Occasionally, compliance officers find themselves being dragged into debates about company law, especially at wealth management firms that handle stock for their HNW clients. This article looks at the subject from the point of view of Guernsey, which services many British HNWs and whose corporate law is similar to the UK’s.

Shareholder activism describes a range of activities undertaken by a company's shareholders intended to cause some change to the behaviour of the company. As one would expect, the objectives of the activist campaigns vary. FTI reported that the most common types in the UK include seeking the removal of a CEO or other board member (through statutory requisitions), the push for the sale of a company or the making of a distribution to shareholders. Other campaigns have targeted particular events, such as a proposed takeover transaction with a view to obtaining a higher offer price.

In many cases, activist campaigns are led by investment funds that specialise in them, the so-called 'activist funds'. A recent JP Morgan report suggests that institutional investors have now also become more activist and indeed have teamed up with activist funds to increased ‘shareholder value.’
 
There are no statistics about shareholder activism in Guernsey. Anecdotal evidence and experience from recent matters suggests that, as in the UK, investors and activist funds are looking at opportunities to extract money from shareholdings in Guernsey listed companies. As Guernsey’s legal system is similar to the UK’s and as there are more entities listed on the London Stock Exchange are based in Guernsey than in any other overseas jurisdiction, this is not surprising.

Use of activism in takeovers

Events such as a bid to take over a company can bring about an activist campaign and encourage the use of activist strategies by investors. Although jurisdictions such as the UK and Guernsey do not have anything like the "appraisal process" that activists exploit, with varying degrees of success, in the US and the Cayman Islands, activists are experimenting with challenges to the scheme of arrangement mechanism used to implement takeovers.

Schemes of arrangement have become a common feature of both public and private M&A (merger and acquisition) transactions in Guernsey. In the 12 months to date, we have acted as Guernsey counsel on five public takeovers through schemes of arrangement.

Although schemes have a compulsive effect on shareholders and are used to "drag along" those who dissent, in the context of takeovers they also offer minority shareholders significant protection. The Guernsey courts are careful to keep such rights in operation. A recent example is the decision in Re Puma Brandenburg Limited (Guernsey Court of Appeal, 18 May 2017) where we successfully challenged a scheme on behalf of a minority shareholder despite it having been approved by the requisite statutory majority.

‘Minority protections,’ however, are also open to exploitation by activist investors engaged in ‘bid activism’ strategies. At its most aggressive is the so-called ‘bumpitrage,’ which involves investors acquiring a strategic stake in a company after the announcement of a bid with the express objective of forcing the bidder to improve the terms of his bid.

It is not only “takeovers by way of scheme of arrangement” that are at risk of such practices – they can also be used against contractual takeover bids. In this instance, the bidding company must achieve an acceptance of 90% of the shares to which the offer relates in order to acquire 100% of the target using the compulsory ‘squeeze out’ provisions in the Companies (Guernsey) Law 2008. With this in mind, activist investors can enter the market to increase their holding and exploit that position to improve the bid terms.

What strategies can activist shareholders deploy in Guernsey?

The approach used by investor activists can vary. In its most subtle form, activists will try to persuade the company’s directors to pursue a course of action. A private approach of this kind avoids the considerable expense and reputational risk of more public action while still achieving the desired outcome. Of course, private meetings with directors come with the implied or even express threat that failure to comply could lead to the exercise of other, more aggressive options.

A common strategy beyond private engagement is the use of company general meetings to pass resolutions, perhaps to replace directors. Bid activists who want to drive up the price of a bid may acquire a larger stake or attract enough support from other investors to block (or at the very least, significantly frustrate) a contractual takeover bid or scheme of arrangement. The threat of a takeover failing to gain enough support can encourage a bidder to increase the price he is offering and, in the most extreme of circumstances, invite hostile bidders to enter the market.

With the ever-increasing use of social media as a primary platform, publicity is another tool that activists commonly use. They also use of social media strategies (in addition to other more traditional forms of attracting support such as investor fora) to build up support for their campaigns. Of course, these strategies are not free of risk for the activists themselves. The powers that shareholders in Guernsey companies have are considered below.

Access to information

Under the Companies Law, shareholders are able to ask the company to provide a copy of the share register. The company must then do so in five days or, alternatively, apply to the court for directions if it does not believe that the request is for a proper purpose.

Access to the share register provides an activist investor with details that enable him to attract support for the campaign from fellow shareholders. For non-listed companies, it may also open the way to acquire further shareholdings.

The Companies Law also allows a non-shareholder to request a company's share register, on payment of a fee, though this may be more likely to prompt a challenge to the request by the company.

Exercising shareholder powers at company meetings

Shareholders do not need to wait for an annual general meeting to set forth their proposals. A shareholding of 10% will enable anyone to requisition the directors to convene a meeting to consider his proposals. The meeting must be called within 21 days of receipt of the requisition notice and be held within 28 days of being called. If the directors fail to obey, the shareholders may call a meeting themselves at the company's expense.

Bid activists may use court-convened meetings of their companies to block schemes of arrangement. For this to happen, a scheme has to be approved by a majority in number and 75% by value of those shareholders who attend the meeting (whether in person or by proxy). A scheme of arrangement can be blocked if the activist investor can secure a majority of investors at the meeting or attract 25% by value of those voting. Given that turnout levels can vary, and almost inevitably for a listed company cannot reach 100%, a strategic stake of less than 25% is likely to be enough to vote the scheme down.

It should be noted that the use of artificial mechanisms such as "share splitting" to achieve a majority in number against the scheme may be challenged successfully in court, as was the case in the recent English decision in Re Dee Valley Group Plc  [2017] EWHC 184 (Ch).

Legal proceedings and challenges

An activist investor may consider the use of the various ‘minority protection’ provisions in the Companies Law to advance his objectives. Here are some (but not all) of the options that he can pursue.

Unfair prejudice petitions – Directors need to conduct the affairs of the company in a way that is not "unfairly prejudicial" to the interests of shareholders. The unfair prejudice remedy allows shareholders to seek relief from a court as long as they can establish that the conduct of the directors is unfair and also prejudices their interests as shareholders.

Derivative actions – Directors owe several duties to their companies and generally only the company can claim against the director for any breach of those duties. The exception is the derivative action, under which a shareholder can seek permission to make such claims, in certain limited circumstances.

Challenge to compulsory takeover – If the 90% "squeeze out" threshold is reached, the compulsory squeeze-out provisions in the Companies Law can be effected and a “notice to acquire” will be sent to dissenting shareholders. However, those shareholders may challenge the notice and seek an order for the compulsory acquisition to be set aside.

Opposing a scheme of arrangement – Even if the company fulfils the statutory voting requirements in favour of a takeover by way of a scheme of arrangement, it needs the sanction of the court to approve the scheme. The sanction hearing provides a unique opportunity for a shareholder affected by the scheme to challenge it in court. He can bring the court’s attention to any technical deficiencies, or ask whether the classes of shareholders that voted on it were properly constituted (for example, some shareholders might be receiving additional or collateral benefits under the scheme). He can ask whether the bid price is justified and verified and whether the scheme is fair such that a reasonable member would have approved it.

Risks faced by activist investors

These strategies are not without risks for activist investors, who ought to keep in mind relevant regulatory obligations that apply, including the City Code of Takeovers and Mergers (known as the Takeover Code), the European Union’s Market Abuse Regulation (MAR) and relevant exchange listing rules.

Investors who want to increase their stake in a company will need to be mindful of notification requirements under listing rules as well as the mandatory takeover provisions of the Takeover Code. This is particularly important in circumstances where by attracting support they may inadvertently associate themselves with other aligned shareholders such that a mandatory bid is required (which may not be their strategic aim), or if their combined shareholding is excluded from the squeeze-out or voting threshold calculations.

In addition, insider dealing can arise under MAR if a person possesses ‘inside information’ and uses it to acquire or dispose of securities to which that information relates. Information regarding another shareholder’s plans and strategies for trading may also amount to inside information.

* Abel Lyall can be reached on +44 1481 739 364 or at abel.lyall@mourantozannes.com; Alex Davies can be reached on +44 1481 739 363 or at alex.davies@mourantozannes.com