As shareholder activists increasingly make their presence felt in Australian boardrooms, David Friedlander and Matt Egerton-Warburton explore how they can be managed.
The rise in shareholder activism is a global trend, and Australia has not been immune. Historically rare, campaigns against Australian companies now regularly account for 10-15 per cent of global shareholder activist campaigns. In the last five years alone, instances of domestic or international activist campaigns against Australian companies have doubled.
There are around 500 activist campaigns on average around the world each year. In 2015 European, Asian and Australian activity grew by 73 per cent, 27 per cent and 10 per cent respectively.
The attraction of shareholder activism lies in its comparative cheapness. While a full takeover bid is a costly and difficult undertaking, an activist with a fairly small stake (less than 10 per cent of outstanding shares) may be able to launch a successful campaign.
Though struggling companies may be easy targets, successful companies can also be caught in activists’ crosshairs. Apple and PepsiCo have been targeted for their balance sheet policies, and activists have successfully secured board seats at Microsoft and Rolls Royce. BHP Billiton is currently in the midst of a shareholder challenge from Elliot Management, which has called on the company to split off its petroleum arm and restructure the business.
Activism in Australia
Shareholder activism involves shareholders agitating for change in corporate policy by exercising rights attached to shares held in a company. Changes sought typically relate to executive remuneration, corporate strategy, board changes and capital redistributions. This article considers three forms of shareholder activism: as an investment strategy pursued by activist funds; shareholder class actions; and the “two strikes” rule (all of which are growing in popularity).
Activists come in many shapes and sizes. While Australia is yet to attract the attention of the world’s great shareholder activists – Pershing Square, Icahn and the Children’s Investment Fund Management (although Elliot’s activism with BHP is an exception to this rule) – some of our fund managers (Perpetual and UniSuper) and entrepreneurs (Solomon Lew, John Singleton and Gina Rinehart) have launched various campaigns and we have attracted the attention of a few Hong Kong based activist hedge funds (including Janchor and LIM).
Australia is also experiencing an increase in the number of mid-sized shareholder activist funds and the proxy advisor sector continues to grow. No one would argue that the local activist landscape is mature, but the sector and strategies are developing.
Legislators in Australia have created a legal regime that is one of the most activist friendly in the world. Voters holding just 5 per cent of a company have a right to:
- a. Put resolutions to a general meeting, including for the appointment or removal (without cause) of the company’s directors.
- b. Requisition or convene a general meeting to put a resolution to the shareholders.
- c. Require the company to distribute a statement authored by that shareholder.
The rules in other jurisdictions are not so generous. By comparison, in the US the relevant threshold of ownership is 10-25 per cent. Further, US directors are not susceptible to motions seeking their removal at any time, and can only be removed when up for re-election or in the event of gross negligence, misconduct, fraud or a breach of directorial duties.
Two strikes rule
The two strikes rule provides shareholders with a right to spill the board if at least 25 per cent of votes cast at the annual general meeting (AGM) have been against the directors’ remuneration for two consecutive years. If a spill is called for and passed by ordinary resolution, all directors (other than the managing director) are up for re-election within 90 days.
Although the two strikes rule was meant to operate as an indicator of dissatisfaction with directors’ pay, in practice the function of the rule allows activists to push for a spill without the need to call a general meeting. In this sense, the two strikes rule provides activists and minority shareholders an opportunity to signal wider displeasure with the board.
AGMs have seen a sustained increase in the exercise of the rule since it took effect in 2011. Voting against remuneration has almost trebled since 2013, with 6.5 per cent of ASX200 companies experiencing more than 25 per cent of votes cast against their remuneration policies through the first half of 2016. In 2016, companies including AGL, Spotless, Woodside, Boral, CSL, Goodman, CBA and Mortgage Choice were among many to receive a “first strike”.
Shareholder class actions
Despite commencing only in 1999, Australia’s shareholder class regime is a firmly established component of the Australian corporate landscape. Plaintiff law firms supported by third party funding now operate in one of the most accommodating class action legal environments in the world. Since 1999 there have been 50 shareholder class actions, launched against the likes of NAB, Aristocrat, Multiplex, GPT and Allco. Outside of the US, corporations operating in Australia are at greatest risk of facing class action litigation.
Unlike their American counterparts, Australian shareholders are prevented from using resolutions to direct the board in its management of the company. This is a direct consequence of protracted grappling for control of NRMA’s board throughout the late 1990s and early 2000s. Shareholders looking to change dissatisfactory board strategy are mainly forced to replace directors altogether.
Case Study: Intrepid Mines & Quantum Pacific
In 2013 Hong Kong-based Quantum Pacific sought to requisition a board spill of Intrepid Mines following its failure to assert its 80 per cent interest in a $5 billion Indonesian joint venture. One year later, however, Quantum Pacific and US-based Fides Capital Partners successfully used their combined 5 per cent stake to abruptly change Intrepid’s strategic direction, replacing half of the board and implementing a $110 million buyback to return cash to shareholders.
Case Study: AMP China Growth Fund & LIM Advisors
In June 2015, Hong Kong activists LIM Advisors sought to requisition a meeting to challenge management’s performance in relation to the $500 million ASX-listed China Growth Fund. AMP Capital persuaded LIM to withdraw the requisition by pledging improved performance. One year later another requisition was successful in demanding, and passing, a resolution to wind up the fund.
Case Study: Quintis/TFS Corporation & Glaucus Research
In 2013 the two strike rule resulted in a board spill for Quintis (formerly TFS Corporation), the Western Australian sandalwood producer. Although the resultant board spill resolution failed, mustering a vote of 12 per cent, the company initiated a comprehensive review of its remuneration processes.
Tips for managing shareholder activists
- Conduct an internal audit – review internal governance and compliance to ensure activists have limited causes for complaint.
- Create a playbook – outline intended responses to a range of different possible scenarios. Ensure directors have a firm understanding of activist tactics and possible responses.
- Run a simulation – a law firm or an investment bank can anticipate possible points of attack.
- Monitor trading – employ a share alert service and monitor substantial holder filings. Comprehensively research and analyse all registered shareholders and beneficial owners, understand who influences them and what their motivations are.
- Maintain shareholder relations – monitor and communicate with shareholders on an ongoing basis. Understand shareholder sentiment and motivations by meeting key investors and proxy advisors, and engage investor relations experts.
- Implement structural defences – understand and consider implementing structural defences to shareholder activist campaigns.
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