Shareholder activists: being the change they want to see in the world

by Raashmi Govender and Inga Macingwane

2019 saw significant victories for shareholder activism in South Africa. Both Standard Bank Limited and FirstRand Bank Limited tabled climate-risk exposure resolutions proposed by their shareholders, some of which were approved [1].   

Per the approved resolutions, FirstRand will be required to adopt and disclose a policy on its fossil fuel lending, and Standard Bank will similarly need to prepare and disclose a report on its exposure to climate risk in certain of its lending and investment activities. These unprecedented victories in South Africa have cemented the global trend of shareholder activism as a viable tool (in the South African market) to petition for, and achieve, change. 

What exactly is shareholder activism and why is it relevant in South Africa?

South Africa currently faces political, socio-economic, environmental, governance and accountability challenges. These challenges have played out in both the public and private sectors. The staggering number of unearthed corruption incidents, the often questionable corporate acts that enabled them, and inadequate regard to some companies’ environmental impacts are evidence of that. These acts (that sometimes appear to be blatantly irresponsible of our corporate citizens) continue to place a demand for novel and effective means to bring about change.

DealMakers - 2019 Annual

Raashmi Govender
Inga Macingwane

Some shareholders have taken this to heart, seeking themselves to influence these changes in the corporates in which they own shares. Shareholder activism is just that: it is a variety of means used by shareholders to utilise the rights, which they derive from their shareholding as co-owners of the company, to influence the managerial decisions (and sometimes the decision-makers) of the company. Shareholders often rely on the Companies Act 71 of 2008 (as amended) (the Companies Act), the Listings Requirements of the JSE and the King IV Code on Corporate Governance as both their weapons and their shields for this purpose. 

Methods of carrying out shareholder activism 
Depending on the outcome to be achieved [2] , the tool/s used to carry out the activism, and the manner in which it is effected, may vary. Some tools which may be used include:  


1.  Exercising the rights afforded under statute, regulation and the constitutional documents of the company to influence a decision: Shareholders often lobby and make argument for or against the occurrence of an act (or inaction, as the case may be) in order to influence the outcome of a matter in question. This is usually done by way of participation at a shareholder meeting. 
    
Another method is for shareholders to propose resolutions to be voted upon (as with FirstRand and Standard Bank, and as recently attempted at Sasol Limited, in which six institutional investors joined forces to file a joint shareholder resolution which, if tabled and approved, would require Sasol to report on its greenhouse gas emissions strategy and how that aligns with the aims of the Paris Agreement. [3,4]

 

Shareholders holding 10% or more of the voting rights entitled to vote on a matter (or such other percentage contemplated in the company’s constitutional documents) may also demand the convening of a shareholder meeting. 

2.  Litigating to seek preventative or remedial action: Various statutes and regulations provide options for shareholder activists to apply to court or regulatory bodies for remedy regarding an action taken (or to be taken) by a company. For example, section 163 of the Companies Act allows shareholders to apply to court for relief against oppressive or unfairly prejudicial conduct committed by a company, or which unfairly disregards the interests of the shareholder. The section provides a wide ambit of discretion to the court in the remedies it may order[5].   

3.  Using media and other stakeholders to appeal to companies: Media platforms often play a role in the plight of shareholder activists, as they raise public awareness of the cause and, in so doing, increase the scale of access to interested parties who may also mobilise on the issue, such as non-profit organisations. To the extent that certain interest groups have a vested interest in the cause which the shareholder/s are pursuing, and may act thereon, the force of pressure upon a company could be significantly increased. Depending on the extent and messaging of the hype created via media, market perceptions may be impacted, which may have a bearing on share prices in certain instances. 

Does shareholder activism practically achieve the outcomes that it seeks?
Many companies welcome shareholder engagement. Issues may be sufficiently dealt with through engagement and compromise from all parties, without becoming too disruptive or hostile to either one. 

Practically, the outcome of shareholder activism is not always consistent. This is due to the multitude of variables at play in each instance, such as the company’s anticipation of the matter; engagement between the company and shareholders (both pre-emptively and retroactively); the company’s engagement with media and other stakeholders in the matter; the nature of the issue; the extent of the shareholdings held by the activist shareholders in the case at hand; the ability to easily approve company decisions despite certain shareholder protest; and the legalities of actions sought by the activists. 

The aims of shareholder activism have, in some instances, been rendered ineffective by the strategies employed by companies. This includes holding pre-emptive one-on-one private meetings with large shareholders, and managing the communication of a message to ensure a shareholder’s support on a vote (despite other possibly dissenting shareholder views). Voting arrangements, and irrevocable undertakings from large shareholders to ensure sufficient voting numbers are obtained in favour of a board-proposed resolution, are also measures sometimes employed in response to shareholder activism. In certain instances where activist shareholders have raised concerns of inadequate disclosures, companies have sought expert legal opinions to confirm the adequacy of information shared. In certain instances where activist shareholders have requested that their proposed resolutions be tabled for a shareholder vote, the counter-action has been to rely on strict literal interpretations of the wording of section 65(3) of the Companies Act, that shareholders may only propose resolutions for consideration upon which they are entitled to vote (our emphasis). Accordingly, a proposed resolution may be argued by a board to be one upon which shareholders are not entitled to vote, and consequently that the proposal not be tabled for a shareholder vote.   

The media and companies’ investor-relations communications are also often used by companies to ensure that certain matters are not unnecessarily exaggerated, and that the company’s rationale and stance on the issue are also publicised alongside those of the shareholder activists.  

Despite shareholder activist measures not always being successful in procuring the entirety of the result sought, there are several other benefits that these actions sometimes produce in the process.  Ensuring that companies are aware that shareholders are scrutinising their actions, facilitating meaningful engagement between shareholders and company management; and forcing more conscious governance and accountability measures (including adequate and meaningful disclosure and transparency) are triumphs in themselves.  

Govender is an Associate and Macingwane a Candidate Attorney, in ENSafrica’s Corporate Commercial department.

[1] It is worth noting that not all the proposed resolutions were endorsed by the respective boards of directors, and not all the proposed resolutions were approved.

[2] The outcome sought may be for an economically-driven purpose (such as greater shareholder value and return); governance-related purposes (such as to require further transparency, further shareholder involvement on certain issues or alignment with best practices); or specific cause-related purposes (such as environmental or human rights causes).

[3]The Paris Agreement is a legally binding agreement on climate change, adopted at the United Nations Climate Change Conference in 2015 (COP 21), by which South Africa is bound.

[4] In terms of section 65(3) of the Companies Act, any two shareholders may propose a resolution concerning a matter upon which shareholders are entitled to exercise voting rights, and may require that the resolution be voted on at a demanded meeting, at the next shareholders’ meeting, or by written resolution, to the extent permitted.

[15] Other sections of the Companies Act which may be used include sections 161, 162, 164 (as read with section 115), 165, 156.

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