Shareholders’ Rights & Shareholder Activism 2022

Global Overview – Shareholders' Rights and Shareholder Activism 2022

Shareholder activism – that is, shareholders seeking to exercise their rights to exert influence on a company or its management with the purpose of bringing about change – has evolved into a permanent feature of global capital markets. Shareholder activists now promote themselves as defenders of the golden principle of shareholder value, and hold management teams and boards to account in doing so. Investors are making increasing demands of directors, as regards both actions and disclosure on key issues, and are prepared to act where those demands are not met. Activist shareholders are becoming increasingly vocal on a broad range of topics, from M&A to climate risk. Although some companies are more likely to be targets than others, it has become clear that no company is immune from the threat of an activist campaign.

Statistics

After the inevitable lull during the COVID-19 pandemic, global shareholder activism levels are up compared to last year, with Q1 2022 being the most active quarter in the last five quarters, followed by Q2 2022. However, the level of activity remains significantly down compared to the same period in any year in the pre-pandemic period from 2015 to 2020.

The highest levels of activity continue to be seen in the US, with Q1 being the stronger quarter of H1 2022. The next most targeted countries in H1 2022 were Japan (a country traditionally less receptive to shareholder intervention), the Republic of Korea, Canada, the UK and Australia. Activity was lowest in Finland, Malta, Turkey, India, Nigeria, Slovenia, Hungary, Italy, Luxembourg, Norway, Belgium, Brazil and the Russian Federation.

The nature of the campaigns seen in H1 2022 has inevitably reflected the challenging and deteriorating market and economic conditions, with an increased focus in Q2 2022 on strategy and operations and capital allocation policies.

The activist profile comprised a broad range of investor types, including:

• established global players;
• regional players;
• sector-focused funds;
• increasingly active ESG specialists; and
• occasional activists.

The proportion of first-time activists was higher than in recent years, with 37% of all activists launching campaigns being first timers.

Sector and size

Globally, the technology and industrials sectors had the greatest number of companies targeted, each accounting for 21% of the total number of campaigns initiated. This was followed by the consumer sector, accounting for 14%, and the power, energy and infrastructure sector, accounting for 11%.

With large-cap companies (defined as those with a market capitalisation of more than USD10 billion) accounting for 29% of campaign targets in H1 2022, large-cap activism remains above the average seen over recent years.

Trends

With the ground-breaking COP 26 summit in 2021, and with climate change and other environmental concerns continuing to dominate the news, it is not surprising that the overwhelming global trend has been a substantial increase in the number of companies publicly subjected to activist ESG demands. As ESG has taken centre stage, investors are increasingly seeing the effective management of ESG risks and opportunities as being fundamental to long-term value creation, and integrating ESG factors into their investment decisions. Poor ESG performance ranks highly amongst the main criteria to identify companies as possible targets for activist shareholders.

The biggest jump has been in relation to the "E" of ESG: the number of companies publicly subjected to "environmental" demands (eg, climate-related demands) rose dramatically, from 63 in H1 2021 to 114 in H1 2022. The number of companies publicly subjected to "social" demands (eg, demands relating to diversity/equality and political activity) also rose, from 93 to 129, whilst those publicly subjected to "governance" demands (eg, calls to amend company policy) increased from 299 to 310.

Looking more widely at the nature of activist campaigns, the number of companies facing remuneration-related demands also increased dramatically, as did the number subjected to activist M&A demands. With the deteriorating economy, there was increased focus on strategy and operations and capital allocation policies, accounting for 21% and 17% respectively in Q2 2022. As regards board seats won by activists, continuing the trend from 2021, a high proportion of board seats were secured via settlement agreements (91% of the total board seats won).

Regions

The number of campaigns has continued to rise in Europe. By contrast to the US, Europe's Q2 2022 was stronger than Q1 (with a 33% increase over Q1), and resulted in a record-breaking H1 2022, with activity up 67% on the previous year. The most targeted sectors were financial services and industrials.

In line with what has been seen in previous years, UK companies were the most frequently targeted in H1, and represented more than a third of all European campaigns. Some of the most high-profile UK activist campaigns have been centred around ESG issues. In this space, key campaigners have included:

• Earthwatch, which uses soft skills to drive change;
• Climate Action 100, which proposes climate resolutions at companies' AGMs; and
• Extinction Rebellion, which uses activism as an opportunity to attract media attention for their cause. Recent AGMs disrupted by Extinction Rebellion include Shell's first UK AGM earlier this year, and the HSBC, Barclays and Standard Chartered AGMs, which were all disrupted in a move to stop investments in fossil fuels.

The number of US-based companies publicly subjected to activist demands in H1 2022 increased over the same period in 2021. Reflecting the global trend, the technology and industrials sectors were the most targeted. The number of US-based companies publicly targeted by ESG-related demands was higher in H1 2022 than H1 2021. Notably, the number of US companies publicly subjected to specifically "environmental" demands increased 76% over H1 2021.

In Asia, there was a big increase in the number of activist targets, with an almost 75% increase from H1 2021 to H1 2022. The most targeted sector was industrials, which accounted for a quarter of all campaigns.

Fewer Australia-based companies were publicly subjected to activist demands in H1 2022 compared to the same period in 2021. Following the trend of previous years, the basic materials sector continues to be by far the most targeted sector, accounting for 36% of the total number of companies targeted during the period. There has been an uptick in the number of Australian companies publicly subjected to activist ESG-related demands and, in particular, environmental demands.

Conclusion

Against this background, it remains critical for those in management positions and their advisers to inform themselves of the rights and expectations of investors, and to be alert and prepared by considering their approach and strategies in the event of an activist campaign. When looking at tackling activism, companies should learn not to be too defensive, especially if the potential activism is ESG related, and should invest time in training their board and management on how to act. An audit of potential issues could always be a useful way of uncovering potential issues that may be raised by activists. Further tools and strategies for companies are explored in the country-specific Q&A. From the investors' perspective, an awareness of the range of available legal and commercial options remains key in order to achieve their strategic objectives in markets that are increasingly sophisticated.