Recently, we reported on the Federal Court ruling dismissing an application by some shareholders to expose the level of greenhouse gas emissions financed by the Commonwealth Bank. That case is notable as it again raises the profile of shareholder activism in Australia, a point that undoubtedly will arise for some this reporting season.
With AGM season about to dawn, now is the right time to refresh the key rules of the game in relation to:
- mechanisms that shareholders can use to be an activist;
- the strategies behind it; and
- from the board's perspective, how to be on the front foot and how to respond.
What is shareholder activism?
Shareholder activism involves shareholders using their investment or holding in a company as leverage to promote their interests and effect change within the company. The agenda can be wide – often it is attempting to alter the composition of the board, the direction of the business or the outcome of specific transactions. The agenda of shareholders may even concern social issues such as the environment.
As ASIC has noted, effective investor engagement can enhance the corporate governance and long term performance and corporate value of a listed entity – active shareholder participation most certainly has a role to play in Australia's corporate governance environment.
The options: mechanisms to be an activist
So, what are some of the key grounds that activists can use get their way? Below is a snapshot of some of the key rights that shareholders can use to be an activist.
- Members with at least 5% of the votes that may be cast at the general meeting may requisition a meeting of shareholders.
- Members with at least 5% of the votes that may be cast on a resolution or at least 100 members who are entitled to vote at a general meeting may give a company notice of a resolution that they propose to move at a general meeting (the resolution needs to be considered at the next general meeting that occurs more than 2 months after the notice is given).
- Members with at least 5% of the votes that may be cast on a resolution or at least 100 members who are entitled to vote at a general meeting may request a company to give to all members a statement provided by that members about the resolution that is proposed to be moved at a general meeting.
- Importantly, the members of a public company also have the right to remove a director from office (for listed companies directors cannot be removed by the other directors). To do so, the notice to move the resolution needs to be given to the company at least two months before the meeting is held.
- Members also generally have the right to:
- inspect and get copies of the company's register of members;
- speak at an annual general meeting and question the board; and
- vote to spill a board of directors if 25% or more of the votes cast at an AGM are against adopting the company's remuneration report for two consecutive years. This is known as the two strikes rule – it is a relatively new, but powerful, provision as companies that receive a first strike are put on notice.
Shareholder activism is a tactics game. As with all tactics, there are moderate approaches (e.g. engaging with the company) and more aggressive approaches (e.g. a board spill and a proxy fight to secure enough votes).
An activist may initially engage with the company, looking for a consensual resolution which will result in a faster and more cost effective outcome. If that fails, often an activist's strategy will combine several of the above options. For example, it may requisition a shareholders' meeting, seek to remove directors, and also obtain a copy of the register of members. By obtaining a copy of the register the activists can communicate directly with shareholders and even circulate its own pre-completed proxy forms as often activist campaigns come down to shareholder resolutions and the battle to secure enough proxy votes.
But there's another piece to the puzzle – under the ASX Listing Rules once a company receives some of the above notices, it's obliged to tell the market – and now it's in the public domain. Activist shareholders can also proactively engage in their own media campaigns as it tries to convince other shareholders of the need for change.
There is one key note of caution if two or more shareholders are looking to act on a joint understanding. Depending on the form and nature of the understanding between the parties, a collective action by activist shareholders can result in those shareholders potentially acquiring an interest in each other's shares. If so, they will need to be acutely conscious of the takeovers prohibition of not acquiring an interest in more than 20% of the listed entity's securities (unless it is though an exception, and shareholder activism is not an exception). They will also need to consider whether the substantial holding disclosure rules may be triggered (being the requirement to disclose to ASX any interest above 5%, and any 1% change thereafter).
The key lessons for the Board
How can companies be on the front foot? There are several ways:
- Monitor the share register for known activists.
- Develop a response manual in advance. Once enlivened, shareholder activist matters can move quickly (others can loiter, even fester). It's important that a company is ready, willing and able to move quickly.
- Consider the potential triggers for activists, and their motives. Shareholder activism can be triggered by a multitude of factors: performance, strategy, governance, capital management, control opportunities, board performance, and the list goes on. By understanding the potential drivers, a company will be best prepared to anticipate, prepare and respond to activists. It may even be able to avoid the activist campaign.
Once the activist's approach starts:
- Consider if there is merit, and wear an objective hat. Activists usually have specific ideas in mind, and the board should consider whether these have merit and are value accretive.
- If it's appropriate, look for ways to engage with the activists and consider what they can bring to the table.
- Once engaged on a matter, have an effective message for shareholders and the activists (as often activists will want to engage with both management and shareholders). Arm shareholders with full information to make an informed decision, including, of course, getting the company's message out there – if the directors do not consider that it's in the company's interests to make the activists' proposed changes, it's important to explain the reason why.
Shareholder activism can attract media attention and can be personal for some of the participants. It can result in important changes for companies, but it can also result in lingering uncertainty and disruption to the business and be expensive. The key for directors is to move assertively and quickly.
Increased shareholder activism in Australia is likely to continue. With that we are likely to see more creative examples of shareholder activism, as well as potentially more aggressive forms of activism often associated with hedge funds. Activists often move quickly and without much notice. For all participants, the more that they are prepared, the more likely it is that their agenda will prevail.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.