I get asked what it’s like acting for activist investors. Fascinating actually. They come in all shapes and sizes and some are just traditional shareholders moved to activism rather than so-called activist funds. But they do share certain traits in common. First, they are incredibly knowledgeable about the companies they are invested in. Secondly, they generally prefer influencing matters behind the scenes. Going public is really a last resort for most. Thirdly, they are generally underwhelmed by the lack of powers available to them to hold companies to account, and the reticence of some fellow shareholders (institutional asset managers) to delve as deeply into the business of the companies they are jointly invested in. To some extent, this is understandable as institutional asset managers manage many positions and don’t generally have the bandwidth to focus on small positions. Once activists are roused to action, they don’t give up easily.
I’ve also advised boards of companies with activist shareholders. How do they react to an activist? Generally, they are horrified to find an activist with a sizeable stake. Activist shareholders tend to be quite demanding of the board and are not easily fobbed off with superficial answers. Whilst they don’t have access to the same base information as the board, if the company has been complying with its disclosure obligations under MAR and the Listing Rules, there is near equivalence of information.
If I’m advising a board I will generally encourage dialogue and an open mindset. An area of tension is over sharing non-public (inside) information which may amount to market abuse. Boards will sometimes use this as a shield to avoid proper dialogue. But I’ve also seen Boards either deliberately or negligently (both of which can be unlawful) sharing information to put the activist in the awkward position of having to work out if it has been made an insider and is thus unable to trade. Since the Einhorn case it’s been clear that stating that you do not want to be made an insider is no defence to trading if in fact the shareholder has been made an insider.
The real area of disagreement tends to be over strategy. Boards tend to assume that activists do not have the same grasp of the management challenges because they are mostly from the analyst community rather than managers. They also mostly assume a short term mindset from the investor, whereas the managers believe themselves to have a more long term mindset and assume that the more traditional long only institutional investors share their priorities. Consequently, boards will assert that they have the support of the majority even if that may be due to some degree of apathy rather than enthusiastic pro-management support.
When challenged, company directors often point to significant votes in favour of their reappointments as directors and approval of other routine business at AGMs like the annual accounts. But of course, these routine votes mean very little and voting is generally ‘guided’ by the proxy firms who focus on vanilla corporate governance compliance rather than strategy and direction. Companies also rely on such support implied by analyst reports with a buy or hold rating. These analysts are arguably wooed and courted by the company, and whilst I’m not for a moment suggesting they are not independent, they do rely more heavily on the information they are provided with by the company’s management (and the inevitable bias) than the activists who are more independent since they are direct financial investors rather than commentators.
The work is interesting because every situation is different and fact sensitive. There are however some familiar themes.
- The activist has generally built a stake based on its own research having spotted an investment opportunity; or an existing investment is underperforming due to events and the activist feels imperilled to do something to protect its investment.
- Normally, the activist has had some interaction with the company but gets frustrated by the attitude of the company and may feel it is being fobbed off and is therefore ‘roused to action’.
- Often the activist has discovered that other shareholders share their frustrations with the company’s performance and the board’s attitude.
- The first advice they often ask for is guidance on what powers they have to effect change, whether their discussions with other shareholders or with the company will prevent action (i.e. due to having inside information) and how to go about matters.
- If the activist is considering board changes, advice on the application of the rules on board control seeking proposals under the takeover code may be needed if the shareholding of the activist and its ‘supporting shareholders’ prior to taking action is more than 30% and activist affiliated directors are being proposed.
- Advice is then often needed on the technical issues involved with making a requisition to convene a shareholder meeting to consider a resolution to make board changes.
- Throughout there is a constant discussion on strategy and tactics to ensure success, whether through private interactions or by going public.
Often, there is detailed discussion about how the company might be able to carry out the changes required or the issues the business faces. This can cover areas as diverse as:
- Whether it is practical to spin off non-core businesses.
- Moving from one stock market to another, generally in a different jurisdiction where the shares might be rated better.
- Carrying out an equity capital raise or refinancing debt.
- Bankruptcy laws and director duties where a company is in the “zone of insolvency”.
- Returning capital to shareholders and/or a solvent winding up.
- Engineering a sale of the company in a takeover.
- How key supplier and/or customer contracts may be impacted by changes.
Having a background as a corporate lawyer to listed companies over many years provides the bedrock for being able to advise on activism given the wide range of issues to consider.
Having experience of litigation also helps, although generally shareholder litigation is a less fruitful avenue in most UK situations. In large part this is due to the fact that action against directors for negligence or breach of duty is difficult to mount and time consuming. Generally speaking the shareholder needs to take a derivative action in the name of the company which requires court consent and where the damages are paid to the company not the shareholder.
The work is never dull. You learn a lot about the target company business and, as I say above, activists are well informed and smart clients with a very personal interest in the performance of the investment they have made.
Robert Ogilvy Watson
31 March 2025
