Shareholders' Rights & Shareholder Activism 2024

Shareholders' Rights and Shareholder Activism 2024: A Global Overview

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. A number of 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 and are prepared to act where those demands are not met. In recent years, activist shareholders have become more vocal on a broad range of topics, from M&A to climate risk. Although some companies are more likely to be targets than others, what has become clear is that no company is immune from the threat of an activist campaign.

In the past year, global activism levels have continued to rise against the backdrop of continued economic uncertainty and geopolitical instability. There are strong signs that this momentum is continuing, with the number of new campaigns globally in H1 2024 setting a record high and demonstrating a greater share of activity by first time activists.

Nature of activist demands

Board seats

Board change has replaced M&A as the most common demand, with 49% of global campaigns targeting seats so far in H1 2024. However, although there have been more campaigns, the number of board seats actually “won” has declined compared with H1 last year, which suggests that companies are fighting back more effectively.

M&A

The demand for M&A has declined so far in H1 2024. The fall in M&A campaign activity can be attributed in part to lower levels of activity in the US, compared with recent years. Activists have adjusted their tactics in acknowledgement of continued economic and geopolitical uncertainty, with the most popular M&A demand being the push for a whole company sale.

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 UK has seen its first cases seeking to hold directors personally accountable for climate change. In 2023, NGO ClientEarth issued a claim (known as a “derivative action”) against all of the individual directors of Shell plc, alleging that they had failed to take steps to protect the company against climate change-related risks. Although the significant hurdles to such a claim mean that it is unlikely to succeed, the initial public acts of threatening, issuing and seeking permission to continue such claims are nevertheless steps that well-funded activists and other claimants can use to interrupt or try to influence a board's strategy and decision-making, and to gain publicity for their cause.

The principal aim behind many climate change claims may not be to “win” in the traditional sense but to draw attention to activities that cause and contribute to climate change, with litigation being just one of the tools available to activists.

2023 also saw activist shareholders putting pressure on companies via shareholder resolutions: investor activist Follow This filed shareholder resolutions against Shell, BP, Chevron and ExxonMobil, urging them to take swifter action to cut greenhouse gas emissions and to set more robust climate targets.

However, the anti-ESG movement continues to gain momentum, causing dilemmas for boards, which must look closely at shareholder value when making decisions on ESG issues.

Remuneration

Shareholder revolts on director remuneration remain a perennial issue for investors and are sometimes the subject of activist campaigns in the UK and also more widely in Europe. There has been a fresh wave of shareholder dissent over large payouts for company bosses, with recent examples in the UK including nearly half of voting shareholders rejecting Smith & Nephew’s plans to raise its chief executive's pay package by around a third and a shareholder rebellion at AstraZeneca’s annual meeting, where over a third of voters rejected the company’s remuneration policy. French carmaker Renault has also suffered a recent backlash against its CEO's pay package.

Strategies and targets

“Trojan horse” activism

Activist shareholders need to appeal to institutional investors by proving that they can create long-term sustainable value 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. Third Point's lobbying for the break-up of Shell has been cited as an example of this strategy.

Vanity activism

There have been cases of ESG activism that is not principally motivated by financial return but is instead based on alternative motivation. An example of this is the unsuccessful proxy fight by Icahn, which owned only 200 shares in McDonald's, for two seats on the board at the fast food giant over the treatment of pigs in its supply chain.

Anti-ESG objectives

There have been recent examples of financial activism with anti-ESG objectives at its core, such as Strive Asset Management, which has a motto of “profits over politics”, criticising Chevron over ESG initiatives and calling on the company to reduce spending on its energy transition plan.

Sector and size

Key sectors

In line with trends in recent years, industrials and technology are amongst the most-targeted sectors. However, companies that receive multiple proposals represent a wide range of industries.

Mega-caps

Activists have become 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. This trend has been more prevalent in Europe so far in 2024, where mega-cap names (such as Rio Tinto and Glencore) have been targeted at roughly twice the global rate.

Regions

In H1 2024, Europe and North America maintained strong momentum in activism campaigns following a record year in 2023, while Asia Pacific has seen a significant spike in campaigns, nearly matching full year 2023 levels in just the first half of 2024. US campaigns in H1 2024 have exceeded figures from H1 2023, albeit comprising a smaller percentage of global activity due to rising activism in the Asia Pacific region.

In Europe, the UK and Germany continue to dominate, with the UK comprising 41% of European campaigns in H1 2024.

Conclusion

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 prepare for, and pre-empt, a possible campaign. An audit of potential issues could be an effective way for a company to address these issues on the company's own terms before they are raised by activists. Further tools and strategies for companies are explored in the country-specific Q&A in this guide.

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.