29 July, 2015
Summary
- Shareholder activist activity in Australia remains relatively confined. Public examples of activist campaigns remain relatively rare. This contrasts markedly with the USA – where large, global corporations are often and increasingly targeted.
- ASIC has finalised its new guidance on ‘collective action’ taken by investors. Commentary at the consultation stage varied – some in the market suggested that the guidance would stymie shareholder activism, although others saw it as potentially useful for activists. The new guidance clarifies some points in response to the submissions but does not deviate from the key messages set out in the consultation draft.
- In Australia, shareholder activists have a variety of tools and tactics available to them. From a practical perspective, we don’t see the guidance as making life more difficult for shareholder activists nor having any real influence on activist behaviour in Australia.
Current state of play in shareholder activism
War is waging in the USA between shareholder activists and corporates and their advisers. And, in the words of one of the most prominent anti-activism voices, corporate law veteran Martin Lipton “activist hedge funds are winning the war”.
The typical shareholder activist playbook is as follows. The activist builds a stake in the target, then kicks off its campaign by engaging in a dialogue with the company – usually through the CEO or chair. The activist will unveil its plan and demands – these commonly include a return of capital, a disposal or splitting of business divisions, a proposal to merge, a change in strategy or management or some combination of these. If the company doesn’t engage with the activist or progress the plan then the activist will take its campaign public. The process from here generally goes one of two ways – the activist and the company announce a ‘settlement’ or compromise (the company agrees to implement an aspect or watered-down form of the activist’s plan), or alternatively, there will be a ‘proxy fight’. In broad terms, this involves the activist nominating its own directors to the company’s board (who can drive the activist’s agenda), and soliciting proxy advisory firms to try to influence as many votes as possible in favour of its nominees.
There has been a dramatic increase in activist activity in the US over the past three years. Activists have been so successful that there is an increasing trend for even household name companies to settle, rather than face the cost, distraction and risk of loss against an activist campaign via a proxy fight.
The recent high-profile DuPont episode is held up as an important ‘win’ for corporates against activists. But remarkably, even in that example where a successful company fought the activists hard, the activists achieved a voting outcome in the mid-high 40s. To recap, the directors of US chemical giant, DuPont, were re-elected following a lengthy battle with billionaire hedge fund manager, Nelson Peltz. Peltz’s Trian Fund Management had sought to have four nominees appointed to the DuPont board and had also publicly proposed a split of DuPont’s businesses (although there was no vote on this aspect). The vote was close – the least successful DuPont director secured 54% of votes in favour of her board reappointment, while Peltz, as the most successful Trian nominee, secured 46% of votes in favour of his appointment.
From an Australian perspective, shareholder activist campaigns have typically been confined to small cap companies and the mid-market, against companies which have had performance challenges. There have not been the high profile campaigns against successful, household name companies as occur in the US.
A key question for our market – and for ASIC in setting policy – is whether this trend from the US will spread to Australia in the same way as securities class actions and ‘loan to own’ transactions took just a few years to move from non-existent to common, embedded features of our corporate landscape – or whether structural differences between US and Australian law and governance will preclude this.
One reason often cited for slower shareholder activism here is that, from an institutional investor perspective, Australia is such a small market that it is not a good idea to offend prominent ‘Corporate Australia’ directors. However, this is what people used to say about securities class actions and it has become commonplace for major institutions to participate in securities class actions in Australia, and to assert the moral high ground in doing so, citing their duty to their investors.
Australia does not have concepts like (nor does our corporate law or Takeovers Panel policy permit) US-style poison pills and staggered boards, which deliver a high level of autonomy to US company boards, even to act against the wishes of shareholders. Visible support for shareholder activism may have arisen as a counter-balance to this – where shareholders feel they need a louder voice than the companies’ constitutional governance framework gives them. This is a key differentiator from Australia, where embedding directors against the wishes of shareholders is not possible.
So, while there are conflicting factors, it cannot be ruled out that this US trend too will gather momentum in Australia. In that context, it was worth ASIC considering (as it did) – and is worth now reflecting on – whether ASIC’s new regulatory guide on ‘collective action’ by investors will assist shareholder activists, or make life more difficult for them in Australia (as was suggested by some practitioners when ASIC released its draft policy). In our view, this new regulatory guide captures, rather than changes, existing practice and policy, and does not materially change the landscape for would-be activists or for corporates which would seek to defend against them.
ASIC’s new regulatory guide – key messages remain the same as in the draft policy
ASIC’s final guidance doesn’t deviate from the key messages in its consultation draft.
ASIC received submissions on activism-related aspects of its draft policy, to which it has responded (including by updating its guidance). ASIC has also clarified its approach in certain respects and expanded its guidance in others.
We look at the more material items below.
Activism-related amendments and clarifications
- Jointly signing a notice to requisition a meeting or put a resolution at a meeting – ASIC’s view remains that it will likely give rise to an association and the acquisition of a relevant interest.
This was the key aspect of the revised guidance which some commentators suggested would make it harder for shareholder activists to requisition meetings to spill boards.
ASIC received submissions querying whether ASIC was correct in suggesting that multiple investors signing a requisition4 was “likely to be accompanied by an understanding about the exercise of voting rights that will amount to the acquisition of a relevant interest”. One respondent said that the guidance was likely to discourage large investors from signing such notices and limit the percentage of members willing to sign to less than 20% for fear of breaching the takeovers threshold.
The scenario presented in that submission is a prime example of where ASIC could defensibly form the view that investors are likely to have some understanding of their own voting intentions and also those of their co-signatories. It takes only 5% of shares to requisition a shareholder meeting. If shareholders with more than 20% collectively sign a board spill requisition, when 5% suffices, this would suggest something else may be at play.
ASIC and the target board would be right to scrutinise that group and their requisition carefully. What are they signalling to the market? A shareholding bloc which will determine the new board’s composition, without having offered other shareholders any premium for that control? That is exactly what our takeovers laws aim to stop.
We therefore agree with ASIC’s final guidance which says that “it would be rare for a person to elect to publicly sign a notice requisitioning a resolution without having formed any understanding with their co-signatories as to voting”.
This does not seem terribly controversial. Why go to the trouble of jointly signing a board spill resolution without some understanding that all signatories will vote in favour? And the revised guidance reiterates that ASIC accepts that in ‘rare cases’ there could be a valid explanation, saying ASIC will look at the particular circumstances, the examples are just illustrative.
Of course, as long as they have less shares in the company between them than the 20% takeovers threshold, shareholders with more than 5% can band together and jointly sign a board spill resolution. They just have to publicly disclose details of any agreement, arrangement or understanding between them. That is a good thing; to ensure all shareholders who are deciding how to vote at the meeting are properly informed.
ASIC, in its finalised policy, has given other examples of the type of requisitioned resolution which could give rise to unacceptable circumstances. Specifically, a resolution relating to the removal of directors to be replaced by directors who are aligned with the requisitioning investors or a resolution which otherwise seeks approval for a transaction on unduly favourable or non-commercial terms or which has an effect on the control of the company.
- ASIC has expanded its list of criteria to address conflicting concerns regarding where the line is between control and ‘corporate governance’.
The draft consultation paper said that ASIC was less likely to examine potential collective action involving matters relating to ‘good corporate governance only’. A common submission theme – irrespective of the shareholder activism perspective of the submitting party – was that “good corporate governance” is not a clearly defined concept.
Given the possibility of activist conduct being construed differently depending on what is viewed by some as an amorphous concept, ASIC has tightened up this aspect of its policy by qualifying the examples proposed in the draft policy and also setting out additional criteria to refine its guidance on what ASIC means by improving corporate governance. ASIC will be less likely to examine collective action that:
- relates solely to the improvement of the company’s corporate governance or issues that can properly be determined at a general meeting,
- is temporary and purely related to the resolution of that issue, and
- is not concerned with the acquisition of a substantial interest in, or the exercise of control of, the company where there is no ongoing undisclosed association between the investors involved.
ASIC noted that it has retained ‘good corporate governance’ as a key consideration in its guidance despite concerns raised, since it is a significant policy objective of the guidance to encourage investors to actively participate in the governance of the entities in which they invest.
- ASIC’s concern in relation to ‘board control’ is changing the board to facilitate investors pursuing their plans, rather than director renewal in the ordinary course.
In a similar vein to the point above, the suggestion was made that ASIC could be clearer in terms of when it will scrutinise conduct concerning ‘board control’. The final guidance says that ASIC will be particularly concerned with collective action that seeks to change the composition of the board for the purposes of facilitating the investors’ plans for the targeted company. We expect that the replacement of directors of the company in circumstances such as the appointment of a new independent director, or removal of an underperforming director, would not ordinarily trigger ASIC scrutiny.
- Expanded guidance in relation to making representations to the board.
Where the collective conduct involves raising general issues of concern in one-on-one or joint meetings with the company, then this is unlikely to result in investors becoming associates or acquiring a relevant interest in other investors’ shares. The draft policy referred, by way of example, to executive remuneration as such an issue. In response to submissions to the effect that this may be too narrow, ASIC has expanded its guidance to provide a second example relating to representations about long-term, forward-looking strategic or commercial issues or large-scale risks facing the company.
However, ASIC has clarified that, if such discussions form part of the pursuit of joint proposals or if it is suggested that joint proposals will be pursued if the company does not give a satisfactory response to matters raised by investors, this may suggest the investors are associates. ASIC indicated that if discussions are accompanied by threats of some form of collective or co-ordinated exercise of rights attached to shares, ASIC would have concerns that the investors have acquired a relevant interest in the other investors’ shares.
ASIC has not changed its view from the draft guidance that it considers that unacceptable circumstances may arise where different investors make representations to the company’s board about a control transaction proposed by one of the investors or about a transaction that may benefit the relevant investors over and above any benefit accruing to the company’s shareholders as a whole.
Commentary – What does ASIC’s new policy mean for shareholder activists in Australia?
Shareholder activism comes in many different forms – in Australia, the requisitioning of a meeting or resolution is only one form, and usually a later step in the playbook. As noted above, an activist campaign usually starts with a private dialogue between the activist (or activists) and the company – it may go no further than this. These discussions are unlikely to give rise to an association between activists, or a relevant interest in each other’s shares, provided they retain their individual discretion.
Many activists prefer to operate ‘behind closed doors’ and are reluctant to have their plans played out in the full glare of the media. However, if necessary to ratchet up the pressure, activists may take their plan public – raising the attention of other shareholders and the market more generally. The next step – requisitioning a meeting, proposing a resolution and engaging with other investors – is where ASIC’s views come into play. We commented above on the rules around these actions. In terms of a board spill, it would depend on the facts; if the nominees are all aligned with the requisitioning investor, and the nominees would control the board, then unacceptable circumstances could exist – this shouldn’t be surprising.
The subsequent tactic of proxy solicitation shouldn’t contravene the policy, provided that no inducements are offered to shareholders to vote in a particular way (or not vote at all).
Provided that investors don’t do what the takeovers laws themselves prohibit – reaching an agreement or understanding and preserve their individual discretion and provided that their intention is the improvement of an entity’s corporate governance (rather than obtaining control without a premium) then investors shouldn’t fall foul of ASIC’s policy. These concepts are not new. In this regard, ASIC’s policy doesn’t change the law and we don’t see it as inhibiting nor having any real practical influence on shareholder activist behaviour in Australia.
Further detail
Further detail in relation to other changes proposed in the consultation draft, are contained in our earlier article ‘ASIC’s proposed new “collective action” guidance to help institutions avoid stepping over the line and into takeovers trouble’ which appeared in our February 2015 edition of Mergers & Acquisitions Update, and which is available here.
For further information, please contact:
Rebecca Maslen-Stannage, Partner, Herbert Smith Freehills
rebecca.maslen-stannage@hsf.com
