Shareholders' Rights & Shareholder Activism 2021

Global Overview – Shareholders' Rights and Shareholder Activism 2021

From the inception of corporate-based enterprise, the question of what pressure a shareholder can exert upon a company and what rights it enjoys (or otherwise) has been a topic for legal debate. The battles between the all-powerful Dutch East India Trading Company (the first public company whose shares were formally listed) and Isaac Le Maire (history’s first known short seller of stock) included, in 1608, the first recorded petition asserting a right to challenge weak corporate governance. Through the 19th century, with the onset of the Industrial Revolution on both sides of the Atlantic Ocean, the law grappled with how to regulate the rights of a larger, more democratised share ownership. The different approaches of New York- and London-based Chancery Courts in seminal decisions in Foss v Harbottle and Robinson v Smith continue to be reflected in modern law. In the 20th century, from the growth of proxy fights in the 1950s to the corporate raiders of the 1980s, greater ingenuity was expended on pursuing – and defending – corporate targets. Yet all this has been swamped by the recent renaissance in shareholder activity on a global scale and with an impressive breadth of objective.

In 2020, levels of shareholder activism – that is, shareholders in a company seeking to exercise their rights in such a way as to bring about change in a company or its management – remained high, in line with recent trends, notwithstanding the impact of the pandemic (albeit slightly lower than the all-time peak in 2018). According to Lazard data, USD40 billion of capital was deployed in 182 activist campaigns throughout the year.

Headline-grabbing examples – such as Third Point’s demand for strategic realignment at Intel, Elliott’s attack on Jack Dorsey’s stewardship as Twitter CEO and Bluebell’s ESG campaign against Solvay’s Tuscan operations – ensured that as we moved into 2020 this issue remained high on the agenda of any well-informed board.

The impact of the COVID-19 pandemic on shareholder activism levels in the first half of 2020 has now largely been diluted, with an uptick from the second half of 2020 into 2021 as activists acclimatised to the new economic and social environment and pursued campaigns against companies that were perceived to have performed poorly in the face of the pandemic.

In the US, activist shareholders have targeted companies across all sectors, ranging from consumer goods and healthcare to financial products and services. Nor is market capitalisation a discriminating factor; in the first half of 2020, around 36% of US activist-targeted companies had a market capitalisation of greater than USD10 billion, while, at the other end of the spectrum, around 25% had a market capitalisation of less than USD250 million.

Besides the USA, other international hotspots of activity include Japan, Canada and the UK. As discussed further in the UK chapter, while shareholder activism is far from a new phenomenon in that market, with its well-developed statutory shareholder protections, there had been a marked increase in UK activist activity over recent years prior to the COVID-19 pandemic. That increase appears to be driven by a shift in public perception of activism and activists, following the 2007 financial crisis, combined with changes to corporate governance requirements, an increased focus on encouraging active share ownership and a raft of US-based hedge funds targeting UK companies. A notable example of the latter has been Odey Asset Management’s demand for the removal of Tungsten’s chairman and CEO, which (despite a settlement between Odey and the company by which the former agreed to withdraw its requisition for a general meeting) led to the CEO’s resignation.

Markets traditionally less receptive to shareholder intervention have also been experiencing an uptick in shareholder engagement. For example, in Japan, shareholder activism has continued to increase, despite the pandemic. At least ten activist campaigns have been launched against Japanese companies in the first half of 2021, reflecting the success of the Toshiba campaign in the face of corporate and governmental tactics to thwart activism. Such developments underscore the fact that investor activism is, increasingly, an issue of global relevance.

While generally motivated to increase shareholder value, specific goals pursued by activist investors are many and varied. They tend to be carefully developed and specifically targeted to the particular company that is the focal point. In broad terms, the most prevalent category of activist demands continues to be governance-related. Interestingly, however, this has not always been successful – in many cases, activists seeking to replace more than 50% of the board of a company have ended up failing to acquire any board seats or settling for considerably fewer. According to Lazard data, M&A-focused campaigns also remain significant, accounting for 44% of campaigns launched in the first half of 2021. There is also a discernible trend towards shareholders using their vote to influence environmental, social and governance (ESG)-related outcomes. Signs of a newer trend are emerging with the proliferation of special-purpose acquisition vehicles (SPACs) in the IPO markets. Activist investors have not been slow to take advantage of SPACs as a new source of capital. As 2021 unfolds, there is greater evidence of investors using the SPAC structure to their advantage – see, for example, Hindenburg’s attack on governance at Clover Health.

The techniques employed by activist investors to achieve these goals are equally wide-ranging. The traditional four pillars of “voting with feet”, stake-building, vocal protest and litigation have been subtly developed. In some instances, a campaign may be run largely “behind the scenes” with little or no public engagement, and in others, may be played out in the public eye. The level of public engagement will be an important strategic decision, both for an investor and for a company responding to an activist attack. In some cases, activist investors may take more aggressive measures, such as the commencement of litigation, as part of their strategy (examples include the lawsuit filed by Elliott Management against PG&E in July 2020 and French media group Vivendi’s dispute with Italian broadcaster Mediaset, which has played out in various courts across Europe). In the chapters that follow, we explore the legal remedies available to shareholders against other key stakeholders in the range of jurisdictions surveyed.

It is also interesting to note that, while a handful of key players continues to dominate the activist investor scene (with Elliott Management having deployed around USD6.2 billion in furtherance of activist activities and ValueAct having deployed around USD2.8 billion in the first half of 2021 in six campaigns alone), in the first half of 2021 over 28% of new campaigns were launched by a “first-time” activist investor. It is clear, therefore, that an ever-larger pool of investors is open to taking on a more assertive role, with Engine No. 1’s successful proxy fight at Exxon leading the charge. In addition, there has been an uptick in recent years (predominantly in the USA) in so-called wolf-pack attacks, in which activist hedge funds, arbitrage funds and traditional long-only funds work in concert to achieve their goals. The increased willingness of institutional investors to align themselves with activists or, more broadly, to take on an increasingly active role in corporate governance, can have a meaningful impact, given the large stakes these investors often hold.

Against that background, it has never been more critical, on the one hand, for those in management positions and their advisers to inform themselves of the rights and expectations of shareholders and to consider their approach to stakeholder engagement and strategies in the event of an activist attack, or, on the other hand, for investors and asset managers in competitive and increasingly sophisticated markets to ensure they are fully apprised of the range of legal and commercial options available to them in those markets in order to achieve their strategic objectives.