The past few years have seen a dramatic rise in shareholder activism across Europe and the US. This trend is now becoming increasingly common in Australia. Following an unsuccessful attempt to gain control of the board of ASX-listed Antares Energy Limited by a US-based hedge fund, Partner Tim Lester, together with Litigation Partner Kim Reid, Managing Associate Matt Ireland and Senior Associate Stacey Hahn discuss the lessons learnt and those things directors of listed companies should be doing to prepare for an approach from activist shareholders.
How does it affect you?
- Activist shareholders have become increasingly willing to exert control and realise returns in Australian companies.
- Activists are targeting a greater range of companies of differing sizes and within diverse industries.
- The tactics and objectives of activist shareholders are wide ranging and varied, and their presence is not always easy to identify or predict.
- Most listed companies have planned how to deal with a takeover offer, but fewer how to react to an activist's approach.
- Companies need to be prepared in order to determine if and when to engage with activist shareholders, and how to respond in the event of a shareholder attempting to effect change within the company.
Shareholder activists use the investment they acquire or hold in a company as leverage to promote their interests and effect change within the company. The targets of shareholder activism range in size and performance, and are commonly companies with perceived board weakness and an underperforming share price or asset base.
Invariably, activist shareholders will have a particular agenda. Often, that involves a proposed change in a company's board representation, general business direction or the outcome of a particular transaction.
Allens recently advised Antares Energy Limited in an attempt by US-based hedge fund Lone Star Value Investors, LP to reconstitute the board of the company. Lone Star requisitioned a general meeting of the company with the aim of removing two directors from the board and nominating five of its own candidates for election. If successful, the Lone Star strategy would have seen five out of the seven board positions filled by Lone Star nominees. An unusual and disproportionate outcome given Lone Star only holds approximately 6 per cent of the shares in Antares.
Antares is an oil and gas exploration and production company with fields in development and production in the Permian Basin in Texas, and is listed on the ASX.
The strategy and approach of Lone Star was seen by the Antares board to be an attempt to gain effective control of the company without paying a premium to shareholders for such control.
Lone Star ran an aggressive strategy and campaign to seek to win the 'hearts and minds' of Antares shareholders, some of the tactics of which are discussed in more detail below.
Ultimately, Lone Star's media and proxy campaign conducted over several months prior to the meeting was overwhelmingly unsuccessful. Shareholders voted to retain the existing board.
Shareholder activists may be driven by a variety of motives, including:
- Strategy – investors who wish to advance a specific strategic cause in the company, e.g. environmental and social responsibility awareness or trade union interests.
- Governance – investors who demand greater transparency and accountability, for example, concerning perceived excessive executive remuneration and deficient corporate governance practices. Institutional shareholders in particular have been taking on a more active role in intervening in management decision-making in recent years.
- Performance/return on investment – investors attempting to impose particular outcomes in order to achieve short-term share price increases or delivery of returns. These investors are typically well-funded, sophisticated companies or funds who increasingly seek support from institutional shareholders and proxy advisers. They are particularly active in the US; several have expanded into Australia (such as Lone Star) and a number of home-grown funds have also been established.
While the economic and social merits of shareholder activism remain contentious, including questions as to whether lasting, long-term value is created by activism, or whether activism simply creates short-term wealth for some shareholders, there is little doubt that it is on the rise.
Lone Star was able to utilise a diverse range of legal tools at its disposal under the Corporations Act 2001 (Cth), having increased its shareholding in Antares between February and March 2014 to more than 5 per cent. Lone Star:
- was able to requisition a general meeting of Antares shareholders under section 249D of the Corporations Act;
- gave notice to Antares of those resolutions it proposed to move at the meeting under s203D; and
- was able to oblige Antares to circulate, alongside its notice of meeting, a statement to shareholders relating to the resolutions it had proposed under s249P.
Other examples of rights available to activist shareholders in Australia include the right to request the company's register of members (provided the proposed use of it is relevant to the holding of interests in the company (s173)), the right to speak at an annual general meeting (s250S), and voting to spill a board of directors if 25 per cent or more of the votes cast at an AGM are against adopting the company's remuneration report for two consecutive years (Division 9).
Lone Star made use of its right to request the company's register of members in order to circulate direct communications to Antares shareholders. In doing so, it was able to circulate its own pre-completed proxy forms to shareholders in an attempt to help gain their support in favour of its campaign.
Lone Star combined the exercise of its members' rights with other more hostile and public means of applying pressure on the Antares directors, such as setting up a website on which links to press and media interviews and articles were posted, as well as open letters to the Antares Chairman.
Various statements made by Lone Star through these means were contested as being defamatory by Antares. In addition, Lone Star threatened court proceedings relating to the general meeting and commenced court proceedings seeking pre-action discovery in relation to certain of Antares' affairs.
Tactics of this nature employed by activist shareholders can also include seeking court injunctions which can impact on a company's operations and implementation of the board's strategy. Litigation in this context can escalate rapidly, and as was the case with Antares, boards need to act quickly and decisively so as to minimise disruption to the company's business.
Key Antares personnel faced very public criticism from Lone Star in advancing its campaign. As a result, directors of companies facing shareholder activism need to be prepared for this, and the public interest that a campaign of this nature naturally stirs.
Whether activist shareholders are able to capture the mood of the market in seeking to realise their goals is difficult to predict. Lone Star's attempt to change the composition of the board seemingly failed on this note. It was clear that they had misjudged the mood of shareholders and the support they had for the existing board and the company's management and direction.
Although not the case in the Lone Star matter, and despite the preference of the board of Antares, activists may also take more subtle approaches in seeking to effect change. This can include private and consultative means through direct engagement with the relevant board as opposed to a public and often bruising public campaign.
Evidence suggests that the increase in shareholder activism in Australia will continue. The effects can be destabilising, and boards of Australian companies may be less prepared for this than their counterparts in the US and Europe. Activism also often involves the threat or use of litigation and boards need to be ready for this.
Even companies considered to be less at risk by reason of strong performance and well respected management should also be prepared for shareholder activism and continue to focus on shareholder engagement.
In order to respond decisively and swiftly to shareholder activism, some of the things boards should be doing include:
- monitoring share registers for early signs of activist investments;
- assessing corporate governance policies and compliance;
- proactively managing shareholder perception of financial performance and corporate governance, particularly around contentious issues such as operational costs, project developments and executive remuneration;
- showcasing an openness to shareholder input as well as the board's track record of achievements;
- understanding the activist's concerns, in order to present a strong counter-argument;
- ensuring appropriate engagement with regulators;
- implementing clear and effective communication strategies to properly and fully inform shareholders and swiftly respond to public or private criticism in an appropriate way; and
- developing and implementing an activist response manual with systems designed to enable a swift response to activist shareholders, including where necessary, responding to or commencing litigation (for example, defending or obtaining urgent injunctions).
Early planning and consultation with key advisers is ultimately the best way to avoid being taken unawares and to ensure shareholders receive correct, fair and balanced information so they can make an informed decision.
Some shareholder activists may simply be looking to make a profit with less lofty aspirations for the long-term wellbeing of the company. In those instances, proactive engagement and communication with shareholders may not be enough to guard against attack. Responding to activism of this kind requires firm management and a robust approach to dealing with unfounded allegations or threats.
Shareholder activists can emerge on short notice, with little obvious warning, and campaigns of this nature tend to become charged and emotive. It is important for boards to have a plan in place for dealing with the challenges presented, to minimise disruption to the business and its operations.