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Shareholder activism in the age of COVID-19

Posted on 22 April 2020

The Government and industry bodies have been pro-active in acknowledging the difficulties that many companies are having during lock-down in fulfilling their statutory and regulatory obligations to hold Annual General Meetings (AGMs). Now that AGM season has started in earnest, further legislation is under consideration to allow companies to hold meetings at a time when physical meetings are impossible.

But what about shareholders and their rights? Is it wise at a time like this for a shareholder to disagree with the course of action proposed by a board? What if shareholders in a company want to register their disagreement with the governance or business plan (COVID-19 related or otherwise)?  In recent years corporate collapses and revisions to the stewardship code have placed greater emphasis on investors to engage responsibly with business and use their shareholder voice. So how do shareholders engage whilst stay at home measures are in place, and would now be the right time to engage in activism? Considering the obligations shareholders owe to their own stakeholders, would taking steps to challenge non-payment of dividends be a step too far? 

Voting at AGMs

Legislation has not been published yet but it is highly likely that UK companies will not be able to use technology to hold virtual AGMs. AGMs will be closed events with shareholders denied access. Shareholders can submit questions or matters for discussion in advance or the company is encouraged to hold a shareholder day later in the year to provide engagement with shareholders.

Shareholders can still use their power under section 338 of the Companies Act 2006 to require a company to propose a resolution at the AGM with the support of shareholders representing 5% of total voting rights, or 100 in number. When it comes to voting, appointing a proxy to attend the meeting and vote on behalf of a shareholder will no longer work unless the proxy is the chairman of the meeting who should, in accordance with the company’s articles, have the power to split his or her vote to respect the instructions given by the shareholders.

Electronic proxy voting will also be effective but decision makers at shareholders should allow themselves sufficient time to cast effective votes because underpinning a simple yes/no/abstain vote is often a complex chain of ownership involving CREST, custodian banks, intermediary banks and brokers. Any shareholder seeking to cast a vote against a resolution proposed by the board of the company should spend time in advance ensuring that their electronic proxy vote will be counted.

Shareholder activist strategies

To date there has been very few publicly reported cases of shareholders taking a position adverse to the COVID-19 strategy advocated by the directors of listed companies. The interruption to normal business life has resulted in on-going activist campaigns being put on hold. This is likely due to the difficulties of carrying on business as normal and also the wider societal imperative for a more collectivist approach. By way of example, Sherborne Investors have announced that they will merely withhold their vote against the re-election of the CEO of Barclays Bank rather than opposing his re-appointment which was their previous position. One exception has been the well-publicised and long running differences between Stellios Haji-Ioannou and Easyjet Plc in relation to its aircraft purchasing strategy but adversarial positions are not currently common.

It might be the case that this hiatus will continue but more likely is that fact that the economic consequences of the lockdown will, for some companies, pit shareholders against the position taken by the board. All the more so if the board does not appear to be steering the corporate ship soundly through the crisis or if shareholders have a suspicion that boards are blaming COVID-19 for other unrelated or pre-existing problems.

Shareholders have a number of strategies available to them at AGMs and the power to call for shareholder meetings and proxy fights at general meetings. Shareholders have used the ability to vote against the remuneration report tabled by the company at AGMs as a generalised rebuke and the resignation by rotation of directors as a personalised rebuke of directors, and it will be very interesting to see whether this practice will be followed during this year’s AGM season. It remains to be seen whether shareholders will use the AGM season to pass comment on the remuneration policies of companies and the degree to which the economic consequences of the lock down will have been shared between different stakeholders in companies. This might very well depend on how proactive management show themselves to be in sharing the pain.

What is certain is that any shareholder taking a position against a board of directors will need to carefully address the PR risk of doing so at this time, as well as genuinely whether it is on balance the most responsible course of action. Almost every company has been forced to take difficult decisions because of unforeseen circumstances. However individual shareholders may believe that some companies are simply not facing the challenges of the current environment in the best way possible or that prior management failings are coming home to roost. Shareholders must be willing to explain the nuances of their approach to head off the response from a board that they are doing their best in very difficult circumstances.

Dividends

One key area where interests of boards and shareholders may collide is the decision of many companies to suspend the payment of dividends.

For some companies, such as banks, boards may have little choice as suspending dividends has been a requirement of its regulator, and in countries such as Denmark, bailout funds have been denied to companies who continue to pay dividends. Furthermore, for those companies whose entire revenue has been wiped out, maintenance of capital by not paying a dividend makes perfect sense.  However, for other companies there is a more complex judgement call as to whether to continue to pay a dividend. Shareholders may have fiduciary duties to their stakeholders to continue to receive a dividend income, with many directly or indirectly relying on that income. 

Whilst the declaration of a dividend is usually carried out by the board of a company, for many companies it is lawful for a shareholder to requisition a resolution to require the company to declare and pay a dividend. This is obviously a very radical course of action, particularly in the current climate where boards will rightly be needing to take into account the need to retain profits to help not only navigate the current crisis, but also plan for an uncertain future. Furthermore, in order for a dividend to be paid, the company must have sufficient realised distributable profits available and boards must consider their ability to give a viability statement. However shareholders in their discussions with boards of companies may wish to have this power in mind.

Conclusion

We expect this AGM season to be remembered more for the practical difficulties of holding meetings rather than the number of shareholder inspired rebellions against directors. However, it is important that shareholders, acting responsibly, continue to engage in constructive dialogue and challenge with their investee companies. 

Decisions taken now, could well have important consequences as the reality of the financial outlook becomes clearer. For some companies, the threat of insolvency will make discussions between different stakeholders a complex area, and we are already seeing a number of shareholders and companies prepare for this eventuality.

Practical guidance for COVID-19
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