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As activist campaigns increase, companies should be aware of risks

Activist shareholder campaigns can have a significant impact on target companies. It is critical to understand the potential effect of such campaigns and be prepared to act if your company is a target.
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By Sophie Robson , 

Claims Advocate

10/05/2022 · 4 minutes read

From attempts to remove board members to initiatives aimed to promote environmental, social, and governance (ESG) strategies, shareholder activism has been steadily increasing, with high-profile attacks forcing some companies to make significant changes.

Although shareholder activism slowed during the first months of the COVID–19 pandemic, dropping by 34% in 2020 as people focused on personal health and wellbeing, activist campaigns are gaining traction. There were more than 60 activist campaigns against UK companies in 2021 and 16 in the first quarter of 2022, up from 11 in the same period last year.

What is shareholder activism?

Shareholder activism usually takes place when an investor in a company — typically a minority shareholder or a group of shareholders — uses their equity stake to exert control over the behaviour of companies and their boards. This activism can take many forms. Fairly benign actions could include seeking a private meeting to discuss the shareholders’ wants or posing difficult questions at an annual general meeting. More determined activist campaigns can even resort to litigation against a company for prejudice, a proxy battle (where activists convince other shareholders to vote with them) or attempt to remove board members.

Shareholders starting activist campaigns typically step out of their traditional role as owner and take steps to steer and control the company’s wider plans or make a specific change. Activist campaigns have been used to promote or resist M&A activity, restructure the board, and promote environmental, social, and governance (ESG) strategies. 

ESG activist campaigns gaining popularity

ESG principles have become an area of focus for boards across the world, and companies are coming under increased pressure from both customers and regulators to improve their ESG strategy, while insurers are more actively scrutinising ESG policies. Shareholders too are expressing interest in the ESG actions of the companies they invest in, advocating for new or improved ESG policies and disclosures.

Shareholders may be driven by multiple factors and goals.

What are the risks for companies and directors?

Sophisticated campaigns can be costly and time-consuming, often requiring legal and other professional advice. Implementing the required changes can also require expensive investments. The intention is often to disrupt the company, which is forced to counter the attack. Aside from expensive litigation and proxy battles, a target company could be faced with a public and social media campaign that could tarnish its reputation. Companies may need to engage with both activist and non-activist shareholders to identify their objectives, engage in communication, and disclose relevant information; this can be a significant undertaking.

Since company directors make decisions on behalf of and owe duties to a company, they could also be exposed to allegations by shareholder activists. Activist campaigns can target directors directly, either by pushing to remove them from office or by attacking and trying to alter their pay. Given directors in large public companies often serve on a number of boards, they are at increased risk of reputational damage. Allegations of, for example, poor financial performance or weak governance of the company, could lead to shareholders forcing the company to bring a derivative claim against a director considered to have breached their duties or acted negligently. A director could also face regulatory scrutiny if an attack uncovers more serious regulatory breaches. A company’s directors and officers liability (D&O) policy may be instrumental in providing protection to individual directors against claims and regulatory investigations. Attacks against the company itself are not generally covered by traditional D&O policies, although specialist products that protect the company against legal and other costs incurred in responding to shareholder attacks are now becoming available.

Key actions to take

In light of the changing landscape, it is crucial that companies, their boards of directors, and their advisors take a number of protective measures, including: 

  • Assess your company’s response to potential activism, especially to possible activist campaigns related to ESG, which are also on regulators’ radars.
  • Take an informed and deliberative approach and consider whether your company would benefit from professional advice on how to avoid or minimise the risk of shareholder activism, which may vary depending on your industry.
  • Evaluate your vulnerabilities and, where possible, benchmark your response and plans against those of your peers. Such an exercise can help you address points of failure early and address them ahead of an activist campaign.
  • Conduct a thorough review of all aspects of risk that influence your insurance coverage. Understand the limitations of your D&O coverage in relation to activist campaigns and explore the need to invest in specialist policies.

Activist shareholder campaigns can have a significant impact on target companies. It is critical to understand the potential effect of such campaigns and be prepared to act if your company is a target of shareholder activism.

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