The FSA’s letter to the Institutional Shareholders Committee regarding shareholder engagement was initially welcomed by many commentators although concerns were raised in some quarters at the narrow focus of the letter.
In that letter, the FSA stated that they were “aware that concerns have been raised over the extent to which more active shareholder engagement would be consistent with certain elements of our existing regulatory regime for market abuse, disclosure of substantial shareholdings and changes in control”.
Setting out their view that there was no fundamental inconsistency, the FSA stated:
“In the three areas mentioned above, we do not believe that our regulatory requirements prevent collective engagement by institutional shareholders designed to raise legitimate concerns on particular corporate issues, events or matters of governance with the management of investee companies. Ad hoc discussions or understandings of this nature would not, in our view, trigger the restrictions or disclosures imposed by our rules.”
Some of the concerns expressed by institutional investors following publication of the letter focused on the implications on engagement by shareholders on a broader range of issues – such as engagement on matters of corporate strategy. The concerns expressed were that their exclusion created doubt as to whether these actions would be consistent with the above regulatory regimes.
The Takeover Panel published a Practice Statement on Shareholder Activism this week which does seem to remedy this and clarifies the Panel’s position as regards to activist shareholders potentially acting in concert. It sets out two test, both of which must be satisfied befoe a mandatory offer would be triggered by activist shareholders:
- Those shareholders requisition a general meeting to consider a “board control-seeking” resolution or threaten to do so; and
- 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 the shares in which they are interested together carry 30% or more of the voting rights in the company (or, if they are already interested in shares carrying 30% or more of the voting rights of the company, they acquire further interests in shares).
It notes that the following factors would not of themselves lead the Panel to conclude that a concert party had come together:
- discussions between shareholders about possible issues which might be raised with a company’s board;
- joint representations by shareholders to the board; and
- the agreement by shareholders to vote in the same way on a particular resolution at a general meeting.
Should there however be any suggestion of a board control-seeking proposal (via the appointment of non-independent directors), this would change the Panel’s view of the group of shareholders, who would then be likely considered a concert party.
In the absence of proposed changes to the board, a proposal by activist shareholders as to the manner in which a company should be managed (for example, a proposal that the company should sell one of its businesses and return the cash proceeds to shareholders) would not, of itself, be considered to be “board control-seeking”. This is because the directors would continue to be in charge of the management of the company. However, if the activist shareholders make it known that, if their initial proposals are not implemented, they will put forward “board control-seeking” proposals, this may cause the Executive to determine that the initial proposals should be considered to be “board control-seeking”, and that a concert party has arisen.
The Panel has indicated that shareholders with concerns or uncertainties about their actions and the consequences should seek guidance or a ruling from the Executive.
Commenting on the announcement, Dr Daniel Summerfield of the Universities Superannuation Scheme said: