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Practicalities and Legalities of Shareholder Activist Campaigns

The practicalities and legalities of hedge fund activism differs in the US and the UK. The UK regulatory environment is much more favourable to incumbent management, meaning that shareholders can much more easily force their will upon a company’s management.

In the UK, any shareholder or group of shareholders with at least 10 per cent of the voting rights in a firm can call a special shareholders’ meeting to introduce a binding shareholder proposal.

The first key step for most US-based activists is the filing of an initial Securities and Exchange Commission (SEC) Schedule 13D form, where the activist clearly states its purpose in buying the shares. The form is triggered after an investor directly or indirectly acquires the beneficial ownership of 5 per cent or higher of any equity security in a publicly traded firm with the stated intent of influencing the firm’s policies.

After the shareholder is on the books, a ‘conversation’ can commence – although the activist probably discovers quite quickly whether the target management and directors are willing to listen to any ideas for change. The reality is that most company boards can easily resist outside investor pressure if they so desire!

According to US federal and state laws, for instance, the only way a shareholder can force a firm’s existing managers to pursue alternative strategies or changes in corporate governance is through a contested proxy fight, which is very costly. Needless to say that as a result of this institutional bias, which automatically shifts the balance in favour of the status quo, most activists choose their battles very carefully.

As you may expect, many company managers use every trick in the book to battle shareholder activists. One of their favourite tactics is the poison pill, which is designed to make the shares less attractive to those wanting to take the company over. Poison pills usually come in one of two forms:

  • A flip-in, which allows existing shareholders (except the acquirer) to buy more shares at a discount.

  • A flip-over, in which the company’s investors are allowed to buy the acquirer’s shares at a discounted price after a suggested merger.

Buying discounted shares dilutes the value of the acquirer’s shares and makes taking over the company more expensive.

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