Insights

16/12/16

Shareholder activism – more than one way to skin a cat

Our review of the results of the 2016 AGM season indicates that shareholder activism is alive and well in Australia.  
 
It is a fundamental principle of Australian corporate law that while the day-to-day management of the affairs of a company is the responsibility of the Board of Directors, the Board in turn is accountable to the shareholders of the company.  The Annual General Meeting (AGM) represents the point in time when this principle collides with the practice of shareholder activism.
 
The term “shareholder activism” is a vague one, but generally refers to the exercise of rights by shareholders in an attempt to influence the strategy, governance or performance of their company.  In simple terms those rights are threefold: shareholders can vote, sell or sue.
 
The Corporations Act 2001 (Cth) (Act) actually provides very fertile basis for the exercise of all these rights.  The statutory basis for derivative actions has been part of Australian corporate law since 13 March 2000 after it was initially introduced through the Corporate Law Economic Reform Program Act 1999 (Cth), and this, coupled with the growth of litigation funding, has seen the emergence of shareholder class actions as a real threat to under-performing companies.  More recently, we have seen the non-binding vote on executive remuneration under section 250R emerge as a useful, albeit somewhat blunt tool for shareholder activism.
 
There are also the even longer standing provisions in what is now Part 2G.2 of the Act, among them sections 249D, 249F, 249N and 249P, which can be used to requisition a general meeting, to propose resolutions at a general meeting or provide commentary on resolutions.  Most commonly, one or more of these provisions is employed for the purpose of seeking changes to the Board.  
 
Following completion of the 2016 AGM season, we decided to undertake research based on announced incidences of shareholder activism involving ASX listed companies.  Our aim was to develop an objective measure of the levels of activism which, anecdotally at least, appear to be on the rise.
 
The ASX Listing Rules require a listed company to announce that it has received a notice under section 249D, 249F or 249N (or other similar provisions) within two business days of receipt.  During that short period it is common for companies to attempt to enter into discussions with the relevant shareholder (or shareholders) to understand their concerns and to seek to resolve them prior to announcing receipt of a notice.  Consequently, there may be more notices served on companies than were announced to the ASX.
 
A cursory glance suggests that of the approximately 29 ASX-listed companies to announce receipt of a notice under section 249D, 249F or 249N this year, 11 such notices proceeded to general meeting and of those, only 8 were successful to any degree.  This suggests that the real story of shareholder activism is a bit more subtle.  In at least 11 other cases, the notices were withdrawn, as they were successful in “encouraging” all or some of the affected directors to resign ahead of a meeting being convened or getting their candidate appointed.  Today’s searching and register analytics tools mean improved confidence of outcome and a level of certainty about whether a vote can be won, without a meeting having to be held, and this may be resulting in few Board tussles actually being resolved on the floor of AGMs.
 
On the whole, it appears that shareholder activists tend to be judicious about their use of formal notices, with the majority being served in the period between the beginning of March and the end of July.  As AGM season looms, shareholders have an opportunity to use the scheduled director re-elections to achieve a similar result.
 
It is interesting to observe that in October and November 2016, there were 427 director resignations across ASX listed companies.  On a rough count, 47 of those resignations related to directors, mainly of small to mid-cap mining, IT or biotechnology companies, who were noted in their company’s notice of AGM as seeking re-election, then either resigned before or were not re-elected at the AGM.  Many of the directors who resigned before the relevant AGM did so in a time period which indicates they would have been aware of the shareholder proxies received by the company - a case of “jump before you’re pushed”.  The remaining 380 resignations included directors who had chosen not to stand for re-election at their AGM or who were removed as a consequence of a deed of company arrangement.
 
Shareholder activism – at least the kind that manifests itself in an attempt to spill the Board – is not always easy to predict and the emergence of a “coalition of the willing” among disgruntled shareholders can be sudden.  In our experience, while many listed companies subscribe to the view that takeover defence readiness is a key responsibility of the Board, few are sufficiently prepared to effectively respond to and manage a shareholder revolt or other forms of activism.  
 
Here are four tips to help you be prepared for an attempt to spill the Board:
 
  1. Have a draft form of announcement ready to go.  Announcement within two business days can be practically difficult to manage and it is important to ensure that the company is in control of the narrative.  Focus on three key messages which emphasise that the directors and management have a clear and achievable plan to realise shareholder value in the medium term.  
     
  2. As far as practical, ensure good investor relations.  Be aware of investor sentiment; when you see a signed notice to spill the Board it’s too late to ask a shareholder why they are not more supportive.  Ongoing and timely communication is key to ensuring that shareholders understand the direction that the company is taking and are along for the journey. 
     
  3. Know your shareholder register.  Review it regularly to determine whether it contains any associated shareholder groups or known shareholder activists.  Know who are buyers and sellers of your company’s stock.  Where possible, it is advisable to engage third parties to conduct searches to ‘look through’ the registered nominee holders to understand who beneficially holds any shares.
     
  4. Get legal advice early.  If you know that there are shareholder activists who are agitating and threatening to serve notices under the 249D or any other section, get a lawyer on board to help you develop a strategy.  These notices have technical requirements and not every notice is valid under the Act.  There are also some principles governing the conduct of the Board in responding to the notice which need to be observed and which, if not, can actually expose the Board to claims of misuse of position.

 

*Amy Joseph, Summer Clerk, also contributed to this insight.
 

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Garth Landers
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