UK: Shareholder Activism

Last Updated: 23 April 2003
Article by Jon Harris

Shareholders are suffering. The downturn in the global economy and recent financial scandals have affected them badly. They are now asking questions and demanding action of companies. But what can shareholders do and how companies should react?

Shareholder activism is on the rise. Witness the recent signs - the attempts by Hermes to remove Sir Angus Grossart from the board of Scottish Investment Trust and the announcement in April 2002 that Stelios Haji-Ioannu would step down from the board of easyJet at the company's 2003 AGM. Shareholders in Glaxo Smithkline forced a climb-down from plans nearly to double the $10 million benefits package of the chief executive and in January 2003 The National Association of Pension Funds objected to the make-up of the boards of BOC and Bellway.

Although investors can bring informal complaints to the board, under the Companies Act 1985 shareholders can also requisition EGMs and circulate resolutions for discussion at the company's AGM.

Requisitioning an EGM

Members of a company holding one tenth of the paid up capital carrying the right to vote at a general meeting can require the directors of the company to convene an EGM. The requisition must:

  • state the object of the meeting
  • be signed by the members requisitioning the meeting
  • be deposited at the registered office of the company

Proposing an AGM resolution

Shareholders representing not less than 5% of the voting rights in the company or no less than 100 shareholders holding shares in the company on which there has been paid up an average sum, per member, of not less than £100 can require the company to circulate a resolution for discussion at the AGM. The requisition must be signed by all the requisitionists and must be deposited at the company's registered office at least six weeks before the meeting, if requiring notice of a resolution or, if not, one week before the meeting.

The Company's reaction

The company should check that the requirements of the Companies Act (referred to above) have been complied with by the requisitionists.

The company should check to see whether the resolutions are capable of being passed:

  • a resolution must be sufficiently precise to be binding
  • a resolution must not conflict with the provisions of the company's articles of association
  • a resolution must not attempt to interfere with the management of a company as articles normally vest responsibility for the management of the company with its directors

Tactics

The requisitioning of an EGM or the proposal of a resolution at an AGM can be used as a method for shareholders to begin negotiations with the directors of a company about a particular issue they are unhappy with. The requisitioning of an EGM or the proposal of an AGM resolution could bring unwelcome publicity to the company and companies often agree a compromise position with the requisitioning shareholders in return for the shareholders dropping the requisition.

Other Powers

Removal of a director

The Companies Act 1985 gives a company the power by ordinary resolution to remove a director, however, special notice (28 days' notice to the company of the intention to move the resolution) has to be given. The director in question also has the right to be heard on the resolution at the meeting.

Minority shareholder action

Under the Companies Act 1985 a shareholder can apply to the court, by petition, for an order on the grounds that the company's affairs are being conducted in a manner which is unfairly prejudicial to interests of its members generally or of some part of its members.

The court has a number of powers but does not often interfere in the running of a company. The most frequent order given is for the purchase of shares of the prejudiced member or members by other members or by the company itself. This power is generally more applicable to an unlisted company.

ISC Institutional Shareholders' Committee

On 21 October 2002 the ISC released a statement of principles entitled "The Responsibilities of Institutional Shareholders and Agents - Statement of Principles". This is a voluntary code but compliance is expected to be high as institutional investors attempt to head off government threats to legislate in this area. It sets out best practice for institutional shareholders and investment managers. Key areas include:

  • evaluating the impact of their policies and reporting back to clients/beneficial owners
  • monitoring the performance of, and maintaining, an appropriate dialogue with their investee companies
  • publishing policy statements on activism and how they will discharge their duties. Areas which the policy statement should cover:
    • how investee companies will be monitored
    • requirements for investee companies to comply with the Combined Code
    • policy on meeting with the board of the investee company
    • how situations where the institutional shareholders have a conflict of interest will be deal with
    • the strategy on intervention
    • an indication of the type of circumstances when further action will be taken and details of types of action that may be taken
    • the policy on voting

Hermes

Also on 21 October 2002 Hermes, the fund manager, published its own set of principles entitled "The Hermes Principles: What shareholders expect of public companies - and what companies should expect of their investors".

Conclusion

Shareholder activism has emerged as a force to be reckoned with. Used constructively institutional shareholders can work with companies to influence decisions. Intervention in the last year has been as a result of the poor performance of companies. In the future, shareholders need to ask questions before the situation gets so bad.

This update is not intended to be a definitive analysis of legislative or other changes and professional advice should be taken before any course of action is pursued.

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