Lifecycle of a Business – Shareholder activism: What can a company do?

26 November 2024
News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, including funding, employment and commercial contracts, but it’s now time to discuss when things go wrong…

Shareholder activism: What can a company do?

We have previously written about the rise of shareholder activism (the article can be accessed here). At its heart, shareholder activism is a way in which shareholders in a company can seek to influence the direction of a company, challenge approaches that are being taken, or have their voices heard. This can relate to matters such as the financials of the company (which in turn can affect distributions to shareholders) to its business affairs.

This article looks at some recent examples of shareholders flexing their muscles and considers how disruption may be minimised in their general meetings; a key place in which activists play a part.

Recent Examples

This year has seen ExxonMobil bringing claims against shareholders in the US. They argued that too many petitions were being put to the company, particularly in relation to climate change, stating that, “Our lawsuit put a spotlight on the abuse of the shareholder-access system”. The case has since been dismissed but has underlined that climate change remains high on the agenda for activist shareholders.

It also saw the activist investor Eminence Capital increasing its stake in Reckitt, the hygiene, health and nutrition brand. This came at a time when the company’s share price fell following a court order in the US for it to pay $60 million in connection with a claim brought in relation to one of its baby formulas. Increasing shareholding is a tactic a number of activist shareholders employ, in order to increase their voting power.

More recently, AJ Investments is liaising with other shareholders regarding its push for the sale of Ubisoft. This has come after calls were also raised for changes to the management of the company, including for the CEO to step down following poor performance by the company in the video game market against its key competitors.

Shareholder Rights

Certain rights are afforded to shareholders in respect of general meetings, many of which are used by activists. These include:

Shareholders holding 5% of the paid-up voting share capital have the right to call for a general meeting to be held and for resolutions to be voted on. This then starts the process by which the directors of the company have to arrange the meeting; a failure to do so will mean that the shareholders can arrange for it to be held.
Shareholders can also require a statement of up to 1,000 words to be circulated to the shareholders of the company relating to a resolution that is to be put to a general meeting or other business to be dealt with at such meeting. Broadly speaking, the company must circulate this statement if it’s received from a shareholder or shareholders holding at least 5% of the voting rights or at least 100 shareholders with the right to vote and who hold shares in the company on which at least £100 has been paid (on average).
At the meeting itself, shareholders may have the right to speak, which can mean posing questions to the directors.
As long as they have voting rights, shareholders can vote at general meetings which means that they can seek to block, or at least record a dissatisfaction, of matters being discussed at the meetings. If they can form a voting block with other shareholders, minority shareholders may, for example, be able to stop special resolutions from being passed.

General Meeting

Once a general meeting has been called, the company and its directors can take steps to assist with the smooth running of proceedings.

Prior to the start, the chair should be fully prepared, having sought advice on their role and duties at the general meeting and the process for matters to pass. A chair’s script is often prepared which will set out, amongst other matters, the resolutions to be put to the meeting and the voting procedures. If possible, the chair should find out as much about the shareholders attending as possible, including their main concerns and objectives.

At the meeting itself, care should be taken to ensure that the relevant persons are in fact able to attend the meeting and speak and vote on the matters that may be put forward. A key form of activism is for shareholders to put questions to a general meeting and to vote for or against certain matters.

By their nature, general meetings provide a space for active debate and to allow the chance for opinions to be aired and information regarding the company to be sought. However, certain powers are afforded to the chair where matters go beyond this (which may be set out in the articles of association of the company, which should be checked carefully prior to the start of the meeting). Examples include:

So that the general meeting can progress, anyone causing a disruption should be encouraged to ask questions instead or be given the opportunity to discuss the particular matter with the company outside of the meeting. Where a number of people are involved in the disruption, they could be asked to appoint one representative.
An adjournment of the meeting may be utilised for the purposes of halting any disruptions and regaining the proper order of proceedings.
The ultimate final step is for the chair to remove someone from the meeting. It is advisable for warnings to be given beforehand and for the consent of the meeting to be obtained prior to the removal of such persons. Practically speaking, any removal of shareholders should be dealt with in a reasonable way.

The key thing to keep in mind is that companies should not automatically assume that all shareholder activism is bad and that they should take all steps possible to stop engagement at general meetings. Professor Alex Edmans (who has been a speaker at a Forsters’ event for full disclosure) has considered activism in detail. His words that “engaged ownership generally create long-term value for shareholders” should be remembered and his exhortation that “rather than viewing activism as blanketly bad (or blanketly good) and seeking to regulate it, we should understand the value of—and seek to promote—the right kind of engagement” is an important one to remember. However, regardless of where you stand on the merits of activism the key takeaway is that no-one will want a disrupted, disjointed, badly run meeting, so companies and executives would do well to prepare themselves along the lines outlined in this article.

Disclaimer

This note reflects the law as at 18 November 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Author

Aaron Morris

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Lifecycle of a Business – Protections for Minority Shareholders

7 February 2024
News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So far, we’ve covered initial considerations, directors and funding, so now let’s have a think about “Shareholders”.

Protections for Minority Shareholders

Minority shareholders are those who cannot, by themselves, control the direction a company will take and, as a result, may be adversely affected by decisions made by the majority shareholder(s). This article sets out some of the rights a minority shareholder may seek in a private limited company in England and Wales and those provisions that majority shareholders can expect their minority shareholders to raise.

Legislation

Legislation offers certain limited protections for minority shareholders, some of which were mentioned in our last article, ‘What are your rights as a shareholder?’. In addition to the points mentioned in that article:

a shareholder can block special resolutions where they, either by themselves or with other shareholders, hold more than 25% of the voting shares in the company. This can stop key matters passing, such as changing the company’s articles of association;
a shareholder can cause a general meeting of the shareholders to be called where they, either by themselves or with other shareholders, hold at least 5% of the paid-up shares that have the right to vote. Alternatively, those shareholders with 5% of the voting rights can arrange for a written resolution to be circulated. Either action will enable the shareholder(s) to put matters in front of the other shareholders for them to vote on;
any shareholder can bring a claim for unfair prejudice against the company (where actions have been, or are being, taken that are, or would be, unfairly prejudicial to the shareholders, or some of them), although it should be noted that a common outcome of this process is that the court orders the majority shareholder to buy out the minority shareholder;
any shareholder can bring a derivative action against a director for actions such as negligence, default, breach of duty or a breach of trust. However, bear in mind that this is an action brought in the name of the company and so any damages recovered would not go to the shareholder; and
in certain qualifying cases, where a shareholder has held their shares for at least six of the preceding 18 months, they can apply to the court for the winding-up of the company, although it should be noted that the bar for success with this route is high.

Given the limited nature of the statutory protections on offer, minority shareholders often seek to negotiate contractual minority protections at the outset of their investment.

Contractual Protections

Contractual protections are usually found in the company’s articles of association and any shareholders’ agreement or investment agreement (which governs the relationship between the shareholders of a company) that is in place. They can include the following (subject to the specific requirements of the transaction and negotiations):

Reserved Matters: A majority shareholder may agree a list of matters which the company cannot carry out without the consent of the minority shareholder(s). These are usually the most important matters relating to the company which would affect a minority shareholder’s position, such as changes being made to the company’s articles of association, the taking out of a substantial loan by the company, the entry into significant contracts by it or the winding-up of the company.
Pre-Emption (Share Issue): Pre-emption rights on an issue of shares by the company enable a minority shareholder to avoid their shareholding being diluted by the future issue of new shares to third parties (or other shareholders), by giving the minority shareholder a right of first refusal to take up any of the new shares, usually in proportion to their shareholding at the time of issue. If a contractual protection is not included, and reliance is instead placed on the statutory pre-emption right, those holding 75% of the voting shares in the company can disapply the provision. That said, the purchase price for a minority stake can be substantial.
Pre-Emption (Share Transfer): Similarly, pre-emption rights can be included in respect of a transfer of shares, giving the minority shareholder a right to purchase certain of the shares of an outgoing shareholder, usually in proportion to the shares the minority shareholder already holds in the company. However, this can again be a costly process and the minority shareholder will need to ensure they have the funds to purchase the shares.
Board of Directors: A minority shareholder can, if its minority shareholding is appropriately significant (usually by reference to a percentage shareholding), request the right to appoint a director to the board and for that person to be present in order for any meeting to be quorate. If they are not able to obtain this right, they may be able to appoint an observer at board meetings so that they are aware of matters discussed by the board, albeit without having the voting rights that come with being a director.
Exit Right: Tag-along rights provide an exit route for minority shareholders where there will be a change of control of the company. Here, they are able to sell their shares to the same purchaser of the majority shareholder’s shares and on the same terms. This ensures that a consistent value is paid for the shares in the company and avoids the minority shareholder(s) being left in the business with a new party. Additionally, a minority shareholder may seek to include a put option, to ensure that if a dispute arises between the shareholders, for example, they will receive an agreed value for their shares or have a mechanism in place for an independent third party to confirm the value.
Information Rights: In addition to the statutory right to see certain company information, such as the company’s annual accounts and directors’ report, a minority shareholder may be able to obtain management reports throughout the year as a means of monitoring their investment in, and the performance of, the company.
Dividend Policy: Having a clear dividend policy in place will help to give certainty to a minority shareholder as to when they are likely to receive a dividend from the company in respect of their investment. Without this, minority shareholders are unable to pass or block an ordinary resolution to declare dividends.
Business Plan: In a joint venture scenario, a minority shareholder is likely to want to have a say in the signing-off of the annual business plan of the company, to ensure that the commercial objectives of the parties are clearly aligned.

Protections of this nature have been in the news recently with Sir Jim Ratcliffe’s investment into Manchester United. It is reported that he will have a right of first refusal for a year if the Glazer family sell their shares, but the Glazer family will be able to drag-along Sir Jim Ratcliffe if there is a full sale of the club after 18 months of the completion of his investment and provided that he receives at least $33 per share.

Conclusion

If you are a minority shareholder investing in a company, or a majority shareholder who has received a request for protections from an incoming investor, please do not hesitate to get in touch with a member of our Corporate team, who will be happy to assist you.

Disclaimer

This note reflects the law as at 2 February 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Author

Aaron Morris

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International Bar Association Tech M&A conference – Key Takeaways

3 April 2023
News

Forsters attended the International Bar Association Tech M&A conference in Berlin on 23 and 24 March. While the Tech sector is being impacted by global macroeconomic conditions, there was a lot of optimism. Here are our key takeaways:

The Tech M&A market has seen exponential growth for two decades, with 7 * growth in deal volumes. This has slowed down recently but the market is by its nature innovative, and so there remains a very positive outlook in the medium to long term. In particular, periods of instability are typically followed by a surge in M&A and investment activity once stakeholders gain confidence that valuations have stabilised, and there is a sense that there is a lot of ‘dry powder’ out there.
Like in the UK, Founders of early stage companies across multiple countries are faced with a market of lower valuations and have been slowing their spend to extend existing cash so far as possible. Investors have been even more selective on where they place their money, with some moving away from the typical 1* preference as a way of balancing risk (though a mention of 8* having been proposed is concerning).
Cybersecurity is a top 3 risk to businesses, with a range of solutions for stakeholders to consider when looking to protect themselves, such as checking that standards and measures have been implemented and monitored, insurance, and technical diligence, alongside legal diligence and warranties on deals. This should be considered on all deals involving data and secret information, not just those with a significant amount of personal data involved. Cybersecurity is a c-suite level conversation for businesses.
Employee incentive schemes remain an important way of rewarding management and employees across the globe, with many taking the form of share/stock plans and phantom share schemes.
Data remains a big topic. Tech businesses with international reach need to be on top of their obligations across various data protection frameworks and need an understanding of how they operate together, considering transfer impact assessments, the UK and EU data frameworks, the US executive order, and more.

Author

Daniel Bryan

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Aaron Morris

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Shareholders speaking up – Aaron Morris writes for CGI

7 June 2022
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Corporate Senior Associate, Aaron Morris, writes for CGI’s G and C Digital Magazine, discussing if supply chain challenges and ESG concerns will drive an increase in shareholder activism.

The article, entitled ‘Shareholders speaking up’ was first published in CGI’s G and C Digital Magazine on 19 May 2022.

Will supply chain challenges and ESG concerns drive an increase in shareholder activism?

As the 2022 AGM season kicks-off, the ever-changing global situation means that shareholders are, more than ever, taking a keen interest in the way in which their companies are being run. In turn, businesses are increasingly facing the challenge of balancing the need to increase profits – especially after a tumultuous couple of years for many – while acting in a way that demonstrates that their business is morally and ethically attuned to the world in which we live.

These factors, along with the government opening up the economy after two years of restrictions, mean that we are likely to see a rise in shareholder activism this year; a continuation of a trend seen over recent years, as reported by IR Magazine. At its core, this relates to shareholders exercising the rights attached to their shares or using their position as a key shareholder of a company to influence changes in how the business is run and the policies it pursues. They may do so by, for example, privately exerting pressure on the board, or putting resolutions to or raising other matters at general meetings.

ESG and sustainability issues are becoming more pressing in the minds of shareholders and are increasingly being used by them as a way to hold businesses to account. The number of environment related issues raised at AGMs is likely to go up following the COP26 summit at the end of last year, as investors will want to start seeing clear objectives for implementing longer term environmental strategies. Greater diversity – particularly ethnic diversity – on boards of directors also continues to be an important topic and, while some progress has been made, there is still a long way to go. Other issues, such as employee wages, are also likely to feature, with Legal & General Investment Management joining other shareholders of Sainsbury’s in pursuing wage increases for staff. This will be particularly pertinent in light of the cost of living crisis.

Impact of the war in Ukraine

Investors would have watched on in disbelief as events unfolded around the Russian invasion of Ukraine, and it seems certain that these actions will lead to an increase in shareholder activism – to the extent they have not already done so. Shareholders are likely to be concerned with any activity a company has in Russia and with Russian owned companies, especially following government-imposed sanctions. The impact of failing to cease business in Russia has already been felt by companies such as Coca-Cola who, due to their slow actions, faced calls on social media for a boycott.

Investors will be conscious of the operational implications that ceasing business in a particular country can have, but also the severe reputational damage that can result from not acting quickly enough. This is particularly true in light of the atrocities in Ukraine. However, as Andrew Edgecliffe-Johnson, the US Business Editor for the Financial Times reports, ‘With the exception of the oil and
gas giants with multibillion-dollar ventures in Russia, most companies’ principled statements have so far come at a pretty low cost.’ While a minority have withdrawn from Russia completely, he said ‘most have just suspended operations, halted new investments or curtailed the range of products and services they offer,’ and due to the facts that have come to light, ‘the prospect of a quick resolution that lets western brands feel fine about returning to the shopping malls of Moscow now look increasingly remote.’ It will therefore be interesting to see the extent to which shareholders push for a complete withdrawal from Russia and how this process will be managed.

The conflict in Ukraine, the COVID-19 pandemic and the after-effects of Brexit are affecting supply chains in a number of industries because of problems such as staff absences through illness and a lack of resources. The renewed lockdowns in China have further exacerbated the issue as the country pursues its zero-COVID policy, resulting in non-essential factories having to suspend production and cargo ships having no option but to wait outside ports. In an article published by Reuters, Foxconn – which makes iPhones for Apple – recently reported that its revenue could reduce by up to 3% this year, which it has put down to the cost of resources. Additionally, Russia and Ukraine produce
the majority of the world’s supply of sunflower oil of which we are starting to see a lack; this is having a knock-on effect on the manufacture of products requiring this ingredient.

Supply chains and deglobalisation

During supply chain disruption, the idea of deglobalisation reappears as companies and countries realise how dependent they are on certain suppliers.

In respect of both the supply chain issue and a possible move towards deglobalisation, activist shareholders are likely to be vocal about the increase in costs as a direct result of demand exceeding supply and delays in the worldwide transportation of goods and resources. Deglobalisation is arguably another determinant of the rise in costs and prices as it leads to a decrease in competition. Shareholders will therefore be keen to see directors adopting policies to counteract this to protect distributions and the value of their shares. There may be a push for raw materials to be supplied from different locations where possible, for manufacturing to be moved to regions deemed more stable and dependable, for funding to be invested in research and development in an attempt to find alternatives and for companies to stockpile goods as part of a contingency plan. As an example, the BBC has reported that Edible Oils has started to increase its production of other oils as a replacement for sunflower oil. Where expenses cannot be kept down, we may also see a move towards cost-saving measures which could include redundancies. Management teams who are unable to meet the challenge of offsetting rising operating rates may also find that shareholders refrain from approving directors’ remuneration packages as a result of poor performance; they may even seek to replace them with a new executive team.

Twitter purchase

Finally, in the United States, we have seen a different kind of shareholder activism through Elon Musk’s purchase of Twitter. Musk initially bought a 9.2% stake in the company to become its second largest shareholder. After his first launch of a takeover was met with Twitter passing a ‘poison pill’ provision, he has since had a $44 billion bid accepted. Such shareholder activism is seemingly being undertaken so that Musk can start to effect changes in the way Twitter operates, particularly with regard to free speech. Takeovers of this size are unlikely to be discussed at AGMs in the UK, but there are some examples of investors pushing for the sale of a company following poor performance. For example, the Financial Times reported that Phase 2 Partners, the US-based hedge fund, is applying pressure to the board of TP ICAP to sell, following a drop of 45% in the company share price over the past year and concerns about the existing governance and ownership structure.

This article has highlighted just a few of the areas in which shareholders are likely to apply pressure, but the current global political and economic position is unlike many seen before, it will be interesting to see what issues arise from shareholder activism at this year’s AGMs.

Author

Aaron Morris

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