Shareholder activism, here to stay

An activist shareholder is a shareholder that uses its equity stake to exercise its ownership rights in a company to put pressure on its management. Shareholder activism allows shareholders to take greater ownership and responsibility of the company and to voice their disapproval on issues ranging from “non-financial” issues (such as environmental, social and governance (ESG) issues) to unlocking additional value and earning a better return on their investment.

Historically, shareholder activism has not been as aggressive in South Africa as in the US and the UK. In particular, shareholder activism in the US is widely acknowledged as an alternative investment class, and there has been significant M&A activity resulting from shareholder activism. One of the most notable examples of this is the shareholder-driven merger of Dow Chemical Co. and DuPont Co., which led to the creation of a giant worth more than USD120 billion. Here, shareholders of each entity actively engaged the boards and forced the creation of a new entity to maximise shareholder value by merging the two entities and then restructuring commercial operations into three distinct units.

Recently, shareholder activism has been on the rise in South Africa and the main catalysts appear to be the minority protection rights contained in the Companies Act, No 71 of 2008 (Companies Act) coupled with the need for good corporate governance and increased transparency. Furthermore, international trends and influences have seeped into the South African market as a result of the shift in the shareholder base of local companies to one that is more diverse and international, leading to increased shareholder activism.

While the majority of recent publicised shareholder activism in South Africa has focused on executive compensation, remuneration policies and the reshuffling of boards, there seems to be an increase in the drive by shareholder activists to unlock a greater underlying value in their shareholding and by doing so, shareholder activists may, in turn, trigger movement within the South African M&A market in the not-too-distant future.

Of course, shareholder activists looking to engage with companies or in lobbying support of co-shareholders need to do so within the prescribed legal framework. Consequently, it is important for shareholder activists to be cognisant of the legal minefield to be navigated, which includes the provisions of the Companies Act, the Competition Act, No 89 of 1998 and the JSE Listings Requirements (in particular, the provisions relating to insider trading). This is also important as shareholders (and in particular minority shareholders) enjoy additional remedies under the Companies Act, which include, amongst other things:

• section 161, which entitles shareholder (i) to apply to court for an order determining its rights, (ii) to apply for the necessary protection of such rights or (iii) to apply for rectification of any harm done to that shareholder by the company (as a consequence of an act or omission that violated any such right or contravened the Companies Act or the memorandum of incorporation) or by any of the directors (to the extent that they are liable or may be held liable in terms of s77, which section deals with the liability of directors and prescribed officers);
• section 163, which provides, amongst other things, that a shareholder may apply to a court for relief where any act or omission by the company or related person has had a result that is oppressive or unfairly prejudicial to, or unfairly disregards the interests of, the shareholder; and
• section 164, which provides for appraisal rights that allow dissenting minority shareholders to require the company to purchase such dissenting minority shareholders’ shares at fair value, in circumstances where the shareholders of the company pass a special resolution to amend the rights of a class of shares in terms of its memorandum of incorporation or to undertake a fundamental transaction.

Shareholder activism is on the rise in South Africa and is gaining traction from both institutional and non-institutional investors. The yard-stick for measuring the performance of an investment is no longer dictated solely by the profitability of the company, as shareholders, now more than ever, are alive to broader issues such as remuneration policies, lack of transparency and communication, and the lack of good corporate governance. Companies should not underestimate the potential impact of shareholder activism and should actively look to engage with their shareholders to ensure that value creation is sparked collectively.

“Boards of directors are like subatomic particles; they behave differently when observed” – Nell Minow, corporate governance expert.