Into the light

Unhappy shareholders are becoming increasingly militant and using their right to be heard at general meetings. Be prepared, say Paul Wilkes and Wayne Atkinson

In recent times investors have become more willing to exercise the rights and remedies available to them to express their dissatisfaction with the management – and performance – of investment funds.

Activist investors have recently employed their right to requisition general meetings, and there are lessons to be learnt from these attempts by boards of corporate structures.

In almost any company the shareholders’ primary voice comes in their opportunity to speak and vote at general meetings. For years minority shareholders of public companies have used this opportunity for personal and political grandstanding.

Of late though, a number of Guernsey companies have seen significant shareholders or groups of shareholders requisitioning meetings and putting forward resolutions with the goal of either changing policy or changing the board.

There is little a board can do when faced with a properly constructed requisition. Guernsey’s Companies Law, like that of many other jurisdictions, provides a right for a shareholder or group of shareholders holding more than 10 per cent of voting share capital to require a company’s board to convene an extraordinary general meeting and put ­forward resolutions.

Provided the necessary formalities are ­followed, boards have no choice but to ­comply with such a requisition.
It is worth noting, however, that the Companies Law provides that the board must not move resolutions that are defamatory,frivolous, vexatious or ­ineffective.

For this reason, resolutions aimed at voicing the views of shareholders should be carefully constructed to ensure they have, if passed, a real effect and cannot be regarded as ­frivolous or ­vexatious.

Multiple choice

The Companies Law does not put any ­limitation on the number of requisitions a shareholder can make in a specific period.

Nevertheless, the convening of multiple meetings through repeated ­requisitioning would, in addition to placing additional cost burdens on companies and potentially ­irritating other shareholders, be more ­likely to be ruled vexatious and hence dismissed by companies.

Once a hostile shareholder has successfully requisitioned a meeting, it is important for each side to marshal their votes. With many shareholdings in public companies or investment funds being held via nominee structures, this can be ­difficult.

Notices may take time to filter through to the ultimate decision-maker, while instructions may take time to filter through to those entitled to execute proxy forms or appoint ­representatives.

These delays can easily eat into a notice period and leave relatively little time for executing and ­submitting proxies.
There is clear value in ­speaking to shareholders and motivating them to act as soon as possible.

Accordingly, both the use of ­formal ­circulars by the board and more direct ­contact should be considered as soon as ­possible. It is worth noting that the ­requisitioning shareholders are also likely to have had some ­contact with the remaining shareholders.

In Guernsey, shareholders are entitled to review the register of members, thus ­assisting their efforts to make contact with the shareholder base. It would be well worth a requisitioner availing themselves of this right in advance of filing any requisition to allow initial contacts to be made with ­significant shareholders and assess the chances of success.

Of course, for companies subject to the UK Combined Code on Corporate Governance, any such communication with fellow shareholders must be considered carefully.

In addition to persuasion, shareholders may also need advice about the logistics of voting. Forms submitted in the name of the beneficial holder or signed by someone without the requisite authority will need to be disregarded. Such simple errors can tip the balance of votes, with the result that the will of the majority is not expressed.

This can lead to a disenfranchised, or further disenfranchised, group of ­shareholders.

Less stress

The receipt of a requisition will inevitably be a stressful time for ­directors but anticipation and planning can reduce this. Although the requisition right in Guernsey is set out under the Companies Law, it is open to companies to insert stipulations on the ­calling of ­meetings into corporate ­documents.

Clarity of wording in relation to the ­delivery of notices, notice periods and the calling of meetings may help both ­shareholders and companies better ­understand their positions and obligations, and more ­easily lead to a satisfactory ­conclusion for both parties.

One of the keys to success for either side in a requisition situation is organisation; formalities should be followed, lines of ­communication should be readied and votes should not be expected or relied upon ­without due cause and verification.

If these issues are adequately considered then one can expect that, having heard both sides, a company’s members will make their voices heard one way or the other. This, ultimately, is the purpose of a right of ­requisition.

Paul Wilkes is a partner and Wayne Atkinson is a senior associate at Collas Day