Faculty of Law
Academic Year 2015 – 2016
Exam session [1]
Shareholder Activism in EU-listed Companies
LLM Paper
by Tim Petrus
Student number: 01004242
I.
CHAPTER I: SHAREHOLDER ACTIVISM......................................................................................................... 6
A.
1)
2)
3)
4)
5)
B.
1)
2)
WHAT IS SHAREHOLDER ACTIVISM? .......................................................................................................................... 6
Definition ...................................................................................................................................................... 6
Types of shareholder activists ..................................................................................................................... 7
Goals of shareholder activism ..................................................................................................................... 7
Tactics of shareholder activists ................................................................................................................... 8
Shareholder activist targets ........................................................................................................................ 9
DOES SHAREHOLDER ACTIVISM WORK? ...................................................................................................................10
Introduction................................................................................................................................................10
Shareholder activism in the United States................................................................................................10
(a)
(b)
3)
4)
II.
Shareholder activism in general ............................................................................................................................ 11
Hedge fund activism ............................................................................................................................................... 12
Shareholder activism in Europe.................................................................................................................13
Conclusion ..................................................................................................................................................15
CHAPTER II: LEGAL FRAMEWORK OF SHAREHOLDER ACTIVISM ................................................................. 16
A.
1)
2)
3)
B.
1)
2)
3)
C.
1)
U.S. ..................................................................................................................................................................16
The Agenda of the Annual General Meeting ............................................................................................16
The Right to Appoint and Remove directors .............................................................................................17
Transparency regulation ...........................................................................................................................18
EUROPEAN LEGAL FRAMEWORK .............................................................................................................................19
Shareholder Directive (Directive 2007/36/EC) and Proposal for amendment .......................................20
Transparency Directive (Directive 2004/109/EC) and Directive 2013/50/EU .........................................21
Impact on shareholder activism in Europe ...............................................................................................22
NATIONAL LEGISLATION ........................................................................................................................................23
Belgium.......................................................................................................................................................24
(a)
(b)
(c)
(d)
(e)
(f)
2)
United Kingdom .........................................................................................................................................26
(a)
(b)
(c)
(d)
3)
III.
U.K. ownership structure and shareholder power ............................................................................................... 26
The Right to put items on the agenda of the Annual General Meeting .............................................................. 28
The Right to Elect and Revoke the Board of Directors ......................................................................................... 28
Transparency in the United Kingdom .................................................................................................................... 29
The Netherlands.........................................................................................................................................29
(a)
(b)
(c)
(d)
D.
E.
Belgian Ownership structure and Shareholder Power ......................................................................................... 24
Rights of Shareholders at annual general meeting in general ............................................................................. 24
The right to put items on the agenda of the annual general meeting ................................................................ 24
The right to elect and revoke the board of directors ........................................................................................... 25
‘Say-on-Pay’ rights .................................................................................................................................................. 25
Transparency in Belgium ........................................................................................................................................ 26
Dutch Ownership Structure and Shareholder Power ........................................................................................... 29
Right to put items on the agenda of the Annual General Meeting ..................................................................... 30
Right to Elect and Revoke the Board of Directors ................................................................................................ 30
Transparency in the Netherlands .......................................................................................................................... 30
DIFFERENCES BETWEEN THE U.S. LEGAL FRAMEWORK AND THE E.U. LEGAL FRAMEWORK .............................................31
SHADOW ACTIVISM: REGULATION REQUIRED? ..........................................................................................................32
CHAPTER III: SHAREHOLDER ACTIVISM: USEFUL OR ABUSIVE?................................................................... 35
A.
B.
C.
FUTURE OF SHAREHOLDER ACTIVISM .......................................................................................................................35
SHAREHOLDER ACTIVISM: USEFUL TOOL FOR CORPORATE GOVERNANCE OR GATEWAY TO ABUSIVE CONDUCT? ...................36
CORPORATE RESPONSE TO SHAREHOLDER ACTIVISM ..................................................................................................36
IV.
CHAPTER IV: CONCLUSION ...................................................................................................................... 38
V.
BIBLIOGRAPHY........................................................................................................................................ 40
Introduction
Shareholder activism is a broad concept firstly introduced in the United States and can be
characterized as a corporate governance mechanism. It has been the key to effecting important
corporate changes recently and some authors describe it as the ‘rejuvenated exercise of
ownership rights’ by shareholders. 1 Throughout time corporate governance has changed
frequently and most often those changes are caused by corporate scandals such as Enron,
Parmalat, etc. But it is also true that corporate governance regulation is also determined by the
wider economic circumstances at that specific time. Since the financial crisis of 2007
originating in the United States and impacting Europe’s corporate and financial atmosphere,
there has been an increase in the academic debate regarding shareholder rights, with Bebchuk
taking the leading role. 2 An increase in new legislative proposals with regards to shareholder
empowerment in order to more stringently supervise the board of directors and management of
companies, banks and financial institutions can be regarded as the consequence of this. One of
these trends was an increase in activity of shareholders, claiming an active role in the
supervision and decision making of corporate entities, sometimes aggressively inducing
conflicts at general meetings or leaking details to the general public.
In the past decade, the ownership structure of European listed companies changed dramatically.
Where previously the company was controlled through a large block holder sufficient to control
the company, the ownership now has become more widely dispersed. Three elements are the
cause of this.3 Firstly, The voices or concerns of the large block holder used to be channelled
through their representatives on the board of directors. With the dispersion of ownership, the
board has become more professional, thus decreasing the amount of shareholder
representatives. Secondly, corporate governance rules required more independent directors
further limiting the amount of representatives. Thirdly, simultaneously with the dispersion of
ownership a new class of major shareholders have presented themselves (e.g. hedge funds,
mutual funds, private equity funds). With these changes, former majority shareholders have to
voice their concerns through other mechanism than that which are embedded in the institutional
framework.4 In 2013, Shareholder activism has almost doubled within three years in the U.S.
and it is expected that Europe will become the next big source of activity in the coming decade. 5
The aim of this contribution is to determine whether such activism of shareholders can add
corporate value in the context of European listed companies. Firstly the concept itself will be
briefly explained and illustrated. In situating the concept, a brief summary of existing empirical
literature will be added in order to define the existing limits of research on shareholder activism
and to determine the added value of this contribution. Secondly, following the empirical analysis,
a legal analysis will be made where special attention will go out to the legal framework of Europe
regarding shareholder rights and thus potentially impacting shareholder activism. Thirdly, this
paper will aim to make an analysis whether or not the proposed increase of shareholder rights
benefits the company and its variety of stakeholders (management, employees). It will also aim
to determine whether or not it is useful to adopt such an increase, taking into account the different
1
I. CHIU, The meaning of share ownership and the governance role of shareholder activism in the united kingdom, 8 Rich. J.
Global L. & Bus., 2008-2009, p. 117.
2
L. BEBCHUK, , The Case for increasing shareholder power, Harvard Law Review, Volume 118, No. 3, 2005, 84 p.; L.
BEBCHUK, Letting Shareholders Set the Rules, Harvard Law Review, Vol. 119, 2006, 30 p.
3
C. VAN DER ELST, The Corporate Response to Shareholder Activism, Era Forum 15.2, 2014, p. 232.
4
Ibid.
5
S. JONES, Shareholder Campaigns Doubled in Three Years, Financial Times, November 10, 2013.
approach of European shareholders towards shareholder activism and the current ongoing debate
regarding the effects of shareholder activism on corporate performance. The ideal research would
consist of a full overview of shareholder rights in Europe and the incorporation of data gathered
throughout Europe, but given the restricted time limits this type of qualitative research is not
possible. Therefore this contribution will focus on defining key aspects of shareholder activism
in a European setting.
I.
CHAPTER I: SHAREHOLDER ACTIVISM
A. What is shareholder activism?
1) Definition
1. Shareholder activism is a broad term which covers a multitude of specific actions undertaken
by shareholders. Essentially it can be described as the way in which shareholders make use of
their rights as owners of the company to influence the board of directors, the management or in
general the corporate decision making process. The main underlying motives for exercising
their rights in a particular way can vary as well, ranging from environmental motives to inciting
a change in management for the general benefit of the shareholders. Regardless of the multitude
of motives, the main objective can always be characterized as wanting to add a certain ‘value’
to the company. This value can entail achieving a better corporate performance as well as better
management for the good of the shareholders. 6
2. The actions or engagements of shareholders with the company generally can vary both in
nature as well in severity. In the existing literature a distinction is made between private
activism, sometimes called ‘quiet diplomacy’, and public activism. 7 Common examples of
shareholder activism consist of private discussions, open communication with the board of
directors and management, press campaigns, public ‘naming and shaming’, open discussions
with other shareholders, putting forward shareholder resolutions, calling together general
meetings and ultimately seeking to replace individual directors or the entire board. 8 The most
lenient of these actions consists of entering into dialogue with the management or board of
directors to express certain concerns about a particular issue. A more severe action method can
consist of drafting a formal proposal on which the shareholders can vote at the general meeting. 9
These actions mostly take place in public listed companies, since there is a larger shareholder
basis as well as involvement of certain institutional investors who can take the lead in the
engagement. But there are certainly some cases known of shareholder activism in smaller,
private companies. However the aim of this contribution is to only discuss and analyse
shareholder activism in European publicly listed companies.
3. Shareholder activism is in essence the response of the shareholders to address the agency
conflict, arising in large publicly traded companies. In such companies, shareholders tend to
B. BLACK, “Shareholder Activism and Corporate Governance in the United States”, The New Palgrave Dictionary of
Economics and the Law, vol. 3, 1998, http://ssrn.com/abstract=45100, p. 3.
7
C. VAN DER ELST, The Corporate Response to Shareholder Activism, Era Forum 15.2, 2014, p. 233.
8
Examples of different actions on http://www.ecgi.org/activism/.
9
B. BLACK, “Shareholder Activism and Corporate Governance in the United States”, The New Palgrave Dictionary of
Economics and the Law, vol. 3, 1998, http://ssrn.com/abstract=45100, p. 3.
6
delegate the decision-making responsibility to the management. However, the interests of these
managers can diverge from the interests of the shareholders. One of the tasks of the board of
directors is to control these conflicts. The demand for activism rises, when boards fail to
perform these tasks.10 There are other options to mitigate such a conflict, such as the sale and
purchase of shares, which is more commonly known as the ‘Wall Street Rule’ or ‘Wall Street
Walk’.11 Because dissatisfied shareholders can sell their shares to the highest bidder, a market
for corporate control is created where potential takeover boards or other institutional investors
can gain control over the company just by buying the shares. Hence the buying and selling of
shares can contribute in influencing the existing board of directors to adhere to the shareholder’s
interests more closely. Another option for shareholders is to exercise their loyalty to the board
and the management by just doing nothing. However these last types of actions are usually not
considered to be a part of shareholder activism. Van der Elst defines shareholder activism as:
“any kind of initiation of actions of non-controlling shareholders to influence the behaviour of
the company. Thus excluding the actions of controlling shareholders as well as “passive”
activities (e.g. voting in favour of management proposals, exiting the company). 12
2) Types of shareholder activists
4. When reviewing the difference between shareholder activists, one can identify several types
of investors. Contrary to the general opinion, shareholder activism is not only practised by
institutional or majority shareholders. Individual shareholders can be shareholder activists as
well. In fact, individual investors dominated the shareholder activism scene in the U.S. from
1942 through the end of the 1970’s. 13 Majority shareholders are typically not characterized as
being shareholder activists, since they can voice their concerns through voting or through their
board representatives. Therefore they will be left out of the scope of this contribution.
5. There are three types of shareholders engaging in activism. The first type are the classic
institutional shareholders, such as mutual funds or public pension funds. These shareholders
tend to adopt a more defensive approach and are more focused on protecting their investments
than making sure the company is run smoothly. A second type of activist shareholders are the
other institutional shareholders, which adopt a more offensive strategy towards activism.
Examples of these are private equity funds and hedge funds. Known for their hands on
approach, they are the rising stars of shareholder activism. A third type of activist shareholders
can be identified as individual investors. Famous examples of individual activist shareholders
are Carl Icahn and Nelson Peltz. They usually acquire large stakes in target companies in order
to gain significant influence and control.
3) Goals of shareholder activism
6. The separation of ownership and control in public companies gives rise to the possibility of
an agency conflict between the company’s managers and shareholders. 14 The decision making
10
S. GILLAN, L. STARKS, The Evolution of Shareholder Activism in the United States, 2007, p. 11 and
http://ssrn.com/abstract=959670
11
J. COFFEE, D. PALIA, The Impact of Hedge Fund Activism: Evidence and Implications, September 15th, 2014, European
Corporate Governance Institute (ECGI) - Law Working Paper No. 266/2014, p. 8 and http://ssrn.com/abstract=2496518,
12
C. VAN DER ELST, The Corporate Response to Shareholder Activism, Era Forum 15.2, 2014, p. 232-233.
13
S. GILLAN, L. STARKS, The Evolution of Shareholder Activism in the United States, 2007, p. 3 and
http://ssrn.com/abstract=959670
14
A. BERLE, G. MEANS, The modern corporation and private property, Transaction publishers, 1932.
power is delegated to the board of directors, but the interests of the shareholders might not
converge with the interests of the management of a company. One possible solution to mitigate
agency costs is that of shareholders monitoring the company’s management. 15 Shareholder
activism is, at bottom, a response to the potential gains from addressing the agency conflict at
the core of large publicly traded companies with absentee owners. The board of directors has a
significant role in controlling such agency problems that comes with its fiduciary duty to the
shareholders. The demand for activism rises when boards fail to perform these tasks.16
7. In essence, shareholder activism is largely aimed at addressing managerial deficiencies. 17
These deficiencies are usually identified as the financial underperformance of the target
company. Shareholder activism tries to add shareholder value by directing it’s actions towards
solving such deficiencies. Therefore the majority of activist interventions include targeting
business’ strategies, policies and corporate governance in order to profit from their
improvement.18 Hedge funds for instance target the appointment of members of the board,
involvement in transactions that might have an impact on the control, corporate governance and
potential business plan changes. Al these actions are aimed at improving the firms performance,
therefore increasing share value and making the hedge funds investment profitable. Brav, Jiang
and Kim identify 5 major categories of underlying motives for activist hedge fund intervention:
general undervaluation/maximize shareholder value, capital structure, business strategy, sale of
target company and governance. 19
4) Tactics of shareholder activists
8. Shareholder activists use a range of tactics to meet their goals and objectives. A distinction
can be made between offensive and defensive shareholder activism. Another form of
categorizing activist tactics is to divide them into categories depending on the degree of hostility
vis-à-vis the management.
9. Defensive shareholder activism is typically the form in which mainstream institutional
shareholders, such as mutual funds and public pension funds, engage. Defensive shareholder
activism can occur when an investor with a pre-existing stake in a company becomes
dissatisfied with corporate performance or corporate governance and reacts by lobbying for
changes, whether behind the scenes or with a public challenge to management. Usually this
approach is exercised by a shareholder who does not own enough shares to guarantee victory
in a contest for boardroom control or dictate corporate policy but potentially can use their stake
as a starting point in the changes they advocate.20 Pension funds and mutual funds engage in
this type of activism because their objective will be to defensively protect the value of their
existing investments.21 The key feature of defensive shareholder activism lies in the fact that
the shareholder already had a significant stake in the company before engaging in shareholder
15
C. CLIFFORD, Value Creation or Destruction? Hedge Funds as Shareholder Activists, Journal of Corporate Finance, Vol.
14, No. 4, 2008, p. 2 and http://ssrn.com/abstract=971018
16
S. GILLAN, L. STARKS, The Evolution of Shareholder Activism in the United States, 2007, p. 11 and
http://ssrn.com/abstract=959670,
17
M. GORANOVA, R. VERSTEGEN, Shareholder activism: A Multidisciplinary Review, Journal of Management, Vol. 40, No. 5,
July 2014, pp. 1230 –1268.
18
E. BELLINI, Hedge fund activism in Italy, 9 J. Corp. L. Stud., 2009, p. 214-215.
19
A. BRAV, W. JIANG, H. KIM, Hedge fund activism: a review, Foundations and Trends in Finance, February 2010, p. 12.
20
B. CHEFFINS, J. ARMOUR, The past, present and future of shareholder activism by hedge funds, 37 J. Corp. L. 51, 20112012, p. 56.
21
Ibid.
activist efforts. With offensive shareholder activism the shareholder builds up a stake ex ante
in order to be able to act if the management does not take the initiative.
10. Offensive shareholder activism, contrary to the nature of the term, does not necessarily
imply antagonism towards other shareholders or the management.22 It is often exercised by
hedge funds, private equity funds and large individual shareholders. However, private equity
funds have the goal of a profitable exit and are comfortable deploying sufficient capital and
obtaining a stake which allows them to obtain voting control. 23 Although known for their
confrontational approach, they often aim for a collegial approach with the management. Hedge
funds will typically begin with pro-active techniques such as telephone calls, letters or e-mails
to the management, urging them to increase shareholder value. If this approach fails, they can
increase the pressure by for instance criticizing management in public or threatening to file a
lawsuit against the company’s directors. A more forceful strategy consists of a transfer by vote.
This is a strategy aimed at gaining managerial control by winning a proxy contest intended to
determine who serves on the board. However, most investors will try to avoid this since a proxy
battle includes high costs. Hedge funds that do engage in such proxy battles aim to signal
potential future targets that they are willing to invest heavily in an activist campaign should this
be required. 24
11. We can also make a distinction regarding shareholder activism tactics according to the
degree of hostility. Moderate forms of engagement are private discussions with a director or the
board of directors. This form is frequently used throughout Europe. More aggressive forms of
engagement consist of share building through the acquisition of shares or stock borrowing, ex
ante press releases containing the agenda of the activist shareholder, open letters to
management, engaging with existing shareholders to get substantial support. Lastly, aggressive
forms of shareholder activism are the usage of minority shareholder rights to require meetings
or proposals to replace board members and appoint new ones. This is a common tactic of public
activism. Sometimes shareholder activists tend to threaten with litigation, but in Europe this
differs significantly according to the respective jurisdictions. 25
5) Shareholder activist targets
12. This section is aimed at determining which companies are targeted by activists. As was
previously mentioned, one of the main goals of shareholder activism is to target companies
displaying poor performance. Needless to say this has been the dominant criteria for activists
in the targeting of companies.26 This has been confirmed in a study by Cziraki, Renneboog and
Szilgyi (2005) they found that activists in Europe target firms that tend to underperform and
show little leverage. 27
13. However, activist hedge funds tend to target firms that are typically ‘value firms’, meaning
they have a low market value relative to book value, although they are profitable with sound
22
Ibid., 57
Ibid., 59.
24
Ibid., 61.
25
S. COOKE, S. NICHOLLS, W. RUSHFORTH, “European Overview” in A. GOLDEN, T. REID, L. TURANO (eds.), Getting the deal
through: Shareholder activism & Engagement, London, Law Business Research Ltd., 2016, p. 7-9.
26
S. GILLAN, L. STARKS, The Evolution of Shareholder Activism in the United States, 2007, p. 15 and
http://ssrn.com/abstract=959670
27
P. CZIRAKI, L. RENNEBOOG, P. SZILGYI, Shareholder Activism Through Proxy Proposals: The European Perspective, 16(5)
European Financial Management 738, 2010, 50 p.
23
operating cash flows and return on assets.28 Hence hedge funds do not target companies based
on poor performance but rather based on potential profitability of their investment in the target
company. Target companies also have more takeover defences, higher CEO remuneration,
higher institutional ownership and higher liquidity. These elements make it easier for activists
to acquire a significant stake quickly. 29
B. Does Shareholder activism work?
1) Introduction
14. This question aims at determining whether the presence or absence of shareholder activism
has an effect as to achieving the main objectives of shareholder activism (e.g. better corporate
performance, better management, etc.). This question has already stirred up quite a debate
between scholars and many literature exists involving this topic. However, most literature on
this topic is focused on shareholder activism in the United States. Very little research has been
done regarding European publicly listed companies. This contribution aims at providing an
overview of existing research regarding shareholder activism in Europe. However to understand
the possible effects of shareholder activism on the European continent, one cannot leave out the
existing body of literature and research on shareholder activism in general and on hedge fund
activism in the United States. This contribution starts by providing a summarized view of
existing research results regarding shareholder activism in the United States followed by the
overview of existing research and expectations for shareholder activism in Europe.
2) Shareholder activism in the United States
15. Before we examine the effect of shareholder activism on firm performance, it is
recommended to determine the specific nature of shareholder activism in the United States. In
the U.S. shareholder activism is typically dominated by large financial institutions and not by
individuals. Generally, two approaches are involved. The first approach is based on presenting
(or threatening to present) a shareholder proposal on a corporate governance issue at a
company’s annual shareholder meeting. This will be analysed further when discussing the legal
framework. A second approach consists of the ‘jawboning’ of a particular firm’s managers or
board of directors in order to achieve a change in management or strategy. 30 This jawboning
technique consists of a form of private negotiation with the target firm. Both forms are not
mutually exclusive and are frequently used together.31 Hence, One must bear in mind that most
often the institutional investors, who are dissatisfied with a company’s performance, first try to
seek a quiet informal arrangement with the management. If successful, no shareholder proposal
will be submitted but if the management resists such a quiet agreement then a formal proposal
at the annual shareholder meeting may result of that. This also means that such quiet agreements
28
A. BRAV, W. JIANG, R. THOMAS, F. PARTNOY, Hedge Fund Activism, Corporate Governance, and Firm Performance,
ECGI - Finance Working Paper No. 139/2006, p. 2 and http://ssrn.com/abstract=948907.
29
Ibid.
30
B. BLACK, Shareholder Activism and Corporate Governance in the United States, The New Palgrave Dictionary of
Economics and the Law, vol. 3, 1998, p. 3 and http://ssrn.com/abstract=45100.
31
J. KARPOFF, The Impact of Shareholder Activism on Target Companies: A Survey of Empirical Findings, August 18th ,
2001, p. 3 and http://ssrn.com/abstract=885365.
are hard to quantifiably measure and therefore may have an relatively unknown impact on the
effect of shareholder activism on corporate performance.
16. Regarding the effect of shareholder activism on corporate performance, the empirical
evidence results are in dispute. Some authors believe that shareholder activism can lead to better
corporate performance by effecting changes in the corporate governance structure. Others
believe that shareholder activism has little to no significant returns with regards to the value of
shares or earnings. I will provide a chronological overview of the prominent existing literature
highlighting the results, the methodological problems and the consequences this has on research
regarding the effects of shareholder activism on corporate performance in the U.S. This is
necessary to grasp the ‘reality’ of shareholder activism and to transpose or compare that reality
to shareholder activism in the European Union.
(a) Shareholder activism in general
17. One of the first studies on the effect of shareholder activism on corporate performance was
conducted by Black (1998). He distinguished five approaches for determining the effect of
shareholder activism on corporate performance. 32 In each case, the presence of mixed results
was noted but in general he is convinced that the overall returns of shareholder activism on
corporate performance are quite low. He is also quite pessimistic on the potential gains of
invisible shareholder activities (e.g. jawboning), since there is no measurable data available and
one must rely on anecdote. Most of the discussion, according to a study by Karpoff, results
from differences in the metrics used and on the way authors describe an activist effort as being
‘successful’ (e.g. even if a shareholder proposal doesn’t win, it draws attention to the subject
matter and can influence the management of a company). His study showed that researchers
targeting changes in target firm’s corporate structure are likely to characterize shareholder
activism as a successful tool in improving corporate performance. He states that a small portion
of shareholder activists have gained some success in inducing prompt, small changes in the
target firm’s corporate structure. On the other hand, researchers targeting changes in share
values, earnings or operations are more likely to characterize shareholder activism as having
negligible effect on target companies. 33
18. Another study, conducted by Gillan and Starks, tends to agree with Black and Karpoff
stating that, despite the predefined problems, the empirical research generally dictates that the
shareholder proposals have no significant abnormal returns around the assumed date of
information release. This means that this study shows that shareholder activism has no
significant positive effect on corporate performance. 34 Some authors notice an abnormal
negative return for proposals to rescind poison pills, board related and anti-takeover proposals.
Other authors notice a positive return for other aspects of shareholder activism, such as the
announcement of a settlement. The same story applies to long term results of shareholder
activism on stock performance. In general all studies show no statistically significant changes
32
B. BLACK, Shareholder Activism and Corporate Governance in the United States, The New Palgrave Dictionary of
Economics and the Law, vol. 3, 1998, p. 10-15 and http://ssrn.com/abstract=45100.
33
J. KARPOFF, The Impact of Shareholder Activism on Target Companies: A Survey of Empirical Findings, August 18th ,
2001, p. 1 and http://ssrn.com/abstract=885365.
34 D. DEL GUERCIO, J. HAWKINS, The Motivation and Impact of Pension Fund Activism, 1998, Journal of Financial
Economics 52, pp. 293-340; S. GILLAN, L. STARKS, Corporate Governance Proposals and Shareholder Activism: The Role of
Institutional Investors, 2000, Journal of Financial Economics 57, pp. 275-305.
in the operating performance of targeted companies. 35 Bebchuk (2005) on the other hand is a
strong advocate of shareholder activism and shareholder rights in general, identifying it as a
useful tool for corporate governance. 36 However, the academic debate regarding the effects of
shareholder activism is still going on. I will elaborate on this later.
(b) Hedge fund activism
19. With the emergence and spiking of hedge fund activism results in the opposite direction are
being noticed. Research suggests that hedge funds are able to influence corporate boards and
managements due to key differences arising from their different organizational form and the
incentives that they face. 37 There are several reasons for this. Firstly, hedge fund managers are
highly incentivized and manage large unregulated pools of capital enabling them to maintain
highly concentrated positions in small numbers of companies thus expanding their potential
influence. The use of performance based compensation, lock-up investor capital and leverage
to increase effective ownership are examples of such incentives which motivate the manager to
monitor and affect the strategy of the target firm. 38 Another reason why hedge funds achieve
better results can be explained by the fact that they have fewer conflicts of interest then
traditional institutional investors and that they are largely unregulated compared to other
institutional shareholders (e.g. mutual funds, pension funds).39 Examples of the lack of
regulation consist of not being subjected to diversification duties in order to receive preferential
taxation status, not being subjected to the same liquidity constraints which means they can lock
up investor capital over an extended period of time, not being subject to a prohibition to use
leverage and derivative instruments, etc.40 And hedge funds also have a very important
additional tool in their arsenal, namely that they can acquire the firm if they are displeased with
its performance. This means that hedge funds have a more elaborate arsenal of disciplinary
mechanisms and thus a larger market for corporate control. 41 It must also be noted that hedge
fund activists tend to target smaller firms as it is easier to obtain a significant stake in those
companies as opposed to large cap companies. A study, conducted by Briggs (2007), showed
that the majority of hedge funds have a stake of around 9,5 %.42 However, hedge funds are also
targeting large firms. In 2013, almost one third of hedge fund activist campaigns focused on
companies with a market capitalization of over $2 billion.43 These characteristics of hedge funds
35
S. GILLAN, L. STARKS, The Evolution of Shareholder Activism in the United States, 2007, p. 27 and
http://ssrn.com/abstract=959670; A. BRAV, W. JIANG, R. THOMAS, F. PARTNOY, Hedge Fund Activism, Corporate
Governance, and Firm Performance, May 2008, ECGI - Finance Working Paper No. 139/2006, p. 2 and
http://ssrn.com/abstract=948907; C. CLIFFORD, Value Creation or Destruction? Hedge Funds as Shareholder Activists, April
2008, Journal of Corporate Finance, Vol. 14, No. 4, 2008, p. 2 and http://ssrn.com/abstract=971018.
36
L. BEBCHUK, The Case for increasing shareholder power, Harvard Law Review, Volume 118, No. 3, 2005, 84 p.
37
A. BRAV, W. JIANG, R. THOMAS, F. PARTNOY, Hedge Fund Activism, Corporate Governance, and Firm Performance, May
2008, ECGI - Finance Working Paper No. 139/2006, p. 2 and http://ssrn.com/abstract=948907
38
C. CLIFFORD, Value Creation or Destruction? Hedge Funds as Shareholder Activists, April 2008, Journal of Corporate
Finance, Vol. 14, No. 4, 2008, p. 3 and http://ssrn.com/abstract=971018.
39
A. BRAV, W. JIANG, R. THOMAS, F. PARTNOY, Hedge Fund Activism, Corporate Governance, and Firm Performance, May
2008, ECGI - Finance Working Paper No. 139/2006, p. 2 and http://ssrn.com/abstract=948907; E. BELLINI, Hedge fund
activism in Italy, 9 J. Corp. L. Stud., 2009, p. 205.
40
C. CLIFFORD, Value Creation or Destruction? Hedge Funds as Shareholder Activists, April 2008, Journal of Corporate
Finance, Vol. 14, No. 4, 2008, p. 8 and http://ssrn.com/abstract=971018.
41
C. CLIFFORD, Value Creation or Destruction? Hedge Funds as Shareholder Activists, April 2008, Journal of Corporate
Finance, Vol. 14, No. 4, 2008, p. 9 and http://ssrn.com/abstract=971018.
42
T. BRIGGS, Corporate Governance and the New Hedge Fund Activism: an Empirical Analysis, Journal of Corporation Law,
vol. 32, No. 4, 2007, p. 697.
43
J. COFFEE, D. PALIA, The Impact of Hedge Fund Activism: Evidence and Implications, September 15th, 2014, European
Corporate Governance Institute (ECGI) - Law Working Paper No. 266/2014, p. 11 and http://ssrn.com/abstract=2496518; R.
LEE, J. SCHLOETZER, director notes: “the activism of Carl Icahn ad Bill Ackman”, The Conference Board May 2014.
eventually create a more credible threat to the management of the target firm and thus may
result in more shareholder benefits from said activism. 44 This results in the finding that
shareholder activism by hedge funds is associated with positive wealth creation in target
companies in contrast with shareholder activism by other institutional shareholders. This is
however dependent on the level of activism and the nature of the activity. The larger investment
returns can be found in a hedge funds activist blocks rather than on their passive blocks, which
leads to the conclusion that this type of shareholder activism can produce significant results and
may mitigate the monitoring costs.45
20. However, one must not over exaggerate the potential success of hedge fund activism. A
recent study by Coffee and Palia (2014) has also shown that, although hedge fund activism may
result in short term stock gains for shareholders, the results regarding the long term effect of
those activist efforts are still debatable.46 Research by Bebchuk, Brav and Jiang (2015)
regarding the long term effects of hedge fund activism tested the claim that hedge fund activism
has a detrimental effect on the long term interests of companies and their shareholders. The
study yielded the result that this claim is not supported by the data. There is no evidence that
the short term gains of activist interventions come at the expense of long term performance.
They also find no evidence of the claim that the initial spike of positive returns is followed by
abnormal negative returns on the long term, thus proving that hedge fund activism has no
detrimental effects on the long term performance of a company, contrary to the general
opinion.47 A more recent study tested Bebchuk’s conclusions and came up with different results,
stating that shareholder activism does not improve the firms performance in the years following
the activist intervention. 48 Bebchuk has responded to this study, stating that he does not agree
with these results and will most likely publish a rebuttal. This illustrates that the empirical
evidence still remains in serious dispute.49 The one common finding is an increase in stock price
when an activist fund files a schedule 13D. Typically, the increase amounts to around 6 or 7 %
and even higher when the schedule is filed by a member of a wolf pack. 50
3) Shareholder activism in Europe
21. When we want to research shareholder activism in Europe, one must bear in mind the
different legal framework, corporate culture and shareholder mind-set. The legal framework
regarding corporate aspects is typically less stringent then in the United States, but provides
more mechanisms for shareholders to exercise their ownership rights.51 Therefore research on
shareholder activism in Europe can lead to relevant empirical evidence on the impact on
44
C. CLIFFORD, Value Creation or Destruction? Hedge Funds as Shareholder Activists, April 2008, Journal of Corporate
Finance, Vol. 14, No. 4, 2008, p. 3. and http://ssrn.com/abstract=971018.
45
C. Clifford, Value Creation or Destruction? Hedge Funds as Shareholder Activists, April 2008, Journal of Corporate
Finance, Vol. 14, No. 4, 2008, p. 30. and http://ssrn.com/abstract=971018.
46
J. COFFEE, D. PALIA, The Impact of Hedge Fund Activism: Evidence and Implications, September 15th, 2014, European
Corporate Governance Institute (ECGI) - Law Working Paper No. 266/2014, p. 4-5 and http://ssrn.com/abstract=2496518
47
L. BEBCHUK, A. BRAV, W. JIANG, The Long-Term Effects of Hedge Fund Activism, Columbia Law Review, Vol. 115, 2015,
71 p. and http://ssrn.com/abstract=2291577.
48
M. CREMERS, E. GIAMBONA, S. SEPE, Y. WANG, Hedge Fund Activism and Long-Term Firm Value, November 19, 2015,
54 p. and http://ssrn.com/abstract=2693231 .
49
J. COFFEE, Hedge Fund Activism: a Guide for the Perplexed, January 25, 2016, The CLS Blue Sky Blog,
http://clsbluesky.law.columbia.edu/2016/01/25/hedge-fund-activism-a-guide-for-the-perplexed.
50
Infra 18, nr. 36.
51
M. BECHT, J. FRANKS, C. MAYER, S. ROSSI, Returns to Shareholder Activism: Evidence from a Clinical Study of the
Hermes U.K. Focus Fund, April, 2008, ECGI - Finance Working Paper No. 138/2006, p. 11-13 and
http://ssrn.com/abstract=934712.
corporate performance. Once again I will provide a chronological overview of the existing
empirical evidence regarding shareholder activism in Europe. The amount of evidence in
Europe is relatively small compared to the United States. This can be explained by the fact that
shareholder activism is relatively recent in Europe and by the fact that shareholders in Europe
tend to be quite passive.
22. Important empirical evidence in Europe was provided by Becht, Franks, Mayer and Rossi
(2008). Their research provides an analysis of private engagements with the management in the
period of 1998-2004 by the Hermes U.K. Focus Fund (HUKFF) in the United Kingdom. This
study is remarkable because it provides an insight into the private negotiation aspect of
shareholder activism. 52 They also develop a new methodology trying to cope with the
methodological problems and biases identified in previous research on shareholder activism.
They simply divide the engagements on the basis of their objective and list them under several
headings such as board changes, financial goals, restricting capital expenditure, increasing payouts and changes in capital structure. Then they classify the responses of target companies.
Using this method they aim to relate outcomes to measured abnormal returns to shareholders
through event studies thus potentially proving the causal effect between shareholder activism
and improved corporate performance. 53 They find that shareholder activism is predominantly
executed through private communication (e.g. private meetings, telephone calls with chairman,
CFO’s, CEO’s).54 HUKFF did not only engage the management but also other institutional
shareholders to communicate their objectives and to potentially gain their support. This means
that previous existing research, which only focused on public engagements, might have
projected a false image regarding the returns of shareholder activism. They found that the
majority of engagements are aimed at a substantial restructuring of target companies’
governance structure.55 Their findings state that the type of shareholder activism as examined
in their study, yielded substantial benefits and effects associated with shareholder activism. A
high proportion of the studied engagements proves successful and provides shareholders with
substantial gains. 56 Therefore their study, in my opinion, provides crucial evidence that
shareholder activism can indeed result in statistically significant returns if the engagements are
well focused. This is in contrast with earlier empirical evidence on the effects of shareholder
activism on corporate performance in the United States.57
23. A second study by Becht, Franks and Grant (2010) analyses 362 activist interventions by
hedge funds, focus funds and other activist investors from 2000 to 2008. These interventions
cover both public as well as private engagements. 58 They found that for public interventions the
disclosure of acquired stakes is associated with large positive abnormal returns. Private activism
is extensive and profitable, but not as profitable as public activism. They also found that hostile
engagements tend to be more beneficial than co-operative engagements and that the returns for
52
M. BECHT, J. FRANKS, C. MAYER, S. ROSSI, Returns to Shareholder Activism: Evidence from a Clinical Study of the
Hermes U.K. Focus Fund, April, 2008, ECGI - Finance Working Paper No. 138/2006, p. 63 and
http://ssrn.com/abstract=934712.
53
Ibid., 6.
54
Ibid., 7.
55
Ibid., 7.
56
Ibid., 41.
57
Supra 11, nr. 17.
58
M. BECHT, J. FRANKS, J. GRANT, Hedge Fund Activism in Europe, May 26, 2010, ECGI - Finance Working Paper No.
283/2010, p. 3 and http://ssrn.com/abstract=1616340.
specialist activist funds are larger than for other investors. They also claim that legal jurisdiction
does not account for the differences in return in different countries.
24. Cziraki, Renneboog and Szilgyi (2010) investigated the corporate governance role of
shareholder proposals across Europe.59 Firstly, they find that shareholder proposals remain
relatively infrequent in continental Europe. Secondly, shareholder activist target firms tend to
underperform and have low leverage. Thirdly, voting proposals enjoy only moderate success
and the voting outcome is driven by the issue addressed. Finally, they find that the shareholder
vote on proposals induces significantly negative stock effects. The market interprets proposals
and their failure to pass the voting test as a negative signal of governance concerns. 60
4) Conclusion
25. Overall no definite conclusion can be made regarding the empirical evidence on the effects
of shareholder activism on corporate performance. The academic debate is still going on and
the empirical evidence remains in serious dispute. Some authors have a pessimistic view of the
potential benefits of shareholder activism in relation to corporate performance. Other authors,
such as Bebchuk, believe that activism can lead to positive long-term effects.
26. The research in Europe however sheds new light as it takes private engagement data into
account, proving that shareholder activism is predominantly conducted through private
communication. The recent studies have proven that hedge fund activism can potentially deliver
substantial benefits and that public activism can yield larger returns than private activism. The
research of Renneboog provides evidence that the market responds negatively on failed
shareholder proposals, therefore adversely impacting corporate performance. The research in
Europe thus suggests that shareholder activism can have positive short term effects on corporate
performance and it potentially disproves the statement that shareholder activism has a negative
impact on the long term corporate performance.
27. In the next chapter I will firstly give an overview of the legal framework in which
shareholder activists can operate. This will relate to shareholder rights, disclosure obligations,
etc. Secondly, I will discuss the potential need for further regulation, especially since an
extensive part of shareholder activism takes place outside of the legal framework thus
potentially impacting others shareholder rights, without them having a say on it. There has also
been some criticism on these private engagements and on hedge fund activism since they remain
largely unregulated and to a large extent dominate the activist scene in Europe. In the next
chapter I will touch on this topic as well, examining or formulating a reasoning why or why
not such activity should be regulated especially given the nature of hedge funds and the
potential benefits or detrimental effects they provide for other stakeholders within the company.
59
P. CZIRAKI, L. RENNEBOOG, P. SZILGYI, Shareholder Activism Through Proxy Proposals: The European Perspective, 16(5)
European Financial Management 738, 2010, 50 p.
60
P. CZIRAKI, L. RENNEBOOG, P. SZILGYI, Shareholder Activism Through Proxy Proposals: The European Perspective, 16(5)
European Financial Management 738, 2010, p. 1.
II.
CHAPTER II: LEGAL FRAMEWORK OF SHAREHOLDER ACTIVISM
28. In this chapter the legal framework revolving around shareholder activism will be discussed.
As we already know shareholder activism consists of a public part and a private part.61
However, from a regulatory point of view shareholder activism can be divided into actions that
are regulated and actions that remain unregulated. Private shareholder activism will almost
always be unregulated, while public activism can be both regulated and unregulated. 62
Therefore it is logical that the existing regulatory framework largely deals with public activism,
which raises the question of what rule makers should do with private activism if it is exercised
in an abusive manner. When discussing the legal framework of shareholder activism there are
a few key elements which are essential for activists to be able to exercise their rights. In the
following sections, an overview will be given of the key shareholder rights and regulation
essential in shareholder activism. These key elements will consist of: the right to put items on
the agenda of the general meeting, transparency regulation aimed at disclosing significant
stakes in target companies and the right to elect and revoke the board of directors.
A. U.S.
29. In the U.S. shareholder voting rights are severely limited by regulation. In order to ascertain
which rights a shareholder has one must look at several sources of legislation. Firstly, the Model
Business Corporation Act (‘MBCA’) which States have to model their corporate laws to.
Secondly, the majority of U.S. listed companies are incorporated in the state of Delaware,
meaning due attention must be given to the Statutes of Delaware and its judicial precedents.
Thirdly, the SEC has also drafted specific rules regarding the right of shareholders to include
proxy proposals and the obligation to disclose certain significant stakes in a company. Lastly,
the scope of shareholder rights may vary according to the relevant company charter and
applicable bylaws. Bylaws are self-imposed rules and regulations deemed expedient for the
convenient functioning of the corporation.63 Thus the scope of an individual shareholder’s right
may vary depending on the company charter and the state of incorporation.
1) The Agenda of the Annual General Meeting
30. In the case of public activism, one of the key elements involves the ability to put an item on
the agenda of the annual general meeting. The ability to do so is subject to regulation. Therefore
the effect of shareholder activism is influenced by the ability of shareholders to put items on
the agenda and being able force the board to obey the approval of such agenda items.
31. In the U.S. shareholders are principally able to vote on items which are deemed to be
‘fundamental transactions’ (e.g. mergers, charter amendments). However this right is severely
limited due to the fact that the board of directors largely controls the agenda of the meeting.
Shareholders can only vote on the items presented to them. Generally such items must first be
proposed by directors themselves. This allows them to avoid submitting matters to the approval
of the shareholders that directors would rather avoid. 64 Typically, shareholder proposals are
61
Supra nr. 2.
C. VAN DER ELST, The Corporate Response to Shareholder Activism, Era Forum 15.2, 2014, p. 234.
63
Gow v. Consol. Coppermines Corp., 165 A. 136, 140 (Del. Ch. 1933)
64
J. VELASCO, Taking shareholder rights seriously, 41 U.C. Davis L. Rev. 605 2007-2008, p. 612.
62
based on the Securities and Exchange Commission rule 14a – 8. This rule allows the respective
shareholder to include a proposal and a 500 word supporting statement in the proxy statement.
This allows the shareholder to envelop his proposal in the proxy statement, distributed by the
company for its annual shareholder meeting. However it must be noted that such proposals are
advisory and the board of directors or management is not obliged to adopt such a proposal even
if it has received majority support by the shareholders. Shareholders have the right to submit
proposals outside the scope of this article, but rarely do so.65 However, rule 14a-8 can’t be used
to nominate candidates for the board of directors and requires the submission of the proposal
six months in advance of a shareholder meeting and is furthermore limited in the subjects the
proposal can address (e.g. redeem or weaken a company’s poison pill, eliminate staggered board
terms, making shareholder voting confidential, adopt cumulative voting for directors).66 An
important right for shareholders is the ability to amend bylaws, without director approval.
However, in reality bylaws cannot be in conflict with the law and the company charter and
directors may potentially counteract any amendments by making use of their own right to
amend bylaws.67 However, Apple, one of the largest listed companies recently amended its
bylaws under behind-the scenes pressure from shareholders in order to diversify the board. 68
This proves it is not entirely impossible for shareholders to amend bylaws and to put proposals
up for a vote.
32. In conclusion, it is difficult for shareholders to put an item on the agenda of the general
meeting in the U.S. .They do enjoy certain possibilities to propose certain items, but in practice
each of those possibilities can be easily countered by the board of directors. Thus the real power
lies with the board directors in determining the agenda. Hence shareholder activists have to put
pressure on the board of directors to put certain items up to a vote on the general meeting in
order to achieve their goals.
2) The Right to Appoint and Remove directors
33. Delaware corporate law provides that shareholders elect the board of directors and that they
can decide on several fundamental decisions.69 One must bear in mind that most provisions of
the Delaware General Corporation Law (‘DCGL’) are fallback rules that only apply if not
otherwise provided for in the certificate of incorporation, where many shareholder rights are
incorporated.70 However corporate law contains several restrictions undermining those rights.
The general rule dictates that directors are elected by a plurality of the votes cast by the shares
entitled to vote in the election at a meeting at which a quorum is present, meaning that the
candidate with the highest number of votes wins. 71 A candidate does not need the majority of
votes cast to be elected.72 In the case of a contested election, plurality voting is preferable.
65
B. BLACK, Shareholder Activism and Corporate Governance in the United States, The New Palgrave Dictionary of
Economics and the Law, vol. 3, 1998, , p. 3 and http://ssrn.com/abstract=45100
66
B. BLACK, Shareholder Activism and Corporate Governance in the United States, The New Palgrave Dictionary of
Economics and the Law, vol. 3, 1998, , p. 4 and http://ssrn.com/abstract=45100
67
J. VELASCO, Taking shareholder rights seriously, 41 U.C. Davis L. Rev. 605 2007-2008, p. 613-614.
68
SATARIANO, A., Apple facing criticism about diversity changes bylaws, 6th of January, 2014, www.bloomberg.com
69
DEL. CODE ANN. tit. 8, § 211(b) (2001); MODEL BUS. CORP. ACT § 7.28(a) (2005)
70
A. CAHN, D. DONALD, Comparative Company Law: Texts and Cases on the Laws Governing Corporations in Germany,
the UK and the USA, Cambridge, Cambridge University Press, 2010, p. 481.
71
DEL. CODE ANN. tit. 8, § 216(3) (Supp. 2006); MODEL BUS. CORP. ACT § 7.28(a) (2005)
72
M. BECHT, J. FRANKS, C. MAYER, S. ROSSI, Returns to Shareholder Activism: Evidence from a Clinical Study of the
Hermes U.K. Focus Fund, ECGI - Finance Working Paper No. 138/2006, April 2008, p. 11 and
http://ssrn.com/abstract=934712
However, in the case of an uncontested election, the plurality voting doesn’t make sense
because the situation can occur where a single candidate gets elected by a single vote most
likely their own.73 The MBCA dictates it is possible to deviate from the plurality voting rule by
a charter amendment.74 Such a charter amendment requires the approval of both the
shareholders and the board of directors.75 This is contrary to DGCL where such a change can
be done simply by amending a bylaw which does not require the approval of the directors. 76 In
practice, changing such a bylaw proves to be difficult as well. 77 However, the American Bar
Association declared its intention to amend this provision in the MBCA to require majority
voting, which remains to be seen to this day. 78 In almost all cases, elections are held annually.79
3) Transparency regulation
34. Transparency regulation indirectly prevents shareholders from exercising significant
influence over corporate decision making. It makes it more difficult for shareholders to build
up a significant stake without having to disclose their participation to other shareholders.
Needless to say, such provisions are crucial for shareholder activists, especially for hedge funds.
35. The SEC has provided rules on the disclosure of shareholders acquiring a significant stake
in the Securities and Exchange Act (‘Exchange Act’). Under Section 13(d) of the Exchange Act
it is required for any person, who acquires 5% of shares to file a notice with the SEC containing
information about the background, residence and citizenship of the person or entity acquiring
those shares alongside information about the source and the amount of the funds used to acquire
those shares and any contractual arrangements pending on the purchase of those shares. This
disclosure obligation is perceived by institutional investors as a regulatory barrier in
coordinating efforts with other investors. Because of the filing requirement they risk a lawsuit
if they do not disclose their plans fully when coordinating their efforts. However, the filing of
such a schedule is not hard and the odds that an individual shareholder will sue an institutional
shareholder are slim, thus primarily indicating the inactiveness of institutional investors.80
36. Other investors, such as hedge funds try to circumvent the filing obligation. They developed
a new strategy called the ‘wolf pack’ strategy. This strategy allows for the formation of a loose
network of activist investors without forming a ‘group’ for purposes under the federal securities
laws, which would require a disclosure obligation (e.g. the filing of a schedule 13D). 81 This
strategy allows for potentially riskless gains and therefore might be the leading factor of the
surge of hedge fund activism. 82 Benefits of this tactic: remaining under the radar as companies
typically do not know shareholders who own less than 5% of shares, delaying the disclosure
73
J. VELASCO, Taking shareholder rights seriously, 41 U.C. Davis L. Rev. 605 2007-2008, p. 611.
MODEL BUS. CORP. ACT § 7.28(a) (2005)
75
MODEL BUS. CORP. ACT § 10.03 (2005).
76
DEL. CODE ANN. tit. 8, § 216 (Supp. 2006)
77
Supra nr. 31.
78
S. BAINBRIDGE, Shareholder Activism and Institutional Investors, Law-Econ Research Paper No. 05-20, 2005, p. 2 and
http://ssrn.com/abstract=796227.
79
A. CAHN, D. DONALD, Comparative Company Law: Texts and Cases on the Laws Governing Corporations in Germany,
the UK and the USA, Cambridge, Cambridge University Press, 2010, p. 481.
80
B. BLACK, Shareholder Activism and Corporate Governance in the United States, The New Palgrave Dictionary of
Economics and the Law, vol. 3, 1998, p. 8 and http://ssrn.com/abstract=45100.
81
Section 13(d)(3) of the Securities Exchange Act of 1934; 15 U.S.C. §78m(d)(3); J. COFFEE, D. PALIA, The Impact of Hedge
Fund Activism: Evidence and Implications, September 15th, 2014, European Corporate Governance Institute (ECGI) - Law
Working Paper No. 266/2014, p. 23-24 and http://ssrn.com/abstract=2496518.
82
J. COFFEE, D. PALIA, The Impact of Hedge Fund Activism: Evidence and Implications, September 15th, 2014, European
Corporate Governance Institute (ECGI) - Law Working Paper No. 266/2014, p. 3 and http://ssrn.com/abstract=2496518.
74
obligation of filing a schedule 13D which allows for the hedge fund to quietly buy up until 5%
of shares before filing such a schedule. In the 10 day statutory period predating the filing of
such a schedule, a hedge fund will typically build up a stock around 6 – 10 %, which can be a
significant influence. 83 There is currently a lot of debate going on regarding the transparency
rules. The SEC is currently considering a rulemaking petition, petitioned by the law firm of
Wachtell, Lipton, Rosen & Katz, that advocates the tightening of the threshold for disclosure
under Section 13(d) of the Securities Exchange Act of 1934. Bebchuk states that the tightening
of such rules would potentially harm investors and undermine efficiency. 84 Martin Lipton, one
of the founders of Wachtell, Lipton, Rosen & Katz, is a strong critic of Bebchuk’s statements.
In a paper, brought forward by his firm, the research of Bebchuk is criticized and the arguments
in support of regulatory change are advocated once again.85
B. European Legal framework
37. The public engagements by shareholder activists are mostly realised through the use of
shareholder rights exercised at the annual general meeting. At the European level, the use of
these shareholder rights has been subject to a certain harmonization in order to allow
shareholders to effectively make use of their shareholder rights throughout the Community.
Similarly to the U.S. (federal-state) the shareholder rights are determined by different levels of
legislation (European-national). Certain directives created common rights for the general
meeting of shareholders, but the possibility to waiver or amend some and the different fields of
application have created a fragmented European corporate law. This translates into the fact that
many disparities remain in corporate law regarding the exercise of shareholder rights at the
general meeting, leaving quite some discretion to national legislators to fill in the blanks. For
instance, Directive 2007/36/EC (‘Shareholder Directive’) has laid down the obligation for
member states to guarantee a right for shareholders of listed companies to put items on the
agenda. However, the Member States are free to amend certain conditions within the boundaries
of the Directive (e.g. requiring a minimum stake of 4%, instead of the maximum 5%) creating
once again disparities between national laws.
38. In this next section we will firstly discuss the Shareholder Directive and the Transparency
Directive, which set out the general legislative framework and thus define the boundaries for
public shareholder activism. Secondly, an overview will be given of the national legislation of
Belgium, the U.K. and the Netherlands more specifically the right to put an item on the agenda
of the general meeting, the right to elect and revoke the board of directors and national
transparency regulation as provided for by the Transparency Directive. The transparency
regulation is essential because it is perceived by certain institutional investors as a regulatory
barrier, therefore potentially limiting the scope of activities of shareholder activists. Another
regulatory barrier consist of regulation concerning market integrity. The rules of insider trading,
market manipulation could also play a role in hindering activists. However, analysing such
83
J. COFFEE, D. PALIA, The Impact of Hedge Fund Activism: Evidence and Implications, September 15th, 2014, European
Corporate Governance Institute (ECGI) - Law Working Paper No. 266/2014, p. 24-25 and http://ssrn.com/abstract=2496518.
84
L. BEBCHUK, R. JACKSON, The Law and Economics of Blockholder Disclosure, July, 2011, Harvard Business Law Review,
Vol. 2, No. 1, pp. 40-60 and http://ssrn.com/abstract=1884226.
85
A. Emmerich, T. Mirvis, E. Robinson, W. Savitt, Fair Markets and Fair Disclosure: Some Thoughts on the Law
and Economics of Blockholder Disclosure, and the Use and Abuse of Shareholder Power, August 27, 2012, 3
Harvard Business Law Review 135, 22 p. and http://ssrn.com/abstract=2138945.
regulation would fall outside the scope of this contribution. It is sufficient enough to identify
market integrity regulation as an additional legal barrier.
1) Shareholder Directive (Directive 2007/36/EC) 86 and Proposal for amendment 87
39. This effective use of shareholder rights in listed companies has also been the aim of the
Shareholder Directive, currently in force.88 The Directive is primarily aimed at strengthening
shareholders’ rights and dealing with several problems regarding cross border voting. It aims
to achieve the goal of strengthening shareholders’ rights by extending the rules regarding
transparency, proxy voting rights, the possibility of participating in cross border general
meetings via electronic means and ensuring that cross border voting rights can be exercised.89
40. This contribution will only focus on the key aspects which can potentially influence
shareholder activism within EU listed companies. It is safe to say that such regulation aimed at
strengthening shareholders’ rights might strengthen shareholder activism as well, since the
more effective use of shareholder rights means a stronger bargaining position for the
shareholders vis-à-vis the board of directors and thus creates the potential for better corporate
governance. This has also been recognized by the Directive itself stating that: ‘effective
shareholder control is a prerequisite to sound corporate governance and should, therefore, be
facilitated and encouraged.’90
41. The directive requires companies to: provide information in a timely manner 91, respect the
principle of equal treatment amongst shareholders who are in the same position with regards to
participation and exercising voting rights 92, guarantee the right of shareholders to put items on
the agenda, not require shareholders to deposit their shares prior to the general meeting, to
ensure that shareholders have the right to ask questions and vote by proxy and that companies
disclose the results. However, this Directive does not further empower shareholders but rather
focuses on strengthening the existing shareholder rights. The items which shareholders are
empowered to vote on at the general meeting are not harmonized which means that there are
still many differences in national corporate law regarding the agenda items. 93 The Directive
does not take into account the internal organization of the company. Therefore it is still
necessary to ascertain the differences in each country in order to estimate the potential influence
of shareholders on the board of directors and thus of shareholder activism.
42. In the Context of the Europe 2020 strategy that aims to improve the business environment
and surrounding regulatory framework in Europe, the Commission has drafted a proposal to
86
Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of
shareholders in listed companies, PBL No.184, 14 July 2007, 17.
87
Proposal for a Directive of the European Parliament and of the Council amending Directive 2007/36/EC as regards the
encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate
governance statement, COM (2014), 213.
88
Considerans 14 of the Preamble of Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007
on the exercise of certain rights of shareholders in listed companies, PBL No.184, 14 July 2007, 17
89
Considerans 1, 2 of the Preamble of Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007
on the exercise of certain rights of shareholders in listed companies, PBL No.184, 14 July 2007, 17
90
Ibid., 3.
91
Art. 5 of Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain
rights of shareholders in listed companies, PBL No.184, 14 July 2007, 17.
92
Art. 4 of Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain
rights of shareholders in listed companies, PBL No.184, 14 July 2007, 17.
93
C. VAN DER ELST, Shareholder rights and shareholder activism: the role of the general meeting of shareholders, Belgrade
Law Review, 2012, No. 3, p. 42.
amend Directive 2007/36/EC.94 The proposal identifies two major problems with regards to
corporate governance shortcomings in European listed companies. The first problem was the
insufficient engagement of shareholders and the second problem relates to the lack of adequate
transparency. More specifically the Directive aims to realise the following objectives: increase
the level and quality of engagement of asset owners and asset managers with their investee
companies, create a better link between pay and performance of company directors, enhance
transparency and shareholder oversight on related party transactions, ensure reliability and
quality of advice of proxy advisors and facilitate transmission of cross-border information
(including voting) across the investment chain in particular through shareholder identification. 95
43. To achieve the predetermined goals the Proposal requires institutional shareholders to
develop a policy on shareholder engagement. If they do not wish to comply they have to give a
clear and reasoned explanation (‘comply or explain’) as to the justification of non - compliance.
The Proposal also requires listed companies to publish detailed and user-friendly information
on the remuneration policy of directors and grants shareholders the right to approve this policy
and to vote on the remuneration report. This increases the potential influence of shareholders
on the board and can thus give rise to shareholder activism in case of corporate
underperforming. The Proposal lays down the obligation for listed companies to subject
transactions with related parties to the approval of the shareholders if the transactions represents
5% of the companies’ assets or have a significant impact on profits or turnovers. If the
transaction represents more than 1% of the companies’ assets, the company is only obliged to
disclose the transaction at the time of its conclusion accompanied by a report from an
independent third party stating that the transaction is on market terms and confirming that the
transaction is fair and reasonable. Once again this provision includes further empowerment of
shareholders subjecting decisions that can impact the corporation to the approval of the
shareholders or providing sufficient disclosure on certain transactions. This contributes to
director accountability and potential control by shareholders and thus positively affecting
shareholder activism. The Proposal also lays down a disclosure obligation on intermediaries
stating that they shall provide information on the shareholder’s identity and contact information.
2) Transparency Directive (Directive 2004/109/EC)96 and Directive 2013/50/EU
44. Regarding transparency regulation in Europe, one must take into account Directive
2004/109/EC on the harmonisation of transparency requirements in relation to information
about issuers whose securities are admitted to trading on a regulated market (‘Transparency
Directive’). This Directive has been amended recently by Directive 2013/50/EU. Transparency
regulation has the aim to provide the company, the (future) shareholders with information about
the proportion of shares and voting rights.97 It lays down the obligation to notify if someone
crosses the threshold while building up a stack of shares. In article 9 of Directive 2004/109/ EC
94
Proposal for a directive of the European Parliament and of the Council amending Directive 2007/36/EC as regards the
encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate
governance statement, COM (2014) 213.
95
Proposal for a directive of the European Parliament and of the Council amending Directive 2007/36/EC as regards the
encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate
governance statement, COM (2014) 213, p. 2.
96
Directive 2004/109/EC of the European parliament and of the council of 15 December 2004 on the harmonisation of
transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated
market and amending Directive 2001/34/EC (‘Transparency Directive’)
97
J. DE WOLF, Onderling overleg in de transparantiewetgeving: wie moet wat melden?, T.R.V., nr. 1, 2015, p. 14.
a shareholder is required to notify the issuer if he acquires or disposes shares exceeding or
falling below the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75%.98 These
thresholds were not amended by the recent Directive. So in essence, shareholders must disclose
their proportion of voting rights and shares if they cross the aforementioned thresholds. The
structure, ratio and obligations of the Directive are similar to that of the United States. As was
previously mentioned, the disclosure of certain participations within a company is perceived by
institutional investors as a regulatory barrier. It prohibits investors from building a significant
and influential portion of shares, without being forced to fully disclose to the company and the
public. Therefore, hedge funds will try new strategies to circumvent those rules (cfr. ‘wolf
pack’).
3) Impact on shareholder activism in Europe
45. In the current situation where the Shareholder Directive and the Transparency Directive are
in force, the impact of the European legal framework on public shareholder activism is
relatively small. Most of the regulation in force focuses on strengthening the exercise of
shareholder rights or harmonizing a small number of items to be put on the agenda of the general
meeting. However, varying fields of application, lack of harmonization on a European agenda
for the general meeting and the possibility for Member States to deviate makes corporate law
in Europe still subject to fragmentation. In order for shareholders to gain the most of their
activist efforts, they are still required to consult national law to know which rights they have
and to what extent they can exercise them at the general meeting.
46. The regulatory framework that the proposal lays down, amending the Directive 2007/36/EC,
could in my opinion achieve its ambition of enhancing the long-term active engagement of
shareholders in European listed companies. The incorporation of new rights of shareholders at
the general meeting combined with additional transparency on institutional shareholdership and
certain transactions lead to a more comprehensible corporate structure which creates an
incentive for shareholders to become actively involved. However, additional transparency
might form a restraint for certain shareholders to build up a sufficient influential stake in a
company. 99 Contrary to that, it provides other smaller shareholders and the company itself to
identify larger shareholders and creates a more transparent shareholder structure. Therefore this
proposal may also effect corporate governance making it easier for shareholders to monitor,
oppose and exercise additional control on the corporate decision making process, in short
creating an incentive for shareholder activism. However, although the fact that a few
harmonized items are added to the agenda of the general meeting, there is still a lack of
harmonization regarding a comprehensive list of general meeting rights in Europe. Therefore,
many differences still exist between the member states. European company law directives grant
shareholders a certain package of rights that can be exercised at the general meeting. However,
there are fourteen rights granted by European law while Van Der Elst identifies thirty nine other
general meeting rights that exist in five different member States (e.g. determine compensation
of auditors in Belgium, provide in a vote of no confidence in member of the management board
in Germany, ratify conduct by a director amounting to negligence, default, breach of duty or
waive a claim in the United Kingdom and Germany). This leads to the conclusion that
98
99
Art. 9 Transparency Directive
Supra, nr. 34
shareholder powers might differ significantly in different member states and thus can
potentially have an impact on shareholder activism.100
47. It can thus be concluded that the European framework provides potential for shareholder
activism to grow, develop and potentially blossom but it currently lacks the regulation and
harmonization in order to do so. The Proposal is a first step in the direction of stimulating
shareholders to get actively involved. However it must be noted that the influence of large
institutional shareholders can still play a major role in activist efforts vis-à-vis the board of
directors. It must also be noted that increasing shareholders’ rights might result in a small
portion of abusive shareholder activism which might cause harm or detriment to other
stakeholders in the company or the company itself. One must also keep in mind that a large part
of shareholder activism is conducted in the shadow of the institution of the general meeting.
Increasing shareholders’ rights at the general meeting does not affect these activist efforts,
which remain unregulated. It is therefore possible that a shareholder might influence the board
of directors with covert efforts, basically circumventing the official organ of approval of a
company, in se the general meeting. This gives rise to the question if such ‘shadow activism’
should be regulated as well as it might open up to abusive activism exercised by powerful
shareholders (e.g. hedge funds, institutional shareholders) or individual investors.
C. National legislation
48. The general meeting of shareholders serves as a corporate body to obtain the consent of the
shareholders for decisions that do not lie within the discretion of the board of directors. 101 As
was discussed earlier, the European framework only sets out certain decisions which are out of
the discretion of the board of directors. Therefore it still remains the task of the national
legislators of a member state to decide which decisions should be the discretion of the board
and which decisions should be left to the general meeting. In this section a small comparison
shall be made to illustrate the differences between national member states regarding the rights
of shareholders at the general meeting and thus potentially influencing shareholder activism.
Providing a full overview of every right that can be exercised at the general meeting would fall
outside the scope of this article. Some authors summarize the power of the general meeting of
shareholders as: “the right to elect and dismiss the board of directors and to take the
‘fundamental decisions’ of the company.” 102 Therefore the overview will be limited to those
rights which are used frequently and are deemed to be crucial or provide the biggest leverage
for shareholder activists (e.g. elect and revoke board of directors, determining compensation of
directors, putting items on the agenda of the general meeting). Transparency regulation has
been identified as a regulatory barrier for investors to build up significant stakes and engage in
shareholder activism in the U.S. Therefore a brief overview will be given of national legislation
which implements the Transparency Directive. As the aim of this contribution is to discuss EU
listed companies, I will only mention the company forms that are eligible to be listed on the
stock exchange.
100
C. VAN DER ELST, The Corporate Response to Shareholder Activism, Era Forum 15.2, 2014, p. 235.
C. VAN DER ELST, Shareholder rights and shareholder activism: the role of the general meeting of shareholders,
Belgrade Law Review, 2012, No. 3, p. 46.
102
K. HOPT, P. LEYENS, Board Models in Europe - Recent Developments of Internal Corporate Governance Structures in
Germany, the United Kingdom, France, and Italy, ECGI - Law Working Paper No. 18/2004, 2004, 24 p. and
http://ssrn.com/abstract=487944.
101
1) Belgium
(a) Belgian Ownership structure and Shareholder Power
49. In Belgium, the ‘Naamloze Vennootschap’ or ‘Société Anonyme’ (‘NV’ or ‘SA’) is the
most dominant company form that is listed on the stock exchange. So the main focus of this
paper will concern the powers of the general meeting in said company form. The Belgian
corporate ownership and equity market can, according to Becht, Chapelle and Renneboog be
characterized by a few elements.103 The first element consists of the fact that only few Belgium
companies are listed. The second element that can be noted is that there is a high degree of
ownership concentration, with the highest ownership stake peaking at 45 %. The third element
is that holding companies, families and to a lesser extent industrial companies are the main
investor categories whose share stakes are concentrated into powerful control blocks through
business group structures and voting pacts. The fourth element is that the control is exercised
through complex and pyramidal ownership structures. This creates the possibility for investors
to gain a significant amount of control through complex ownership structures while maintaining
low cash-flow rights.104 Keeping these elements in mind, the rights of shareholders in such
companies will be discussed. The combination of both the corporate structure and shareholder
rights set the stage and provide opportunities for shareholder activists in Belgian publicly listed
companies.
(b) Rights of Shareholders at annual general meeting in general
50. In Belgium the rights of the annual general meeting of publicly listed companies are
contained within the Belgian Companies Code. The board of directors has residual power,
meaning they can decide on every topic not explicitly mandated to the general meeting.105 This
means that the shareholders’ meeting is no longer the supreme body in the company’s
organization, but the board of directors is.106 The shareholders’ meeting is convened at least
once a year, in a regular meeting on the date stated in the articles of association. In addition,
there may be one or more extraordinary meetings, dealing with changes in the articles of
association. 107 In general the shareholders’ meeting has the right to decide on all matters relating
to the agency relationship within the company and on all matters relating to changes in the
company’s articles of association, even if they are minor. 108
(c) The right to put items on the agenda of the annual general meeting
51. Regarding the right to put items on the agenda of the annual general meeting, it must be
noted that such a right is provided for by the Shareholder Directive. Article 6 lays down the
obligation for Member States to ensure that shareholders of listed companies, acting
individually or collectively, have the right to put items on the agenda of the general meeting,
M. BECHT, A. CHAPELLE, L. RENNEBOOG, “Shareholding Cascades: The Separation of Ownership and Control in
Belgium”, in F. BARCA, M. BECHT (eds.), The Control of Corporate Europe, New York, Oxford University Press, 2001, p.71
- 72.
104
M. BECHT, A. CHAPELLE, L. RENNEBOOG, “Shareholding Cascades: The Separation of Ownership and Control in
Belgium” in F. BARCA, M. BECHT (eds.), The Control of Corporate Europe, New York, Oxford University Press, 2001, p. 72.
105
Art. 522, §1 Belgian Companies Code
106
E. WYMEERSCH, “Belgium” in T. BAUMS, E. WYMEERSCH, (eds.), Shareholder voting rights and Practices in Europe and
the United States, London, Kluwer Law International, 1999, p. 21.
107
E. WYMEERSCH, “Belgium” in T. BAUMS, E. WYMEERSCH, (eds.), Shareholder voting rights and Practices in Europe and
the United States, London, Kluwer Law International, 1999, p. 21.
108
E. WYMEERSCH, “Belgium” in T. BAUMS, E. WYMEERSCH, (eds.), Shareholder voting rights and Practices in Europe and
the United States, London, Kluwer Law International, 1999, p. 21.
103
provided that each such item is accompanied by a justification or a draft resolution to be adopted
in the general meeting and have the right to table draft resolutions for items included or to be
included on the agenda of a general meeting. 109 However, Member States may limit the exercise
of that right upon the condition that the relevant shareholder or shareholders hold a minimum
stake in the company. Such minimum stake shall not exceed 5 % of the share capital.110
52. The Belgian legislator has incorporated this right in the Belgian Companies Code. The
general principle dictates that the corporate body calling the meeting, sets the agenda. This
applies to the board, the auditor and shareholders in the case they urge the board to convene a
meeting. The shareholders’ meeting cannot amend its own agenda, unless all shareholders are
present and act unanimously. In principle the meeting cannot discuss items which are not on
the agenda. In companies who have issued shares to the public, the agenda must not only be
explicit, but also state the proposed non-binding resolutions to the items up for a vote, allowing
shareholders to simply say ‘yes’ or ‘no’. 111 In Belgium one or more shareholders, collectively
owning shares equalling 3% of the listed company’s capital have the possibility to put items on
the agenda of the annual general meeting and to submit proposals for decisions to be made on
other topics on the agenda.112 This has to be done in writing. 113
(d) The right to elect and revoke the board of directors
53. The shareholders have the right to elect and revoke the board of directors. 114 This power is
considered to be one of the most important duties of the general meeting. 115 However it is not
uncommon to grant nomination rights to large shareholders in the articles of association of the
company. The general meeting also has the power to remove directors from office, without
having to provide a reason or without the company having to pay damages. 116 In Belgium this
right is deemed to be of public order.
(e) ‘Say-on-Pay’ rights
54. In Belgium the shareholders of publicly listed companies also have a significant ‘say on
pay’ regarding the remuneration of directors, board members and even auditors. They have the
right to approve a severance pay package granted to an executive, director or other board
member, if the severance pay package supersedes the threshold of 12 months, or in special
circumstances 18 months, of pay.117 They also have the right to approve the remuneration
report, which forms a part of the annual report of the company, providing the general meeting
with a controlling power over the remuneration of directors and other board members. 118 In
some countries the general meeting has the power to discharge the directors, which limits claims
against the directors for a breach of duty disclosed in the annual accounts and report. In
109
Art. 6 Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain
rights of shareholders in listed companies, PBL No.184, 14 July 2007, 17.
110
Art. 6, §2 Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain
rights of shareholders in listed companies, PBL No.184, 14 July 2007, 17.
111
E. WYMEERSCH, “Belgium” in T. BAUMS, E. WYMEERSCH (eds.), Shareholder voting rights and practices in Europe and
the United States, London, Kluwer Law International, 1999, p. 28.
112
Art. 533ter, §1 Belgian Companies Code.
113
Art. 533ter, §2 Belgian Companies Code.
114
Art. 518, §2 Belgian Companies Code.
115
C. VAN DER ELST, Shareholder rights and shareholder activism: the role of the general meeting of shareholders,
Belgrade Law Review, 2012, No. 3, p. 48.
116
Art. 518, §3 Belgian Companies Code.
117
Art. 554, fourth paragraph, Belgian Companies Code.
118
Art. 554, third paragraph, Belgian Companies Code.
Belgium, the general meeting must vote on the discharge of the board of directors and the
auditor.119
55. These elements, among other rights of the general meeting, create the potential leverage for
shareholders to influence the board of directors in a company. Being able to vote on
remuneration, discharging directors and maintaining a position on the board grants substantial
power to the general meeting. However, it must also be noted that a large part of the
shareholders are either free-riding, apathetic or attend meetings and support as good as all
agenda items. 120 This basically means that if a company’s shareholder structure is dispersed and
the majority of shareholders resembles these characteristics it is relatively easy for a board of
directors to conduct their business without interference of shareholder activism. Therefore
shareholder activism can’t play a role as strategic corporate governance tool for this type of
value creation.121
(f) Transparency in Belgium
56. In Belgium, the Transparency Directive has been transformed into national legislation by
the law of the 2nd of May 2007 122 on the disclosure of important participations and its Royal
Decree of the 14th of February 2008.123 As confirmed by the Financial Services and Market
Authority (‘FSMA’), the transparency regulation has the goal to provide transparency on the
shareholder structure in listed companies. In this manner, it wants to achieve the disclosure of
the balance of voting power within the company and to assure the disclosure of significant
changes within that structure.124 The legislation provides the obligation for shareholders to,
under certain circumstances, notify the listed company of their participation in such a manner
provided for in the legislation. It is then up to the company to disclose that information to the
public.
57. There are two thresholds possible for disclosure. Firstly the European thresholds, which
have been previously mentioned. Secondly, the listed company has the ability to provide for
lower or other thresholds in its statutes for incorporation. 125 The statutes of incorporation can
only provide the following thresholds: 1%, 2%, 3%, 4% and 7,5% . The obligation to disclose
is mandatory for all natural and legal persons acquiring or transferring shares with voting
rights.126
2) United Kingdom
(a) U.K. ownership structure and shareholder power
58. When discussing the corporate ownership structure and shareholder power of listed
companies in the U.K., some differences can be noted in contrast to other European countries.
Firstly the U.K. has a higher proportion of listed firms. It also differs in ownership concentration
119
Art. 554, third paragraph, Belgian Companies Code.
C. VAN DER ELST, Shareholder rights and shareholder activism: the role of the general meeting of shareholders,
Belgrade Law Review, 2012, No. 3, p. 64.
121
C. VAN DER ELST, Shareholder rights and shareholder activism: the role of the general meeting of shareholders,
Belgrade Law Review, 2012, No. 3, p. 63.
122
Wet van 2 mei 2007 op de openbaarmaking van belangrijke deelnemingen, B.S., 12 juni 2007.
123
K.B. van 14 februari 2008 op de openbaarmaking van belangrijke deelnemingen, B.S., 4 maart 2008.
124
Practitioner’s guide FSMA_2011_08 dd. 10th of November 2011 (update 2nd of September 2014).
125
Art. 18, §1 Wet van 2 mei 2007 op de openbaarmaking van belangrijke deelnemingen, B.S., 12 juni 2007
126
Art. 6, §1 Wet van 2 mei 2007 op de openbaarmaking van belangrijke deelnemingen, B.S., 12 juni 2007
120
and shareholder classes and furthermore, the U.K. is the only European country with an active,
hostile market for corporate control.127 Most U.K. firms are controlled by insider shareholders,
meaning the management or members of the board of directors. Hence the majority of
regulation is aimed at self-regulating the business (e.g. The Cadbury Code).128 The U.K. also
differs from continental Europe and the U.S. in the presence of institutional investors. The U.K.
equities market is considerably more institutionally dominated than the U.S. stock market.129
Although they have a large stake as a whole, their individual participation in companies is
relatively small making it unattractive for them to monitor each company in their portfolio when
you take into consideration the cost of this. Therefore they tend to free-ride on other corporate
control mechanisms. 130 However the U.K. institutional shareholder network is, contrary to its
U.S. counterparts, closely knit allowing easy and unregulated communication between
investors.131 The United Kingdom adopts a one tier board model. This means that both
management and control are essentially entrusted with the board of directors, who are vested
with universal powers.132 The shareholders however control the composition of the board. The
shareholders are the owners of the company and therefore in ultimate control since they appoint
and remove directors. However, the articles of association of the company might contain
provisions to protect directors from shareholder interference in the execution of the
management functions entrusted to them, leaving the shareholders with certain residual
powers.133 Shareholders cannot exercise powers of management unless they change the articles
of association or by refusing to elect the directors of whose actions they disapprove. 134
59. Black and Coffee (1994) also identified certain legal barriers in the United Kingdom
restraining institutional investors.135 Firstly, the rules on insider information prevent
shareholders from talking with the management. The fear of receiving insider information,
which would prevent them from trading, can be regarded as the cause of this.136 Secondly,
institutional investors are concerned about control person liability. Some institutions don’t want
to nominate too much board members or become too involved with management because of
this liability. However their research showed that most institutional investors don’t think about
control person liability but this liability can potentially reinforce them to refrain from building
up significant stakes up to 10%.137
M. GOERGEN, L. RENNEBOOG, “Strong Managers and Passive Institutional Investors in the UK” in F. BARCA, M. BECHT
(eds.), The Control of Corporate Europe, New York, Oxford University Press, 2001, p. 259.
128
M. GOERGEN, L. RENNEBOOG, “Strong Managers and Passive Institutional Investors in the UK” in F. B ARCA, M. BECHT
(eds.), The Control of Corporate Europe, New York, Oxford University Press, 2001, p. 260.
129
B. BLACK, J. COFFEE, Hail Britannia?: Institutional Investor Behaviour under Limited Regulation, 92 Michigan Law
Review 1998, 1994, p. 2002.
130
M. GOERGEN, L. RENNEBOOG, “Strong Managers and Passive Institutional Investors in the UK” in F. B ARCA, M. BECHT
(eds.), The Control of Corporate Europe, New York, Oxford University Press, 2001, p. 260.
131
B. BLACK, J. COFFEE, Hail Britannia?: Institutional Investor Behaviour under Limited Regulation, 92 Michigan Law
Review 1998, 1994, p. 2002.
132
K. HOPT, P. LEYENS, Board Models in Europe - Recent Developments of Internal Corporate Governance Structures in
Germany, the United Kingdom, France, and Italy, ECGI - Law Working Paper No. 18/2004, 2004, 24 p. and
http://ssrn.com/abstract=487944.
133
R. HOLLINGTON, Shareholders’ rights, London, Sweet & Maxwell, 2010, p. 104.
134
R. HOLLINGTON, Shareholders’ rights, London, Sweet & Maxwell, 2010, p. 105; John Shaw & Sons Ltd v. Shaw (1935) 2
K.B. 113, 134, Greer L.J.
135
B. BLACK, J. COFFEE, Hail Britannia?: Institutional Investor Behaviour under Limited Regulation, 92 Michigan Law
Review 1998, 1994, 87 p.
136
B. BLACK, J. COFFEE, Hail Britannia?: Institutional Investor Behaviour under Limited Regulation, 92 Michigan Law
Review 1998, 1994, p. 2065.
137
B. BLACK, J. COFFEE, Hail Britannia?: Institutional Investor Behaviour under Limited Regulation, 92 Michigan Law
Review 1998, 1994, p. 2065.
127
60. The listing requirements are contained within the Listing Rules drafted by the Financial
Services Authority. Only public companies can offer securities to the public, while private
companies are prohibited to do so.138 Public companies must be registered as such and must be
of limited liability. In the next sections, an overview will be given of the key shareholder rights
in the U.K., allowing activist investors to participate in public activism within the national legal
framework.
(b) The Right to put items on the agenda of the Annual General Meeting
61. As previously mentioned, the Shareholder Directive lays down the obligation for Member
States to incorporate a right to put items on the agenda of the general meeting. The British
legislator incorporated this right for public companies in Section 338 of the Companies Act.139
Section 338 (1) states that the members of a public company may require the company to give
notice of a resolution which may properly be moved and is intended to be moved at that
meeting. The resolution may properly be moved at an annual general meeting unless it would,
if passed, be ineffective (whether by reason of inconsistency with any enactment or the
company’s constitution or otherwise), it is defamatory of any person, or it is frivolous or
vexatious.140 Section 338 (3) makes it mandatory for companies to give notice of a resolution
once it has received requests from members representing at least 5% of the total voting rights
of all the members who have a right to vote on the resolution at the annual general meeting to
which the requests relate or at least 100 members who have a right to vote on the resolution at
the annual general meeting to which the requests relate and hold shares in the company on
which there has been paid up an average sum, per member, of at least £100. A request may be
in hard copy form or in electronic form, must identify the resolution of which notice is to be
given, must be authenticated by the person or persons making it, and must be received by the
company not later than 6 weeks before the annual general meeting to which the requests relate,
or if later, the time at which notice is given of that meeting. 141
(c) The Right to Elect and Revoke the Board of Directors
62. Regarding the right to appoint or revoke the directors the Companies Act 2006 does not
specifically provide that directors be appointed by shareholders, nor does it determine a
maximum term for directors.142 However, the general meeting is free to remove directors from
their office before the expiration of their period in office, notwithstanding anything in the
contract between the company and the director.143 However, a special notice of resolution144 is
required and the director has the right to protest and be heard. 145 This requirement protects the
director but makes it hard for the general meeting to dismiss the director pending the meeting,
therefore limiting its power.146 In the U.K. it is also possible for shareholders to call
extraordinary general meetings with 10% or more of the voting share capital, and put forward
propositions to remove any and all directors at any time during their term. If more than 50% of
138
Section 755 Companies Act.
Section 338 Companies Act.
140
Section 338(2) Companies Act.
141
Section 338 (4) Companies Act.
142
A. CAHN, D. DONALD, Comparative Company Law: Texts and Cases on the Laws Governing Corporations in Germany,
the UK and the USA, Cambridge, Cambridge University Press, 2010, p. 479.
143
Section 168 (1) Companies Act.
144
Section 168 (2) Companies Act.
145
Section 169 Companies Act.
146
C. VAN DER ELST, Shareholder rights and shareholder activism: the role of the general meeting of shareholders,
Belgrade Law Review, 2012, No. 3, p. 50.
139
the votes cast are in favour of such a resolution, then the director is required to resign. Thus
staggered boards do not limit shareholders’ ability to dismiss a director unlike the U.S.147 The
Companies Act requires that directors of public companies are to be voted on individually. 148
For listed companies, the Listing Rules require that the company complies with the Combined
Code or explain any deviation.149 The Code states that all directors should be subject to election
by shareholders at their first annual general meeting after their appointment, and to re-election
thereafter at intervals of no more than three years. 150 The statutory rule in the U.K. is cumulative
majority voting, meaning that each and every director must receive the majority of ‘yes’ votes
cast to be elected. Directors coming up for re-election might be removed from the board without
an alternative director being proposed or appointed.151
(d) Transparency in the United Kingdom
63. In the United Kingdom, The Financial Services and Market Act152, as amended by the
Companies Act153, states that the transparency rules are drafted by the competent authority, in
this case the Financial Conduct Authority (‘FCA’). They drafted the Disclosure and
Transparency Rules (‘DTR’). Section 5.1 of the DTR deal with the notification of the
acquisition or disposal of major shareholdings. A person must notify the issuer of the percentage
of its voting rights he holds as shareholder or holds or is deemed to hold through his direct or
indirect holding of financial instruments if the percentage of those voting rights: reaches,
exceeds or falls below 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10% and each 1% threshold thereafter
up to 100%.154 This is basically the implementation of the obligation laid down in the
Transparency Directive. Section 5.2 deals with the notification duties in case of acquisition or
disposal of major voting rights. It deals with indirect shareholders who control the voting rights,
but not the shares themselves.
3) The Netherlands
(a) Dutch Ownership Structure and Shareholder Power
64. The Dutch corporate board structure is somewhat different, displaying a two-tier board
system. It is characterized by a formal separation of executive and supervisory responsibilities.
On the one hand there is a supervisory board (‘Raad van Commissarissen’) which may only
consist of independent and non-executive directors. The managing board is the counterpart.
Both boards are legal organs of the company and can thus be held directly responsible to the
general meeting of shareholders.155 This regime is mandatory for large companies and roughly
60 per cent of publicly listed companies opt for this regime. This might prove a major factor
for shareholders and might influence shareholder power and therefore shareholder activism
147
M. BECHT, J. FRANKS, C. MAYER, S. ROSSI, Returns to Shareholder Activism: Evidence from a Clinical Study of the
Hermes U.K. Focus Fund, ECGI - Finance Working Paper No. 138/2006, 2008, p. 12.
148
Section 160 Companies Act.
149
FSA Listing Rules, Rule 9.8.6(5), (6)
150
Combined Code, Principle A.7.1.
151
M. BECHT, J. FRANKS, C. MAYER, S. ROSSI, Returns to Shareholder Activism: Evidence from a Clinical Study of the
Hermes U.K. Focus Fund, ECGI - Finance Working Paper No. 138/2006, 2008, p. 11.
152
Financial Services and Markets Act 2000.
153
Ss. 89A-89G and cross-heading inserted by Companies Act 2006.
154
Section 5.1.2 DTR, http://www.handbook.fca.org.uk/
155
P. MOERLAND, “Complete separation of ownership and Control: The Structure-Regime and Other Defensive Mechanisms
in the Netherlands” in J. MCCAHERY, P. MOERLAND, T. RAAIJMAKERS, L. RENNEBOOG (eds.), Corporate Governance
Regimes: Convergence and Diversity, New York, Oxford University Press, 2002, p. 288.
since a large portion of powers are allotted to the supervisory board and a large shareholder
cannot easily gain control over the company’s key positions. The two-tier board system can
therefore be used a corporate defensive mechanism against shareholder activists, hostile
takeovers and proxy contests.156
(b) Right to put items on the agenda of the Annual General Meeting
65. As was previously mentioned. The Shareholder Directive lays down the obligation on
Member States to incorporate a right to put items on the agenda, potentially under certain
restrictions or conditions. As a general principle the party who convenes the meeting sets the
agenda. In principle, this competence lies with the board of directors or the ‘Commissarissen’.
If no legal competence has been given to the general meeting of shareholders to call a meeting,
than they have no right to put items on the agenda, unless they judicially force the board to call
the meeting.157 However, Dutch law provides the possibility for shareholders, owning shares
representing 3% of the company’s capital, to put items on the agenda. 158 The statutes of a
company can foresee in a lower percentage required to put an item on the agenda.
(c) Right to Elect and Revoke the Board of Directors
66. Regarding the right for shareholders to elect and revoke members of the board, it must be
noted that the members of the supervisory board are appointed through co-optation by the
managing board. The general meeting does have the power to object if they deem the candidates
for the supervisory board to be unqualified or if they think that the composition of the board is
inappropriate. They are also allowed to recommend candidates for appointment to that board,
but they are non-binding. 159 The supervisory board has some legal responsibilities which under
a normal regime are appointed to the general meeting such as the right to appoint and dismiss
members of the managing board and to approve the annual accounts. The supervisory board
also has the legal power to approve a number of managerial decisions. However, Certain types
of large companies may derogate from that mandatory regime, by form of dispensation. This
is mostly granted to multinational concerns having their principal residence in the Netherlands,
functioning purely as management company and having the majority of their employees
working outside the Netherlands. The Dutch subsidiaries of said company are then subject to a
milder regime, which implies they should also have a supervisory board but the right to appoint
and dismiss members of the managing board lies with the general meeting of shareholders.
(d) Transparency in the Netherlands
67. The obligation laid down in the Transparency Directive is implemented in the Dutch ‘Wet
Financieel Toezicht’. Article 5:38 states that a shareholder, acquiring or selling and crossing
the thresholds as provided for in that law, has to notify the financial supervisory authority. 160
68. The Corporate structure and mandatory regime makes it difficult for any shareholder to gain
control over a company’s key positions and therefore to obtain any leverage or influence over
the board of directors. This has a major impact on shareholder activism since most of the
P. MOERLAND, “Complete separation of ownership and Control: The Structure-Regime and Other Defensive Mechanisms
in the Netherlands” in J. MCCAHERY, P. MOERLAND, T. RAAIJMAKERS, L. RENNEBOOG (eds.), Corporate Governance
Regimes: Convergence and Diversity, New York, Oxford University Press, 2002, p. 139
157
F. ORANJE, , “Hoofdstuk 9 Convocatie- en agenderingsrecht van aandeelhouders” in P. VAN DER KORST, R. ABMA, G.
RAAIJMAKERS, (eds.), Handboek onderneming en aandeelhouder, Deventer, Kluwer, 2012, p. 281.
158
Art. 2:114a Dutch Civil Code.
159
Ibid., 288.
160
Art. 5:38 Wet op het financieel toezicht.
156
essential shareholders’ rights are allocated to the supervisory board and their remaining powers
are limited to non-binding recommendations and objections to the appointment of supervisory
board members. Therefore, it is not unthinkable that a shareholder might engage in private
activist efforts in order to influence the supervisory board and managing board outside the body
of the general meeting of shareholders, since it has the most chance to gain an influence in this
manner. The question will be if such private negotiations undermine the legal system that was
put in place to protect the interests of the company. The board is under a legal obligation to
protect those interests. Could they be held liable in case of private influence? In my opinion
this will be the case. If a shareholder, via private activist efforts, gets the board to adopt a certain
decision which in hindsight proves to be detrimental to the companies’ interest, a liability claim
will be perceivable and potentially viable. I also believe a board will refrain from engaging into
such private negotiations to safeguard their independence which is a key requirement of the
supervisory board. Becoming to interdependent on a shareholder might undermine this and give
rise to liability. Overall, a board consisting of independent, non-executive members is
acknowledged as a vital element of best practice in corporate governance. 161 Therefore, the
additional element of shareholder activism might prove useless in terms of corporate control
and monitoring corporate performance. However, there is evidence that the supervisory board
regime has a negative effect on the firm’s market returns in contrast with firms who didn’t adopt
the same approach. Moreover, it is stated that concentration of ownership, as in large
shareholders generally monitoring corporate performance, yields a positive effect.162 This
evidence might provide a powerful argument for shareholder activism as a tool for corporate
governance.
D. Differences between the U.S. Legal Framework and the E.U. Legal Framework
69. The U.S. equity market is typically dominated by large financial institutions and
occasionally by individuals. Those financial institutions are not the driving force for corporate
governance. They are either passive, they vote with their feet or choose companies with a strong
inside ownership. Due to the existence of statutory defences, corporate control in the United
States is less contestable than the raw voting power numbers suggest. 163 This is similar to the
U.K. equities market where traditionally institutional investors dominate. Compared to the U.S.
however, the U.K. institutions hold significantly more shares than their U.S. counterparts.
70. Regarding shareholder rights and legal barriers to activism, a few comparisons can be made.
Firstly, shareholders in continental Europe generally have more effective shareholder rights
than U.S. shareholders. In the U.K. as well as in the U.S., many shareholder rights are provided
for in the certificate of incorporation, making it hard to compare.164 According to Bebchuk
(2006) the significant powers of the board of directors are a consequence of the U.S. legal
P. MOERLAND, “Complete separation of ownership and Control: The Structure-Regime and Other Defensive Mechanisms
in the Netherlands” in J. MCCAHERY, P. MOERLAND, T. RAAIJMAKERS, L. RENNEBOOG (eds.), Corporate Governance
Regimes: Convergence and Diversity, New York, Oxford University Press, 2002, p. 290.
162
P. MOERLAND, “Complete separation of ownership and Control: The Structure-Regime and Other Defensive Mechanisms
in the Netherlands” in J. MCCAHERY, P. MOERLAND, T. RAAIJMAKERS, L. RENNEBOOG (eds.), Corporate Governance
Regimes: Convergence and Diversity, New York, Oxford University Press, 2002, p. 293.; A. DE JONG, P. MOERLAND, T.
NIJMAN, Zeggenschapsverhoudingen en financiële prestaties, Economisch Statistische Berichten, 85(4252), 2000, p. 368371.
163
M. BECHT, F. BARCA, , The control of corporate Europe, Oxford, Oxford University Press, 2001, p. 296.
164
A. CAHN, D. DONALD, Comparative Company Law: Texts and Cases on the Laws Governing Corporations in Germany,
the UK and the USA, Cambridge, Cambridge University Press, 2010, p. 481.
161
system, insulating boards from shareholder intervention. 165 He believes that increasing
shareholder involvement, and thus potentially strengthening shareholder activism would lead
to better and improved corporate governance in U.S. companies. In Europe, generally the board
of directors dictates the affairs and management of the company, while shareholders can decide
on the rest.
71. Secondly, the exercise of shareholder rights is subject to different levels of regulation in
both continents. In the U.S., the most important rules which are relevant for listed companies
are contained within the federal MBCA, the State Laws of Delaware and the different company
statutes. In Europe, the amount of shareholder rights and shareholder protection is dependent
upon the national legislation. Corporate law regarding shareholder rights is only partially
harmonized creating two fronts. On the one front you have harmonized regulation, but with the
power of member states to regulate additionally. On the other front you have unharmonized
aspects of corporate law and corporate governance essentially leaving it to the discretion of
national legislators. This creates a patchwork of legislation. However in general one can
conclude that shareholders in Europe enjoy more opportunities to enforce their rights than
shareholders in the U.S.. As was illustrated in the analysis of the legal framework, major
differences exist between the right to elect and revoke the board of directors, the right to put
items on the agenda of the general meeting and the right to amend the corporate charter. Some
legal rules bear a remarkable resemblance to their U.S. counterparts. The structure, system and
aim of securities market regulation regarding disclosure of certain information or insider trading
information are similar to that of the United States. These rules have been perceived by
shareholders as legal barriers to engage in activist efforts. It can thus be concluded that there
are substantial differences in volume, enforcing and regulation of shareholder rights, but
similarities in other regulation perceived as legal barriers to shareholder activism. The
differences in legislation, mind-set and corporate ownership markets between the United States
and Europe leads to the conclusion that shareholder activism can potentially be conducted more
freely and unregulated in Europe. The presence of a higher amount of variable shareholder
rights, a different corporate culture will most certainly have an impact on shareholder activism.
Activists will most likely avoid the Netherlands and Germany, because of its two-tier system
and strict regime, which allows little to no room for influence on the management. It must be
noted that the U.K. is somewhat different from continental Europe, bearing more legal and
structural similarities to the United States. An explanation for this might be that they both share
a common law background in contrast to the civil law background of Continental Europe.
E. Shadow activism: regulation required?
72. As was mentioned earlier, European regulation as well as national regulation does not
interfere with shadow activism. Shadow activism is the covert branch of activism where a
shareholder directly contacts or reaches out the board of directors outside the corporate body of
the general meeting. The general meeting is basically the corporate body of consent for all
matters relating to agency and the articles of association. The question is whether or not such
activism is lawful. A large shareholder in Belgium can take two courses of action. Either he can
voice his concerns privately by for instance writing letters, e-mails or making phone calls to a
director individually or the board as a whole. This shareholder might have a significant
165
BEBCHUK, L., Letting Shareholders Set the Rules, Harvard Law Review, Vol. 119, 2006, p. 1. and
http://ssrn.com/abstract=891823.
influence on the board because of his stake in the company. He can also voice his concerns
publicly by putting certain items on the agenda, block decisions at the annual general meeting
or maybe even remove directors and appoint his own. Another course of action might be that
the shareholder might sell his stake in the company. To the outside world, the exit of a large
shareholder of a company might give a negative signal to the market, therefore decreasing the
share value. This is also not typically considered to be shareholder activism. The public voicing
of concerns has already been dealt with when analysing the legal framework. The private
voicing of concerns raises questions regarding its lawfulness.
73. If decisions, taken by the board of directors under the private influence of shareholders,
prove to be harmful to the company or other stakeholders, who will be held liable or
responsible? In my opinion it is up to the board of directors to not let it get that far. In the end,
the liability regarding decisions within their discretion falls on them. If they let large
shareholders influence them in making decisions detrimental to the company, they might risk
their appointment and they might be subject to liability claims. For instance, in the Netherlands
the board has a legal obligation to protect the interests of the company. Taking such influenced
decisions might lead to liability if it is incompatible with the interests of the company. In the
U.K. a director has the duty to act in good faith. 166 This means that a director is required to act
in the way he or she considers would be most likely to promote the success of the company for
the benefit of its members as a whole. This is the so called ‘enlightened shareholder value
principle’. 167 It is perceivable that a director, influenced by the interests of a single shareholder,
might make a decision which does not align with the interests of the company as whole. This
could be considered as a breach of the duty of good faith and might clear the path for a derivative
action by another stakeholder in the company. However, most courts are reluctant to apply such
grounds, because it requires the judge to interpret the commercial reasoning of the director
weighing several considerations, which the court is ill-equipped to do so.168 A director can also
be revoked at any time by the general meeting with a special resolution, which potentially
provides a valuable tool for dissatisfied shareholders.
74. In Belgium the directors can be discharged ‘ad nutum’, meaning by a simple majority at the
general meeting. They can also incur liability either by a claim of a minority shareholder, which
was foreseen with the intention of providing for a corrective mechanism to combat the majority
shareholders, or by the specific grounds for directors’ liability in article 527-530 Belgian
Companies Code.169 There is also the express possibility for small shareholders to invoke an
‘actio mandati’.170 It allows a shareholder to put forward a liability claim against directors in
his own name, but for the account of the company. The shareholder has to fulfil certain
requirements (e.g. minimum of 1 % of the shares or shares worth €1.250.000) at the moment
that the general meeting has to decide on the discharge of directors. 171 Furthermore they must
not have approved the discharge of directors validly. However this action is not very popular.
Firstly the arrangement of costs provides for a negative incentive. The claimant runs the risk of
the payment of the costs in case of failure of the action.172 He also runs the risk of being forced
166
Section 172 Companies Act 2006.
R. HOLLINGTON, Shareholders’ rights, London, Sweet & Maxwell, 2010, p. 55.
168
R. HOLLINGTON, Shareholders’ rights, London, Sweet & Maxwell, 2010, p. 57; J. LEWISON in Iesini v. Westrip Holdings
Ltd (2009) EWHC 2526 (Ch), 85.
169
H. BRAECKMANS, J. DUPONT, De minderheidsvordering: een kritische analyse, D.A.O.R. 2014, afl. 112, p. 5.
170
Art. 562 Belgium Companies Code.
171
Art. 562 Belgium Companies Code.
172
Art. 567, first paragraph Belgium Companies Code.
167
to pay damages to the directors. Secondly, the burden of proof is not to be underestimated and
lies with the claimant. He has to prove he is a shareholder and that he did not approve the
discharge of the director(s). Furthermore, the length and lack of precedents provide for legal
uncertainty.173 These elements provide for a useless corrective mechanism for minority
shareholders. Hence, the ‘big fish’ can still dictate the outcome of the vote on the general
meeting due to their large stake, mostly because absence of shareholders, non-involvement and
free-riding.
75. One solution to this problem might be to impose a two tier system such as it is the case in
the Netherlands to minimize potential influence of shareholders vis-à-vis the management.
Another solution might be to impose a specific liability claim for any shareholder in case of a
potential influence on decision. However there are two main issues that might undermine this.
Firstly, evidence regarding a potential influence might be hard to find or could be non-existent.
Secondly, providing a claiming option for every shareholder might open up the floodgates for
a tsunami of liability claims, swamping courts and hindering the normal functioning of a
company. As was discussed in previous sections, current law provides several mechanisms to
cope with such shadow activism which might cause harm to the company’s and the other
stakeholders interests. However, such mechanisms might face difficulties in proving the
existence of influence or a breach of duty by a director. Furthermore, minority shareholders
very rarely put forward liability claims against directors. Additional regulation would only
complicate the matter and make directors subject to yet another ground for liability, which does
not contribute in any manner to good corporate governance. The preferable option from the
corporate view in my opinion lies in adapting your company structure in such a way that any
potential influence is being kept to a minimum. As was previously mentioned, market integrity
regulation could also play a role in this. If private shareholder activism is of such a nature that
it disturbs the integrity of the market, it can be dealt with under that legal regime. For instance,
if a shareholder wishing to buy or sell his shares in the target company for a better price than
the current one, he might engage in an anonymous public campaign spreading certain false
information to manipulate the stock price. Such actions are prohibited under market integrity
regulation.
173
H. BRAECKMANS, J. DUPONT, De minderheidsvordering: een kritische analyse, D.A.O.R. 2014, afl. 112, p. 5-7.
III.
CHAPTER III: SHAREHOLDER ACTIVISM: USEFUL OR ABUSIVE?
76. Now that we have analysed the different corporate regimes and legal framework
surrounding shareholder activism, it is without doubt identified as a patchwork of different
national legislations with only a few patches in common due to European legislative action.
Therefore shareholder activism is more likely to be present in countries where the national
legislation grants broad and flexible rights to shareholders at the general meeting, where the
ownership is concentrated with large shareholders and where those shareholders have the means
to manage activism. Keeping this in mind, it seems according to my opinion that shareholder
activism will most likely be a game of big fish in a large ocean of tiny fish. In Europe the mindset of individual small shareholders is more apathetic, uninvolved and more directed towards
free-riding on other larger shareholders. Since this is the case, most large or institutional
shareholders will more easily be able to exercise control without having a significant proportion
of shares and push their wishes through on general meetings. This creates a certain potential
risk for abuse by such shareholders if they engage in shareholder activist efforts that might be
detrimental to the company or other stakeholders. The aim of this next section is to determine
the future of shareholder activism in a broad sense, as well in a strict sense in Europe. It will
also aim to ascertain whether the empowering or creating more involvement of shareholders
will have an impact on shareholder activism. Thirdly, it will try to answer the question whether
all these elements contribute to the benefit or the company and its stakeholders or instead can
be used to damage the company. To say it in other words: is shareholder activism useful or
abusive? Lastly, a brief overview will be given of some of potential corporate responses to
shareholder activism.
A. Future of shareholder activism
77. Shareholder activism is here to stay. According to the annual review 2015 of Activist
Insight, a total of 344 companies worldwide were subject to activist demands in 2014, equalling
an increase of 18 % to the 291 recorded in 2013. However, this is only the tip of the iceberg
since a large part of activist demands does not become public knowledge. In 2014 Activist
Insight recorded an increase of 43% of regulatory filings to the ones recorded in 2013.174 Since
2010, Europe has seen an increase of 126% in activist investor action, with the U.K. as a primary
focus. 175
78. Shareholder activism is increasing globally and this can be explained by several factors.
Firstly, investors are increasingly focused on returns for shareholders and the reform of
company strategy. Secondly, shareholders want to realise cash sitting on balance sheets and
take advantage of a low-cost debt market. Thirdly, the recovery of the equity capital markets
since 2009 has encouraged activists to push for mergers, acquisitions and divestments. Lastly,
companies and their boards want to create value and generate growth.176 All these elements
predict that Shareholder activism will continue to gain momentum in the future as shareholders
try to seek new ways to improve corporate performance by stating their opinion directly to the
174
Activist insight Annual review 2015, www.activistinsight.com
D. MEDLAND, Europe Sees 126% Rise In Activist Investor Action In Five Years, Forbes, November 15, 2015,
www.forbes.com.
176
S. COOKE, S. NICHOLLS, W. RUSHFORTH, “European Overview” in A. GOLDEN, T. REID, L. TURANO, Getting the deal
through: Shareholder activism & Engagement, London, Law Business Research Ltd., 2016, p. 7-9.
175
management of a company. The era where all corporate decisions were the sole result of the
interplay between the management and the general meeting is coming to an end. Shareholders
try to influence the decision and pressure the management to serve their interests and voice their
concerns. In this way one could state that shareholder monitoring has taken on a dominant place
in the corporate governance sector and is here to stay.
B. Shareholder activism: useful tool for corporate governance or gateway to abusive
conduct?
79. This section aims at determining if shareholder activism can be considered as a useful tool
for mitigating agency costs and increasing shareholder engagement thereby improving
corporate governance. A study by Vermeulen and Zetsche (2010) set out markers to indicate
abusive investor suits creating opportunistic and unjustifiable litigation costs in the Netherlands
and Germany. An investor suit is considered to be abusive if it was induced by a low-tier law
firm that represents professional and recurrent plaintiffs and which hold a small rather than
significant stake in the company’s stock. The complaints on which the suits rely are of a boilerplate or formalistic nature. Their key motivation are expected side benefits rather than the desire
to enhance the value of the issue in which the plaintiff invested and the suits are lacking
institutional backing by shareholder associations or government agencies.177 The study revealed
that the majority of suits in the Netherlands could be classified as useful, while the bulk of suits
in Germany was rather abusive in nature.
80. Judicial intervention is costly and takes up a lot of time. The fact that investor suits are still
frequent, means that the costs outweigh the potential benefits for shareholders. An investor suit
that can reduce an agency conflict creates value. 178 However, uncertainty on the outcome of the
proceedings creates opportunism of shareholders, potentially leading to abuse. Providing more
legal grounds for shareholders to sue might thus increase the amount of abusive investor suits.
This has to be nuanced, because of the fact that almost all investor suits are labelled as ‘abusive’
by management while they are actually lawfully addressing an agency conflict and therefore
creating value. Lawful investor suits help mitigate agency costs and are therefore a useful tool
for corporate governance. However, situations occur where shareholders abuse their rights and
increase the costs for the company, and other shareholders.
C. Corporate response to shareholder activism
81. Shareholder activism is basically aimed at addressing managerial deficiencies. The optimal
solution would be to avoid any deficiency. However, in reality this is impossible. So the
question remains: how should companies deal with shareholder activism? Should they go in
defensive mode or somehow incorporate it? This section aims to provide some arguments on
how to respond if a company is confronted with shareholder activism. 179
82. Before being able to deal with shareholder activism it is absolutely crucial to have some
corporate affairs in order. Firstly, knowing your shareholder base is crucial. This requires upto-date databases of your shareholders and identification of every shareholder. In companies
with a widely dispersed ownership this might prove difficult. Secondly, communication
E. VERMEULEN, D. ZETZSCHE, The use and abuse of investor suits – an inquiry into the dark side of shareholder activism,
7 ECFR, 2010, p. 1.
178
E. VERMEULEN, D. ZETZSCHE, The use and abuse of investor suits – an inquiry into the dark side of shareholder activism,
7 ECFR, 2010, p. 11.
179
C. VAN DER ELST, The Corporate Response to Shareholder Activism, Era Forum 15.2, 2014, p. 238-240.
177
between the board of directors and shareholders or the market is also an important element.
Thirdly, strategic awareness of the board should also be a priority. Finally, the governance
structure of the board must be scrutinized.
83. As a possible solution, Van Der Elst advocates integrating shareholder activism in the
internal control and risk management system of a company. This would increase corporate
awareness of shareholder activism and embedding those with other risks in the system.
Shareholder activism will be identified, recognized and responded to.180 This system can ensure
that the board of directors puts the interests of the company above the interests of the
shareholders.181 This might be a viable solution in my opinion. However I do believe that much
is dependent on the mind-set of the management. Internalizing shareholder activism in the risk
management system is prudent from the corporate point of view, because it allows companies
to develop a policy on how to deal with shareholder activism. However, from a shareholders
point of view, it can be perceived as labelling shareholder activism as a ‘risk’ for the company.
This can be the case for abusive investor suits but shareholder activism can also contribute
towards improving or mitigating managerial deficiencies. Companies must therefore be careful
to incorporate a risk policy aimed at filtering out useful shareholder activist engagements and
dealing with them in an efficient and cooperative way.
180
181
C. VAN DER ELST, The Corporate Response to Shareholder Activism, Era Forum 15.2, 2014, p. 240.
C. VAN DER ELST, The Corporate Response to Shareholder Activism, Era Forum 15.2, 2014, p. 241.
IV.
CHAPTER IV: CONCLUSION
84. In this paper we identified shareholder activism as a response in addressing the agency
conflict. The disparities flowing from diverging interests between management and
shareholders creates agency costs. For decades, scholars have tried to find solutions to mitigate
that problem, mostly relying on free market mechanisms such as the market for corporate
control. Shareholder activism is a more recent potential solution to mitigate those costs and
improve corporate governance. This contribution firstly tried to define the scope and concept
of shareholder activism, the tactics used by activists and the firms they tend to target. It was
illustrated that shareholder activism is not only being exercised by majority shareholders (e.g.
banks, financial institutions), but also by institutional investors (e.g. hedge funds, private equity
funds) and even individuals. It showed that in general European activists targeted financially
underperforming firms, with the exception of hedge funds who tend to seek out ‘value’ firms
with a higher chance of profitability. Regarding the tactics used by activists a division could be
made between offensive and defensive activism. Some scholars also tend to rank activist
interventions according to the degree of hostility.
85. Secondly, an overview of the existing empirical literature regarding the effect of shareholder
activism on corporate performance was given. Both the U.S. and European research was
incorporated. In the U.S., some authors stated that shareholder activism did not yield any
statistically significant effect on corporate performance, with the exception of small structural
changes. Others believe that shareholder activism can yield significant returns both in the short
term as well as in the long term. However, with the emergence of hedge fund activism, research
yielded statistically significant positive returns both on the short term and long term. This could
be explained due to key differences arising from their different organizational form and the
incentives that they face as opposed to institutional investors. Hedge funds have the potential
to mitigate the agency problem through activist efforts where classic institutional shareholders
failed to do so. The shareholder activism scene shifted towards hedge funds and private equity
funds. However, the empirical research is still highly disputed and academic debate is still going
on at this point. A definitive answer is yet to be provided for and advocates of both sides are
trying to prove their point. In Europe, research included hedge funds’ private engagements as
well as public ones. It showed that, depending on the issue addressed, shareholder activism can
yield statistically positive returns. The majority of engagements are conducted privately and are
aimed at restructuring the company’s corporate governance structure. A second study showed
abnormal significant positive returns for public activist efforts and proved that the returns for
public activism are more profitable than the returns for private engagements. A third study
showed that shareholder proposals that fail to pass the vote on a general meeting produce
negative stock returns, because they form a negative signal for governance concerns.
86. With the majority of activism in Europe being conducted privately, and the potential gains
of public activism being higher than private activism, the legal framework revolving public
activism was analysed. Two forms of public activism exist. On the one hand shareholders
voicing their concerns through the corporate body of the general meeting and on the other hand
shareholders making use free market mechanisms such as selling their shares. In this
contribution the focus was on the ability of shareholders to voice their concerns at the general
meeting and the legal barriers they face. Key shareholder rights such as the right to put items
on the agenda, the right to elect and revoke the board of directors were discussed in a European
context as well as on a national level (Belgium, U.K., Netherlands). An important legal barrier
for activists, in the U.S. and Europe, is the regulation of the disclosure of major shareholdings
in companies. Specific attention was given to the European transparency regulation and the
national implementation thereof.
87. Analysing the legal framework surrounding public activism in Europe, One can conclude
that it is a patchwork of legislation. Only certain aspects are harmonized in Europe, leaving a
broad discretion for national legislators to amend certain aspects and to incorporate different
rights. Therefore shareholder activism will most likely be more present in Member States with
strong shareholder protection. In countries having two-tier board systems, such as the
Netherlands or Germany, it will be hard for shareholders to influence the board of directors.
Several differences exist between the U.S. and Europe regarding corporate law and shareholder
rights, the U.K. being an exception as it displays some characteristics similar to U.S. law
probably due to its common law regime. However, when analysing disclosure regulation, a lot
of similarities can be found in the aim, structure and ratio of both U.S. and European regulation.
Regarding corporate governance and shareholder activism, the legal framework surrounding
both continents is not so different in essence. However, the different shareholder mind-set, less
stringent statutes and more concentrated ownership create more possibilities for shareholder
activists to gain substantial influence in European listed companies.
88. This contribution also discussed the possible need to regulate private shareholder activism.
The conclusion was that this would only complicate corporate governance matters further.
Several national mechanisms exist to mitigate agency related problems and abusive shareholder
suits, but they often cope with a heavy burden of proof and unwillingness of minority
shareholders to sue other major shareholders. Another danger lies in the fact that providing
shareholders with more legal grounds to engage with management would create the possibility
of abusive investor suits. In my opinion, the striking of this balance will definitely be at the
heart of the debate between policy makers. In my opinion, policy makers must be careful not to
rob shareholders from the possibility to lawfully voice their concerns to the management, even
if it is outside the corporate body of the general meeting. On the other hand, increasing
shareholder power and providing more legal grounds to act on those concerns, might open up
the gateway for abusive conduct. So once again, the balancing of these two considerations will
be key.
89. Finally, I briefly mentioned the predictions for shareholder activism in the future. The
amount of engagements is increasing exponentially in Europe, with the U.K. taking the lead. It
is safe to say that shareholder activism is here to stay and will certainly continue to dominate
the corporate governance debate the next decade.
V.
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