The Shareholders’ Rights & Shareholder Activism 2019 guide provides expert legal commentary on key issues for businesses. The guide covers the important developments in the most significant jurisdictions.
Last Updated: September 25, 2019
From the inception of corporate-based enterprise, the question of what pressure a shareholder can exert upon a company and what rights it enjoys (or otherwise) has been a topic for legal debate. The battles between the all-powerful Dutch East India Trading Company (the first public company whose shares were formally listed) and Isaac Le Maire (history’s first known short seller of stock) included, in 1608, the first recorded petition asserting a right to challenge weak corporate governance. Through the 19th century, with the onset of the Industrial Revolution on both sides of the Atlantic Ocean, the law grappled with how to regulate the rights of a larger, more democratised, share ownership. The different approaches of New York and London-based Chancery Courts in seminal decisions in Foss v Harbottle and Robinson v Smith continue to be reflected in modern law. In the 20th century, from the growth of proxy fights in the 1950s to the corporate raiders of the 1980s, greater ingenuity was expended on pursuing – and defending – corporate targets. Yet all this has been swamped by the recent renaissance in shareholder activity on a global scale and with an impressive breadth of objective.
In 2018, levels of shareholder activism – that is, shareholders in a company seeking to exercise their rights in such a way as to bring about change in a company or its management – reached an all-time peak. According to Lazard data, USD65 billion of capital was deployed in 247 activist campaigns throughout the year.
Headline-grabbing examples – such as the proxy fight for Campbell Soup led by Third Point (ending in a settlement granting boardroom representation to the latter), Elliott Advisors’ successful pressure on Whitbread to divest its Costa Coffee investment and the campaign to bring Royal Dutch Shell to account for its lack of climate change progress – ensured that as we moved into 2019, this issue remained high on the agenda of any well-informed board.
Although recent data suggest that, after 2018’s record figures, activism levels slowed in the first three quarters of 2019, shareholder activism continues to play an extremely significant role in modern corporate governance. According to Activist Insight, in the first three quarters of 2019, 712 companies were publicly subjected to activist demands. Consistent with previous years, the highest level of activist activity was in the USA, where more than half of the companies targeted in 2019 so far are based.
As observed in the USA chapter, a key trend discernible from the experience in that jurisdiction is that “no corporation is immune” from shareholder activism. Activist shareholders have targeted companies across all sectors, ranging from consumer goods and healthcare to financial products and services. Neither is market capitalisation a discriminating factor: in the first three quarters of 2019, around 30% of US activist-targeted companies had a market capitalisation of greater than USD10 billion, while, at the other end of the spectrum, around 11% had a market capitalisation of less than USD50 million.
Besides the USA, other international hotspots of activity include Australia (which, in contrast with the overall global trend, actually saw an increase in the number of companies targeted by activists compared to the equivalent period in 2018), Canada and the UK. As discussed further in the UK chapter, while shareholder activism is far from a new phenomenon in that market, with its well-developed statutory shareholder protections, there has been a marked increase in UK activist activity over recent years (albeit with 2019 so far not quite matching up to record 2018 highs). That increase appears to be driven by a shift in public perception of activism and activists following the 2007 financial crisis, combined with changes to corporate governance requirements, an increased focus on encouragement of active share ownership and a raft of US-based hedge funds targeting UK companies. A notable example of the latter was Sherborne & Company’s ultimately unsuccessful bid this year to appoint its CEO to the board of Barclays Bank plc and to remove certain of the bank’s existing board members.
Even markets traditionally less receptive to shareholder intervention have been experiencing an uptick in shareholder engagement. In one such market, Japan, the number of shareholder proposals put forward at corporate annual general meetings in 2019 was 54, more than double the number put forward in 2011. Such developments underscore that investor activism is, increasingly, an issue of global relevance.
While generally motivated to increase shareholder value, specific goals pursued by activist investors are many and varied. They tend to be carefully developed and specifically targeted to the particular company that is the focal point. In broad terms, the most prevalent category of activist demands continues to be governance-related. Interestingly, however, this has not always been successful – in many cases activists seeking to replace more than 50% of the board of a company have ended up failing to acquire any board seats or settling for considerably fewer. M&A-focused campaigns also remain significant, accounting for 46% of campaigns launched in the first half of 2019, according to Lazard data. Of these M&A-focused campaigns, in approximately one third, investors were pushing for a sale (a recent example being San Francisco-based investor ValueAct’s movement for UK-based Merlin Entertainments to be taken private); a similar number were agitating for the divestiture of a non-core business division or company break-up (as in the case of Third Point’s recent campaign in relation to Sony); and a similar number again sought to intervene in an existing contemplated deal, whether intending to improve terms or to block the deal altogether (as seen in French hedge fund CIAM’s recent opposition to the proposed merger between Renault and Fiat Chrysler Automobiles). There is also a discernible trend towards shareholders using their vote to influence environmental, social and governance (ESG)-related outcomes. Examples of this playing out in 2019 include Citigroup consenting in January to publish its global median gender pay gap data in response to a proposal submitted by Arjuna Capital; 44.5% of shareholders in Starbucks voting in March in favour of a motion proposed by Trillium Asset Management and the non-profit shareholder advocacy group As You Sow calling for improvements in the company’s sustainable packaging initiatives; and 56.6% of Newell Brands shareholders backing in March a proposal submitted by Trillium Asset Management calling on the board of directors to produce an employment diversity report.
The techniques employed by activist investors to achieve these goals are equally wide-ranging. The traditional four pillars of “voting with feet”, stake-building, vocal protest and litigation have been subtly developed. In some instances, a campaign may be run largely “behind the scenes” with little or no public engagement, and in others, may be played out in the public eye. The level of public engagement will be an important strategic decision both for an investor and for a company responding to an activist attack. In some cases, activist investors may take more aggressive measures, such as the commencement of litigation, as part of their strategy (examples being the claim advanced in the New York courts by Icahn Enterprises LP and Darwin Deason against Xerox Corp and the challenge mounted by Sports Direct to the Debenhams restructuring). In the chapters that follow, we explore the legal remedies available to shareholders against other key stakeholders in the range of jurisdictions surveyed.
It is also interesting to note that, while a handful of key players continue to dominate the activist investor scene (with Elliott Management having deployed around USD3.4 billion in furtherance of activist activities and Starboard Value having commenced ten new activist campaigns in the first half of 2019 alone), in the first half of 2019 over a quarter of new campaigns were launched by a “first time” activist investor. It is clear, therefore, that an ever-larger pool of investors is open to taking on a more assertive role. In addition, there has been an uptick in recent years (predominantly in the USA) in so-called wolf pack attacks, in which activist hedge funds, arbitrage funds and traditional long-only funds work in concert to achieve their goals. The increased willingness of institutional investors to align themselves with activists or more broadly to take on an increasingly active role in corporate governance can have a meaningful impact given the large stakes these investors often hold.
Against that background, it has never been more critical, on the one hand, for those in management positions and their advisers to inform themselves of the rights and expectations of shareholders and to consider their approach to stakeholder engagement and strategies in the event of an activist attack, or, on the other hand, investors and asset managers in competitive and increasingly sophisticated markets to ensure they are fully apprised of the range of legal and commercial options available to them in those markets in order to achieve their strategic objectives.