Australia: Shareholder activism (Part II) – welcome to the jungle

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:
    1. inspect and get copies of the company's register of members;
    2. speak at an annual general meeting and question the board; and
    3. 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.

The strategy

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:

  1. Monitor the share register for known activists.
  2. 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.
  3. 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:

  1. 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.
  2. If it's appropriate, look for ways to engage with the activists and consider what they can bring to the table.
  3. 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.

Conclusion

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.