Enter to open, tab to navigate, enter to select
Shareholder activism: a modicum of reassurance
Practical Law UK Articles 9-500-3174 (Approx. 4 pages)
Shareholder activism: a modicum of reassurance
by Martha McQuay, PLC
| Published on 01 Oct 2009 • United Kingdom |
The Takeover Panel Executive has taken steps to allay institutional investors' concerns that collective shareholder action might trigger the Takeover Code's provisions on mandatory offers by publishing a policy statement that provides clarification of this area. However, there are still grey areas that shareholders and their advisers should continue to treat with vigilance.
The Takeover Panel Executive (the Executive) has taken steps to allay institutional investors’ concerns that collective shareholder action might trigger the Takeover Code’s (the Code) provisions on mandatory offers by publishing a policy statement (the Panel statement) that clarifies this area (for background on these concerns, see feature article “Shareholder activism: there’s a lot of it about”, www.practicallaw.com/7-381-9645).
The Panel statement builds on the recommendations in the Walker review (the review), currently out for consultation, that there should be greater communication and engagement by the boards of banks or financial institutions with their institutional shareholders (see Exclusively online article “Walker review: spotlight on banks’ corporate governance”, www.practicallaw.com/0-386-6070).
Publication of the Panel statement follows close on the heels of a letter from the Financial Services Authority (FSA) to the Institutional Shareholders Committee (the FSA letter), which also attempted to clarify how certain of the FSA’s rules interact with active shareholder engagement.
However, while both the Panel statement and the FSA letter provide some reassurance for investors, there are still grey areas that shareholders and their advisers should continue to treat with vigilance.
Takeover Code tests
The Panel statement confirms that a mandatory offer (see box “Takeover Code provisions”) will only be triggered by activist shareholders if both the following tests are satisfied:
- Those shareholders requisition a general meeting to consider a “board control-seeking” resolution, or threaten to do so.
- After an agreement or understanding is reached between the activist shareholders that a board control-seeking resolution should be proposed or threatened, those shareholders acquire interests in shares such that their combined interest takes them over the mandatory offer threshold (or, if they already have such a level of interests in shares, they acquire further interests).
A resolution will not normally be considered to be board control-seeking unless it seeks to replace existing directors with directors who have a significant relationship with the requisitioning shareholders, with the result that those shareholders would effectively be in a position to control the board. It will also not normally be considered to be board control-seeking if the directors to be appointed are independent of the activist shareholders, or if the proposal’s primary purpose is to appoint additional non-executive directors in order to improve the company’s corporate governance.
Non-concert party factors. The Executive specifies three common situations which will not, of themselves, lead the Executive to think that a concert party has come together. These are:
- Discussions between shareholders about possible issues which might be raised with a company’s board.
- Joint representations by shareholders to the board.
- The agreement by shareholders to vote in the same way on a particular resolution at a general meeting.
In addition, a proposal to change the manner in which a company is managed that does not involve changes to the board will not normally be considered to be board control-seeking unless the activist shareholders make it known that, if their initial proposals are not implemented, they will put forward board control-seeking proposals.
FSA letter
The FSA letter, published on 19 August 2009, clarifies how the FSA’s rules on market abuse, disclosure of major shareholdings and changes in control interact with shareholder activism. It explains that ad hoc discussions or understandings in the context of collective engagement by institutional shareholders designed to raise legitimate concerns on particular corporate issues, events or matters of governance will not trigger the restrictions or disclosures imposed by its rules.
However, under the regimes for disclosure of major shareholdings and changes in control, voting power will be aggregated where there is an agreement between two or more persons which obliges them to adopt a "lasting common policy".
Potential hazards
Both the Panel statement and the FSA letter provide welcome reassurance for institutional investors, as Michael McKersie, assistant director of capital markets, and Danka Starovic, policy adviser on regulation, at the Association of British Insurers explain: "The FSA and the Executive have been prompted by the review to be more helpful on issues that they have already addressed in the past. This time, the Executive has produced a very worthy effort to go the extra mile, and while the FSA letter comes across as rather more guarded, it nevertheless also provides encouragement for the members of the Institutional Shareholders’ Committee."
However, while both sets of guidance are useful, there are areas which remain unaddressed, according to Lucy Fergusson, a partner at Linklaters LLP: "While it is now easy to be clear that there is not a problem at one end of the spectrum, it is when the board does not listen to investors’ views and the investors want to take further action that the risk of crossing the line on the Code and the FSA rules emerges. Shareholders will still need to be careful when deciding to tell the board that they will take further action, and when planning or agreeing how to vote on that issue at the next general meeting, as these are the types of approach that risk going beyond ad hoc discussions or understandings."
Gavin Davies, a partner at Herbert Smith LLP, agrees: "Overall, this is a welcome reminder of the provisions and broadly confirms practitioners’ understanding of them. The question will always be left open as to what will constitute agreement or understanding in respect of a board control-seeking proposal" .
Fergusson flags up that the review’s recommendation for a memorandum of understanding (MoU) among major long-term investors may be of particular concern to investors in this context. While the MoU would not, of itself, fall within the board control-seeking test relating to the Code issues (see “Takeover Code tests” above), it could potentially constitute a lasting common policy under the FSA rules (see “FSA letter” above).
"The practicalities of the MoU remain to be seen in practice", says Fergusson. "If shareholders want to appoint a spokesperson, they may need to agree instructions and agree to abide by them for the grouping to carry any weight. There could be a point, particularly in relation to the FSA’s rules, at which such arrangements would begin to fall on the wrong side of the line".
However, McKersie and Starovic caution that both sets of guidance are still in a state of flux, as reaction to the Panel statement and the FSA letter will contribute to investors’ feedback on the review, and the review’s final recommendations may, in turn, affect the environment for investors: "Until the review comes back, the definitive answer is still awaited."
Martha McQuay, PLC.
Takeover Panel practice statement No. 26, Shareholder activism, www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PS26.pdf.
Takeover Code provisions
Under the Takeover Code (the Code), if a person acquires (together with persons acting in concert with him) 30% or more of the voting rights of a company to which the Code applies, he must normally make a general offer for all of the shares in that company (Rule 9.1(a)).
In addition, if a person (together with persons acting in concert with him) is interested in shares which carry 30% or more of the voting rights of a company (but not more than 50%) and that person, or any person acting in concert with him, acquires further interests in shares which increase the percentage of his shareholding, that person must make a general offer for all of the shares in that company (Rule 9.1(b), the Code).
The Takeover Panel (the Panel) does not normally regard the action of shareholders voting together on a particular resolution as action which, of itself, indicates that such parties are acting in concert. However, the Panel will normally presume that shareholders who requisition or threaten to requisition the consideration of a board control-seeking proposal either at an annual general meeting or at an extraordinary general meeting, in each case together with their supporters as at the date of the requisition or threat, are acting in concert with each other and with the proposed directors. Such parties will be presumed to have come into concert once an agreement or understanding is reached between them in respect of a board control-seeking proposal, with the result that subsequent acquisitions of interests in shares by any member of the group could give rise to an offer obligation (Note 2 to Rule 9.1, the Code).