Activist shareholders are becoming more efficient, more sophisticated and better resourced

How companies can stay ahead of evolving campaigns 6 min read

Shareholder activists are increasingly using novel tactics to influence the strategies of companies. While campaigns continue to focus on the full spectrum of key issues like M&A activity, business operations and strategy, regulatory concerns and ESG-related matters, we are seeing a change in the type of shareholder launching campaigns. Large institutional players and funds (including super funds) are moving into this space, resulting in better-funded and more sophisticated campaigns. Activists are also increasingly willing to take campaigns public without first engaging with the company, meaning they are less predictable.

This escalation underscores the need for companies and boards to understand the interests of their stakeholders and anticipate potential activist agendas, and to take a proactive approach to managing those issues in order to be prepared and minimise the risk of becoming a target of a campaign.

In this Insight, we discuss recent shareholder activism trends in Australia, explore some of the novel tactics used by activists and discuss strategies for companies to prepare for an activist campaign.

Key takeaways 

• With large institutional players and funds (including super funds) becoming more active, campaigns are becoming more efficient, sophisticated and resourced.
• There has been an increasing trend for activists to go public without prior engagement with the company, meaning an impending campaign is not always easy to identify or predict.
• The tactics and objectives of activist shareholders are wide-ranging, with shareholders using novel tactics such as fast-paced public campaigns through online platforms and seeking access to internal company documents.
• To mitigate against these risks and disruption to the business, companies and boards must plan and execute effective strategies that anticipate and respond to activist campaigns.

Who is launching campaigns?

Super funds and other large institutional investors are increasingly pursuing an active role in the oversight of their investments – which is pertinent, given super funds currently hold an interest in approximately 34% of the ASX, which is estimated to eventually increase to more than 50%.¹ Further, the Australian market has seen activist investment firms, including Australian-based hedge funds, join forces to exert greater influence over company strategy. 

Key issues driving activists

M&A activity

Where a prospective M&A opportunity requires shareholder approval, then by its nature, it needs to be viewed favourably by shareholders to satisfy any applicable approval thresholds. However, even where shareholder approval isn't being sought, we are seeing a rise in shareholders using their influence to oppose or otherwise alter the terms of M&A activity, putting pressure on the company to pursue alternative strategies or alter the terms of a deal. Tactics used by shareholders to exert influence on emerging M&A transactions can range from confidential non-public engagement with the company, to (increasingly) public criticism of the deal and launching a campaign to actively oppose the relevant transaction and seek support from other shareholders. For instance, earlier this year, Pendal Group, Qantas' largest investor, publicly voiced concerns about Qantas' ability to meet projected earnings margins amidst plans to purchase aircraft assets worth over $3 billion. Following the widespread criticism, the company was reported to have pulled back from public presentations on the matter. Whitehaven was also targeted by Bell Rock, a hedge fund investor, as it pursued a transaction to acquire metallurgical coal assets from BHP. The public campaign opposed the proposed acquisition and use of Whitehaven funds, and subsequently targeted the company's remuneration policies, including writing letters to Whitehaven shareholders and creating a website encouraging shareholders to take action at the upcoming AGM. It culminated in Whitehaven applying to the Panel seeking a declaration of unacceptable circumstances (see our Insight for more details on Bell Rock's misadventure here).

We have seen an increase in highly publicised activist campaigns that have successfully resulted in shareholders rejecting takeover bids and schemes of arrangement. Historically, shareholders opposing M&A activity were often competing bidders seeking to advance their own position. Recently, there has been an increase in campaigns by shareholders that are not competing bidders, but rather they oppose the transaction because they see the proposal as opportunistic or otherwise have different views on the longer term value of the company. Notable recent examples are AustralianSuper's opposition to the Origin takeover and Tanarra Capital's push for change at Bapcor.

Business operations and strategy 

Shareholders have a clear incentive to pursue an activist campaign against a company where, in the eyes of the activist, there are perceived strategy or governance shortcomings or an underperforming share price or asset base.

Activists can and more frequently will look to challenge corporate strategies in the pursuit of what they perceive as better value or alignment with long-term growth objectives. In May this year, an Australian-based oil and gas producer faced shareholder dissent at its AGM and received a 'first strike' against its remuneration report. Shareholders had been advocating for a higher dividend payout ratio and a greater return of cash.

Activist investment firms, in particular, are increasingly making public statements regarding their own business strategies for investee companies – for example, recommending dividends and buybacks over M&A activity and development. As mentioned earlier in this article, Bell Rock's campaign against Whitehaven was borne from the hedge funds' dissatisfaction with the corporate strategy to cease a buyback and deploy the capital on an M&A opportunity. Lendlease, similarly, experienced significant pressure from activist firms Tanarra Capital, Allan Gray, and HMC Capital to refocus its activities on domestic operations rather than offshore expansion.

Regulatory concerns

Australian companies and boards are navigating Australia's ever-changing and complex regulatory landscape. With increasing shareholder expectations regarding a company's legal and regulatory compliance, we are seeing a rise in shareholders advocating for changes that they believe will enhance compliance, protect a company from legal risks, and strengthen its financial health and public reputation.

In the gambling sector, for example, non-compliance has compelled shareholders to demand changes to cultural practices and the reconfiguration of boards. Recently, the Alliance for Gambling Reform voiced its plans to target Nine Entertainment and Seven West Media from within, as shareholders, in an attempt to stop gambling advertisements. Shareholder resolutions were publicly revealed as the activism tactic of choice. Unsurprisingly, there remains a consistent push for corporate behaviour to align with regulatory best practices and investor expectations.

Environment, social and governance considerations

Historically dominated by individual investors and smaller single-issue activist groups, shareholder activism in the ESG space is now also characterised by the involvement of large institutional investors, with significant resources to dedicate to activist campaigns. Earlier this year, HESTA voted against the re-election of the Chair of the Santos board on the basis of climate-related factors. The activity of these types of investors is often driven by their own ESG-related targets and other commitments they have made to their investors.

Beyond climate, we anticipate that future shareholder activism in the ESG space may be driven by nature-related considerations. Allens recently discussed the growing need for boards to exercise due care and diligence in relation to nature-related risks and opportunities following elevated investor scrutiny and agitation in this area. In particular, boards must understand the risks associated with a company's nature-related dependencies and impacts in order to appropriately consider, manage and/or disclose a company's nature-related matters to meet shareholder expectations.

Developing strategies to address ESG interests of shareholders and more broadly adapting to the shift in societal expectations will be paramount. The constant advancement of tools and methodologies used to evaluate ESG successes will further drive shareholder scrutiny. M&A front-runners are progressively turning their attention towards these issues, devising innovative approaches to embed relevant ESG factors into their M&A strategies.²

Activist tactics

While activism can take many forms depending on the specific goals of the shareholder involved, there are some common tactics employed in the Australian market. 

Established tactics

The more typical activist tactics involve utilising the mechanisms available under the Corporations Act to do one or a combination of calling a meeting, proposing resolutions, distributing materials to shareholders and nominating candidates to the board, each with the purpose of placing a spotlight on an issue or advancing an agenda.

With a spotlight on the experience of the ASX300 during the 2023-24 financial year:

• of the 37 remuneration reports voted down by shareholders, around five appear to have been a protest vote due to shareholder concerns beyond remuneration-related issues; and
• four companies had shareholders approve amendments to their constitution, where those amendments were proposed by shareholders and opposed by the board.

The window for these types of activist campaigns was in the lead-up to AGM season.

Historically, activists would generally engage with the company as a first step, before going public with a campaign in the month or two ahead of the relevant AGM, which meant companies had more lead time to prepare.

However, we are now seeing these campaigns being launched outside that typical AGM window. Activists are also becoming more aggressive and are increasingly willing to take the campaign public without first engaging with the company, which can surprise the company and put them on the back foot.

Emerging tactics

The existing toolkit is being supplemented with new tactics that are coming to the fore.

Harnessing the power of the internet and social media, shareholders are reaping the benefits of activism in a tech-savvy world. Novel online platforms are providing new and unpredictable ways for activists to join forces and launch powerful campaigns. The Alliance for Gambling Reform, mentioned earlier in this article, used online share-trading platform SIX, a trading platform that unites shareholders, to begin its campaign against gambling advertising. Similarly, the widespread reach of social media means that shareholders have more power than ever to captivate the public and influence a market. In a successful campaign against a proposed demerger in 2022, the largest shareholder of an Australian-based energy provider launched a sharp website and employed X (then Twitter) to broadcast a video that appealed to other shareholders. Companies must become comfortable with the reality that one activist could quickly and unexpectedly gain substantial online support.

Shareholders are also seeking opportunities to obtain a company's own documents and policies (not all of them public) and hold them to account against a particular activist agenda. This approach has seen shareholders seek preliminary discovery of documents relating to the target company's internal risk management framework. More recently shareholders have used document inspection powers under the Corporations Act to seek to obtain the target company's internal documents relating to its climate exposure, as well as human rights issues.

How to prepare

Campaigns can be launched without warning and escalate quickly. All companies should take steps to prepare, even if they aren't anticipating being a target. To be able to be decisive and act swiftly, companies should:

• actively monitor securities trading and share registers for any early signs of stakes being accumulated;
• ensure public-facing documents clearly and consistently articulate the company's strategy;
• proactively communicate with stakeholders regarding the company's strategies and values, particularly around points that could be open to challenge, such as operational costs, executive remuneration, ESG related performance and regulatory compliance;
• consider the breadth of their ESG related public commitments and statements and areas that may be open to scrutiny based on gaps in practice against those commitments or trends in stakeholder activism focus areas;
• undertake training exercises and work through scenarios with the board and senior leadership to be familiar with how a campaign could play out and potential responses; and
• have standing appointments for financial, legal and other specialist advisers (such as communications experts) that can be called on quickly if the need arises.