What is shareholder activism?
When a company lists on a public market such as the London Stock Exchange or the NASDAQ, a huge range of entities will suddenly be able to buy shares in the company. These will range from massive asset managers, sovereign wealth and pension funds through to hedge funds and even individual retail investors. One type of hedge fund that may choose to buy shares is an activist hedge fund. These are often highly specialised and sophisticated investors who will buy a stake in a company in order to force through a particular change or agenda, often with the hope of driving the share price up and making a profit on their initial investment.
In the past year, shares in Unilever plc have ranged from £4358 (July 2021) to £3328 (March 2022), a drop of ~25% in less than a year. An activist may buy shares in March – April 2022 when the price is relatively lower than previously and then push the company to institute certain changes which will take the price back up and beyond the July 2021 high.
What do shareholder activists want?
Activists will often buy a company that they perceive as undervalued by the market or struggling due a particular set of obstacles and then seek to push the share price up by instituting a set of changes. Common changes activists will push for include:
1. changing the management or board of a company;
Canadian National Railway Co., the largest railway operator Canada, agreed to replace its CEO and appoint two new independent directors to the board with substantial railway experience after activist investor TCI threatened to overthrow the entire leadership at a specially called shareholder meeting.
2. encouraging the company to sell part of its business or break itself up;
Bluebell Capital Partners pushed Glencore, the major mining company, to spin off its thermal coal business and separate its carbonised and decarbonised businesses in order to accelerate its shift towards carbon neutrality and increase its share price.
3. changing the corporate strategy or governance of the company;
Bluebell Capital Partners forced Danone, a major French food producer, to split its CEO and chairman roles and encouraged it to focus on increasing investor returns rather than ‘purpose-driven capitalism’.
4. encouraging the company to pursue a greater focus on ESG; or
Engine No 1 successfully won a shareholder vote forcing the oil giant Exxon Mobil to appoint three new directors all with strong environmental experience in order to push the company to reduce its climate risk and accelerate its net-zero strategy.
5. pushing the company to sell itself or merge with another company (activists may also intervene to stop a sale if they think the offer price is too low).
Elliott Management and Farallon Capital Management has engaged in a long running a campaign at Toshiba, the Japanese technology manufacturer, to push it to take itself private via a sale to private equity, which it argues represents the best possible value for shareholders. If it goes ahead, the sale will be the largest take-private in Japanese history and represent a major shift in Japanese corporate culture.
How to shareholder activists achieve their goals?
Companies are run on a day-to-day basis by senior management and the company’s board. However, all companies are ultimately owned and controlled by the shareholders, and shareholders have the power to make even very minor decisions if they are able to put all the necessary processes in place.
Under English law, shareholders holding up to 5% of the company’s shares can call a general meeting – this is a meeting of all shareholders where resolutions are voted on. An activist who wants to drive change at a company may i) refuse to confirm the appointment or re-election of directors ii) propose their own directors to sit on the company’s board iii) require a statement to be sent to all shareholders setting out an activist’s agenda or iv) propose resolutions to be voted on at a general meeting.
Activists may engage in a proxy fight. This is where activists will engage in an active campaign to solicit votes from other shareholders, including through public pressure, media campaigns and third party advisors who will reach out to every shareholder in a bid to secure votes.
Activists will often also make private approaches towards a company to voice concerns and drive change internally without engaging in a big public (and expensive) campaign.
Case Study
Nelson Peltz (Procter & Gamble)
In 2017, Trian Partners, one of the largest and most highly regarded activist hedge funds in the world announced that it would run a proxy fight at the company’s next AGM to have Nelson Peltz, the co-founder of Trian elected to the board of Procter & Gamble. P&G is a massive consumer goods company listed on the New York Stock Exchange which had a market value of around $220 billion at the time of Trian’s announcement, but had suffered a disappointing few years of results and a declining share price. Trian bought around $3.3 billion of P&G stock and pushed for Peltz to be appointed as a director by the board in order to help turn the company around.
P&G spent an estimated $60 million to wage a proxy fight against the appointment, including hiring four investment banks to advise on the effort and using the company’s former CEO to support its cause. Trian in turn circulated a 94 page white paper outlining P&G’s failings to all shareholders. After several recounts and a public battle even after the votes were counted, an audit showed that Peltz won the proxy battle by 0.0016% after P&G initially declared victory by 0.02%.
Peltz served on P&G’s board until October 2021 and Trian exited its position in the company in May 2022, at which point the share price had risen by around 75%.
Nelson Peltz (Unilever)
In January 2022, it was leaked that Trian had built up a stake in Unilever, another massive consumer goods company listed on the London Stock Exchange, which had dropped 25% over the past two years, and had lost shareholder confidence following an abortive £50 billion bid for GSK’s consumer health division and publication of scathing criticism by a top-15 shareholder. In May 2022, it was announced that Peltz had been appointed to Unilever’s board, driving the share price higher.
In comparison to the proxy fight at P&G, the Unilever appointment was done with the consent of the company’s board and without any media campaigns or proxy fights. Given the turnaround at P&G following Peltz’s appointment, the consensus from analysts was that Peltz has the necessary experience and skills to help revive Unilever. Unilever’s perilous position with shareholders following public criticism also suggested that there was little appetite to engage in a high stakes and expensive battle which may further damage the reputation of the company, especially given Peltz’s and Trian’s fearsome reputation as an activist. From the activist’s perspective, the appointment of Peltz without a proxy fight shows the value in approaching companies privately.
Written by Ollie Winters
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