What is shareholder activism?
Shareholder activism refers to when proactive, agenda-driven investors drive change in a company through various strategies. These investors first acquire a (usually minority) stake in the company, then leverage their voting position in order to steer business practises of the target. The approach need not be necessarily public, however - they may privately voice their concerns to a company’s board or existing shareholders to influence stakeholders’ views. Investors will ultimately seek to boost share prices of the target through channels such as corporate governance, strategic decisions, profit distribution, and internal culture. Environmental, Social and Governance (“ESG”) considerations and relevant performance indicators are also increasingly at the heart of this decade-old trend.
Near conception, shareholder activism was almost exclusively a North-American paradigm. Recent stories, however, make it evident how activist shareholders share a global footprint. As hedge funds increasingly seek diversified investment opportunities and as EMEA corporate culture becomes more receptive towards shareholder engagement, we expect this trend to continue into the medium term.
What tactics can these investors employ?
On a basic level, investors initiate dialogues with managers or submit formal proposals which are to be voted by shareholders at the annual meeting. Certain classes of shares that these investors take up may allow for further distinct voting privileges as well as dividend entitlements. Often, the activist will call for a particular transaction, be it acquiring or disposing of a particular asset or a target company. It may also advocate a reshuffling of the board in order to steer the company’s day-to-day operations and overall strategic vision.
As mentioned previously, investors may equally opt for a private approach instead. This could entail addressing the board and ensuring their views are heard, or contacting other shareholders via social media or campaigns.
The tactics are not always friendly, however. In fact, certain funds or individuals are notorious for their hostile, offensive style of effecting change - a good example being Carl Icahn’s hostile takeover of TWA airlines in 1985. Media channels may be employed to publicise their demands and thus amount pressure on the company. In extreme cases, litigation threats take place as well.
Case Study 1: Vodafone
Cevian Capital, Europe’s largest activist fund with $15bn AUM, has built a stake in Vodafone and is pressing for a restructure in light of dipping share prices.
The fund’s proposal is centred around simplifying Vodafone and making it a more focused business. Specifically, it is calling for “in-market as well as a towers consolidation” via potential European mergers (across Italy, Spain, Portugal and the like) which will boost returns. This aligns with the fund’s investment strategy, i.e. offloading redundant business units and aggressively striking deals to increase scale in a focused subsector. Whether competition regulators will willingly open doors is most uncertain.
Cevian’s moves to streamline the business, cut costs and consolidate key European markets is thought to have received general support from stakeholders. This is demonstrated by Vodafone’s share prices rising by 5 pc as Cevian built a stake.
Case Study 2: Shell
Third Point, an activist NY hedge fund, has acquired a 750 million dollar stake in Shell late 2020. It has since urged Shell to split itself into multiple standalone companies; namely, a “legacy” arm focused on oil and gas and “low-carbon” arm focused on LNG, renewables and marketing. This comes at the backdrop of The Hague court’s order for Shell to expedite its greenhouse gas emission cuts. In essence, as the two entities will pursue two clearly different investment objectives, they will independently deliver significantly higher returns for shareholders.
However, unlike Vodafone’s case, incentives do not align well within the company. The CEO has openly voiced opposition arguing that a “significant part of the energy transition will be funded by the legacy business.” Furthermore, there is no guarantee that the products of the demerger will guarantee better performances. It is most likely that the legacy arm as a standalone business will face an even greater existential crisis going forward with the transition away from carbon. Also, there are concerns over Shell’s fledgling renewables division which is virtually uncompetitive without the cash-flow from the lucrative oil division.
On the other hand, advocates call for an orderly transition which can add value to the firm’s low-carbon transition. They argue that removing the “incoherent, conflicting set of strategies that attempt to appease multiple interests” is duly necessary.
From a lawyer’s perspective
Whether shareholder activism is a force of good or bad is most difficult to say. On one hand, it can leverage the expertise of seasoned investors, thereby expediting the removal of inefficient practises. Advocates thus often describe the activism as a watershed moment for a stagnating conglomerate. It may also implicitly keep board members in check, so that they manage good relationships with existing shareholders and publicly market values like ESG in its strategic vision.
On the other hand, it may ignite disruption and conflict within the firm. While uncommon, “proxy battles” (an unfriendly contest for control over an organisation) may take place, leaving the ownership fragmented and/or polarised. It further sets the company up for market speculation, risking reputational damage on part of the investor or even a lower share price.
As such, many law firms specialise in activism defence as legal counsel of public company boards or management. Their roles range from preventative measures to repelling activist attacks which brew as a contentious matter. They may advise specifically on matters including campaign strategies, corporate governance, etc. Usually, lawyers will work with a host of advisors and regulators in the sector in order to pre-empt attacks or resolve existing conflicts in a way that benefits the client.