Shareholders' Rights & Shareholder Activism 2023 Comparisons

In the US, companies are formed under individual state business entity laws. While each state’s business entity laws are unique in detail, each state generally provides for two dominant forms of company: the corporation and the limited liability company (LLC). Both types are treated as distinct legal persons and offer limited liability to their equity holders, meaning that the equity holder is not liable for the entity’s obligations, except under extraordinary circumstances.

The LLC is commonly used for privately held companies, given the greater flexibility offered by state LLC laws compared to corporate statutes. LLCs may also have more flexible income tax characteristics under US federal and state tax laws, including the possibility of single-level pass-through taxation regardless of the number and nature of an LLC’s equity holders. In contrast, with very limited exception, almost all publicly traded companies in the US are corporations, due to income tax laws and the capital and governance structure offered by state corporation laws.

Both corporations and LLCs in the US may be freely owned by foreign investors, and the type chosen is usually related to tax characteristics and governance issues, as outlined in 1.1 Types of Company.

Corporations generally have two classes of shares, common and preferred, as provided by each state’s corporation law. Preferred shares may carry special rights and privileges, including:

• mandatory dividends;
• enhanced, limited or no voting rights;
• priority pay-outs upon a liquidity event or the liquidation of the corporation;
• rights to convert into another class of stock or property; or
• rights regarding redemption of the preferred shares (call rights where the company can elect to redeem, and put rights where the holders can require the company to redeem).

In addition, a class of preferred shares may be broken down further into series, each of which has may have variations in its characteristics from other series.

Common shares, in contrast, are typically entitled to vote in all matters requiring shareholder approval and are entitled to dividends only when and if dividends are declared by the board of directors. While corporations need not have preferred shares, most state laws require a corporation to have common shares.

LLCs are not required to have any particular type of shares or equity interests, and the capital structure is generally left to private ordering by the LLC’s owners. Nevertheless, some LLCs may follow the corporate model, with classes of ownership interests that track common and preferred equity classes. In addition, the shares of LLCs do not need to be certificated.

Given the extent of private ordering permitted by most state LLC statutes, the types of equity issued by an LLC and the relative rights of each are established through an agreement among the equity holders, known in most states as the LLC operating agreement.

Where a corporation has multiple classes or series of shares, the relative rights of the various share classes are established by a combination of state corporation law, which typically has extensive provisions regarding corporate capital structure, governance and procedure, the corporation’s certificate of incorporation filed with the state of incorporation to establish the corporation (the “charter”) and its by-laws, a quasi-contractual instrument by which all shareholders are bound by virtue of share ownership. Shareholders can also consent to changes in the nature of their rights by approving amendments to the charter or by-laws, subject to limits under state law. Corporate charters, particularly for public companies, often include authorisation to issue “blank check preferred shares”, so called because the board of directors is authorised to determine the specific rights, preferences and limitations of each issuance of preferred shares without further shareholder approval.

In the case of LLCs, equity holder rights are varied through the terms of the LLC operating agreement, which is a matter of contractual agreement among the equity holders.

Minimum share capital requirements do not generally exist for corporations or LLCs. Some state corporation laws continue to have the archaic concept of “par value”, which must be paid in upon share issuance, but par value may be set at nominal levels, such as a small fraction of a penny, so as to be irrelevant as a practical matter. Note that some states calculate franchise taxes based on the number of shares that are authorised.

Corporations and LLCs may be owned by one or an unlimited number of shareholders. However, US income tax laws may limit the number and type of shareholders in the case of a corporation that elects to be taxed as a pass-through entity.

Shareholders’ agreements and LLC operating agreements are often used when privately held companies have multiple shareholders or multiple classes of equity.

Typical provisions include:

• ownership percentages;
• governance and management, including board composition and shareholder representation on the board;
• procedural matters regarding board and shareholder meetings;
• restrictions on the transfer of shares, including rights of first refusal, the right of shareholders to participate in the sale by another shareholder of its shares to a third party (known as tag-along rights) and the right of certain shareholders to require all other shareholders to participate in a sale of the company (known as drag-along rights);

• informational rights;
• pre-emptive rights to participate on a pro rata basis in future share issuances; and
• rights to require shares to be registered with the SEC and exchange listed.

Shareholders’ agreements (and LLC operating agreements) are generally enforceable as private contracts, and are supported by facilitating provisions in state laws. These agreements are generally private in nature but, in the case of a public company, US securities laws may require the disclosure of shareholders’ agreements if the parties thereto exceed certain ownership thresholds or if the agreement is considered a material agreement of the public company itself.       

Corporations are generally required to hold an annual meeting to elect directors as a matter of state law. For public companies, stock exchange listing requirements also mandate the conduct of an annual general meeting (AGM). SEC rules also mandate certain matters that must be voted upon at a public company’s annual meeting, including shareholder approval of senior executive compensation (known as say-on-pay votes and the frequency of say-on-pay votes).

In most cases, LLCs do not have such requirements, and any requirement to conduct an annual meeting will be set forth under the LLC operating agreement. Notice requirements vary from state to state but tend to be a minimum of approximately ten days, which may only be shortened by individual shareholder waiver of notice.

As a matter of law, virtually any issue that is relevant to the entity can be discussed at an AGM; however, most public companies may provide for limitations on subjects and the manner by which a shareholder may bring a matter before the shareholders at the meeting, through their by-laws.

Special shareholder meetings may also be called, as required, to consider special matters such as a merger, certain financing transactions or charter amendments.

Most states require a minimum notice of ten days, which may only be shortened by individual shareholder waiver of notice. This notice period could be greater than ten days based on the terms and conditions of the company’s by-laws and/or shareholder agreements. For public companies, SEC regulations require minimum notice periods of up to 40 days where the corporation delivers its annual meeting proxy materials through the internet.

The procedure to call shareholder meetings is usually established in a corporation’s by-laws or the LLC operating agreement. Shareholder meetings can usually be called by the board of directors or, if provided for in the by-laws, shareholders’ agreement of LLC operating agreement, by specified shareholders or groups of shareholders (such as shareholders holding a certain minimum percentage of shares). Public companies usually have very detailed by-laws with respect to who can call a special meeting and the requirements as to the exercise of the right to call a meeting.

In most cases, all shareholders entitled to vote at a meeting are entitled to receive notice. State corporation laws do not typically specify significant disclosure requirements or information rights beyond the date, time, place and subject matter of the meeting. Shareholder information rights are left to what may be negotiated in the shareholders’ agreement or LLC operating agreement. Some states, such as Delaware, have developed common law disclosure requirements, flowing from director fiduciary duties, but these are not specific or uniform.

In the case of public companies, however, SEC rules and regulations provide highly detailed and often granular disclosure requirements for shareholder meetings. These requirements are tailored to the subject matter of the meeting and may include extensive biographical and qualifications disclosures in the case of the election of directors or, in the case of a vote on a corporate merger, detailed information regarding the parties to the deal, the background of the transaction, the board of directors’ recommendation to the shareholders to approve the transaction, a description of any formal opinion by a financial adviser to the board and other subjects.

Most state corporation laws give shareholders the right to inspect the corporation’s list of stockholders in connection with a shareholders' meeting.

Since 2020, nearly all states have adopted enabling legislation that permits shareholders' meetings to be held virtually or remotely.

The quorum for a shareholders' meeting is generally set by state law as the holders of a majority of the votes entitled to be cast at the meeting. Quorum requirements may be lesser or greater if so provided in the charter, by-laws or LLC operating agreement, and may also be varied by the terms of a class of shares.

Most state laws provide that most shareholder actions may be approved by a majority of the votes cast or a majority of the votes represented at a meeting. Certain significant decisions are required by law to have a higher standard, such as a majority of the outstanding voting power entitled to vote on the matter. Voting standards may also be set by charter provisions, the by-laws or the LLC operating agreement.

Matters requiring enhanced shareholder voting standards usually include:

• amendments to the charter, which would include changes to the number of authorised shares or nature of the authorised capital stock, or by-laws;
• approval of a merger or other extraordinary corporate transaction; or
• dissolution and liquidation.

In some cases, a particular class or series of shares may be entitled to a separate vote (eg, the matter must be approved by both the common shares and the preferred shares).

Typically, shareholders can vote by proxy or through electronic means, or by submitting a ballot at a physical meeting. The specifics of voting are mandated through a combination of the applicable entity law and the constituent organisational documents of the entity, and are subject to considerable variation in the case of privately held companies. The number of votes represented by each share is similarly regulated through these organic instruments as well. In most instances, state law provides that each share is entitled to one vote, but that may be varied in the case of a corporation by its charter, or in the case of an LLC by its LLC operating agreement.

Shareholder rights to bring a matter before a shareholders’ meeting are regulated by the charter, by-laws or LLC operating agreement. Public companies, in particular, maintain highly detailed by-law requirements (typically known as “advance notice by-laws”) to bring a matter before a shareholders’ meeting. These by-laws usually require detailed information about the shareholder seeking to bring the matter forward, the shareholder’s personal interest in the matter, the reasons for the proposal and other salient facts, as well as any information that might be required under SEC rules. Long lead times are usually included so that the public company has sufficient time to react to any such request. SEC rules may also require a public company to include certain shareholder proposals in its annual meeting proxy statements, but these rules do not supersede the requirements of advance notice by-laws.

Generally, a resolution validly passed at a shareholders’ meeting may only be challenged through a lawsuit seeking court review of the resolution or the process by which it was adopted, either under state legal requirements or, in the case of a public company, under SEC or stock exchange regulations. Grounds for a challenge may include:

• a failure to comply with the meeting or voting procedures set forth under law or the organic documents;
• the validity of proxies or other means used to vote, including whether a purported shareholder was entitled to vote at the meeting, or the timeliness of a vote;
• whether the matter voted upon was a proper subject for consideration; or
• whether the board failed to fulfil its fiduciary duties in respect to the matter voted upon.

Court challenges may take various forms, including individual lawsuits, class action suits (where some but not all shareholders may be aggrieved) or derivative cases on behalf of the corporation itself. While post-passage challenge is possible, it would be more common for a challenge to be filed prior to the meeting, either to prevent the conduct of the meeting in its entirety or to prohibit or modify the challenged matter.

Institutional shareholders exercise considerable influence in the US, particularly with respect to public companies. Such influence may take many forms, including through direct demands issued to companies in which an institution invests, as well as participation in trade organisations representing institutional investors that advocate for particular corporate governance characteristics. Institutional shareholders may also seek influence through insurgent campaigns, which may include approaching a company’s management privately or publicly to seek certain changes in governance, management or strategic direction, accompanied in some instances by a demand for representation on, or replacement of some members of, the board of directors.

Refusal of these demands may be followed with an effort by the insurgent institution seeking to bring a matter in front of the shareholders for a vote or, where management is bringing a matter to the shareholders, such as the approval of a merger, waging a proxy contest to oppose approval of that matter. Insurgents seeking board representation or a board member change may also conduct a proxy contest seeking to elect their own nominees for board election. Such campaigns may seek to replace the entire board or a smaller number of directors, known as a “short slate” campaign. Credible threats to conduct such campaigns may be resolved through negotiated settlement with the insurgent where some or all demands are satisfied.

Most state entity laws provide that shares are voted by shareholders of record rather than beneficial owners. Therefore, where shares are owned by a nominee record holder, an arrangement must be made between the beneficial owners and the nominee to pass through informational and notice rights. In the case of public companies, US securities laws facilitate direct communications to beneficial owners regarding shareholder meetings, and there are elaborate systems that permit the customers of brokerage firms to receive proxy materials (often through the internet) and to vote their shares (again, often through the internet). In the case of privately held companies, these arrangements would be created through private agreement in most instances, or though the auspices of service companies that act as institutional nominees or shareholder representatives.

While subject to requirements or elimination as set forth in the constituent organisational documents, most state corporation and LLC laws provide that shareholders may act through written consent. Typically, action by written consent requires the consent of holders of a number of shares that would be necessary to approve a matter at a meeting if all shares were present and voting at such meeting. However, the constituent organisational documents may alter that voting standard, but not below minimums mandated by law. Action by written consent is available to public companies, but a solicitation of written consents is subject to extensive regulation and disclosure requirements under SEC rules similar to the regulation of a proxy solicitation for a meeting.

State corporation and LLC statutes do not generally provide for pre-emptive rights or, in rare cases where they do, permit the entity to opt out through provisions in its constituent organisational documents. Accordingly, in almost every instance where a corporation or LLC has pre-emptive rights upon new issuances of equity, those rights arise out of enabling provisions in the charter, by-laws, shareholders agreement or LLC operating agreement.

Pre-emptive rights are nearly unheard of in the case of US public companies, given the difficulties of administering such rights in the case of a public shareholder base, as well as the complexity such right would create in accessing the public capital markets. On occasion, a public company may voluntarily make a “rights offering” to its shareholders, allowing them to purchase shares on a pro rata basis. While the reasons for a rights offering may vary, they are often used where a company intends to raise equity capital at a discount due to its financial condition and thus provides a similar opportunity to existing holders to minimise potential legal challenge or investor backlash.

Restrictions on the transfer or disposal of shares are created solely by provisions contained in the organic documents. Transfer restrictions may include rights of first refusal, tag-along rights and drag-along rights.

While share transfer restrictions are typical in the case of privately held companies, usually to limit the shareholder base as to the number of holders or the nature of the holders (eg, to limit holders to those with similar business objectives or to prevent competitors from owning shares), or to maintain certain tax or governance characteristics (such as in the case of a “close corporation”, which may be entitled to more flexible legal standards if it has a small number of shareholders), they are far less common in the case of publicly traded companies.

Exceptions to this general rule do exist, however, for public companies that are subject to laws that limit foreign ownership (such as in the case of FCC licensed broadcasters) or for companies such as real estate investment trusts where tax characteristics are dependent on the nature of the shareholder base and the distribution of shares among the shareholders. In such cases, transfer restrictions will usually be established in the corporation’s charter.

In addition, the transfer of shares may be limited by US federal or state securities laws that are applicable to the resale of shares issued by a company other than through a registered public offering or that are being resold by an affiliate (controlling person) of the issuer. These restrictions are usually subject to exceptions that permit limited or unlimited resales after a holding period and other resale requirements are satisfied.

Unless prohibited by the constituent organisational documents, shareholders in the US are generally free to grant securities interests in their shares. In the case of publicly traded stock, borrowing on the basis of shares used as collateral is commonly provided by banks and brokerage firms, albeit subject to so-called margin rules under securities and banking laws that limit loans collateralised by securities. As a result of recent trends and pressure from proxy advisers, many public companies have policies that prohibit company directors and officers from pledging their share ownership in such companies.

In general, the granting a of security interest in shares is a private matter between the shareholder and the lender. Exceptions may exist where the grant of a security interest is considered to be a share transfer under the constituent organisational documents and may require a consent or waiver of such restriction thereunder. In addition, public companies typically have publicly disclosed policies that prohibit insiders from pledging shares. Waivers of or other deviations from those policies may require disclosure in SEC filings.

SEC rules also require persons who beneficially own more than 5% of a public company’s issued equity securities to file ownership reports (Schedules 13D and 13G) with the SEC, which may require the disclosure of borrowing arrangements with respect to the shares owned by the reporting person. Material changes in the facts contained in such reports are required to be reported via amended filings. The SEC recently adopted final rules which, among other things, have accelerated the reporting timelines that had been in effect for years. These changes are intended to increase the speed and transparency of reports to the market by investors having accumulated significant positions in a company’s shares and the shareholder’s intention with respect to such ownership, such as to influence or change corporate policy or control.

Shares may be cancelled after issuance only if reacquired by the issuer, pursuant to contractual or charter-based redemption rights, open market purchase programmes, a merger or other plan of recapitalisation that is approved by the shareholders, or through a direct agreement with a shareholder. Reacquired shares may return to the status of authorised but unissued shares or be held as “treasury shares” (issued but not outstanding), in either case subject to reissuance or sale by the issuer, or to being retired so as not to be issuable or sold again.

Companies may generally repurchase issued shares, either in voluntary transactions or, in the case of redeemable shares, pursuant to such redemption rights. Share repurchases are limited by state law requirements similar to those that limit dividends or other distributions upon equity. Generally, shares may only be repurchased if, after giving effect to such purchase, the fair value of the company’s assets will exceed the fair value of its liabilities and the company will still be able to pay its obligations as they come due. In addition, the board of directors must determine, in the fulfilment of their fiduciary duties, that the share repurchase is in the best interest of the company and its shareholders.

In the case of public companies, newly adopted SEC rules now require enhanced quarterly disclosures setting forth on a daily basis share repurchases during the most recently completed fiscal quarter and the reasons and policies under which such repurchases were effected, among other things. In addition, share repurchases may be limited under a company’s negative covenants with its lenders or other investors.

Dividends are generally paid to shareholders when and if declared by the board of directors. Dividends are limited by state law requirements. Generally, dividends may only be declared and paid if, after giving effect to such dividend, the fair value of the company’s assets will exceed the fair value of its liabilities and the company will still be able to pay its obligations as they come due. Dividends may be limited under a company’s negative covenants with lenders or other investors.

Preferred shares, however, may have terms that provide for dividends. These dividends may be at a specific rate or dollar amount, may be mandatorily payable or may be limited to payment only if dividends are paid on the common shares. Often, dividend-bearing preferred shares prohibit the payment of dividends on common or other junior shares, unless all dividends have been paid on the preferred shares.

State laws generally provide that directors may be removed by a shareholder vote, either at a duly convened shareholders’ meeting or by written consent. Removal rights may be subject to limitation, such as to instances of “cause”, but the validity of such limitations varies by state. Delaware corporate law, for example, does not generally allow removal to be limited to cause.

Director removal and replacement may also be governed by the company’s constituent organisational documents. Normally, a meeting to remove directors would be a special meeting of the shareholders, which may or may not be called by shareholders, depending on the constituent organisational documents, and may be subject to advance notice by-law requirements. In the case of private companies, where specific investors may be entitled to designate representative directors to the board, the instruments providing for such rights usually include a freely exercisable right of such investor to remove and replace such designee director.

A shareholder wishing to challenge a director decision must seek court review of the decision in question. Usually, a shareholder so challenging will file a lawsuit seeking a declaration that the decision is improper because it allegedly violates applicable law or the company’s constituent organisational documents, or was the result of a breach of the directors’ fiduciary duties. In most instances, courts review director decisions under the “business judgement rule”, under which directors’ decisions are presumed to be valid if any rational business reason can be ascribed to such decision, unless the complaining shareholder can demonstrate that the decision was the result of the breach of the directors’ fiduciary duty of due care (informed judgement) or duty of good faith (considering only the best interests of the company and its shareholders, as a whole).

Under some state laws, such as Delaware, certain decisions are subject to enhanced scrutiny, such as the approval of a sale of the company, the approval of a transaction in which a controlling shareholder is a party or in which a director has a material interest, or the approval of measures that adversely affect the voting rights of shareholders, among others.

In general, auditor appointment/removal is left to the discretion of the directors or, particularly in the case of public companies, the audit committee of the board of directors. However, private company constituent organisational documents may include provisions regulating the appointment/removal of the auditor. While most public companies seek annual shareholder ratification of the auditor appointed by the audit committee, those votes have no real effect and the failure to obtain ratification (an almost unheard-of event) would not require a change in auditor, but may be taken into consideration by the audit committee.

Other than in the case of public companies, there is generally no requirement to report on corporate governance arrangements. However, public companies are required by the SEC and stock exchange rules or investor expectations to provide detailed information regarding their governance arrangements, policies and practices, including:

• the number of board and committee meetings;
• director meeting attendance;
• compensation policies;
• risk management oversight;
• management stock ownership requirements;
• related party transactions;
• director diversity; and
• qualifications and business credentials, among other matters.

A controlling company shareholder may be deemed to have fiduciary duties to the other shareholders of the controlled company as a matter of state common law principles. Usually, these duties come into question when the controlling and controlled company are engaging in a transaction with each other. Common examples would be a so-called “freeze-out merger” in which the controlling shareholder forces the buyout of the other shareholders of the controlled company, or a transaction in which the controlling shareholder is seeking to sell an asset or business to the controlled company at an excessive price.

The governance rights of a shareholder do not generally change simply because a company becomes insolvent, although state corporate laws will typically prohibit the issuance of a dividend while a company is insolvent, and the shareholder’s equity may be deemed to have no or very little value. If the company enters a liquidation or receivership under applicable state corporate law, then the person(s) appointed to act as liquidator/receiver will typically be empowered to take control of the entity’s assets and to resolve the claims and liabilities of the company. In such case, shareholders will have no right to recovery unless and until the company’s debts are paid.

If a company files a liquidation proceeding under Chapter 7 of the US Bankruptcy Code or an assignment for the benefit of creditors under state law, a trustee or assignee will be appointed to take control of the company’s assets and resolve all claims and liabilities. In such cases, shareholders will not generally have any governance rights, and distributions will be made in accordance with the priorities provided for in the Bankruptcy Code or applicable state law.

If an insolvent company commences a proceeding under Chapter 11 of the US Bankruptcy Code, existing management (ie, the board of directors and ultimately the shareholders) will oversee the ongoing operations of the company and the resolution of all claims and liabilities, subject to oversight by the Bankruptcy Court. Distributions in a Chapter 11 also follow the applicable priorities set out in the Bankruptcy Code.

Shareholders have the right to appear and be heard in a Chapter 7 or 11 bankruptcy proceeding or an assignment proceeding under state law, but will not generally receive any distribution on account of their existing equity unless all creditors and parties with higher priority claims are paid in full.

A shareholder wishing to challenge any company’s action must seek court review of the decision in question. Usually, a shareholder making such a challenge will file a lawsuit seeking a declaration that the act is improper because it allegedly violates the applicable law or the company’s organic documents, or was the result of a breach of the directors’ fiduciary duties.

In most instances, courts review acts approved by the directors under the “business judgement rule”, under which directors’ decisions are presumed to be valid if any rational business reason can be ascribed to such decision, unless the complaining shareholder can show otherwise or can demonstrate that the decision was the result of the breach of the directors’ fiduciary duty of due care (informed judgement) or duty of good faith (considering only the best interests of the company and its shareholders, as a whole).

Under some state law, such as Delaware, certain acts are subject to enhanced scrutiny, such as the sale of the company, the approval of a transaction in which a controlling shareholder is a party or in which a director has a material interest, or the employment of measures that adversely affect the voting rights of shareholders, among others.

Shareholders may seek legal remedies against directors and officers under a variety of bases, including breach of fiduciary duty or failure to comply with the company’s constituent organisational documents or applicable law. Remedies may include money damages or injunctive relief prohibiting the company from taking an improper action or requiring the company to take an alternative or remediating action. Shareholders may also bring claims against directors and officers as controlling persons for violations arising under securities laws, including for making materially misleading statements about the company’s financial condition, results, operations or prospects. In the case of public companies, shareholders may have recourse against directors and officers in connection with violations of the securities laws, particularly anti-fraud provisions that prohibit material mis-statements of fact or omissions to state material facts in company communications.

Many state entity laws, however, provide for the exculpation of directors (and officers under a recently adopted statutory amendment in Delaware) so as to shield them from liability for money damages, provided that the directors’ behaviour meets specified standards. The practical effect of these statutes limits the recovery of money damages to instances of relatively egregious behaviour, such as breaches of the duty of loyalty, bad faith or intentional misconduct, knowing violation of law or the declaration of improper distributions or dividends to shareholders.

Acts that adversely affect the company or the shareholders may be challenged through derivative actions, in which the company itself is the nominal plaintiff and the defendants are members of the company’s board of directors or officers. Derivative actions must be preceded by a demand on the board of directors to institute a cause of action against the applicable defendants, or by a showing that such pre-suit demand would be futile because the directors would have a conflict of interest in evaluating such demand.

Shareholder activism remains at a high level in the US. Key legal provisions include state law and both statutory and common law that regulate corporate governance, as well as securities laws and regulations regarding proxy contests and solicitations. Activism tools include:

• information and inspection rights available to the shareholders;
• the ability of shareholders to elect and remove directors;
• the right of shareholders under SEC rules to require certain proposals to be included in a company’s proxy statement;
• the newly effective universal proxy rules that require a company to include an insurgent’s director nominees on the company’s proxy card, which makes it easier for shareholders to vote for the insurgent’s candidates;
• advisory votes on senior management compensation;
• the ability to conduct proxy contests under SEC rules seeking shareholders to vote against actions recommended by the board of directors;
• shareholders' legal remedies against the improper or oppressive conduct of the company or its directors/officers; and
• the ability to leverage voting recommendations of proxy advisory services that have policies that often seek to promote shareholder rights and governance policies.

Activist shareholders, first and foremost, are institutional investors who seek attractive returns on their investment in target companies. Activists use a variety of strategies intended to increase the share price of the target. For example, some activists specialise in identifying underperforming management teams, and work to improve or even replace management in order to unlock value. Others seek to identify inefficient capital structures, underperforming or non-synergistic assets, and work to obtain changes (increases in leverage, stock buybacks or asset sales, for example). Some even seek the sale of the target company. Some seek changes in strategic direction, such as forcing companies to adopt changes to product mix or ESG policies.

Activists typically build their stake through open market share acquisitions. Sometimes, this strategy is supplemented with the use of options, swaps and other derivatives. The goal is to build a sizeable position quickly, before regulatory disclosure of ownership must be made public (the SEC revised disclosure requirements in October 2023 to provide for accelerated filing, beginning in 2024). Activist engagement strategies run the gamut from meeting target management to propose and support specific changes, to proxy contests seeking board representation, and can include public pressure campaigns to force change.

Activists continue to focus on technology and healthcare, which represent the most targeted sectors. Banks also continue to see activity, particularly community banks, especially from activists seeking the sale of the target company. Industrial, retail and real estate are also frequently targeted.

In the wake of several recent high-profile large-cap targets, it is clear that market capitalisation is not a barrier to activism. While companies with smaller capitalisation present easier targets and are frequently the subject of activists, campaigns involving Disney, ExxonMobil and other large-cap companies show that no company, large or small, is immune.

Most activists are hedge funds whose principal strategy to maximise fund value is shareholder activism. In rare circumstances, an institutional investor or a family office may deploy an activist approach to a particular investment; however, these are usually unique situations involving a specific investment rather than a strategy.

Activists’ success, as measured by successfully placing one or more of their candidates on the board of directors of target companies, held steady in the first half of 2023. In this regard, because of the cost and risk involved, most activist campaigns settle before a final vote, with at least one dissident nominee being added to the board. In contested elections that have gone to a vote in 2023, Barclays reports that 80% resulted in at least one dissident getting elected, compared to 33% in 2022. The number of activist nominees elected in 2023 so far is in line with the four-year average as reported by Barclays.

No public company is immune from shareholder activism and each should be prepared. Management should carefully review potential vulnerabilities, whether financial, operational or reputational, and identify policies, business practices, methods and performance that could draw the attention of activists or be the subject of investor initiatives. For instance, companies should periodically consider and evaluate strategic paths and potential transactions or other changes with a focus on maximising shareholder value, and should regularly evaluate other areas such as corporate governance polices, internal controls, executive compensation and board composition, and include comparison with peers and competitors.

Companies’ investor relations teams should monitor and identify the shareholder base and develop effective investor relations strategies, to get in front of news or disclosures that might draw activist attention. In addition, the investor relations team, in conjunction with other senior management (including the CEO, board chair, lead independent director and compensation committee chair), should formulate and implement an active programme of stockholder outreach to ensure that key investors and other stakeholders understand and support the company’s direction and policies, and to understand the concerns or criticisms of those key investors.

Moreover, each company should be prepared to respond to the emergence of activist shareholders with compelling, fact-based explanations for the company’s strategic decisions, policies, procedures and initiatives, as well as an explanation of why the activist’s proposals are sub-optimal in comparison. Each company should also have a response plan to facilitate a disciplined and thoughtful response when an activist demand emerges. The plan should identify the management team members and outside advisers who would be involved in evaluating any activist communications and demands in order to efficiently develop the response strategy (eg, the board members, management, internal and external counsel, accountants, investor relations and public relations professionals).

In addition, companies should periodically review their corporate governance instruments and consider whether key provisions, such as advance notice by-laws, are current and as protective as practicable. Consideration should also be given to the creation of a template stockholder rights plan (poison pill) that can be placed on the shelf and quickly adopted as needed.