In past days, after a very public and bitter campaign by Palliser Capital, all but two of the directors of Capricorn Energy plc (formerly known as Cairn Energy, the London-listed gas-focused energy company) have departed or will depart the board of the company and, by extension, appear to have crashed (the second) fundamentally transformative transaction planned by that board. Shareholder activism has returned to the front of the business pages again after the Covid ceasefire.
Similarly, in recent weeks, Home REIT has been the subject of an acerbic “bear attack” report by two activist investors which made allegations around its financial stability, triggering a delay in publishing its audited accounts, significant share price pressure, an investigation into its directors and a mooted legal claim against the company.
This is as much a live issue for the smaller and mid-cap universe too – Topps Tiles recently defeated a suite of board changes proposed by a major shareholder with a view to driving operational and commercial strategy change; DX and Allied Minds were the subjects of shareholder requisitions seeking board change; Burford, Manolete, and Telit amongst others damaged by allegation-filled dossiers, and so forth.
Shareholder activism is a very broad term, generally describing the actions taken by a shareholder (or a group of shareholders) to effect a change within a company by engaging with the managers. This is usually with a view to improving the value of the company by taking a particular action, or many actions, including for example:
- a capital restructuring or instruction to find a buyer for the company or a division; and/or
- to change its strategy or operational approach (for example, ESG concerns are an increasing subject of campaigns); and/or
- its governance (for example, change board composition or to change executive compensation packages)
M&A transactions present an attractive opportunity to, for example, seek to “greenmail” a prospective buyer of a company into raising their price.
Often, but not always, these campaigns are deliberately shared with the media to increase attention, generate sympathy, and therewith put pressure on the target. Proxy voting agencies that are consulted by many public market investors, ISS and Glass Lewis, have an increasingly sympathetic ear to dissenting voices.
The implications for the target are, obviously, not positive. They are a considerable distraction and operationally disruptive as the team prepare the company’s response, and the worst kind of negative publicity that lingers, even if the matter is amicably settled or the allegations proven to be unfounded. Nevertheless, and noting that the motivations are not necessarily altruistic (nor do they need to be), this does not mean that the shareholder or the theme of the attack is wrong.
We are regularly consulted on both sides of activist engagement regarding companies and the transactions that they are seeking to undertake.
Our key recommendations for NEDs facing such situations
- Prevention is better than cure – have your own “playbook”, especially in relation to perceived areas of weakness. Engage with your advisers, at least annually, to critically self-appraise and to “horizon scan” for threats and potential lines of attack. A weakness in financial or share price performance are obvious grounds for complaint
- Understand your own shareholder base and their expectations on core issues – not only to identify threats, but importantly, helpful in identifying pools of support for your position. Chairs/ SIDs should aim to engage with shareholders at least once a year. A failure to engage with negative feedback in a considered fashion, or to engage with shareholders at all, are often grounds cited by disaffected investors
- Clarity of communication- be clear on your strategy, short term and longer term objectives, how you are delivering against them and how you are communicating this
- Keep your house in order – there is limited scope to campaign against a company or board that has been transparent and timely in communications, articulated its strategy, follows good corporate governance practices, and has control of its own finances
- Engage with the investor (usually) – have empathy and explore the argument, however unwelcome or disagreeable, and do not dismiss their right to be heard (or under-estimate their sophistication)
- Rarely can a well-considered campaign be defeated by litigation or legal technicalities, however tempting it might be to rely on these