activism will help the board draw up a targeted response. The activist is likely to have thought long and hard about their plans for the company and where improvements could be made, so rather than treating it as a hostile actor, it would be sensible for the board to hear what the activist has to say.
Doing due diligence on the activist shareholder is part of examining their aims – knowing their motivations, investment strategy and previous activist activities will all help build a picture of the activist and develop a fuller understanding of their aims. These investigations may also help determine what steps the company should take in response. If there are, or have been, previous campaigns in the same sector, it would be useful to examine these to see if there are lessons to be drawn from these events.
- Who are the shareholders of the company?
As well as building a picture of the activist shareholder and their aims, the board should gather as much information as possible about the rest of the shareholders in order to draw up the most appropriate response and to devise the best policy for communicating this response to the other shareholders. Where possible, understanding the investment goals of key shareholders will also help inform the company's response. For example, if an activist is pushing for the company to put itself up for sale, are the other shareholders long term investors who may not want to cash out at the first opportunity? Analysing results at previous general meetings may also provide useful insights.
Obviously, the register of members will provide a certain amount of information about the shareholder base, but it will only contain details of the registered owners, not of any underlying beneficial owners. In addition, listed companies can look at DTR 5 disclosures for information. To dig further, public companies can investigate shareholders' connections in more detail by serving section 793 notices on any person they know, or have reasonable cause to believe, to be interested in the company's shares. This tool is not a means of building a complete picture of the beneficial ownership of the company's shares. However, it may be useful on a targeted basis in certain circumstances.
Rather than doing this in reaction to an activist appearing on the register, many listed companies monitor their register on an ongoing basis through a section 793 programme, to seek to ensure that they are not caught unawares. However, this type of monitoring has its limitations. Activist shareholders will often use financial instruments to build their interest in a listed company and their use will not necessarily become evident in the context of a section 793 request, nor are such interests disclosable for the purposes of DTR 5.
- What legal rights does the activist shareholder have to effect the change they are seeking?
Under the Companies Act 2006 (CA2006), shareholders have a variety of rights in relation to their holding in a company which an activist shareholder may use. These rights range from standard rights to attend meetings, appoint proxies and vote shares, through to rights to requisition resolutions and remove and appoint directors. The rights available will depend on the number of shares held by the activist and, in some cases, any relevant provisions in the articles of association.
For more details on the rights of shareholders, see our Corporate Governance Fundamentals: Shareholder requisition rights, available here.
- What steps can the company take in response?
Depending on the approach taken by the activist, the company will have a number of options available to it. In some circumstances, such as for example where the activist requisitions a resolution or seeks to change the composition of the board, the steps that the company needs to take will be set out in the CA2006 and the articles of association (for more details see our Corporate Governance Fundamentals: Voting rights at shareholder meetings and Corporate Governance Fundamentals: Appointment and removal of directors).
Putting to one side the requirements placed on the company under the CA2006, there are also practical steps which the company can take:
- Be media savvy: As noted, there is often considerable press interest in activist campaigns and in the past how the campaign is perceived in the media has played into its success. Working alongside PR consultants and lawyers, companies should ensure that their messaging is reaching, and engaging, the underlying owners.
- Anticipate the activist's play: Building on the research already carried out on the activist, companies should work with their advisers to try to anticipate what requests the activist may have and consider how best to counter these requests, including what solutions might be acceptable to all parties. This game planning will include determining how to engage with the shareholder and the tone of the debate.
- Watch for changes to the register: The activist may acquire more shares in order to increase their voting rights and so companies should ensure that their registrars are monitoring for DTR 5 notifications of changes to voting rights.
- Understand your share register: Where there are many nominee shareholders on the register, the company should work with a proxy solicitation expert to ascertain the ultimate beneficial owners so that engagement can take place to encourage them to instruct their nominees how to vote the shares in which they hold the beneficial interest, or even to attend and vote at any general meeting held.
There is no set formula for how activism campaigns are conducted, and so boards will need to seek specific advice from their trusted advisers on how to respond to any steps taken. However, having an awareness of the rights which activists may exercise to achieve their goals and some of the tools available in response, will set the board in good stead. After all, as the famous adage attributed to Alexander Bell sets out, "before anything else, preparation is the key to success".
The Saba SevenIn December 2024, Boaz Weinstein, the US activist investor, through his hedge fund Saba Capital, took aim at seven UK listed investment trusts, and in a letter to shareholders urged them to support his bid to replace the directors on the boards of the UK trusts on the grounds of poor performance and disengaged management. Saba's stake in the trusts ranged from 19% to 29%, so above the threshold in the CA2006 to requisition a shareholder meeting but below the level required to remove a director through an ordinary resolution (which requires support from a majority of the votes cast). Saba however was relying on voter turnout being low and that its holding would as a result represent the majority of votes cast. Voter engagement was therefore absolutely key. Whilst there were concerns amongst investors about the performance of the trusts and size of the discount at which the shares in the trusts were trading (relative to the value of the underlying assets held by the trusts), the reaction to Saba's proposals was extremely hostile. Ultimately Saba's resolutions failed at each of the shareholder meetings, with what has been described as "unprecedented" levels of voting among the investment trust shareholders. This voting turnout was achieved through different means, as compared to investor engagement in most commercial companies, given the very high level of retail shareholders investing in the trusts. In this context therefore engagement via the media and retail investor platforms was a key part of the response strategy. With hindsight, it seems that Saba:
No wonder the FT dubbed the experience Saba's "awfully small UK adventure". That being said, Saba did tap into valid concerns about aspects of the trusts' performance and it has been reported that some boards are implementing changes following this episode, highlighting the benefits of listening to, and objectively evaluating, the issues raised by activists. |
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
