Shareholders' Rights & Shareholder Activism 2020 covers 15 jurisdictions. The guide identifies primary sources of law and regulation, types of shares, rights and agreements. The guide also covers voting requirements, disclosure of interests, activism and activist strategies, and remedies available to shareholders.
Last Updated: September 30, 2020
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 2019, 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 – remained high, in line with recent trends (albeit slightly lower than the all-time peak in 2018). According to Lazard data, USD42 billion of capital was deployed in 209 activist campaigns throughout the year.
Headline-grabbing examples – such as Elliott Management's demand that Marathon split itself up into three businesses (which culminated in a spin-off of Marathon’s gas station business Speedway and the replacement of one of Marathon’s directors with one approved by Elliott), Starboard’s pressure on AECOM to launch a full strategic review and sell its construction services business (which culminated in a settlement including a new Starboard partner being appointed to AECOM’s board), and Cat Rock Capital’s heavy involvement in Just Eat’s takeover by Takeaway.com – ensured that this issue remained high on the agenda of any well-informed board as we moved into 2020.
The COVID-19 pandemic resulted in a drop in shareholder activism levels in the first half of 2020, due in part to uncertainty regarding the impact of activism on target companies and fears of backlash against activists who push ahead with campaigns. However, shareholder activism is expected to pick up in the second half of 2020 as activists acclimatise to the new economic and social environment and pursue campaigns against companies that were perceived to have performed poorly in the face of the pandemic. According to Activist Insight, in the first half of 2020, 522 companies around the world were publicly subjected to activist demands. As in previous years, the highest level of activist activity was in the USA, where well over half of the companies targeted so far in 2020 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. In the US, 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 half of 2020, around 36% of US activist-targeted companies had a market capitalisation of greater than USD10 billion, while, at the other end of the spectrum, around 25% had a market capitalisation of less than USD250 million.
Besides the USA, other international hotspots of activity include Australia, 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, prior to the COVID-19 pandemic. 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 encouraging active share ownership and a raft of US-based hedge funds targeting UK companies. A notable example of the latter has been Odey Asset Management’s demand for the removal of Tungsten’s chairman and CEO, which (despite a settlement between Odey and the company by which the former agreed to withdraw its requisition for a general meeting) led to the CEO’s resignation.
Markets traditionally less receptive to shareholder intervention have also been experiencing an uptick in shareholder engagement. For example, in Japan, shareholder activism has continued to increase despite the pandemic. At least 19 activist campaigns have been launched against Japanese companies in the first half of 2020, equalling the record number of Japan campaigns in the entire year of 2019. 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. According to Lazard data, M&A-focused campaigns also remain significant, accounting for 34% of campaigns launched in the first half of 2020 (although the uncertain M&A environment has contributed to a noticeable decline in the proportion of such campaigns as compared to the previous year’s 47%). 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 2020 include 44.9% of shareholders in IPG Photonics Corporation voting in May in favour of a proposal by Trillium Asset Management calling for the board of directors to produce a management team diversity report, and 54.7% of Philips shareholders backing a proposal submitted by As You Sow calling on the company’s board of directors to produce a report on the risks of its Gulf Coast petrochemical investments.
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, while in others it 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 include the lawsuit filed by Elliott Management against PG&E in July 2020, and French media group Vivendi’s dispute with Italian broadcaster Mediaset, which has played out in various courts across Europe). 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 USD6.2 billion in furtherance of activist activities and ValueAct having deployed around USD2.8 billion in the first half of 2020 alone), in the first half of 2020 more than 30% 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, for 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.