Is shareholder activism common and what are the recent trends?
Even though the Austrian Shareholder Association and certain Austrian activist shareholders continue to take more active roles in representing (minority) shareholders' interests, shareholder activism does still not play an important role in Austria.
Notwithstanding the above, shareholders of public companies tend to make a more active use of their rights leading to an increased number of opposing votes to e.g. the appointment of members of the supervisory board and other, also structural, decisions. In addition, in merger and squeeze out situations, shareholders are even more willing to contest e.g. the share exchange ratio of mergers resp. the squeeze-out compensation in court.
Shareholder activism is not well developed in Brazil. Recent years, however, have seen a growing amount of shareholder activism, especially by some fund managers, but shareholder activism is still not part of the culture of the Brazilian capital markets.
The Brazilian companies most exposed to shareholder activism are those that have issued American depository receipts in the US market. A good example would be Petrobras, the Brazilian oil and gas company, which faced securities class actions filed with the New York courts by US investors, owing to losses stemming from the money-laundering and corruption schemes that have become public in the past years; Petrobras announced in January 2018 that it has signed an agreement to settle such class action in the amount of US$2.95 billion. Owing to this settlement, some minority shareholders have filed lawsuits in Brazil asking for a similar indemnification in Brazil, but it is unlikely that they will receive an indemnification from Petrobras in such amount, since the Brazilian legislation and judicial environment do not provide minority shareholders the ability to receive indemnifications in such proportion.
There is a certain amount of shareholder activism in France but it is not as significant as in some other countries. Shareholder activism is facilitated by a steady stream of legislative changes marginally increasing shareholder rights and transparency, as described above in this paper. “Say on pay” issues have been the most visible, but activists have also proposed reorganisations or exceptional dividends and challenged takeover bids. Solicitation of proxies is permitted, subject to some restrictions.
While there has always been a certain number of shareholder agitators (so-called predatory shareholders) who sought to enjoin shareholder resolutions for their own benefit, i.e. to settle these claims against compensation by the company, a new type of US-style shareholder activism has been playing an increasingly important role since around the year 2000. Since then, hedge funds and specialized activist funds have started to make demands of CEOs of German listed companies. The activist playbook is often similar: first demands are usually discussed behind closed doors. If management does not appease the activist, public letters to the CEO or the chairman of the Supervisory Board follow. Next, activists launch a PR campaign and search for fellow investors with whom they share common interests in order to exert further pressure on management. Finally, the activists use their legal tools in their capacity as minority shareholders, for example to amend agenda items, call for an extraordinary shareholder meeting or deny a vote of confidence (Entlastung) for certain members of the Management Board and/or the Supervisory Board.
Recently, Germany has seen an increased trend by activists to request a special audit to investigate potential violations of law (e.g. Elliot/Uniper) and thereby prepare damage claims against members of the Management Board and/or the Supervisory Board. In the face of strong criticism, companies have even in some cases considered to commence a "voluntary" special audit (e.g. ThyssenKrupp).
Another trend is the blurring of the lines between activist (hedge) funds and more regular investment funds like pension funds. They often work hand in hand, with more regular funds backing activist funds and supporting activists in their demands of management.
A recent decision of the German Federal Supreme Court provided more clarity regarding the question when investors are "acting in concert" regarding a company. Activists are keen to avoid this situation, because all shareholdings in a company of investors "acting in concert" must be aggregated and publicly notified, in the absence of which the investors lose, inter alia, their right to vote the shares. The increased legal certainty following the court decision should make it easier for investors to coordinate their behavior in respect of single events (as opposed to the general strategy of a company) and should thereby foster activist acting in so-called "wolfpacks".
Shareholder activism is not so common. However, the newly enacted Law has introduced the concept of shareholders’ unions. Shareholders can thus act through unions. Such unions take the form of an association as provided by the Greek Civil Code. The unions can provide information regarding the shareholders rights through a website. A Presidential Decree shall be issued by the Ministers of Finance and Development which will set out in more details about the operation of the unions.
Shareholder activism is not common in Hong Kong because there is no class action system that allows one or more named plaintiffs to lodge a claim on behalf of a “class” of people who claim to have suffered a common injury. Although the Law Reform Commission of Hong Kong published a report in May 2012 proposing the introduction of a mechanism for class actions in Hong Kong, no actual timetable has been introduced by the government. Nevertheless, there are signs of rise in shareholders activism in recent years. Regulators such as the Hong Kong Stock Exchange has taken steps to reform regulations to protect minority shareholders. On May 4, 2018, the Stock Exchange announced amendment to the Listing Rules (Hong Kong Stock Exchange, “Consultation Conclusions – Capital Raisings by Listed Issuers”, May 2018) which are “aimed at restricting abusive practices relating to capital raisings by listed issuers [listing applicants] and protecting the interests of minority shareholders” and upholding “fair and equal treatment of all shareholders”. Some of the changes include requiring minority shareholders’ approval for all open offers, unless the new shares are to be issued under the authority of an existing general mandate and requiring listing applicants to disregard any excess applications made by the controlling shareholders and their associates in excess of the offer size minus their pro-rata entitlements.
Shareholder activism has become more common in Japan in recent years, and there have been several movements which require attention every year. Recently, there have been an increasing number of cases where activist shareholders positively propose to conduct M&A transactions to companies, or activist shareholders intervene to prevent a company from conducting M&A transactions or propose to seek better conditions.
Shareholder activism has not been frequent in shareholders meetings and tends to occur in the context of change of control or restructuring processes (e.g., during the financial crisis or in takeover processes).
There are a number of public interest groups that actively seek to advance shareholders’ rights, monitor the activities of the large-scale enterprise groups and publicly disseminate the results of relevant studies, and provide assistance (including legal assistance) to minority shareholders in bringing derivative actions against companies.
In addition to the recent legislative efforts driven by shareholder activism, Korean authorities have actively encouraged institutional investors to exercise their shareholder rights and responsibilities. The Korean version of the Stewardship Code was also recently introduced, which provides guidelines for the institutional investors’ active exercise of shareholders’ rights and addressing any issues that may obstruct exercise of such shareholder rights.
Korea Corporate Governance Service (“CGS”) is responsible for enacting and amending the Stewardship Code, as well as supporting the participation and performance of institutional investors, researching market trends and creating the general environment.
Recently, domestic and foreign activists have become more involved in extraordinary corporate actions, such as corporate mergers and splits. There is a growing tendency for activists to proactively claim their rights as shareholders.
With almost 30 shareholder initiatives between 2010 and 2017, Switzerland is a key European target for activist shareholders. Since 2012, such initiatives in Switzerland have more than doubled.
Shareholder activism is a way that shareholders can influence a corporation's behavior. Activism can range from proxy contests to replace the entire board to shareholder proposals to requests for dialogue or meetings with management or the board.
Shareholder activism reached record levels in the first half of 2018 in terms of board seats gained, capital deployed and number of campaigns mounted. While well-known activist investors like Elliott Management and Icahn Partners continued to account for a large portion of activist campaigns, a wider group of investors have begun to employ activist techniques. In particular, institutional investors are becoming central and vocal players in efforts to influence corporate governance policy and decision-making.
Activist campaigns often focus on one or more of the following objectives:
- Capital reallocation: The return of capital to shareholders through a share repurchase or dividend;
- Business transaction: The sale of the company or spin-offs or divestitures; also mergers with desired targets (sometimes other holdings of activist);
- Governance change: Change of CEO or board of directors; and
- Operational change: Improvements in cost profile and other metrics; often coupled with proposed change in target leadership
The UK has seen a rise in shareholder activism in recent years. Research suggests that approximately 60 UK companies are potential targets for activists, which increasingly target larger listed corporates. For example, during the summer of 2018, British Telecom came under pressure to spin out its Openreach internet infrastructure business and Elliott Advisers targeted Sky earlier in the same year.
Many institutional shareholders apply the UK Stewardship Code, a framework for active engagement with investee companies, and are increasingly showing discontent with boards at annual general meetings. One in five UK listed companies experienced a rebellion by more than 20% of shareholders on one or more annual general meeting resolutions in 2017 (most related to director compensation), a higher level than was generally expected. The discontent expressed at annual general meetings may suggest that the somewhat genteel culture of the UK stock market is changing and that accusations of shareholder apathy are less true than traditionally believed.
In 2018, the Investment Association started to publicise the names of companies which experienced significant shareholder rebellions. A public register is now available online naming companies who had 20% of more of its shareholders vote against a resolution. The register also gives details of which resolutions were the subject of such revolts.
Under the UK Corporate Governance Code, when 20% or more of the votes have been cast against the board recommendation for a resolution, the company should explain what actions it intends to take to consult shareholders in order to understand the reasons behind the result, and publish an update no later than six months after the shareholder meeting.
Whilst there has undoubtedly been a rise in activism in the UK, and greater publicity and transparency on this, the trend should be seen in context. Activism is not as pronounced as in many other jurisdictions and the process is often less adversarial and less likely to be the subject of litigation than in other large markets, notably the US.
While shareholder activism has traditionally been less prevalent in Canada than in the U.S., it has been on the rise in Canada, both as a result of U.S. activist shareholder activity in Canada and increased participation by Canadian institutional investors.
There has recently been a trend away from “activism” and towards “engagement” by management and boards with a wider base of shareholders. The corporate governance and investor stewardship principles espoused by many major U.S. companies and investors appear to be gaining traction in Canada as well. The scope of shareholder proposals has expanded to encompass a broad range of issues such as environmental, social and governance matters (“ESG”) and ‘say on pay’ votes on executive compensation.
Italian financial markets experienced a significant growth in shareholder activism and engagement in the past years.
According to the latest publicly-available data (Report on corporate governance of Italian listed companies, issued by CONSOB in December 2017): ‘In 2017 the attendance by institutional investors has marked its highest rate over the last six years by hitting 19.4% of the share capital. This results from the stable increase in the participation of foreign institutional investors, equalling on average 18.3% of the share capital (eight percentage points higher than its 2012 value), whereas over the time span under consideration attendance of Italian institutional investors has remained substantially unchanged’.
In 2018, activism and engagement have grown even stronger, a trend which will reasonably be confirmed in the upcoming months, also considering that the national legal framework is going to be supplemented with the relevant implementing measures of the provisions under Directive (EU) 2017/828 as regards the encouragement of long-term shareholder engagement (Shareholder Rights Directive 2 or SRD 2).