Ever-rising equity prices are putting more and more pressure on the profitability listed companies need to show to keep their shareholders satisfied. Even though the share price should not naturally guide the actions of the management, there are two main scenarios the Board should be mindful of in relation to potential shareholder actions and ‘activist campaigns’. The first is how does the Board maintain its focus on the shareholder interests when the pressure mounts to answer to the calls for profitability and growth. Secondly, how should the Board prepare itself for actions due to lagging share price development compared to its peers or the markets.
I will discuss below some company law rules how an investor or a group of investors may attempt (whether justifiably or not) to promote their own or the company’s interest, acquire control, affect the structure and business of the target company by trying to (i) have a particular issue to be decided by the shareholders’ meeting; (ii) nominate or replace a part of the Board; and (iii) invoke legal actions against the company or its management.
Naturally the ‘toolbox’ can in practice be more extensive, ranging from publicity campaigns to strategic alliances and acquisition of controlling debt of the target etc. These issues and the question of whether the Board should perhaps oppose or support such actions or whether they are even entitled to do so are not addressed here. Most of the discussed issues apply to listed companies.
Right to Have a Matter Referred to a Shareholders’ Meeting
The first question how to affect the company is to ask whether the matter is within the authority of the shareholders’ meeting or the Board, whether to call the meeting or take matters to try to replace the Board that makes the actual decision.
The company will have to hold an extraordinary shareholders’ meeting if the auditor or the shareholders representing at least one tenth of the shares so require (unless the Articles refer to a lower threshold). The matters covered by this right are the resolutions that are in the scope of the authority of the shareholders’ meeting either generally or under the Articles. This also applies to the shareholder meetings called by the company or the Board. For listed companies, such a request will need to be made at least four weeks prior to the delivery of the call to the meeting. Under general law, the period should be at least one week prior to the call. In addition, according to the Corporate Governance Code (CGC) of the Finnish Securities Markets Association, a listed company should inform on its web-page the last possible time for making such a request. It should be noted that the matter requested to be included in the meeting agenda should be specific-enough and something enabled by the Finnish Companies Act.
The shareholders are allowed to collect proxies for the purposes of reaching the 1/10 threshold. In more extensive transactions, it should be borne in mind that in some cases concentrated actions by parties, whose combined ownership exceeds the statutory limits, leads to a mandatory redemption requirement under the Finnish securities law. However, mere collection of proxies for the purpose of discussing a single matter is unlikely to trigger the acting in concert rules. As a rule of thumb, a concerted decision in a single shareholders’ meeting is unlikely to trigger the requirement either.
Nomination and Election of the Board
The members of the Board are elected by the shareholders’ meeting, unless the Articles contain rules (e.g. election by a supervisory council) deviating from this general rule. The Articles may also contain a provision that less than half of the Board is selected by some other means. The CGC sets out that the notice to the meeting should contain a suggestion for the elected Board members. The CGC also requires that the notice should contain the procedure used for preparation of the suggested list, which procedure can be either use of a (i) Nomination Board (more than half will have to be independent members and the CEO or another management person cannot participate); (ii) Shareholder Nomination Board set out by the shareholders’ meeting consisting e.g. mainly of the largest shareholders (the procedures for the elections, chairman and structure are being confirmed by the shareholders’ meeting); (iii) the largest shareholders making the nomination beforehand.
The nomination procedure elected by the company of the above alternatives is an important piece of information when considering whether the process and nominations can be affected by the shareholders or a group of shareholders. Therefore, the manner of affecting the process varies case-by-case and the alternatives for affecting these nominations needs to be considered both before the call and in connection with the actual call. For this purpose, it should be noted that the call to the meeting will have to contain information of the chosen process and the suggestions for the Board members.
If the interested shareholders elect to propose their own members to the Board, they are entitled to give their own suggestion, provided that they represent at least 1/10 of the votes, the nominees have given their consent and the proposal is delivered to the company in time so that the proposal may be included in the call to the meeting. The company is obligated to publish such proposals separately.
Claims against the company or the management
In addition to affecting the decisions of the company and election of the Board, a shareholder may also affect the decisions of the company by disputing a resolution of the shareholders’ meeting if the resolution itself or the procedure used is contrary to the Companies Act or the Articles. However, making such a claim is a complicated matter and cannot be discussed here. However, it should be noted that the Companies Act contains both specific and general obligations for the management and the shareholders’ meeting, which should be individually evaluated. Right to make such claims is not generally connected with whether the shareholder participated the meeting or not. Furthermore, the right is extended to resolutions made prior to the shareholder acquiring the shares if the earlier shareholder would have been entitled to raise such a claim. Therefore, building up a position after the decision for the purposes of making a claim is generally possible. However, a party that has participated in the resolution is generally barred from making such claims.
Connected to claims against resolutions of the shareholders’ meeting, a shareholder is in some cases also entitled to make claims against the management of the company. E.g. a member of the Board or a CEO will have to compensate for the costs and losses (damages) caused to the company through breach of the duty of care (negligence or willful conduct) of care. Usually, such claim is not possible if the shareholders’ meeting has released the relevant person from liability. However, this discharge is not often effective, because it does not e.g. shield against actions not disclosed to the shareholders in advance.
In addition, the Board members and the CEO will also have to compensate for the damages to the company and also to third parties, if the breach concerns other breach of the Companies Act or the Articles (negligence or willful conduct) than the duty of care. However, only the company is entitled to claim damages for the losses, costs and equivalent items caused solely to the company. However, the question and the law of derivative claims and damages in Finland is not clear and always requires a specific analysis and evaluation of the actual grounds and effects of the act or negligence.
Importantly, and as a supporting technique, a shareholder may be entitled to litigate on behalf of the company for damages payable to the company itself if it is unlikely that the company does not take such actions and if the shareholder(s) hold at least 1/10 of the shares or the grounds for the claim concerns breach of the equal treatment of the shareholders under the Companies Act.
It may seem that the litigation alternative may be too strong a position in terms of affecting the management and structure of the company. However, it should be borne in mind that these remedies often rise in connection with takeover procedures or in connection with strategic changes in the structure and fortunes of the firm. It may be that some of these alternatives can be used to deter the controlling shareholders or the company from making certain strategic resolutions not duly approved by the shareholders in a due Companies Law procedure.
From a listed company’s point of view, the important matter is to be prepared for dealing with the above-type-of claims and proposals and to be able to respond to them in a prompt and prudent manner weighing carefully the interests of all shareholders. From the interested shareholders’ perspective, Finnish law provides relatively well-defined procedures for promotion of the interests of the shareholders and the company and tools to affect the management and structure of the companies in a sound and structured manner.
Mika J. Lehtimäki,
Partner, Banking & Finance and M&A