Activist Shareholders and Relationships with UK Boards

There has been a noteworthy increase in shareholder activism in the UK in the past few years, nor is Brexit expected to change this. In the past, US hedge funds and alternative investors with event-driven strategies were often considered to be the principal shareholder activists in the UK. But, in recent years, long-term institutional investors have become increasingly involved in activist campaigns and, on occasion, have formed alliances with hedge funds or alternative investors for this purpose. For directors, it means becoming increasingly focused on this area, and preparing either a better means to dialogue with shareholders, or defence scenarios.

UK boards are faced with new activism

The directors of UK-listed companies are becoming increasingly focused on rising shareholder activism.

Shareholder relationships with UK boards are rarely as fraught as some in the US, but there is increasing demand by investors for action on issues like executive pay and board performance, according to corporate governance experts Will Pearce and Allison Kramer at the London-based law firm Davis Polk & Wardwell.

Nor is Brexit expected to change this. “Strong shareholder rights, including the ability to call a meeting with just 5 per cent of shares, and a highly liquid and dispersed market, should mean the UK continues to be a focal point for activism in Europe,” according to Armand Grumberg, a securities lawyer at the London-based firm of Skadden, Arps, Slate, Meagher and Flom.

Directors are advising certain clients to take additional proactive steps to protect themselves from being challenged by activist shareholders, for example, by conducting regular strategic reviews to identify potential areas of challenge (including, if appropriate, through a ‘fire drill’ exercise, where management is put through mock attack scenarios), and by monitoring unusual trading (or other) activity which may indicate that the company is being targeted.

The principle of shareholder engagement is a key feature of UK corporate governance. A company will be less vulnerable to challenge from an activist shareholder if it engages regularly with its major shareholders, advised Pearce and Kramer.

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Institutional Shareholder Service (ISS), the US-based proxy advisory service, published its first UK voting guidelines in January 2015, which became effective for meetings held on or after 1 February 2016, a sign of increasing demand by shareholders for action.

ISS supports governance that favours shareholder action. “Boards should be accountable to shareholders, the owners of the companies, by holding regular board elections, by providing sufficient information for shareholders to be able to assess directors and board composition, and by providing shareholders with the ability to remove directors. Directors should respond to investor input such as that expressed through vote results on management and shareholder proposals and other shareholder communications. Shareholders should have meaningful rights on structural provisions, such as approval of or amendments to the corporate governing documents and a vote on takeover defences. In addition, shareholders’ voting rights should be proportional to their economic interest in the company; each share should have one vote. In general, a simple majority vote should be required to change a company’s governance provisions or to approve transactions.”

Behavioural shift of institutional shareholders

The apparent behavioural shift of institutional shareholders is due to a number of factors, including the publication of the ISS guidance aimed at promoting effective engagement between institutional shareholders and listed companies and the introduction of ‘say-on-pay’ legislation, Grumberg explained.

Activism in the UK has focused primarily on board composition and remuneration. However, there has also been significant activity in operational areas in recent years. This includes strategic reviews, restructurings, spinoffs and other divestitures, and (in a takeover context) actions to increase the takeover offer price. Balance sheet strategies, such as share repurchases, dividends and leveraged recapitalisations, are not uncommon.

There have been some notable examples of socio-political activism in the oil and gas industry. A good example is the ‘Aiming for A’ coalition, which has £230 billion assets under management and includes the Local Authority Pension Fund Forum, the largest members of the Church Investors Group, together with Hermes Investment Management, Sarasin & Partners, The Pensions Trust and Rathbone Greenbank Investments, and which successfully pushed the passage of special resolutions at BP, Glencore and Royal Dutch Shell to accelerate participation in the transition to a low-carbon economy.

High-profile proxy battles

Activism has roared back to prominence in the United Kingdom since 2014, according to the Harvard Law School Forum on Corporate Governance, with three high-profile proxy battles and the first FTSE 100 company accepting an activist into its boardroom.

Rolls-Royce was the FTSE 100 company in question. San Francisco-based ValueAct Capital Partners was the first company in the UK to successfully negotiate a board seat for its representative in exchange for maintaining a 7.5 per cent shareholding. The fund worked with new CEO Warren East for over 200 days before its nominee was offered a board seat.

Starting in 2014, activist shareholder Edward Bramson fought his way to a seat on the board of London-based Electra Private Equity after taking a 30 per cent stake in the firm. Bramson finally got there in 2016, and then Bramson’s vehicle, Sherborne Investors, effectively protested the state of corporate governance at the investment firm, and finally caused the termination of the contract of Electra’s investment manager, which had been responsible for Electra’s assets for 40 years.  Since then, almost all of the firm’s other directors have been forced out.

In another example, Portuguese billionaire Luis Amaral has shaken up the board at the LSE-listed Polish vodka producer Stock Spirits. With about a 10 per cent stake in the company, Amaral has forced the Stock Spirits board to cease making acquisitions and to pay a special dividend to shareholders. He’s also gotten two of his own nominees elected to the board, but they have been named “non-independent” directors, a move Amaral is now fighting.

UK expected to remain focal point of activism

Strong shareholder rights, including the ability for activists to call a general shareholders’ meeting with just 5 per cent of shares, and a highly liquid and dispersed market, should mean the UK continues to be a focal point for activism in Europe, according to Pearce and Kramer.

Passive investors in the UK are also joining the game. Patrick Connolly, of the UK-based investment consulting firm Chase de Vere, noted that asset managers have an opportunity to vote and assert influence in line with their views and beliefs — and that passive investment managers shouldn’t be precluded from doing so, too. “It is sensible for investment companies to pool their active and passive holdings if this means they are able to assert more influence which can help to bring about positive changes,” he said.

Culturally, US activist shareholders are more likely to use public measures, such as requisitioning general meetings and voting against resolutions for the appointment of new directors, at an early stage in the campaign process. On the contrary, UK institutional investors tend to first engage in private discussions with the board before submitting a formal proposal.

In general, activist tactics are more cooperative than those in the US. Any public form of engagement would usually represent a last resort, largely because it involves considerably more expense and risk (both in execution and reputation). So a UK activist would pursue its objectives through private engagement with the company’s board. If the activist is satisfied that its objectives will not be met through private engagement, it may use public announcements, open letters, website campaigns and even social media to voice its concerns and obtain support for its proposals from other shareholders and representative bodies (such as the Investment Association or the National Association of Private Pension Funds).

Diligent board portal facilitates shareholder engagement

As UK boards of directors increase shareholder engagement efforts, the role of effective and secure communications becomes critical.

Diligent Boards provides such an environment, enabling secure messaging among all operating systems and platforms. Diligent moves all of the agendas, documents, annotations and discussions of board meetings online into one intuitive, secure portal. The platform goes beyond digital board books to manage the full scope of a board’s moving parts — committees, contacts, voting, reporting and more.

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