Shareholder Activism in the UK:  An Introduction to the “Tools in the Box” for 2014

February 18, 2014

Following an increase in shareholder and investor activism beyond pure executive remuneration issues in the United Kingdom (UK) in 2013, with some 25 companies targeted for public campaigns, this article provides a summary of certain principles of English law and UK and European regulation applicable to UK listed public companies and their shareholders that are relevant to the expected further increase in activism in 2014.  This article covers (i) stake-building; (ii) shareholders’ rights to require companies to hold general meetings; (iii) shareholders’ rights to propose resolutions at annual general meetings; and (iv) recent developments in these and related areas through raising and answering a number of relevant questions.

I own or am intending to acquire shares: Do I need to make any disclosures?

The UK’s disclosure obligations (under the UK Listing Authority’s Disclosure and Transparency Rules (DTRs)) apply once a person (or persons acting in concert) has (or together have) a holding of 3% or more of a listed UK incorporated company’s total voting rights and capital in issue (either as a shareholder or through a direct or indirect holding of relevant financial instruments) unless the relevant listed public company enters an “offer period” (as to which, see below). Thereafter, any changes to that holding that cause the size of the holding to reach, exceed or fall below every 1% above the 3% threshold (i.e. reaching, exceeding or falling below 4, 5, 6% etc.) must be disclosed by the relevant shareholder(s) to the listed company and the listed company is then obliged to announce those disclosures to the market. For non-UK incorporated listed companies the thresholds are 5% and then 10%, 15%, 20%, 25%, 30%, 50% and 75%.  In addition, the disclosure obligations extend to the disclosure of voting rights held by a person as an indirect holder of shares, such as where a person is entitled to acquire, dispose of, or exercise the voting rights attaching to shares, (for example, via synthetic holdings or contract(s) for difference). It is important to note that any indirect holdings must be aggregated and separately identified in the relevant notification(s).

The form & timing of disclosure

There are rules on the form of notification that must be used and the information that it must contain. In particular, notifications must provide details of all the parties to any agreement (formal or informal) which obliges them to adopt, by the concerted exercise of the voting rights they hold, a common policy towards the management of their holdings (although there is no requirement to disclose the detailed nature of that agreement). The notification must be made to the relevant listed company as soon as is possible and in any case within two trading days in the case of UK companies and four trading days in the case of non-UK incorporated companies. For shares admitted to trading on the London Stock Exchange’s main market for listed securities, the notification must be made to the Financial Conduct Authority (FCA) using Form TR-1.

Further comments

The disclosure obligations cannot be avoided by connected third-parties (such as a financial adviser or related company) acquiring shares as part of an arrangement under which they would ultimately be sold to or otherwise under the control of the principal. A person will be an indirect holder of shares for the purpose of the notification requirements where voting rights are held by a third-party with whom that person has concluded an agreement which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the target in question. Such an agreement does not necessarily need to be in writing or indeed legally binding. While ad hoc discussions and understandings which might be reached between institutional shareholders in relation to particular issues or corporate events, which is often referred to as collective engagement by institutional shareholders, are unlikely to be caught,[1] an understanding reached in relation to planning or agreeing how to vote at an upcoming (and possibly future) annual general meeting (AGM) or general meeting may well start to fall on the wrong side of the line, and accordingly could result in an aggregation of the relevant shareholdings for disclosure purposes. For these reasons, the standards promulgated by the UK’s Hedge Funds Standards Board suggest that all such arrangements be documented and reported to the compliance function. As the issues arise for the specific facts of each case, it is important to seek advice at an early stage.

Finally, a disclosure should also be made to the relevant listed company by a person who reaches, exceeds or falls below the thresholds as a result of events changing the breakdown of voting rights and on the basis of information disclosed by the listed company (for example, following an unrelated corporate action, such as a share buy-back). In terms of penalties, non-compliance with the DTRs, while not a criminal offence, may attract significant financial penalties and/or a public censure. It should be noted that, if a UK listed public company enters an “offer period”, disclosures of any dealings are then required by any person who is interested (directly or indirectly) in 1% or more of any class of securities of the company in question (pursuant to Rule 8 of the Code (as defined below)). This rule catches a wider category of instruments than the DTRs, including, in particular, options and long derivative positions.

I have a significant shareholding: What actions can I take?

Calling shareholder meetings

A shareholder (or shareholders acting together) can use the statutory procedure set out in Part 13 of the Companies Act 2006 (Companies Act) to requisition a general meeting. The directors of a company are required to call such a general meeting once the company has received requests to do so from shareholders representing at least 5% of such of the paid-up capital of the company that carries the right to vote at general meetings (excluding any paid-up capital held as treasury shares).  If multiple shareholders together requisition the meeting (such that their holdings are aggregated for the purposes of reaching the relevant threshold) the requests must be in substantively the same form (either on multiple substantially identical requests or by way of the relevant shareholders submitting a single joint requisition).

The content of the request, timing & shareholder statements

The relevant shareholder’s request must state the general nature of the business to be dealt with at the meeting and may (but is not required to) include the text of a resolution (or resolutions) intended to be moved at the meeting. Assuming the necessary formalities are complied with, the directors are required to call the meeting within 21 days of the requisition, with the meeting to be held not more than 28 days after the date of the notice of the meeting. There are additional restrictions on the timing for the meeting for “quoted companies” under the Shareholder Rights Directive 2007/36/EC of the European Union (EU), as implemented in the UK (the SRD), as implemented by amended provisions in the Companies Act. For quoted companies, there must be at least 14 or 21 clear days (depending on whether the company has passed the relevant enabling resolution at its most recent annual general meeting) between the date on which the notice of meeting is circulated and the date of the meeting itself.

Shareholders representing at least 5% of such of the paid-up capital of the company as carries the right of voting at general meetings (excluding treasury shares) also have a right to require the circulation to shareholders of a statement (limited to 1,000 words) relating to the matters referred to in a proposed resolution to be tabled at the relevant meeting (or the business to be dealt with at the relevant meeting more generally) by the company. Any such statement must be received by the company at least seven days before the general meeting. It is generally the case (although there are certain limited exceptions) that the shareholder(s) who request the circulation of the statement will be responsible for the costs associated with its circulation, unless the company resolves otherwise. In such circumstances, the company is not bound to comply and circulate the statement unless there is deposited with or tendered to it, not later than seven days before the meeting, a sum reasonably sufficient to meet its expenses in doing so (again, unless the company resolves otherwise).

Annual general meetings of public companies

In addition to the right to require resolutions to be put before a general meeting requisitioned under the Companies Act for that purpose, shareholders of public companies can require specific resolutions to be put before a listed company’s AGM. The ownership threshold for such an action is the same as for requisitioning a general meeting as described above, although a notice requiring such motion(s) must identify the actual resolution(s) to be tabled at the AGM, rather than merely requiring the discussion of general business, as is permitted at a requisitioned general meeting. In addition, the resolutions must be received by the company at least six weeks before the relevant AGM or, if later, by the time that the notice of AGM is circulated by the company.

I have a significant shareholding: What shareholder resolutions can I propose (or block)?

Binding, advisory & conditional resolutions

Generally, specific resolutions, which have the result of effecting particular transactions, appointments or events relating to a company, elicit greater shareholder interest and engagement and are much more effective in terms of shifting shareholders out of the apathy that can be prevalent in companies with disparate (especially retail investor heavy) registers. Nonetheless, it is also possible for a shareholder (or shareholders acting together) to propose, and a company to pass, both advisory (sometimes referred to as “directive”) and conditional resolutions. An advisory resolution is one whereby shareholders either (i) request the directors undertake an action as an indication of their collective wishes (i.e. the wishes of a majority of shareholders that have voted on the relevant resolution(s)) but do not formally require the directors to do so (even though they may be able to as a matter of company law); or (ii) pass an ordinary resolution to request the directors to do something which they would be obliged to do had the resolution been proposed and passed as a special resolution.

A resolution which is intended to be binding on the directors will often need to be passed as a special resolution as such a resolution will override the provisions of the company’s constitution that give the board of directors the power to manage the business of the company. As compared to ordinary resolutions, special resolutions require a higher voting threshold in order to be passed (75%, rather than a simple majority) and require compliance with additional formalities in terms of notice requirements and restrictions on the ability of directors and shareholders to make amendments to them prior to or at the vote at the relevant meeting.

It is also possible for shareholders to propose and approve both advisory and binding resolutions that in each case are conditional upon the occurrence of another event and/or the passage of time (although it is essential that the occurrence of the event(s) upon which the relevant resolution is conditional is capable of being objectively and irrefutably determined). Accordingly, it is not possible to make a resolution conditional upon the occurrence of some vague or indeterminate event (although that is not to say the triggering event cannot itself be subject to some other approval); the issue is one of certainty. Typical examples of such conditional resolutions include the adoption of new constitutional documents following a capital reorganisation or the application for the listing of the shares in a de-merged business following the dividend in specie of that business to shareholders.

Blocking resolutions

A shareholder or shareholders holding 25% or more of a UK company can restrict certain actions by the company by preventing special resolutions being passed, the most relevant being (i) a reduction of capital (a technique commonly used to increase distributable reserves, subject to approval by the court in the case of public companies); and (ii) a company altering its constitution.  In relation to public companies, the Institutional Investor Committees (IPCs) (that include bodies such as the Association of British Insurers) request that a special (instead of an ordinary) resolution be passed for on-market share purchase authorities, which accordingly can also be blocked by a shareholder or shareholders holding 25% or more, but the position of the IPCs regarding off-market share purchase authorities is less clear and an ordinary resolution may suffice.

Similarly, a shareholder or shareholders holding 25% or more of a UK public company will be able to block a takeover of that company being effected by way of a court approved scheme of arrangement (as such a scheme will require special resolutions to be passed). In practice, a shareholder or shareholders holding less than 25% of a company’s shares may also be able to prevent special resolutions being passed (because only votes cast by shareholders present in person or by proxy at the relevant shareholder meeting are counted, and it is unlikely that all shareholders will attend and/or vote).

Finally, it should be noted that a shareholder or shareholders holding 10% or more of a UK listed company will likely be able to block a takeover of that company by way of a contractual offer as the bidder would not be able to use the “squeeze-out” mechanism under Part 28 of the Companies Act to remove that shareholder or shareholders and would likely not want to be left with a significant minority. Accordingly, such a shareholding is likely to give the relevant shareholder “a seat at the negotiating table” in relation to any takeover offer.

Executive remuneration

Since 2002, UK company law has required listed public companies to produce and table a directors’ remuneration report, which is voted on by shareholders at the company’s AGM.  Until 1 October 2013 that vote was purely advisory and, while therefore only a barometer of shareholder satisfaction, it did result in a number of high profile director resignations where there was a significant vote against the remuneration report.  Since 1 October 2013 (i) the directors’ remuneration report has been split into two separate parts (one, an implementation report, detailing how the company’s current policy has been implemented during the previous financial year; and two, a policy report, setting out the company’s current remuneration policies for executives and restrictions on their salaries and benefits); (ii) the implementation report continues to be subject to a shareholders’ advisory vote every year and the policy report is subject to a binding vote (by way of ordinary resolution) either whenever changes are proposed or at least every three years; and (iii) a company’s approach to exit payments are required to be included in the policy report and therefore made subject to the binding shareholder vote. These changes, which will come into play for the 2014 results reporting season, are likely to give significant shareholders greater ability to influence listed public companies’ remuneration policies and structures, give those shareholders a more tangible way to influence boards and press for change should they be dissatisfied with the performance and/or effectiveness of current management.

Is the UK Takeover Code relevant to me?

As defined in the City Code on Takeovers and Mergers (the Code), persons acting in concert are persons who, pursuant to an agreement or understanding (formally or informally), cooperate to obtain or consolidate control of a company or to frustrate the successful outcome of another offer for the company, with control for these purposes meaning the acquisition of 30% of the voting rights in the target company. If persons are deemed to be acting in concert there are important implications in terms of obligations to make a mandatory offer under Rule 9 of the Code and the price at which any offer for the relevant company is required to be made.

The Code presumes that certain categories of person will be acting in concert unless the contrary is shown; however, the Panel Executive (which oversees enforcement of the Code) has confirmed[2] that it does not believe that the intention or effect of Rule 9 and the mandatory bid requirements is to act as a barrier to collective shareholder action (such as minority shareholders jointly seeking to influence the board or other similar activist strategies). That said, persons who collectively work to requisition a general meeting to consider a “board control-seeking” resolution (or threaten to do so) will usually be presumed to be acting in concert, and almost certainly will be where they have aligned themselves prior to the announcement of the requisition. A resolution will not normally be considered to be “board control-seeking” unless it seeks to replace the existing directors with directors who are not independent, and have a significant relationship with the requisitioning shareholder(s), with the result that the shareholder(s) 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 that are proposed to be appointed are independent non-executive directors and the requisitioning shareholder(s) are seeking their appointment in order to improve the company’s corporate governance.

The Panel Executive has also specified some situations which will not, of themselves, lead to a concert part relationship, being: (i) discussions between shareholders about possible issues which might be raised with a company’s board; (ii) joint representations to a company’s board by shareholders; and (iii) an agreement by shareholders to vote in the same way on a particular resolution at a general meeting (but see the potential disclosure issues noted above). In addition, a proposed change to 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 “board control-seeking” proposals will be put forward if the management changes are not implemented.

The Panel Executive will presume shareholders putting forward “board control-seeking” proposals to be acting in concert with each other, their supporters as at that date and also with the persons proposed to be appointed as directors of the company concerned. While the act of coming together may not trigger a requirement to make a mandatory offer if those “acting in concert” together hold less than 30% of the relevant company’s voting rights, they must be careful not to do so by further stake-building. It is important therefore to be able to identify the size of the aggregate of the shareholdings concerned. It is therefore often the case that appropriate standstill arrangements are entered into. It is interesting to note that, although it is technically possible for the proposal of a “board control-seeking” resolution to result in the relevant shareholders having to make a mandatory offer for the company concerned, since the introduction in 2002 into the Code of the current provisions on collective shareholder action, the Panel Executive has not required any such mandatory offer to be made.

Are any insider dealing, market abuse or other regulatory regimes relevant to me?

The nature of possible offences

One of the most important questions to be considered prior to the acquisition of any shares is whether purchasing shares (in whatever quantity) will amount to an offence under the criminal insider dealing and market abuse legislation, or whether the application of other regulatory regimes is triggered. Offences can be committed both when an individual in possession of inside information deals in securities and when that person encourages others to do so.

Insider Dealing

Under the Criminal Justice Act 1993 (CJA) an offence is committed if an insider (i) deals in price-affected securities when in possession of inside information; (ii) encourages another to deal in price-affected securities when in possession of inside information; and/or (iii) discloses inside information otherwise than in the proper performance of his employment, office or profession. However, it should be noted that all three offences can only be committed by an individual and only if he holds “inside information” as an “insider”. For these purposes, “inside information” means information which (i) relates to particular securities or to a particular listed company or companies (and not to securities or listed companies generally); (ii) is specific or precise; (iii) has not been made public; and (iv) if it were made public, would be likely to have a significant effect on the price of any securities. There are a number of important uncertainties here: there is no definition or guidance in the CJA on what “specific or precise” means and/or what will amount to a “significant effect on the price of securities”.

Market Abuse

In addition to the criminal regime under the CJA, the market abuse regime applies to both persons and bodies corporate, whether authorised or unauthorised, who abuse a prescribed market. Market abuse can be committed by either one person acting alone or two or more persons acting jointly or in concert. The relevant behaviour may be on-market or off-market and there are seven types of such behaviour, the most commonly referenced being engaging in insider dealing, misuse of information, and misleading behaviour and market distortion. There is also an offence relating to the dissemination of false or misleading information. It is important to note that the market abuse offences, in particular, can be committed without any securities having been acquired and/or any profit having been made.

Of particular relevance for activist shareholders is the market abuse offence of “misuse of information”. This offence is committed where behaviour (not falling within the market abuse insider dealing or improper disclosure behaviours outlined above) is (i) based on information which is not generally available to those using the market, but which, if available to a regular user of the market, would be, or would be likely to be, regarded by him as relevant when deciding the terms on which transactions in qualifying investments should be effected; and (ii) likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the market. There is a good deal of subjectivity here in that an offence is only committed if the relevant conduct constitutes a failure to observe the standard of behaviour reasonably expected of market participants in the relevant position.

Also of particular relevance to activist shareholders may be the offence of engaging in “manipulating transactions”. This is where behaviour consists of effecting transactions or orders to trade (otherwise than for legitimate reasons and in conformity with accepted market practices on the relevant market), which either give, or are likely to give, a false or misleading impression as to the supply of, or demand for, or as to the price of, one or more qualifying investments and/or secure the price of one or more such investments at an abnormal or artificial level. In terms of what constitutes “legitimate reasons” for the purpose of the relevant provisions, it is accepted under the FCA’s Code of Market Conduct that where a transaction (or series of transactions) are entered into so as to open a new position (rather than closing out a position to remove the relevant person’s exposure to the relevant market) and where the transaction complies with the rules of the relevant prescribed markets (for example, as regards reporting and disclosure in accordance with the DTRs, as described above) those facts are strong evidence that the relevant conduct has been undertaken for “legitimate reasons” and so falls outside the scope of the relevant market abuse regime.

Issues for activist shareholders, etc.

The most obvious concern in relation to a purchase of shares in the market by a stake-building activist is in circumstances where, through its enquiries prior to the purchase, it has received, and is therefore in possession of, non-public information from the company, or an insider such as a director, at the time of the purchase that would, if made public, be likely to significantly affect the company’s share price. However, the FCA has also warned that an activist strategy could itself constitute inside information. While it is clear that dealings by an activist on the basis of its own intentions and knowledge of its strategy would not be regarded as market abuse, there are other circumstances which give rise to concerns, such as situations where (i) a person trades on the basis of knowledge of another investor’s intentions or strategy; (ii) warehousing arrangements are used to avoid disclosures to the market that might otherwise be required; and (iii) false rumours and expectations are generated to take advantage of the resulting share price movements.

Of course, once an activist’s presence on a company’s share register is publicly identified and its activist strategy is publicly known, any potential market abuse issues are normally addressed because they should cease to be price sensitive. This the main reason why activists, once relevant shareholdings have been acquired, often use “open letters” to garner support from other shareholders, as opposed to private approaches to them before publicly launching an activist campaign.

Penalties & enforcement

If a person is found guilty of market abuse the FCA may (i) impose an unlimited fine; (ii) censure that person publicly; and (iii) apply to the court for a restitution order. The market abuse civil regime supplements (and, to a certain extent, cuts across) the criminal regime for insider dealing under the CJA and the criminal offences of misleading statements and market manipulation under Section 397 of the Financial Services and Markets Act 2000 (FSMA). However, the civil market abuse regime under FSMA is wider in scope than the criminal regime and, in particular, effectively extends an insider dealing regime into the commodities and energy markets. The existence of both a criminal and a civil market abuse regime means that various legislative provisions need to be considered in relation to any one set of facts (taking into account the differing burdens of proof) and may also mean the FCA has a choice as to whether to pursue a criminal prosecution or take civil action in respect to the same behaviour. Against this legislative background, in recent years the FCA has adopted an increasingly robust approach to the investigation and prosecution of the market abuse offences and this approach is widely expected to continue. The FCA’s approach on market abuse is generally perceived to be merging into a broader focus on standards of market conduct, and the trust and integrity issues. Market participants should note that the FCA has recently secured criminal prosecutions for insider dealing (which it had not often prosecuted) and issued a number of high-profile civil sanctions and sizeable fines under the market abuse regime.

Other Regulatory Regimes

There may also be other relevant regulatory regimes to be wary of.  Regulatory approvals may be required in certain regulated sectors (e.g. banking and financial institutions) if the shares or voting interests held by the persons engaging with the company on a collective basis exceed specified levels.  For example, the EU Acquisitions Directive 2004/39/EC (as amended by Directive 2007/44/EC) has a trigger requiring regulatory approval if 10% or more of the shares or voting rights are required in certain financial institutions.  In the UK, the “change of controller” regime, which implements the EU Acquisitions Directive, requires approval of the Prudential Regulatory Authority and/or the FCA when certain thresholds of holdings of shares or voting rights are passed through in UK authorised financial institutions.  Shares or voting rights are aggregated where, among other things:

  • (as for disclosure of major shareholdings) there is an agreement between two or more persons which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the institution; or
  • persons are “acting in concert”.

In certain circumstances, collective action may also risk triggering merger control and anti-trust law restrictions under UK domestic and EU anti-trust laws.  This issue needs to be considered on a case by case basis.

Can I engage with the Company’s board or with other activists/shareholders?

Engaging with the current board and the UK Stewardship Code

Engaging with the current board of the company and establishing a dialogue should normally be seen as a precursor to any more aggressive “activist” strategies, the emphasis being to protect and enhance overall shareholder value. The UK Stewardship Code was introduced in 2010 and sets out good practice for institutional investors seeking to engage with boards of UK listed companies. The purpose of the Stewardship Code is to encourage dialogue between investors and the boards of UK listed companies when shareholders intend to use their powers to make a company take notice of issues of concern to them. It is therefore expected that a board will engage with all significant shareholders on a regular basis to offer an appropriate forum for their views to be aired. In particular, it would be common for the board of a UK listed company to engage in dialogue with significant shareholders (even before they reach or exceed the 3% and 5% thresholds referred to above) and to gauge their interest before major transactions involving the company are undertaken; the intention of the Stewardship Code being that the relationship between the board and significant shareholders is one of co-operation and constructive dialogue to maximise overall shareholder value. The Stewardship Code operated by the Financial Reporting Council (FRC) and adherence by shareholders to it is voluntary. The FRC encourages all institutional investors to publish a statement on their website of the extent to which they have complied with the Code, and to notify the FRC when they have done so and whenever the statement is updated (a “comply or explain” approach). The FRC also encourages each institution to name in its statement an individual who can be contacted for further information and by those interested in collective engagement. In its December 2013 report, the FRC noted that the Stewardship Code now has nearly 300 signatories, of whom approximately two-thirds are asset managers. It noted that, between them, the current signatories own or manage a significant proportion of UK listed equities and have the potential to become the critical mass of investors needed to oversee and engage with companies with the aim of achieving a long-term return to savers.  It also noted that the quality of reporting by Stewardship Code signatories remains variable. It stated that there are some very good examples, and some investors are now going beyond simply describing their policies and processes and have begun to report on the outcomes of specific cases of individual and collective engagement. The FRC welcomed this as it helps to demonstrate that there is substance behind their public statements.  For the same reason, the FRC has also encouraged more signatories to consider obtaining an independent assurance on their engagement processes, as recommended by the Stewardship Code. While the number of signatories doing so has increased, at 14 per cent it remains low.

Engaging with other shareholders

An activist shareholder looking to agitate for change will first commonly use public records (both from the company’s publicly disclosed information and/or previous shareholder filings, including DTR disclosures) to assess the size of other shareholdings and gauge (from public statements as mentioned above) the likelihood of various shareholders or groups of shareholders supporting its proposals or strategy.  A shareholder may also inspect (free of charge) and obtain a copy (for a prescribed/reasonable fee) of both the register of members and the register of interests in shares (but there will often be data protection issues to be considered when dealing with that information once obtained).  This information will also be helpful to an activist shareholder in determining the identity of potential supporters.

The next stage will often then be to engage with other significant shareholders.  However, as noted above there are a number of risks which a shareholder who wishes to engage in collective action in relation to a publicly listed company needs to be wary of.

Certain information about, and/or acquired during the course of, collective action can amount to non-public price sensitive information, and hence may restrict the ability to deal in securities of the listed company and so there should be heightened sensitivity in relation to “joint strategies” by activists. An activist may seek another’s support in numerous different ways, including (i) requesting permission to use its name in discussions with the company concerned; (ii) seeking a letter of support in relation to the activist’s proposals or strategy; (iii) agreeing to a joint or coordinated stake-building strategy; (iv) seeking and agreeing to non-binding letters of intent or legal undertakings to support a shareholder vote (and, perhaps, requiring the other to retain is shareholding ahead of the relevant shareholder meeting); and (v) requesting the other to join in and co-sign a meeting requisition to propose agreed resolutions (which may also constitute “board control-seeking” proposals, as referred to above).

When engaging with other shareholders, the activist will need to confirm their willingness to be “wall-crossed” (i.e., be provided with potentially price sensitive information) with respect to the activist’s proposals or strategy. If they are so willing, any discussions prior to an announcement of a general meeting requisition or other matters that could constitute material price sensitive information should take place within the confines of appropriate confidentiality/non-disclosure and, possibly, standstill arrangements.

Activists and other shareholders who come together to agree to a joint or coordinated stake-building strategy in relation to the company in the context of also adopting a joint activist strategy need to be fully aware of both the likely disclosure consequences of doing so and also the Code implications of potentially being treated as acting in concert. Appropriately confidential discussions in connection with a properly disclosed and organised stake-building exercise are, of themselves, unlikely to constitute market abuse (although it is essential that such confidentiality be maintained and that information flows be carefully monitored) nor, of itself, is the actual stake-building (provided the disclosure rules are appropriately complied with). Those involved need to be continually mindful of triggering a requirement to make a mandatory offer under the Code if they, and others “acting in concert” with them, together acquire 30% or more of the company’s voting rights.

On 12 November 2013, the European Securities and Markets Authority (ESMA) published a long-awaited statement setting out guidance for investors on shareholder co-operation and “acting in concert” under the European Directive 2004/25/ac on Takeover Bids in which ESMA said that whenever shareholders engage in certain activities on its “White List”, such co-operation will not, in and of itself, lead to the conclusion that these shareholders are acting in concert.  The “White List” of activities is set out below:

  • entering into discussions with each other about possible matters to be raised with the company’s board;
  • making representations to the company’s board about company policies, practices or particular actions that the company might consider taking;
  • other than in relation to the appointment of board members, exercising shareholders’ statutory rights to:
    • add items to the agenda of a general meeting;
    • table draft resolutions for items included or to be included on the agenda of a general meeting; or
    • call a general meeting other than the annual general meeting;
  • other than in relation to a resolution for the appointment of board members and insofar as such a resolution is provided for under national company law, agreeing to vote the same way on a particular resolution put to a general meeting, in order, for example:
    • to approve or reject:
      • proposal relating to directors’ remuneration;
      • an acquisition or disposal of assets;
      • a reduction of capital and/or share buy-back;
      • a capital increase;
      • a dividend distribution;
      • the appointment, removal or remuneration of auditors;
      • the appointment of a special investigator;
      • the company’s accounts; or
      • the company’s policy in relation to the environment or any other matter relating to social responsibility or compliance with recognised standards or codes of conduct; or
    • to reject a related party transaction.

While the “White List” is welcome guidance and helpful, and runs alongside the specific situations identified by the Panel Executive which will not, of themselves, lead to a concert party relationship, it will nonetheless often be necessary to liaise with the Panel Executive for guidance and a ruling if there is any doubt over proposed action.

As mentioned above, once the general meeting requisition or other matters of concern have been announced and are then public knowledge, by definition, the information shared and/or that was the subject matter of the relevant discussions should cease to be price sensitive, cleansing the parties and freeing them to deal in the relevant securities as they wish. That said, any discussions post-announcement of a requisition, for example seeking non-binding letters of intent or legal undertakings to support a shareholder vote, should be done on the basis of “equality of information” to all shareholders, a principle enshrined in the DTRs.

Engaging through the new Investors Forum

One of the recommendations in the Kay Review of Equity Markets and Long Term Decision Making was the establishment of an investors’ forum to facilitate collective engagement by investors and UK companies.  Professor Kay saw the forum as an opportunity for collective action to help “improve the performance of a company”.

The UK Government accepted this recommendation and tasked a small group of senior figures in industry to review how, through engagement with asset owners and managers, listed companies can improve sustainable, long-term company performance and overall returns to end savers. In conjunction with this, the Collective Engagement Working Group (CEW Group) was formed in April 2013, and it published its final report on 3 December 2013.  The CEW Group agreed that an Investor Forum should be established and that it is working to see it operational by the end of June 2014. The key conclusions of the CEW Group are:

  • a new “Investor Forum” for Collective Engagement should be created to:
    • ensure the opportunity for inclusion and participation of the broadest possible range of institutional investors (especially international asset owners and asset managers and sovereign wealth funds);
    • operate Engagement Action Groups (EAGs) to maximise strength of voice and achieve positive results where there are shared concerns about a particular company; and
    • drive cultural change and promote the commitment of more resource to long-term stewardship and engagement by institutional investors.
  • cultural change is needed. Asset owners, asset managers and companies need to develop a shared sense of partnership, with the objective of promoting long-term strategies for prolonged competitive advantage at companies, leading to sustainable wealth creation for all stakeholders.
  • major listed companies should hold an annual strategy meeting for institutional investors, outside the results cycle, where investors and company executives can link governance to the company’s long-term strategy without the focus on short-term results.
  • engagement on governance issues should be integrated into the investment process.
  • routine remuneration matters are not expected to be a core focus for the Investor Forum.
  • the Investor Forum should have its own Secretariat to progress its objectives and manage the EAGs.

The EAGs will be set up on a company by company basis and the Secretariat will engage on a confidential basis with shareholders to identify whether there was sufficient support/”critical mass” on particular issues and also to identify investors who would be willing to form part of the core membership of a specific EAG.  The Investor Forum’s initial thought is that around 10 investors would be an optimum number for each EAG.  The Secretariat will be responsible for engaging directly with the identified investee companies – this is envisaged as usually commencing with a letter to the chairman, requesting a meeting with pre-identified agenda items.  The Secretariat will also consider issues around and the manner of dissemination of views amongst Investor Forum participants on specific matters in relation to specific EAGs.  This may involve publication in a general press release, though it is envisaged that there may be matters specific to a particular investee company which may need to be communicated privately by the Secretariat to it or by a meeting between it and representatives of the relevant EAG.

It should be noted that as a condition to participation in the Investor Forum, a shareholder will be required to agree to an undertaking which will contain an acknowledgement of the rules of the Investor Forum, and agreements that the shareholder operates in accordance with applicable laws and gives specific confidentiality obligations.  Breach of the undertaking will result in a shareholder being expelled from the Investor Forum.

The Company is being mismanaged: What action can I take?

Derivative claims

Any shareholder can make a derivative claim in the name of the company, for a wrong done to the company, in order to obtain relief on behalf of the company. However, a claim can only be made for negligence, default, breach of duty and/or breach of trust of a director. The director(s) in question need not have benefitted personally for such a claim to be made. The shareholder must file evidence establishing the basis for a claim and obtain the court’s permission to continue. However, the court will not give permission if the impugned action has or is likely to be authorised by the majority of independent shareholders.

Unfair prejudice

Any shareholder can apply to court if a company’s affairs are being conducted in a manner that is unfairly prejudicial to some or all of the shareholders in that company, including the applicant. If the claim is proved, the court may take such action as it thinks fit. The types of order that could be issued include, but are not limited to, an order regulating the future conduct of the company or, most commonly, providing for the sale or purchase of shares in the company by the complainant. In contrast to a derivative action, an unfair prejudice claim is designed to compensate the particular aggrieved shareholder(s).

[1] See the guidance from the Financial Services Authority of 19 August 2009.

[2] See the Panel’s Practice Statement 26 dated September 9, 2009 (available at

We will continue to monitor these and other related developments and keep you updated as both regulation and market practice unfolds.  Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the author of this alert:

Jeff Roberts (+44 20 7071 4291, [email protected])

Other Key Contacts in the United Kingdom

Selina Sagayam (+44 20 7071 4263, [email protected])
Gareth Jones (+44 20 7071 4266, [email protected])

For information about Gibson Dunn’s Hostile M&A and Shareholder Activism Practice, please visit

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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.