More power for activist shareholders

In this economic climate, directors should take heed of the powers which disgruntled minority shareholders can wield.  Falling values mean that shareholders are more likely to challenge their board of directors than in boom times and there are now a number of different tools in the activist shareholder's toolkit for doing so.

One such tool is the ability for shareholders to require a company's directors to call a general meeting. Since the beginning of August 2009, the threshold required to use this tool has been reduced. It is now available to a shareholder, or shareholders together, holding 5% of the paid-up share capital carrying voting rights, rather than the 10% which was usually required before. The 5% minority can use the power to convene a general meeting to propose that a specific resolution is voted on. For example, the resolution may be to remove a director, challenge a director's pay award or require the board to change a particular strategy. Alternatively, the power could be used to prompt a general shareholder discussion of the matter which is troubling the disgruntled shareholder. Of course, unless the minority is able to persuade other shareholders making up the required majority to pass the relevant resolution, they might not succeed in removing the director or changing the company's policy. However, the procedure can result in unwanted publicity for the company as well as the cost, time and energy of the board in defending its position.

Neither the board nor the minority shareholder should be shy of taking advice when tension develops. This is just one of a number of powers available to the 5% minority shareholder regarding meetings and resolutions (for example, they can also require circulation of a statement of not more than 1,000 words on matters proposed at general meetings and, in the case of a public company, table resolutions at the company's AGM). There are a number of time limits and other potentially costly procedural traps involved for the unwary party, so it is important to take advice promptly. Hugh Fearnley-Whittingstall discovered one such trap at this year's Tesco AGM when he (unnecessarily) had to pay over £80,000 to circulate a resolution about Tesco's chicken purchase policy. There would have been no cost if he had sent it in before the end of the company's financial year.

The Corporate Group at Mishcon de Reya has acted as key advisers to a number of companies facing threats from activist shareholders, as well as acting as key advisers to activist shareholders.