Activism Campaigns involving UK listed companies

Activism Campaigns involving UK listed companies

We have advised boards of UK listed companies where they have an activist on the register as well as institutional shareholders which run campaigns for change.

We don’t generally publicise our involvement, but our name was made public advising Invesco, Janus Henderson, Aegon, Global Value Fund and Pelham Capital in a shareholder campaign involving Trian Investors 1 Ltd. See this article in the FT.  This resulted in board changes and a capital return to shareholders as disclosed in this announcement.

From our experience of activism campaigns we have advised on in the UK, we have drawn together some of the practical and legal issues for boards and shareholders to be aware of.  This note complements an earlier note we published on activism in the UK which can be found here.

Requisitioning a shareholder meeting to challenge strategy and direction

It is not easy to requisition a shareholder meeting to propose a shareholder resolution which directs the board to act in a particular way, e.g. to buy back shares, sell assets or carry out a strategic review.  This is because:

1. Most UK listed companies have a provision in their Articles of Association which states that management is vested in the board of the company, subject to a special resolution being passed by shareholders which directs management how to act. Since a special resolution requires a >75% majority of those shareholders attending and voting at the shareholder meeting, it is a very challenging threshold to meet.
2. It is technically possible to put forward an ‘advisory’ resolution which is not binding on the board. This need only be an ordinary resolution which requires a >50% majority of those shareholders attending and voting at the shareholder meeting.  However, we have seen instances where the board of a listed company rejects a requisition on a technicality.  Whilst that technicality may be open to challenge, the process to do so is time consuming and involves a court application.
3. In the case of a listed investment trust, the company generally adopts an investment policy which can be changed by ordinary resolution. However, whilst the board can propose an ordinary resolution to change policy, a shareholder generally cannot as this would fall foul of the Articles as noted in point 1 above.

In view of the above, activists are generally advised to pursue change in one or more of the following ways:

1. To propose a resolution to either remove or appoint a director and specifically state that the change is being proposed so that the shareholders have an opportunity to vote on that appointment or removal as a proxy for the desired change.
2. To propose resolutions to change the majority of the board by appointments and removals and thereby create a new board which can take a fresh approach.
3. A public campaign is instigated by the shareholder which sets out the rationale for the proposed change in strategy or outcome desired which enables shareholders to pressure the board to pursue the change.

Whilst a single new director can be outvoted by the incumbent board, the board will find it hard to ignore the fact that a majority of shareholders have voted for the new director and the strategy change which that that new director has been appointed to advocate for.

Changing the majority of the board by appointments and removals can make the process more challenging because:

1. It is necessary to identify a sufficient number of suitable new directors who will agree to serve.
2. It is necessary to consider the board control seeking provisions of the Takeover Code if the new directors are not independent of the shareholder(s) putting forward or supporting the nominations. Whilst navigating these provisions of the Takeover Code is rarely an issue in practice, it can complicate the process.
3. A new board will need to meet requirements for independence, diversity and suitability under UK corporate governance codes.
4. As this is a more aggressive approach, it is likely to be resisted fiercely. Many instinctively passive institutional shareholders may be reluctant to support such an approach as they will worry about the future balance of the board and governance issues.  Also, the proxy advisors (who many more passive shareholders will follow) rarely support wholescale board changes unless the case is absolutely overwhelming to them, which is rarely the case.

How to requisition a shareholder meeting effectively

A shareholder or shareholders owning 5% of the voting shares can force a company to put resolutions to a shareholder vote at an AGM or a specially convened shareholder meeting (e.g. a resolution to remove or appoint a director).  See our Q&A here for more detail.

However, this right can only be exercised by the registered shareholder.  This can present some practical issues in terms of signing the requisition because most shareholders hold shares in dematerialised form and via a custody agent.  Companies routinely reject a requisition on a technicality so it is vital to draft the requisition correctly and have it signed by the registered shareholder.

This issue can be overcome in one of the following ways:

1. The shareholder can elect to have the shares materialised and registered in their own name rather than in the name of the nominee of the custodian. However, in our experience. this can alert the target company that events are afoot since the company’s registrar will be involved in the process of re-registering the shares.
2. A better option may be for the beneficial shareholder to instruct the custodian to arrange for the custodian’s nominee which is the registered shareholder to sign the requisition. This is an effective method but can sometimes take some time as this is not something that custodians routinely do.  We have experience of helping to arrange this process.

Where investors have economic interests using derivatives or total return swaps, they own no shares and cannot requisition a shareholder meeting.  The counterparty to the interest (generally a prime broker) will own stock which is held as a hedge but will not customarily act on the instructions of the investor counterparty.

This can be addressed as follows:

1. The investor could elect to close out the derivative and acquire >5% of the hedge stock of the prime broker.
2. The investor could borrow >5% of the company’s stock (in which event the shares get registered in the name of the investor) and then use that position to requisition.

The first option will generally involve cost which the investor may wish to avoid, e.g. stamp duty.  The second option whilst technically possible is generally not considered a legitimate practice having regard to the Securities Borrowing and Lending Code of Guidance issued by Securities Lending and Repo Committee of the Bank of England.

Making sure the votes count in an activism campaign

It is vital to ensure that the votes of shareholders are correctly cast and counted.  Given that most shareholders hold their shares via a custodian, it is the custodian that casts the vote.  Unfortunately, in our experience mistakes happen.  By way of example, we have been involved in campaigns where:

1. Instructions have been given but the votes have not been cast.
2. The votes have been cast contrary to the instructions.
3. Those casting the votes have used platforms managed by the proxy advisers and have cast the votes according to the recommendations of the proxy adviser (because that is what they routinely do) rather than according to the instructions of the beneficial shareholder.

To avoid these mishaps, we recommend that:

1. The activist shareholder maintains a database of the shareholders who have indicated their support for the resolutions so that they have a precise tally of what votes they are expecting to be cast alongside them.
2. The activist shareholder or its legal adviser contacts the company secretary/administrator at the company and requests an update on the votes being cast. This way a tally can be kept and if votes are missing, the activist shareholder can follow up.
3. The activist shareholder is ready to remedy missing votes by arranging for a corporate representative to be appointed by the shareholder who can attend in person and vote at the meeting if necessary.

Board considerations where an activist is on the register

First and foremost, we generally advise early engagement with disgruntled shareholders.  Avoiding a public battle is normally in the best interests of the company.

1. Agreeing to appoint a nominee to the board is often a gesture which can soothe a disgruntled shareholder, especially if it is likely to get support from other shareholders.
2. Once a nominee is on the board, that director has fiduciary duties to act in the best interests of all shareholders. We have seen instances where once the new director is on board, that director realises that the situation is more complex than it appears from the outside.
3. Alternatively, agreeing to some but not all the demands of shareholders can diffuse the situation and avoid a public battle.

Conclusions

Knowing the law is not sufficient. These (and other) practical issues need to be addressed for an activism campaign to be successful; and/or for a board to successfully address shareholder concerns.

Ultimately, the outcome should be determined by the power of the argument deployed by the activist or the board.  Considerable care should be taken to ensure any public statements made are accurate.