Beware the Shareholder Activist You Don’t Know

What is Shareholder Activist?

The term “shareholder activist” is defined by Erin Gobler in an article appearing on the www.thebalancemoney.com website of December 2021. The definition is copied unchanged below:

A shareholder activist is an individual—or group—who uses their stake in a company to effect change and influence behaviour.

In some cases, shareholder activism can be relatively passive and include a letter-writing campaign to the company. On the other end of the spectrum, shareholder activists may actively work to change the company’s strategy, leadership, and structure.

Shareholder activism can have a wide variety of purposes. Shareholders might attempt to oust the company’s current leadership, change financial policies within the firm, or encourage the company to change its environmental practices, for example.

Another definition is from James Chen in an article appearing on the www.investopedia.com website of June 2022. The definition is copied unchanged below:

A shareholder activist is a person who attempts to use their rights as a shareholder of a publicly-traded corporation to bring about change within or for the corporation.

KEY TAKEAWAYS

• Shareholder activists are shareholders of companies who bring about change within or for a corporation.
• These changes span a vast range, from environmental concerns to governance to profit distribution to the internal culture and business model of a company.

• Shareholder activists typically buy up a minority stake in a company and, subsequently, employ a variety of tactics, from media pressure to litigation threats, to force a conversation and bring about change.

The theme is consistent no matter which definition you use, a shareholder activist attempts to extract change by exerting pressure on the board of directors and/or upper management.

I’m going to abbreviate the term “shareholder activist” to “ShAct”, and for the purposes of this article (from the Jollygist, describe SA activism in the context of a listed junior exploration company.

Who are ShActs?

The short answer is anyone.

A person or a group do not need to be a shareholder or shareholders of the company he/she/they have “targeted” [are targeting]. More often than not though, the ShAct is a small to medium sized shareholder of a [the] company.

The Purpose of Shareholder Activism and the Motivation of a Shareholder Activist

As the definitions of the ShAct above allude to, the purpose of the ShAct is to exert direct and/or indirect pressure on the board of directors and/or upper management of the company to extract change. The change might be to encourage the company to pursue “green” policies, to address gender equality, to form a voter block against hostile take-over bids, issuance of dividends, compliancy and/or transparency issues… indeed, any aspect of the management and the operation of the company.

What I call positive activism, is pressure applied on the company for good outcomes; green policies, gender equality, compliance matters, and the like. I realise this is subjective. What I call negative activism, is pressure applied on the company for poor outcomes; outcomes more related to the self-interests of the ShAct alone, or to a small percentage of the registry, but generally that comprises the function of the company. Again, somewhat subjective.

This qualification leads inevitably to the motivation behind the ShAct’s activism. Is the “activism” truly for the general good of the company, meaning for the benefit of all its shareholders and/or the refined or improved undertaking of the core activity? Or, is it for the good of the ShAct only or the ShAct’s following.

Before “joining” a shareholder activist bandwagon, know your activist.

Questions to ask. What is the ShAct’s motivation?

Is the ShAct pedalling his/her/its own interests? Or those of a few shareholders? Or those of the entire registry?

What is the ShAct credentials and experience?

Does the ShAct have the relevant experience in, for example, corporate management, the ASX listing rules and compliance, exploration processes, JORC-compliant reporting, human resources, etc..?

Is the ShAct activist knowing/unknowingly Acting in Concert?

The ShAct might be in breach of the Corporations Act (in relation to Take Overs) by Acting in Concert.

Persons acting in concert are also known as a concert party – a group acting together in a takeover situation. Persons acting in concert are persons who, pursuant to an agreement or understanding (whether formal or informal), co-operate to obtain or consolidate control of a company or to frustrate the successful outcome of an offer for a company. Control in the context of the Corps Act is 20% of the voting rights in the target company.

A person and each of its affiliated persons will be deemed to be acting in concert with each other. The Code also presumes that certain categories of person will be acting in concert unless the contrary is shown.

And…as provided by Ashurst Legal, www.ashurst.com referring to the Australian Corps Act…

A person’s [let’s say a ShAct] voting power in a company is equal to the aggregate relevant interests of the person and their associates in the voting shares of the company. The definition of associates is cast widely. Broadly, two or more persons are associates if one controls the other or they are under common control, or there is an agreement, arrangement or understanding between them for controlling or influencing the composition of the target’s board or the conduct of the target’s affairs, or they are acting or proposing to act in concert in relation to the target’s affairs.

Does the ShAct have a Conflict of Interest?

If the ShAct has a very large shareholding or a percentage ownership of a company asset (project) might he/she/it be acting in concert by attracting followers?

How does the ShAct conduct his/her/its activism?

How does the ShAct communicate with the board of directors? Does he/she use internet forums, either directly or indirectly (through other HC contributors, under his/her/its own name or through nom de plumes). Does he/she/it email/call the company? Does he/she/it visit operation sites, or visit the office?

Does the ShAct have an open and respectful line of communication with the board of director? How close is the ShAct to the board? And does he/she/it accurately describes to his/her/its influence on the company?

Ultimately you have to determine whether the ShAct you intend following is a disrupter or a contributor. Does he/she/it add value to the company through his/her/its actions, or the reverse.

The message for the reader is fairly simple. If you are thinking of joining a ShAct group, or you are in a group already, how well do you know the activist. How well do you know the purpose and the motivation.

Beware the activist you don’t know.