Shareholder activists have claimed that a shareholder resolution they proposed at Tesco's AGM brought about the grocery giant's announcement that it would increase the proportion of its healthy products from 58% to 65% of total sales and quadruple the sales of plant-based alternatives to meat by 2025. Concerns for public health and the environmental impact of meat consumption were the driving factors behind the activists' intervention and the outcome demonstrates the effectiveness that exercising shareholders' rights can have on changing a company's behaviour.
Shareholder activism is not a new concept. Shareholders generally have voting rights in the companies in which they hold shares and they are increasingly more willing to make their vote count. There are a number of reasons why a shareholder or group of shareholders might want to effect change and such influence is not necessarily detrimental to the company – it can bring benefits, particularly where there are moderate activists and institutional investors that act as guardians over long-term value creation. Sometimes these activist shareholders introduce agenda items that serve as a wake-up call for the management and board, thereby encouraging the reconsideration of strategic aims and equity growth plans.
Of course, there are exceptions: where shareholder activists are looking to exploit companies, perhaps by applying pressure to secure returns in short timeframes before moving on elsewhere.
More traditional drivers for shareholder activism relate to concerns about the management and direction of a company, conflicts of interest, inadequate dividend distributions (shareholder return), breaches of a director's service contract, or concern over possible illegal or fraudulent activities by board members. These are still valid reasons for activism, but increasingly change is now being sought on Environmental, Social, and Governance (ESG) grounds, as more investors, including institutional investors, consider these non-financial factors to identify material risks and growth opportunities.
It is important for both companies and individuals to be aware of the rights of the shareholders. The company's articles of association and any shareholders agreement will set out the main rules that govern the company and the shareholders. This may include a dispute resolution procedure or other requirements that may affect the ability to use shareholding rights. For example, there may be a requirement that a shareholder who is a director whose service contract is being terminated must sell their shareholding.
Shareholders could raise concerns privately with the board rather than take direct action - as this may be enough to bring about the desired change. However, if concerns fall on deaf ears then there are range of options available to shareholders to escalate pressure. Social media and public relations are often key pressure points for larger companies but it is worth bearing in mind the provisions of the Companies Act 2006, which can empower shareholders by permitting them to:
- Pose questions at a general meeting – under section 319A, shareholders may pose questions at general meetings and demand an answer.
- Vote against resolutions – shareholders can act collectively to block a special or ordinary resolutions of a company influencing the direction of the business and the decisions reached (a special resolution requires 75% of the shares to be voted in favour and for an ordinary resolution 50% plus one share is required). Note that any shareholder can ask to inspect or receive a copy of the register of members (section 116). This preliminary step will enable the identification of shareholders in order to seek support in opposing resolutions.
- Request a general meeting – under section 303, shareholders representing at least 5% of the paid-up voting share capital can require the company to call a general meeting and set out the text of any resolution to be proposed. If the company fails to do so, those shareholders can call a meeting themselves.
- Requisition a resolution at a general meeting – sections 338 to 340 allow shareholders holding either 5% of total voting rights or numbering at least 100 in number and holding both voting rights and at least £100 of paid-up share capital each to requisition a resolution and force it to be put before an AGM (although they must bear the cost of the company complying).
- Requisition the circulation of a statement – shareholders can also require a company to circulate to all shareholders a statement (of up to 1,000 words) relating to any matter to be dealt with at a general meeting that may be properly moved as a written resolution (section 314).
- Remove a director – shareholders can also effect (or prevent) change at boardroom level if they have sufficient votes together, by voting against any ordinary resolution to appoint a new director (section 160) or passing an ordinary resolution to remove one (section 168).
Whilst the above measures outline the actions that a shareholder might take in relation to meetings of a company, there are two further significant tools in a shareholders armoury:
- Bring a claim for unfair prejudice – a shareholder can petition the court for relief where the affairs of the company are being conducted in a manner that is unfairly prejudicial to the member's interests as a member. The type of conduct that might be brought within such a petition is vast. However, a petition is not a simple (or low cost) option and ultimately it may result in the disgruntled shareholder's shares being purchased by the majority shareholders at a court determined valuation or the company or vice versa.
- Pursue a derivative claim – if a shareholder can show that a former or present director has been negligent or has breached their duties, they can also bring a derivative claim under section 260(3). Effectively the shareholder applies to court to bring a claim in the name of the company. Any monies recovered belong to the company and not to the individual shareholder. However, derivative claims pose a number of difficult hurdles to overcome and are relatively rare.
Shareholder activism has been on the increase for many years and this is likely to continue with the greater investor focus on ESG issues and the close scrutiny of companies, including as how they have managed the COVID-19 crisis.
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