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As shareholders both large and small seek to exert their influence on companies, Saul Sender, partner in the corporate group at Mishcon de Reya, examines the growth of shareholder activism in the UK.
An NGO lobbying an oil company to stop it exploring the arctic tundra and a New York hedge fund advocating a change of management at an investment fund would seem, at first glance, to be strange bed fellows—yet both of them are shareholder activists. The increase of shareholder activism in the UK has been widely reported and this is partly due to the term ‘shareholder activism’ being applied to such a wide range of parties.
There are a number of factors behind the growth of shareholder activism. As the UK markets have clawed their way out of recession, it has become easier for shareholder activists to point to management failings as the reason behind poor performance. Against a background of rising share prices, the risk of a failed shareholder activist campaign is mitigated. There have also been a number of US activist funds opening offices in the UK to take advantage of market conditions and to apply tactics that have long been used in the US. Social media also makes the propagation, and discussion, of activist agendas much easier.
One of the conclusions that investors have drawn from the financial crisis is that shareholders can no longer be passive passengers in the conduct of the businesses that they are invested in. UK institutional investors who have traditionally exerted power behind the scenes in smoke-filled rooms are now more willing to take public positions against the management of the companies they are invested in. This was evident in the 2012 ‘shareholder spring’ where the report of the remuneration committee at a number of high-profile companies was either rejected by shareholders or suffered significant minority disapproval. This led to the government introducing new legislation requiring the adoption of remuneration policies—as a result shareholder activism on this issue appears to have diminished.
The threat of shareholder activism ought to make companies more transparent and more willing to communicate in an appropriate manner with shareholders. However it can become acrimonious. Quindell, which at the time was the largest company listed on AIM, suffered a £900m drop in its market capitalisation after US-based activist/researcher Gotham City published a 74-page dossier detailing allegations of accounting impropriety at the company. Quindell responded with a detailed rebuttal and alleged that Gotham were motivated by short selling. Subsequently Quindell won a defamation claim against Gotham which was not defended.
It is difficult to draw meaningful conclusions from a particular shareholder activism episode because the outcomes are very specific to the particular circumstances. As previously noted, the UK shareholder activist community is very diverse and the UK lacks the high profile shareholder activists whose performance and style can be compared. The investment trust sector seems to have been a fertile ground for shareholder activists in the UK, perhaps because performance of funds can easily be benchmarked against underlying asset performance and competitors in the market place.
The UK legal and regulatory environment provides both the activist and the target company with a variety of weapons. Activists can use the range of shareholder rights set out in the Companies Act 2006 (CA 2006) which include:
Targeted companies can use the disclosure requirements of the Disclosure and Transparency Rules and the Takeover Code, as well as the power to require parties interested in shares under CA 2006, to force activist shareholders to disclose their position in a company. All parties need to be aware of the restrictions on their activities required by the Takeover Code, the Market Abuse Directive 2001/57/EU and insider dealing legislation. There is also legislation making its way through Parliament at the moment to require private companies to know who their significant beneficial owners are. We work very closely with both activist and company clients to navigate these rules to obtain the best outcomes.
We keep up-to-date with trends in US shareholder activism because the likelihood is that US practices will come to Europe, with the UK being the first in line. Carl Icahn’s tweets about Apple have become famous and we expect that, in due course, UK activists will follow suit. It might also be the case that litigation will also become a shareholder activist strategy as this is the way that many activist shareholder battles have gone in the US. Keeping up good relations with proxy solicitation firms can also play an important role in mobilising support either for or against an activist agenda.
Interviewed by Neil Fanning.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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