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