IRISH UPDATE: Key Issues for Irish Listed Companies when Considering Shareholder Activism
The volatility in global markets caused by the COVID-19 pandemic and resulting economic uncertainty has put activist shareholders and defending against opportunistic bids at the top of the agenda for listed companies. We have set out below 14 key considerations relating to shareholder activism that Irish-incorporated listed companies should be focused on in the current environment. In some cases, different legal regimes apply to Irish companies whose listing is subject to European Union securities laws (“EU listed companies”) and Irish companies whose listing is subject to United States securities laws (“US listed companies”), and we have indicated where this is the case below.
1. Early Disclosure of Activist Positions: One defensive advantage of Irish law for US listed companies is that an activist investor engaged in stakebuilding must announce their position at an earlier stage than is required under Schedule 13D and Schedule 13G obligations under the SEC regime. Once a shareholder goes through the 3% shareholding threshold (and each 1% movement thereafter), they must disclose their holding to the company within five business days (the threshold increases to 5% for some categories of investment firm). This disclosure requirement applies to holdings held through derivative instruments, although there may be some categories of cash-settled-only CFDs that may not be caught by the requirement. Where shareholders are acting together to acquire shares in a company, their respective interests may be aggregated for the purpose of this disclosure requirement in certain circumstances, and, accordingly, the disclosure obligation may be triggered earlier.
For EU listed companies, the period for disclosure of holdings is reduced to two trading days, and the implementing measures of the Transparency Directive will usually capture even cash-settled instruments referenced to a company’s shares.
During a takeover, the disclosure threshold drops to 1%, with all dealings above this level notifiable to the company by the next business day. Failure by a shareholder to comply with the disclosure requirements renders any rights attached to the relevant shares unenforceable by the shareholder, subject to limited exceptions.
In addition, there is a prohibition on rapid stakebuilding where an acquisition by a shareholder of more than 10% of a company’s voting capital in a seven-day period would result in a total holding of more than 15%. A breach of these rules can result in the Irish Takeover Panel requiring the shareholder to unwind their position.
Activist short sellers of EU listed company securities are also required to disclose, within one trading day, net short positions in excess of 0.1% (to be increased to the standard 0.2% threshold on 17 September 2020 following the lifting of ESMA’s reduced COVID-19 disclosure obligation) to the Central Bank of Ireland and to publicly disclose positions in excess of 0.5%, and in each case changes in increments of 0.1% thereafter.
2. Investigating Activist Positions: In addition to the shareholder obligation to disclose significant shareholdings, the company has a right to demand information on underlying holdings of nominee shareholders to determine whether a relevant threshold may have been breached, including details of relevant holdings in the past three years. Where a shareholder does not comply with these enquiries, a company may take court action to suspend the rights attaching to the relevant shares.
Companies can also include enforcement provisions in their constitutional documents, which would allow them to suspend the voting and dividend rights of the relevant shares without the requirement for court action where a shareholder fails to comply with the request. As part of a company’s defensive planning, it is usual to have the relevant notices of inquiry pre-prepared in the defence manual.
3. Turning Defence Manuals into Response Manuals: It is now common practice for Irish listed companies to have a defence manual to deal with a hostile approach, which sets out details of the steps to be taken in the first 72 hours after such an approach is made, including the key legal dos and don’ts, contact lists, board and communication protocols and draft announcements.
Over the past few years it has become increasingly common to supplement these defence manuals with sections on activism, with an established plan identifying key vulnerabilities of the business and key defensive themes that would be employed in the event of an activist approach – turning the defence manual into a broader response manual. In addition to the manual, there are some key software and database tools now available that provide information on activist investors, including their track records and tactics used in previous transactions. Having access to one of these platforms can be a further helpful advance-planning tool.
4. Defensive Measures: While the Irish Takeover Rules contain extensive restrictions on a board taking actions that might frustrate an offer or potential offer, these restrictions only apply where an offer is imminent. Most activist campaigns are unlikely themselves to trigger these provisions, and thus a company is likely to continue to have the freedom to undertake a full range of corporate transactions – including M&A activity, demergers, strategic reorganisations, and special dividends, etc. – when it has activist shareholders on its share register.
5. Shareholder Rights Plans: One of the key defensive mechanisms for US listed companies are shareholder rights plans (“SRPs”). In the event of a shareholder building a position of greater than a specified threshold without board approval (typically in the range of between 10% to 20%), SRPs trigger the vesting of additional shares or equity rights for all other shareholders, effectively diluting the acquiring shareholder’s position. SRPs can be adopted from an Irish law perspective, provided that they have an automatic trigger and are adopted in circumstances where the company is not in an offer period and an offer for the company is not considered imminent. In certain circumstances, a company may need to make amendments to its constitution for the purposes of structuring the SRP in order to work within the company’s existing share issuance authorities.
SRPs with a duration of longer than 12 months adopted without shareholder approval have usually been opposed by ISS and Glass Lewis absent a specific threat justifying the SRP. ISS has recently updated its guidelines to state that a severe share price decline as a result of the Covid-19 pandemic is likely to be considered a valid reason for adopting an SRP of less than 12 months’ duration.
While the implementation of SRPs for EU listed companies is technically possible, given the established expectations of UK and Irish capital markets in respect of anti-takeover defences, the adoption of SRPs is a theoretical option rather than a practical defence measure.
6. Investor Outreach: As the Irish Takeover Rules on equality of shareholder information and “chaperoning” of shareholder conversations only apply during an offer period, they will typically not be triggered by an activist campaign. For US listed companies, this means that Irish law restrictions will not apply to its discussions with activists during activist campaigns that do not result in a takeover offer.
For EU listed companies, some consideration will need to be given as to whether the information being shared with activists constitutes inside information (i.e., price sensitive information); it may also be necessary to consider whether any shareholder outreach would amount to a market sounding which would require the market sounding procedures under the EU Market Abuse Regulation (“MAR”) to be complied with. The MAR obligations also need to be considered by US listed companies that have debt instruments subject to MAR listed on EU markets.
In general, the assessment as to whether inside information exists will be determined by reference to the likely effect of the information on the price of the relevant EU listed securities. In the case of debt securities, there tends to be a very high threshold before the relevant information is likely to impact the price of the debt securities, as corporate transactions will generally not impact on the debt ratings or trigger pre-payment events for the relevant issuer.
7. Dealing Restrictions for the Company: For US listed companies, there are no specific Irish law restrictions preventing the company or its officers from continuing to deal in shares where an activist campaign does not result in a potential takeover offer. Any issues with share dealing in these circumstances will be determined by relevant US laws.
For EU listed companies, MAR will apply and, to the extent that the company or its officers have inside information regarding an activist approach, dealing restrictions, including the potential suspension of share buy-back programmes, may need to be imposed until the inside information is disclosed to the public.
8. Dealing Restrictions for Activists: Regardless of where a company is listed, the main restriction on an activist building a large stake rapidly is the prohibition under the Irish Takeover Rules on acquiring more than 10% of a company’s voting capital in a seven-day period where this would result in a total holding of more than 15% of a company’s voting capital.
Stakebuilding will also result in the purchase price of any shares acquired by the activist during a look-back period of between three and 12 months (depending on the Panel’s discretion) setting a floor price for a subsequent bid by the activist and persons acting in concert with the activist. In addition, if an activist acquires more than 10% of the voting capital of a company in the 12 months prior to an announcement of a bid, any offer for the company by the activist must be in cash or include a full cash alternative.
For EU listed companies, an activist will also have to comply with the MAR prohibition on insider dealing. Activist stakebuilding generally does not come under the MAR safe harbour that facilitates takeover bids, so activists will need to rely on the “own knowledge” safe harbour (i.e., the activist has no price sensitive information other than the knowledge that it is building a stake) in respect of any acquisition activity. Where an activist engages in discussions with other shareholders, there is a significant risk that the “own knowledge” safe harbour will not apply, and there may be insider dealing issues that raise points of vulnerability for activists and may prevent them from acquiring shares in the company.
9. Company Announcement Obligations: Where activist activity does not amount to a potential offer, activist activity or engagement with the company will generally not create any announcement obligations or considerations for US listed companies. The Irish Takeover Rule requirements for companies to monitor for anomalous price movements or market rumours will not therefore apply in these circumstances.
For EU listed companies, MAR will apply and companies will need to assess whether any discussions with activist investors amount to inside information and, if so, whether they need to rely on the conditions permitting delayed disclosure.
10. Activist Announcements: Where activist activity does not amount to a potential offer, activists will not be required to make any announcements under Irish law, other than the share dealing disclosures discussed above. However, activists may opt to make announcements or publish communications with the company. Where target company securities are subject to MAR, the MAR restrictions on market manipulation will apply to activists, specifically the prohibition on disseminating false or misleading information to the market. Any announcements by activists should therefore be closely scrutinised from this perspective, and companies may have the option to refer misleading activist announcements to the relevant regulators.
11. Regulatory Engagement: In any activist or potential offer scenario, it is important for the company to maintain an open and direct line of communication with the Irish Takeover Panel. The Panel’s interpretation and application of the Irish Takeover Rules are as important, perhaps more important, than the content of the Rules themselves. It is also important that the company establishes and maintains its credibility with the Panel, as the Panel may be called upon to adjudicate on disputes between activists and/or potential bidders and the company if the activist activity puts the company in play.
12. Board Changes: Irish law has a significant influence on the manner in which activists seek board nominees. For EU listed companies, the norm is for all directors to be subject to annual re-election, and shareholders together holding more than 3% of the voting capital of the company have the right to propose a resolution to remove a director and, subject to certain notice requirements and the terms of any constitutional documents, to appoint a replacement director, and for such resolution to be included in the meeting notice. In addition, where an EU listed company’s constitutional documents deem the election of directors to be ordinary business, rather than special business, the election of directors may be considered at a general meeting even where such business is not included in the notice of the meeting. There is case law which suggests that, subject to the terms of any constitutional documents and the wording of the notice for the meeting, shareholders may be permitted to propose a nominee as a director live at the meeting, whether in place of, or in addition to, a nominated director, in certain circumstances.
For US listed companies, staggered boards (with one-third rotating each year) and plurality voting for contested elections are permitted, and it is the norm for any companies with annual re-election requirements to have lengthy advance notice periods for shareholder nominations of directors specified in their constitutional documents.
Regardless of where the company is listed, shareholders have a statutory right to remove any director by simple majority, and shareholders together holding more than 5% of the voting capital of the company (or 10% where the company is US listed or listed on a secondary EU market) can requisition the company to convene a shareholder meeting, subject to certain conditions, at which they can propose the removal of directors and the appointment of replacement directors.
In light of these provisions, reviewing the company’s contingency plan for a requisitioned shareholder meeting and messaging around shareholder demands for changes to the board should form part of a company’s defensive planning considerations.
13. White Listing: One limiting factor on the options available to activists is that they could be found to be acting in concert with other shareholders, and subject to mandatory bid requirements, if together the group of co-ordinating shareholders holds more than 30% of the company’s voting capital. The main consequence of the shareholders being deemed to be acting in concert is that any acquisition of shares which takes them to, or over, 30% will trigger a requirement to make a mandatory cash offer for the company (if already over 30%, any acquisition of 0.05% will trigger the mandatory offer provisions).
ESMA has published a paper outlining the list of activities relating to the exercise of corporate governance of a company that shareholders are permitted to cooperate, engage, and take collective action on, and which will not lead to those shareholders being regarded as persons acting in concert. Permitted activities on the so-called “White List” include many key activist demands, such as seeking to promote certain courses of corporate action, including M&A, divestments, spin-offs, returns of capital, dividends, and CSR issues, as well as permitting collective action in deciding how to vote on resolutions at general meetings. Significantly, however, collective action to vote on the appointment of directors is expressly excluded from the White List. While this does not automatically mean that co-ordination between shareholders to appoint or remove directors will trigger a concert grouping, the Irish Takeover Panel is likely to carefully consider whether such action is intended to result in the activist investor group seizing board control. In making this determination, the Irish Takeover Panel is likely to consider whether (i) a candidate for election is clearly the nominee or related party of the activist investor group, (ii) there is a high level of co-ordination between the activist and their supporting shareholders, and (iii) the appointment of any nominee and removal of any other director could together have an impact on the balance of power on the board. Carefully scrutinising activist behaviour with other shareholders is therefore an important part of the defensive tools available to a company.
14. Remuneration and the 2021 Battle Ground: A focus on senior executive compensation has long been an important entry-point for activist campaigns. While companies have made significant cuts to executive pay and bonuses in response to the Covid-19 pandemic, this issue is likely to be a key battleground for 2021, particularly in light of the reducing justification for other levers, such as pushing for returns of capital to shareholders and increasing leverage. The focus for institutional and activist shareholders is likely to be on whether companies have “done enough” to re-set executive compensation and balance burden-sharing across the company’s employees as a whole in light of the pandemic, and on whether remuneration policies are sufficiently targeted on sustainability given the vulnerabilities the pandemic has exposed in companies’ operating models and strategic plans. Advance planning and, where appropriate, investor engagement will be critical to manage these sensitive issues and to avoid significant votes against the remuneration report and re-appointment of members of the Remuneration Committee at the 2021 AGM.