Shareholder activism: How to be an involved investor

9th May 2011

Aren't all shareholders supposed to be active?

Yes, but it has nothing to do with protesting about buying one share and protesting against an environmental disaster at an energy company's annual meeting or complaining that, as an investor in a supermarket, the Little Puddlington branch should stock your favourite Burgundy. Nor does it have any relationship with the "active vs passive" debate in fund management.

So this is something special?

Shareholder activism is where a holder who has built up a sizeable minority of the equity seeks to influence the company. This can be in a number of ways including demanding directors step down to be replaced by the activist's nominees, or proposals to change the way the company works, or to alter its share structure, or to sell parts of the firm, or to make acquisitions. In some cases, activists propose the company goes into liquidation.

What firms do they target?

Successful activists look for companies that they believe are sleepy, undervalued, incompetent, barking up the wrong strategy tree – or a combination of all of these. In the UK this has often meant investment trusts or investment companies.

Wouldn't they achieve their aims with a takeover bid?

No. Activists aim to exert maximum influence with the minimum spend. A takeover bid inevitably pushes up the share price so why bother with that if you can get what you want with perhaps 5 to 10% of the shares – especially if you can cement alliances with other significant shareholders. In any case, activists, often hedge funds or private equity specialists but sometimes pension funds or even very wealthy individuals, are maybe there for the short haul, not the long term. Activists often use companies' annual and extraordinary shareholder meetings to push their proposals?

How do companies react?

Some do behind the scenes deals. Others try to fight their demands by appealing to the wider shareholder base, claiming that their long term needs do not chime with the activists' demands.

Why is activism active in the news?

Laxey Partners, an Isle of Man investment manager, is trying to shake up Alliance Trust, the UK's biggest investment trust worth about £2.8bn with a proposal that it should have a "discount control mechanism". The current Alliance board disagrees – the battle will come to a head at Alliance's annual meeting in Dundee on May 20th. Activist shareholders also achieved boardroom gains at F&C Asset Management in February.

A DCM is a device that buys in shares any time the gap between their underlying worth (the "net asset value" or NAV) and their quoted stock market price exceeds a set amount. This mechanism, common at many trusts, could help push the share price upward.

Why does Laxey want one?

It says the discount at Alliance is 15.5% – well ahead of the 8.7% average for the global growth investment trust sector. It wants a DCM set at 10%. It cites that rival Foreign & Colonial Investment Trust claims its DCM (dating from 2005) has been "an unqualified success" for shareholders. It also says Alliance performance has been "pedestrian" and that its once bargain-basement total expenses ratio (TER) has soared.

How does Alliance respond?

It says the DCM would "impair investment flexibility and therefore impact investment performance" because it would "have to manage its portfolio on a more short-term basis." It says it already has a flexible, as opposed to a rigid, share buyback policy. It also claims the TER would increase as the cost base would be spread over fewer shares.

What about the other shareholders?

Alliance has a widely spread ownership base, largely through its savings scheme. Laxey has under 2% of the shares – the board does not have a large stake either. So both need to appeal to smaller shareholders. Each side argues that voting the wrong way would reduce shareholder value. So all votes will be important.

Can you give me other examples of where shareholders are making a difference?

You don't have to be an individual investor to be an activist. The annual general meeting train and bus company National Express was nearly hi-jacked by its activist investor, the US hedge fund Elliott.

Elliott, which owns 18 per cent of the British company, had wanted to appoint three of its own directors and force National Express to adopt a more aggressive tack, including expansion in the US and possibly putting itself up for sale.

BP and Shell shareholders have also used annual general meetings to get some answer as reported on PlanetGreen.com

It said: "Groups of investors at BP and Shell have written a resolution demanding full disclosure and justification of the companies' involvement in Canada's oil sands-development of which causes three times more greenhouse gas emissions than conventional oil, and which also destroys forests and local ecosystems."

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