Shareholders' Rights & Shareholder Activism 2023

Global Overview – Shareholders' Rights and Shareholder Activism 2023

Shareholder activism (ie, shareholders seeking to exercise their rights to exert influence on a company or its management with the purpose of bringing about change) has evolved into a permanent feature of global capital markets. Shareholder activists now promote themselves as defenders of the golden principle of shareholder value and hold management teams and boards to account in doing so. Investors are making increasing demands of directors, as regards both actions and disclosure on key issues, and are prepared to act where those demands are not met. Activist shareholders are becoming increasingly vocal on a broad range of topics, from M&A to climate risk. Although some companies are more likely to be targets than others, it has become clear that no company is immune from the threat of an activist campaign.

Activist demands

M&A

Despite the continuing lull in the M&A market as a result of uncertainty on interest rates and the availability of debt finance, activists continue to make M&A-based demands. Key themes in the last year include break-ups and divestures (such as Bluebell's campaign for the break-up of Bayer AG), as well as opposition to takeover offers that are deemed to be opportunistic and undervalue the target (such as Palliser's opposition to bids made for Capricorn Energy by Tullow Oil and NewMed). As and when the M&A market rebounds, more activists are expected to push for M&A as a solution for undervalued companies.

ESG

The escalating climate crisis has made environmental, social and governance (ESG) issues a key priority in recent years for institutional investors, who are increasingly seeing the effective management of ESG risks and opportunities as being fundamental to long-term value creation and integrating ESG factors into their investment decisions. Poor ESG performance ranks highly amongst the main criteria to identify companies as possible targets for activist shareholders.

The biggest jump has been in relation to the “E” of ESG: the number of companies publicly subjected to “environmental” demands (eg, climate-related demands) has risen dramatically in recent years, most notably in relation to natural resources and financial services companies.

Oil companies such as Shell, BP, ExxonMobil and TotalEnergies have faced climate-related shareholder resolutions backed by activist group Follow This. Earlier this year, significant minorities of investors in Goldman Sachs, Wells Fargo and Bank of America, including some of the world's largest asset managers, backed shareholder resolutions in favour of climate transition plans, against the recommendation of their boards.

However, an “anti-ESG” backlash has also emerged, causing dilemmas for boards, which must look closely at shareholder value whilst making decisions on ESG issues.

Board changes

Board changes dominated the US activists' agenda, facilitated by a new SEC rule requiring use of universal proxy cards in contested director elections, which has the potential to allow activists to gain board representation more easily.

Remuneration

Shareholder revolts on remuneration remain a perennial issue for investors, and are sometimes the subject of activist campaigns. For example, Restaurant Group faced a 46% vote against its directors' remuneration report after Oasis Management claimed the chief executive's pay was “disproportionate”.

Strategies and targets

“Trojan horse” activism

Activist shareholders need to appeal to institutional investors by proving that they can create long-term sustainable value, and by campaigning on issues significant to those investors, such as ESG risks. With the increasing amount of disclosure on ESG-related matters globally, there has been a marked increase in “trojan horse” activism, with some activists pulling levers likely to garner support from investors who may have ESG concerns, in combination with non-ESG proposals such as financial underperformance issues. Third Point's lobbying for the break-up of Shell has been cited as an example of this strategy.

Swarming

We have also seen a recent expansion of the “swarming” phenomenon, whereby multiple activists, often with competing agendas, pursue the same target concurrently or in quick succession. For example, Salesforce was targeted this year by five separate campaigns within a period of a few months.

Sector and size

Key sectors

Key sectors for recent activist campaigns currently include industrials, technology, healthcare, consumer and financial services.

Mega-caps

Activists are becoming bolder in their choice of targets – campaigns involving large-cap (over USD10 billion) and “mega-cap” (over USD50 billion) companies are becoming common, despite the necessity to work with a much smaller percentage stake, including Nelson Peltz's proxy war with Disney and Ryan Cohen's campaign against Alibaba.

Regions

US companies are still the target of significantly more activist campaigns than any other single nationality, although the number has dipped slightly this year. Outside of North America, companies that attract the most activist campaigns are in Europe (predominantly the UK and Germany) and the Asia-Pacific region (Japan, South Korea and Australia).

Conclusion

Against this background, it remains critical for those in management positions and their advisers to inform themselves of the rights and expectations of shareholders, and to be alert and prepared by considering their approach and strategies in the event of an activist campaign. When looking at tackling activism, companies should invest time in training their board and management on how to act. An audit of potential issues could be a way for a company to uncover potential issues that may be raised by activists and address them on the company's own terms.

Further tools and strategies for companies are explored in the country-specific Q&A. From the investors' perspective, an awareness of the range of available legal and commercial options remains key in order to achieve their strategic objectives in markets that are increasingly sophisticated.