Although shareholder activism in Australia has undoubtedly grown in recent years, 2017 was particularly interesting in that a number of high-profile ASX-listed companies (Woolworths, Origin Energy and BHP to name a few) faced shareholder-requisitioned resolutions from shareholders concerned about the social and environmental impact of their investments.
The majority of these resolutions sought to encourage companies to disclose climate change risks, while two of them also sought disclosure of human rights-related risks and compliance. Although these resolutions weren’t supported by the majority of shareholders (in fact, many of these resolutions were brought by less than 1 per cent of shareholders), there’s a growing recognition that the act of simply putting forward these resolutions is having an impact on companies. For example, a shareholder who’s vocal in their criticism of a company’s inadequate climate change risk reporting or their board’s lack of gender diversity may generate a good deal of negative publicity for the company, as well as distract its management from other pressing concerns. This type of activity has generated a lot of discussion about shareholder activism more broadly and anxiety on the part of listed companies about how to prepare for it.
What is shareholder activism?
“Shareholder activism” is a vague term – it generally refers to shareholders exercising the rights attached to their shares to try to change the governance, performance or strategy of their company. Historically, shareholder activists operated on the fringes with little support from other shareholders. In recent years, however, there’s been a softening in attitude towards activists, and a wide range of investors – from individual shareholders to large institutional investors (such as superannuation funds) – are now more likely to support activist shareholders.
Shareholder activists generally exercise these rights in one of two ways:
- Investors or activist funds (foreign and domestic) actively seek out and take a stake in a company (often one that has perceived problems, such as an under-performing board or share price) with the aim of disrupting the existing management and the board, and driving rapid change in the direction of the company.
- Shareholders at general meeting, dissatisfied with the direction of the business or the decisions of the board, seek to make changes in relation to the governance of the company, operational issues or environmental and other social issues.
Shareholder groups have become highly effective in monitoring and influencing a company’s actions, and companies are increasingly under pressure worldwide to provide more information about, and put in place strategies to address, the environmental, social and governance risks facing their businesses.
For companies, shareholder activism is a double-edged sword; while it gives a company the opportunity to address areas of weakness highlighted by an activist (such as the company’s financial health), it also provides an avenue for self-interested investors who are overly focused on maximising short-term profit at the expense of long-term value. Campaigns by shareholder activists can also be destabilising and can distract management from focusing on what may be more important issues for a company.
What tools do shareholder activists use?
The Corporations Act 2001 (Cth) and the ASX Listing Rules provide a range of rights for shareholders, all of which may assist an activist shareholder to pursue their agenda.
The shareholders’ ability to call meetings of the company and propose resolutions means that dissatisfied shareholders have a powerful tool at their disposal for keeping directors accountable. For example, shareholder activists often use their legal rights to block the re-election of directors or use the “two-strikes rule” to trigger a spill resolution. This tactic is currently being employed by Solomon Lew, whose company Premier Investments Limited (Premier) has requested a copy of the Myer shareholder register in preparation for its proposed call for an extraordinary general meeting at which it proposes to put forward an alternative board.
Activist shareholders also have powerful non-legal tools at their disposal. Social media, for example, is increasingly being used by activists in the US to vent opposition to a company’s performance or proposed strategy. Given the effectiveness of its reach, it’s likely that social media will increasingly be employed by activist shareholders in Australia.
Preparing for and responding to shareholder activism
Fortunately, there are several strategies that a company can put in place to:
- minimise the risk that it will become the target of shareholder activism; and
- effectively respond to shareholder activism if it’s targeted.
In summary, a company that wants to minimise the risk that it will become the target of shareholder activism should:
Communicate regularly with its shareholders by:
- being open to shareholder input, engaging with investors and focussing on their concerns;
- proactively managing communications with shareholders (not leave it to the media);
- regularly communicating the company’s strategic plan and long-term vision to its shareholder base;
- reporting regularly to shareholders on the status of long-term projects; and
- articulating clear justifications for board and management decisions.
Put in place a communication plan to establish a process for:
- public messaging (for example, public relation campaigns and media releases);
- employee outreach; and
- meeting with stakeholders, such as environmental groups, to head off or prepare for the possibility of an activist campaign.
Monitor its share register to:
- understand its shareholders – for example, are any of them known for particular views or actions?
- note any unusual activity before an annual general meeting;
- note any significant changes in the size of holdings; and
- detect possible collective action or associations.
Put in place a core response team that:
- includes both internal personnel (such as senior management, directors and general counsel) and external advisers; and
- regularly works through possible activist scenarios to ensure the company is prepared and has considered the broader crisis-management ramifications of a high-profile attack.
If the board and management have put in place, and followed, sound strategies to prepare for activism, the company should be able to respond quickly and confidently to a shareholder activist’s approach.
Once a company has been targeted by an activist shareholder, there are several things it should do, including:
- be mindful of the directors’ duty to act in the best interest of the company;
- check whether the activists are acting in compliance with the CA 2001;
- ensure the company complies with the requirements of the CA 2001;
- implement the communication strategies put in place in anticipation of such activism;
- engage with the activists to understand their concerns and remain open to discussing those concerns;
- ensure appropriate engagement with regulators; and
- consider engaging an expert public relations adviser, as well as financial and legal advisers.
A text book example of an effective response to shareholder activism occurred in 2017, when BHP became a public target for US hedge fund Elliot Associates (Elliott). On receiving Elliott’s proposals, BHP:
- carefully assessed Elliott’s proposals, methodically worked through and countered each one, then quickly released its response;
- maintained an open dialogue with Elliott; and
- ensured it remained aware of shareholder sentiment.
By thinking through how they will respond to activism and following the strategies they have implemented, companies (rather than activists) will be in a position to set the agenda.
Practical Law Australia Company Law provides detailed guidance and tools to help lawyers navigate this complex, dynamic area of the law, including:
- Practice note: Shareholder activism
- Practice note: Climate change and shareholder activism
- Checklist: Key strategies for preparing for shareholder activism
- Checklist: Key strategies for responding to an approach by activist shareholders
- Checklist: Environmental, social and governance risks: disclosure requirements
- Checklist: Examples of shareholder-requisitioned climate change resolutions affecting ASX 200 listed entities in 2017
Our expertly drafted resources help lawyers to decide what questions to ask, what law applies and why. To learn more about Practical Law Australia or to request a trial, visit the website.