Due to a series of largely unrelated events, New Zealand seems to be entering a new phase of shareholder activism which may make this year’s AGM season more interesting than most.
These include recent shifts in the shareholding spread of some companies, most notably Contact Energy, a growing trend toward electronic voting and the formation of the New Zealand Corporate Governance Forum comprising a number of institutional investors.
Each of these developments has the potential to influence shareholder dynamics – conferring a particular relevance on recently updated guidance from ASIC on the boundary between appropriate and inappropriate coordination among shareholders.
Direct electronic voting
This method has been available since changes
to the Companies Act in August 2012 but is only now being widely taken up, probably as a result of two factors: active promotion by the New Zealand Shareholders’ Association (NZSA
) and the shift away from shareholder use of traditional postal services.
The effect is to promote the use of voting by poll at company AGMs, with the attendant “one share, one vote” rule, rather than through the usual default of a show of hands (where each shareholder has one vote, regardless of size of shareholding).
This should increase voting among those shareholders who do not attend AGMs, while at the same time cementing the effective control of the large institutional investors who hold larger blocks of shares.
Computershare and Link share registries have developed standardised on-line proxy appointment and/or direct voting facilities, intended to facilitate electronic voting and enhanced shareholder participation. Both platforms offer the option of appointing the NZSA as a shareholders’ proxy.
Institutional investors are key players in New Zealand capital markets so it is natural – even desirable - that they should form an organisation to promote their views. And the newly-established Forum has signalled that it means business by using its debut to launch a set of guidelines
for listed company directors.
We have already commented
that some of the Forum’s requirements strain the bounds of practicality in the context of the small New Zealand market and have urged the Forum to engage with the Listed Companies Association to develop a code which is more workable.
The sophistication of analysis the institutional or professional investor brings to the table is an important spur to company performance but there is also the potential for large investors to act together to secure objectives which benefit them either in exclusion to, or disproportionately to the small investor.
The Australian Securities and Investment Commission (ASIC) was responding to a growth in this sort of activity in Australia, including US-style activist campaigns, when it brought out its new guidance on collective action by large institutional investors.
ASIC guide on collective action by investors
The guide seeks to balance the benefits of investor engagement against the risk of investors acting collectively to surreptitiously obtain a substantial stake in, or illegitimately gain control of, an organisation - generally, a listed company or a managed investment scheme.
ASIC identifies where collective action can cross the line and become coordinated conduct. The Australian legislation differs from New Zealand’s, in particular in relation to takeovers, where the New Zealand focus is narrower – focussing on the holding or controlling votes rather than acquiring “relevant interests”.
Nonetheless, ASIC’s guidance provides a useful overview of different types of co-ordinated activity and will be relevant in the New Zealand context to:
- the association rules in the Takeovers Code (aggregating the shareholdings of persons who act jointly or in concert for the purposes of testing whether Code thresholds are triggered), and
- the substantial product holding provisions in the Financial Markets Conduct Act (where the shareholdings of persons who act in concert in relation to the exercise of voting rights can be aggregated for disclosure purposes).
Much of ASIC’s advice is conveyed by illustrative example.
Discussing with other investors voting on a specific proposal or at a specific meeting, provided no one is bound by the decision and each investor retains discretion over how to vote
Formulating joint proposals to be pursued together or entering an understanding to act or vote in a particular way
Jointly signing a notice to requisition a shareholder meeting or request that a particular resolution be put to a shareholder meeting, especially where this relates to getting a pliant director on the board or support for a transaction that is unduly favourable to the investors or affects the control of the company
Making representations to the company’s board, either one-on-one or in joint meetings, on general issues (which may include some aspects of executive remuneration, such as the structure of the company’s incentive schemes)
Pursuing agreed joint proposals, or threatening to pursue them unless the company responds satisfactorily – particularly if accompanied by overt threats of coordinated action in relation to shares
Making representations about a control transaction proposed by one of the investors or which will benefit the investors disproportionately to other shareholders
Recommending to other investors that they pursue a particular course of action, providing no undertakings are sought or given
Agreeing on a strategy concerning voting, accepting an inducement to vote in a specific way, limiting one’s freedom to vote (e.g. by giving another investor an irrevocable proxy)
Red flag areas
Key areas which ASIC identifies as likely to attract regulatory attention are:
- actual or proposed control transactions
- attempts to replace directors
- proposals which will advantage particular investors rather than investors as a whole, and
- investors with a history of collective action.