Activism and engagement have long outlived the shareholder spring of 2012. UK boards must prepare to become more responsive
Shareholder activism was once almost universally seen in a negative light, with the earliest activists labelled 'corporate raiders'. But over the years, this perception has shifted. The notion that shareholder engagement should be increased has become orthodoxy. This has coincided with a broader range of investors beyond the traditional activist funds – such as event-driven and long/short equity funds, as well as mainstream institutional investors and sovereign wealth funds – becoming more vocal in expressing their views on corporate strategy. Their market significance cannot be denied. The Financial Times reported last year that $72.4 billion was invested by hedge funds who identified themselves as activists. Such funds continue to attract high inflows from investors attracted by their record of generating outsized returns. Though shareholder activism was traditionally much more prominent in the US, there is growth (and an increased acceptance) of activism in the UK.
Shareholder activism describes a number of different courses of action whereby a shareholder attempts to bring about change in a company (whether by lobbying the target board or their fellow shareholders, or by the exercise of legal rights) to unlock value. The UK operates what's known as an enlightened shareholder value system of corporate governance. This reflects the historic proposition that ultimately shareholders have the right to determine how their capital is deployed. That proposition has been tempered (or enlightened) with requirements for directors to also consider the impact of their decisions on employees and other stakeholders. The more recent impetus for increased shareholder activism in the UK market comes from the global financial crisis. Increasing discontent among shareholders in early 2012 spawned what has been termed the shareholder spring; a period of time when institutional investors rejected executive pay plans which were seen as rewarding lacklustre performance. No doubt spurred on by high levels of public interest and extensive media coverage of issues such as executive bonuses, shareholders succeeded in rocking the boat at general meetings and ousting CEOs. Since then, the pressure has remained. Examples include the ejection of four directors from the board of Glencore Xstrata in response to retention packages provided in the companies' merger, and the introduction of say-on-pay votes for UK-incorporated, quoted companies.
"Bidders are increasingly reliant on target shareholders to engage with their board to force them to engage with bidders"
Since then, the Kay Review of UK Equity Markets and Long-Term Decision Making sought to review the effect of the UK equity markets' mechanisms of control and accountability on company performance, and ensure that the regulatory climate works for the benefit of companies and their shareholders. Professor Kay's recommendations (published in July 2012) advocate for an industry-led reform of the culture of short-termism that surrounded UK equity investment. His report has resulted in changes to the UK Stewardship Code (in September 2012) and renewed government commitment to regulatory reforms that facilitate relations between companies and their shareholders. Key to that industry-led reform is the Collective Engagement Working Group Established in April 2013. This aims to encourage collaboration between investors in their interaction with companies, through the establishment of an investor forum (Forum) and the issuance of practical recommendations informed by dialogue with key actors.
The market has also been influenced by US funds, with established records of activism, setting their sights on the UK. Elliott Associates, Spring Owl and Sandell Asset Management have all shown recent interest in UK companies, and are a prime example of how activist strategies are employed to elicit shorter-term financial gain.
Heightened regulatory influence and growing encouragement of engagement has led to more high-profile cases of shareholder activism.
Earlier this year, Essar Energy was one of the few companies to not meet FTSE's 25% free float requirement. This left it vulnerable when, after several years of declining share value, its majority shareholder sought to buy the minority shares and delist the company. Perhaps offering a glimpse of the future operation of the Forum, the Association of British Insurers represented a number of shareholders in objecting to the bid. It successfully lobbied to expedite a change to the Listing Rules (in May 2014) to require a company with a controlling shareholder (50% or more shares) to obtain the prior approval of a majority of its independent shareholders, or acquire an 80% holding before delisting. This deal also demonstrated an increasingly important strategy used by activists – mobilising regulators, policymakers and other actors in support of their campaign.
WM Morrison Supermarkets found itself subject to various activist strategies this year. Elliott Associates and Sandell Asset Management built stakes in the company, before calling on WM Morrison to divest itself of freehold property. In March, WM Morrison announced its plan to monetise £1 billion ($1.68 billion) of property (but no more than 20% of its portfolio). In June, the company saw an attack on its board of directors following its changes in strategy and ever-diminishing share price. Sir Ken Morrison spoke out about his discontent with the management direction and, although Sir Ian Gibson and Dalton Philips found themselves re-elected as chairman and CEO respectively without the support of Morrison, Gibson has confirmed that he will not seek re-appointment in 2015. Twenty-seven percent of shareholders voting at the company's AGM disapproved of the proposed remuneration policy.
In May of this year, after several months of public criticism of the company's strategy, the online gaming firm Bwin.Party agreed to appoint Daniel Silvers to its board as a representative of Spring Owl. In July, the UK saw one of the biggest ever investor rebellions as 52.7% of Burberry's shareholders voted against the company's remuneration report, which included the pay package of the company's new chief executive, Christopher Bailey. In addition, over 16% of investors voted against the company's remuneration policy at the company's AGM. Even though these say on pay votes are non-binding, they do exert significant pressure on the board and, particularly in this case, significant publicity of the matter.
As we continue to see trends of shareholder activism evolving and maturing in the UK market, both activists and companies will need to have a heightened understanding of the regulatory environment and the tools they can employ.
Activists have sought to deploy many different strategies to achieve their goals in the UK (see table below). These tactics may include:
- using the media to raise issues and propose actions a company should take;
- approaching the company privately to raise concerns (and threatening various actions if these are not addressed);
- requesting copies of a company's register of members and contacting other shareholders with a view to obtaining support for certain actions;
- requisitioning a general meeting to try and effect changes (most often to the board of directors); and
- taking or threatening to take legal action (eg derivative actions) against the board.
In the UK, in addition to lobbying, activist shareholders have a variety of legal tools at their disposal; the majority of these are found in the Companies Act 2006.
|Frequency of activist goals in the UK over the past four years|
|Goal||Number of instances|
|Gain board representation||34|
|Remove CEO or other board members||14|
|Push for the sale of the company to a third party||9|
|Influence the executive remuneration policy||6|
|Push for the spin-off or sale of a business division||6|
|Oppose takeover terms||6|
|Push for the issue of equity||5|
|Push for the sale or retention of assets||4|
|Push for the declaration of dividends||4|
|Change the board composition||4|
|Push for general cost cutting||3|
|Push for the acquisition of a third party||2|
|Takeover the company||2|
|Influence the business focus||2|
|Return excess cash to shareholders||1|
|Push for a merger with a third party||1|
|Push for a restructuring of the business||1|
|Push for the closure of a business unit||1|
|Oppose an acquisition by a third party||1|
|Push for the provision of accurate information by the company||1|
|Push for a restructuring of company debt||1|
|Push for the amendment of a company Bylaw||1|
|Push the company to under-leverage||1|
Pass or block resolutions Shareholders can pass ordinary resolutions with 50%+1 votes and special resolutions with 75% of votes. These percentages are of those shareholders who attend and vote, so in practice, a lower percentage is often sufficient. Shareholders with more than 10% of a company's voting rights may be able to block a takeover offer (as opposed to a scheme of arrangement) by preventing the bidder from squeezing out minority shareholders under section 979.
"One key distinction between the US and UK is use of the media"
Shareholders' statement Shareholders holding five percent of the total voting rights, or at least 100 shareholders in number, can require the company to circulate a statement relating to a matter referred to in a proposed resolution to be considered at a meeting or other business to be dealt with at a meeting.
Requisition a resolution, or require business to be dealt with, at AGM Shareholders of a public company may require the company to put resolutions before the AGM. Shareholders of a traded company may also request the company to deal with certain businesses at an AGM. The required threshold is five percent of total voting rights or at least 100 shareholders, and is subject to the same caveats as shareholder's power to requisition a meeting.
Request an independent report on a poll Shareholders holding five percent of total voting rights, or at least 100 shareholders in number, of a company on the Main Market can request an independent report on a poll taken, or to be taken at a general meeting. In practice, this is unlikely to be required for public companies whose resolutions would usually be taken by poll (as opposed to a show of hands) by a professional registrar.
Questions at meetings A shareholder of a traded company can require an answer to a question relating to the business of a general meeting. In certain circumstances the board may refuse to answer (including if it would not be in the interests of the company). However, this would likely be viewed unfavourably by shareholders.
Right to inspect register of members
Any shareholder of the company may inspect the register of members subject to a 'proper purpose' test to be applied by the courts on application of the company. According to the Institute of Chartered Secretaries and Administrators (ICSA) guidance, 'proper purpose' would include shareholders seeking to contact other shareholders regarding an exercise of their rights.
However, inspection of the shareholder register may be of limited use because it records only legal ownership. Activist shareholders can investigate the identities of beneficial shareholders of listed companies by looking at disclosures made under DTR 5 or AIM Rule 17 (see below).
Removal and appointment of directors
Shareholders can remove a director by ordinary resolution at a general meeting. Further, in accordance with the UK Corporate Governance Code, shareholders of FTSE 350 companies are expected to be afforded the opportunity to vote against a resolution for the appointment of a new director or the re-election of an existing director annually. All other directors should be subject to election by shareholders at the first AGM after their appointment, and to re-election thereafter at intervals of no more than three years.
Unfair prejudice Shareholders are allowed to bring an action in court for unfair prejudice on the grounds that: the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the shareholders; or that an actual or proposed act or omission of the company is or would be so prejudicial.
Derivative claim Part 11 allows shareholders of a company to bring a derivative claim against a director or a third party in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of a company.
DTR and AIM rules
Under the Disclosure and Transparency Rules (DTR), shareholders of a UK company whose shares are traded on the LSE Main Market or AIM (or non-UK companies on the Main Exchange for which the UK is their home member state) are subject to special requirements. Broadly speaking, these shareholders must notify the company (a notification that becomes public) of the percentage of voting rights they hold directly and indirectly if, as a result of an acquisition or disposal of shares or financial instruments, the percentage of those voting rights reaches, exceeds or falls below certain levels.
For companies on AIM and UK companies on the Main Market, the thresholds are three percent and each one percent thereafter. For non-UK companies on the Main Market, the thresholds are five percent, 10%, 15%, 20%, 25%, 30%, 50% and 75%.
This regime may assist activists in notifying them of other shareholders with whom they could seek to work.
The UK Takeover Panel does not normally regard shareholders voting together as 'acting in concert'. However, activist shareholders working together may be presumed to be 'acting in concert' if together they requisition, or threaten to requisition, a resolution seeking board control at a general meeting of a company to which the Takeover Code (Code) applies. In such a case, the mandatory offer requirement could be triggered if, following the requisition or threat, they acquire interests in shares carrying 30% or more of the company's voting rights. It could also be triggered if they are already collectively interested in shares carrying 30% or more of the voting rights and any further interests are acquired.
Historically the Code has taken the view that shareholders should determine whether a company should be sold. For this reason, target directors are prohibited from taking action that would frustrate an offer without shareholder approval. Following Kraft's bid for Cadbury in 2011, the Code was changed to set a 28-day bid deadline following the public identification of a potential bidder (except where the company is undergoing a formal sales process). Targets are now therefore able to 'just say no' and refuse to engage, knowing that once the 28-day period ends, the bidder will have to either announce a hostile offer or walk away and stay away for six months. This means that bidders are increasingly reliant on target shareholders to engage with their board to force them to engage with bidders. The general tendency of institutions to support target management and avoid public statements may begin to break down if boards do 'just say no' and shareholders are thereby deprived of the opportunity to consider bids that they might have accepted.
US versus UK
While US shareholder activists are now seen more frequently on this side of the Atlantic, the UK still has some catching up to do. Bill Ackman, founder and CEO of Pershing Square Capital Management has predicted there will be more activity in the UK, but that Europe is "10 years behind the US in the degree of shareholder activism and in how directors respond".
Pioneered by the likes of Carl Icahn and T Boone Pickens, activism in the US continues to rise. It is now common for US public companies to spend time preparing for possible shareholder activist campaigns and regularly communicate with their shareholder base in order to manage the issue. Common preparatory work would include regularly updating directors in this area, conducting internal reviews periodically to identify any issues which activists may raise, and meeting regularly with the largest institutional investors. This is not yet the norm for UK companies.
Additionally, recent legal and regulatory discussions in the US may favour US activists. These include the acceptable use of poison pills, changes to corporate voting rules, the role and power of proxy advisers, and hedge fund disclosures of their stakebuilding. Such discussions anticipate the possible legal and regulatory changes in the near future.
Even in the prevailing legal landscape, activists arguably have more leverage in the US because the practice has been tried and tested in the local market. In addition to the goals listed in the table opposite, Activist Insight has recorded campaigns targeting US companies to replace management, oppose proxy contests, influence succession planning, and push for:
- the company to eliminate a staggered board of directors;
- board independence;
- separation of the chairman and CEO roles;
- companies to focus on growth strategies;
- redemption or amendment of poison pills;
- adoption of the majority vote standard;
- opposing director nominations;
- share repurchase;
- operation efficiency;
- or oppose the merger of shares;
- the replacement of the company's auditor; and
- shareholder proposals.
As in the UK, the most common goal of activists in the US is to gain board representation. Over the last four years, Activist Insight recorded 526 campaigns with the goal of gaining representation on a US company board.
One key distinction between the US and UK is use of the media. Activists in the US have embraced media campaigns, while UK shareholders have traditionally preferred a more private approach. One notable UK activist, the fund manager Hermes, disclosed that they execute their activism predominantly through private intervention and approaching the board quietly, as opposed to the use of shareholder proposals at the company's annual meetings or filing of proxy statements.
Shareholder activism in the UK is clearly on the rise. US funds are investing in UK companies. Essar Energy, WM Morrison, Bwin.Party and Burberry are just some of the recent examples of campaigns on this side of the Atlantic. The UK Corporate Governance Code, Stewardship Code and Kay Review have created a friendly climate for shareholder engagement. Though traditionally UK shareholders have preferred to approach boards quietly to voice their concerns, activists targeting UK companies have now adopted more public and aggressive tactics, following in the footsteps of their American counterparts. These activists are able to launch their campaigns using the tools provided by the UK legislative and regulatory framework. In light of the anticipated growing activity in the UK, both activists and companies will need to maintain a thorough understanding of the main considerations surrounding shareholder activism and the tools available to them.
By Scott Hopkins and Lorenzo Corte, partners at Skadden Arps Slate Meagher & Flom in London
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