Activist Shareholders in Corporate Governance: The Australian Experience and its Comparative Implications 9781509952229, 9781509952250, 9781509952243

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ACTIVIST SHAREHOLDERS IN CORPORATE GOVERNANCE This book explores the regulatory challenges of public company shareholder activism. Around the world, policy makers, practitioners and academics debate how best to regulate shareholder activism. Using Australia as a case study, the book examines key issues raised by this debate. With a market structure and legal settings that are conducive to activism, Australia makes an ideal case study and provides a fresh comparative perspective on the regulatory debate about shareholder activism, which tends to be dominated by US-focused analysis and commentary. The book presents empirical evidence which reveals that Australian activism is a significant and multifaceted phenomenon, undertaken by different types of activists pursuing varying strategies and supported by a range of complementary market developments. The book uses this evidence to develop comparative insights and explore internationally topical issues, including: –– –– –– ––

activists’ willingness to use interventionist governance rights; the role of intermediaries such as proxy advisers in facilitating activism; institutional investor stewardship; and the risks of collective shareholder activism.

This book provides an important comparative perspective on the topic of shareholder activism. It is an essential resource for policy makers, practitioners and academics interested in the regulatory implications of shareholder activism.

CONTEMPORARY STUDIES IN CORPORATE LAW Series editors: Marc Moore, Christopher Bruner Corporate law scholarship has a relatively recent history despite the fact that corporations have existed and been subject to legal regulation for three centuries. The modern flourishing of corporate law scholarship has been matched by some broadening of the field of study to embrace insolvency, corporate finance, corporate governance and regulation of the financial markets. At the same time the intersection between other branches of law such as, for example, labour, contract, criminal law, competition, and intellectual property law and the introduction of new inter-disciplinary methodologies affords new possibilities for studying the corporation. This series seeks to foster intellectually diverse approaches to thinking about the law and its role, scope and effectiveness in the context of corporate activity. In so doing the series aims to publish works of high intellectual content and theoretical rigour. Titles in this series Working Within Two Kinds of Capitalism: Corporate Governance and Employee Stakeholding: US and EC Perspectives Irene Lynch Fannon Contracting with Companies Andrew Griffiths The Law and Economics of Takeovers: An Acquirer’s Perspective Athanasios Kouloridas The Foundations and Anatomy of Shareholder Activism Iris H-Y Chiu Corporate Governance in the Shadow of the State Marc T Moore Reconceptualising Corporate Compliance Anna Donovan Corporate Opportunities: A Law and Economics Analysis Marco Claudio Corradi The Making of the Modern Company Susan Watson Court-Supervised Restructuring of Large Distressed Companies in Asia: Law and Policy Wai Yee Wan

Activist Shareholders in Corporate Governance The Australian Experience and its Comparative Implications

Tim Bowley

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2023 Copyright © Tim Bowley, 2023 Tim Bowley has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2023. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Names: Bowley, Tim (Writer on corporate governance), author. Title: Activist shareholders in corporate governance : the Australian experience and its comparative implications / Tim Bowley. Description: Oxford, UK ; New York, NY: Hart Publishing, an imprint of Bloomsbury Publishing, 2023.  |  Based on the author’s doctoral dissertation—Sydney Law School.  |  Includes bibliographical references and index.  |  Summary: “This book explores the regulatory challenges of public company shareholder activism. Around the world, policy makers, practitioners and academics debate how best to regulate shareholder activism. Using Australia as a case study, the book examines key issues raised by this debate. With a market structure and legal settings that are conducive to activism, Australia makes an ideal case study and provides a fresh comparative perspective on the regulatory debate about shareholder activism, which tends to be dominated by US-focused analysis and commentary. The book presents empirical evidence which reveals that Australian activism is a significant and multifaceted phenomenon, undertaken by different types of activists pursuing varying strategies and supported by a range of complementary market developments. The book uses this evidence to develop comparative insights and explore internationally topical issues, including: - activists’ willingness to use interventionist governance rights; - the role of intermediaries such as proxy advisers in facilitating activism; - institutional investor stewardship; and - the risks of collective shareholder activism. This book provides an important comparative perspective on the topic of shareholder activism. It is an essential resource for policy makers, practitioners and academics interested in the regulatory implications of shareholder activism”— Provided by publisher. Identifiers: LCCN 2022043090  |  ISBN 9781509952229 (hardback)  |  ISBN 9781509952267 (paperback)  |  ISBN 9781509952243 (pdf)  |  ISBN 9781509952236 (Epub) Subjects: LCSH: Stockholders—Legal status, laws, etc.—Australia.  |  Corporate governance— Law and legislation—Australia. | Corporation law—Australia. | Stockholders— Legal status, laws, etc.  |  Corporate governance—Law and legislation. Classification: LCC KU957 .B69 2023  |  DDC 346.94/0666—dc23/eng/20221101 LC record available at https://lccn.loc.gov/2022043090 ISBN: HB: 978-1-50995-222-9 ePDF: 978-1-50995-224-3 ePub: 978-1-50995-223-6 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

Acknowledgements

T

his book has its origins in my doctoral research, undertaken at Sydney Law School at the University of Sydney under the patient and generous guidance of my supervisors, Professor Jennifer Hill and Dr Olivia Dixon. I would also like to thank Sydney Law School and Harvard Law School for the opportunity to spend time at Harvard as a visiting doctoral researcher in 2017, supported by a Walter Reid Scholarship from the University of Sydney. This experience provided me with invaluable insights into contemporary shareholder activism and its corporate governance implications. I would also like to thank my colleagues at the Centre for Commercial Law and Regulatory Studies at the Faculty of Law, Monash University. My colleagues and the activities of the Centre have provided me with many opportunities to explore and test ideas developed in this book. I am grateful to Professors Marc Moore and Christopher Bruner, Series Editors at Hart Publishing, and Dr Roberta Bassi, Commissioning Editor at Hart Publishing, for their support of this project and, in particular, their shared belief that Australia’s experience of shareholder activism has comparative significance. I also thank my research assistant, Beryl Tan, for her enthusiastic and diligent assistance. Last, but not least, my sincere thanks to my family which has patiently tolerated the demands of this project on my time during the last two years.

vi

Contents Acknowledgements����������������������������������������������������������������������������������������v Abbreviations and Defined Terms�������������������������������������������������������������� xiii Table of Cases���������������������������������������������������������������������������������������������xv Table of Statutes and Regulations��������������������������������������������������������������xvii 1. Introduction��������������������������������������������������������������������������������������������1 1.1. What is Shareholder Activism?��������������������������������������������������������1 1.2. Shareholder Activism and Australia������������������������������������������������4 1.3. The Comparative Significance of Australia��������������������������������������8 1.4. Structure of the Book�������������������������������������������������������������������10 2. The Shareholder Activism Debate����������������������������������������������������������11 2.1. The Broader Debate about Shareholder Participation in Corporate Governance��������������������������������������������������������������11 2.2. The Shareholder Activism Debate�������������������������������������������������14 2.2.1. Factors that Shape the Nature and Extent of Shareholder Activism��������������������������������������������������������15 2.2.2. Whether Shareholder Activism is Beneficial for Companies������������������������������������������������������������������21 2.2.3. Are there More Appropriate Mechanisms for Promoting Corporate Performance and Accountability?����������������������������������������������������������������25 2.3. The Shareholder Activism Debate and the Comparative Significance of Australia���������������������������������������������������������������26 3. The Setting for Australian Activism��������������������������������������������������������28 3.1. The Australian Listed Equities Market������������������������������������������28 3.2. Public Company Share Ownership Trends�������������������������������������29 3.3. Ownership at the Firm Level���������������������������������������������������������31 3.3.1. Absence of Controlling Blockholders��������������������������������31 3.3.2. Ownership Concentrated in Groups of Significant Shareholders��������������������������������������������������������������������32 3.3.3. Retail Ownership Remains Significant in Some Large Companies but Influence is Marginal��������������������������������36 3.4. The Australian Regulatory Setting������������������������������������������������37 3.4.1. Key Sources of Australian Corporate Law�������������������������37 3.4.2. The Basic Governance Framework of an Australian Public Company���������������������������������������������������������������38

viii  Contents 3.4.3. The Central Place of Shareholders in Australian Corporate Law�����������������������������������������������������������������39 3.4.4. Initiating Shareholder Decision-making����������������������������42 3.4.5. Disclosure Requirements��������������������������������������������������43 3.5. Conclusion�����������������������������������������������������������������������������������44 4. The Evidence of Australian Shareholder Activism (I)������������������������������46 4.1. Investigating Interventionist Campaigns in 2013–16����������������������48 4.1.1. Incidence of Interventions in the All Ordinaries Index 2013–16������������������������������������������������������������������50 4.1.2. Nature of Interventions����������������������������������������������������51 4.1.3. Nature of the Activists Behind the Interventions����������������52 4.1.4. Summary�������������������������������������������������������������������������60 4.2. Third Party Data and Research on Interventions���������������������������62 4.3. Other Evidence of Interventionist Activist Campaigns�������������������65 4.3.1. The Reported Data does not Indicate that Interventionist Activism is Widespread or Inexorably Increasing���������������67 4.3.2. Other Notable Findings����������������������������������������������������67 4.4. Conclusion�����������������������������������������������������������������������������������69 5. The Evidence of Australian Shareholder Activism (II)�����������������������������71 5.1. Participation in Routine Company-Convened Shareholder Meetings�������������������������������������������������������������������71 5.1.1. Background����������������������������������������������������������������������71 5.1.2. Shareholders Eschew Physical Attendance at AGMs����������72 5.1.3. However, AGMs Provide Shareholders with the Opportunity to Exercise Voting Influence��������������������������73 5.1.4. Increased Levels of Dissent Expressed Through Voting������������������������������������������������������������������������������75 5.1.5. Expressing Dissent Through ‘Say on Pay’��������������������������76 5.1.6. Expressing Dissent by Voting in Favour of Shareholder-Proposed Resolutions Addressing ESG Issues������������������������������������������������������������������������79 5.1.7. Use of ‘Abstain’ Votes�������������������������������������������������������80 5.1.8. Voting Coordination Among Investors������������������������������81 5.1.9. Summary�������������������������������������������������������������������������82 5.2. Behind-the-Scenes Engagement Practices���������������������������������������83 5.3. The Role of Governance Intermediaries in Leveraging Shareholder Influence�������������������������������������������������������������������88 5.3.1. Representative Bodies�������������������������������������������������������88 5.3.2. Representative Bodies and Stewardship Codes�������������������91 5.3.3. Engagement Firms������������������������������������������������������������92 5.3.4. Proxy Advisers�����������������������������������������������������������������94

Contents  ix 5.3.5. Investor Networks������������������������������������������������������������96 5.3.6. The Broader Corporate Governance Industry��������������������97 5.3.7. The Role of Governance Intermediaries: Summary������������98 5.4. Conclusion�����������������������������������������������������������������������������������98 6. The Nuances and Significance of Australian Shareholder Activism�������� 100 6.1. The Nuances of Australian Activism������������������������������������������� 100 6.1.1. Diversity������������������������������������������������������������������������ 100 6.1.2. Tactical Variation and Specialisation������������������������������ 101 6.1.3. Different Patterns of Activism Across the Market������������ 103 6.1.4. Low Levels of Aggressive Activism���������������������������������� 104 6.1.5. The Limited Role of Hedge Fund Activism��������������������� 113 6.1.6. The Increasing Significance and Sophistication of ESG-related Activism������������������������������������������������������ 114 6.1.7. Shareholder Activism as an Exercise in Influence-wielding���������������������������������������������������������� 116 6.1.8. The Corporate Governance Ecosystem Supporting Institutional Investors����������������������������������������������������� 117 6.1.9. International Influences�������������������������������������������������� 119 6.2. The Significance of the Australian Experience����������������������������� 119 6.2.1. The Need for a Particularised Approach in Regulatory Debates�������������������������������������������������������������������������� 120 6.2.2. Appreciating the Potentially Complex Mix of Factors that Shape Activism�������������������������������������������������������� 120 6.2.3. Although Increasing Institutional Investor Share Ownership is a Global Trend, Local Implications May Vary����������������������������������������������������������������������� 124 6.2.4. Approach Overseas Insights and Experience with Care����������������������������������������������������������������������� 127 6.2.5. Influence-Wielding Activism and its Regulatory Implications������������������������������������������������������������������� 128 6.3. Conclusion��������������������������������������������������������������������������������� 130 7. Revisiting the Regulatory Debate (I): Shareholder Resolutions Law Reform����������������������������������������������������������������������������������������� 131 7.1. Introduction������������������������������������������������������������������������������� 131 7.2. Background�������������������������������������������������������������������������������� 133 7.3. Whether there is a ‘Utility Gap’ and How a Right to Pass Declaratory Resolutions Might Address it����������������������������������� 136 7.3.1. The Questionable Utility of Shareholders’ Core Governance Rights under Australian Law������������������������ 136 7.3.2. The Limitations of Shareholders’ Other Governance Tools����������������������������������������������������������� 138 7.3.3. The Precise Nature of the Utility Gap����������������������������� 140

x  Contents 7.4. Shareholders’ Annual Say on Pay: Highlighting the Utility of Declaratory Resolutions���������������������������������������������� 144 7.5. Why Don’t Shareholders Give Themselves a Right to Pass Declaratory Resolutions Through Constitutional Change?���������� 147 7.5.1. Shareholders’ Apparent Reluctance to Engage in Constitutional Change��������������������������������������������������� 147 7.5.2. Support for a ‘Say on Climate’���������������������������������������� 148 7.5.3. Implications of these Developments for the Law Reform Debate�������������������������������������������������������� 149 7.6. The Design of a Statutory Right to Propose Declaratory Resolutions�������������������������������������������������������������������������������� 151 7.6.1. Mandatory or Default?��������������������������������������������������� 153 7.6.2. Binding or Non-binding Declaratory Resolutions������������ 154 7.6.3. A Right to Propose Declaratory Resolutions at Large or a ‘Say On …’ Model?���������������������������������������� 156 7.6.4. Restrictions on the Right������������������������������������������������ 157 7.7. Conclusion��������������������������������������������������������������������������������� 159 8. Revisiting the Regulatory Debate (II): Regulating Collective Shareholder Activism��������������������������������������������������������������������������� 162 8.1. Introduction������������������������������������������������������������������������������� 162 8.2. The Corporate Control Implications of Collective Action����������� 164 8.3. Collective Action and Takeover Laws: The Australian Regulatory Setting���������������������������������������������������������������������� 166 8.3.1. The Over-reaching Nature of Australian Takeover Laws���������������������������������������������������������������� 168 8.3.2. The ‘Sting in the Tail’ of Australian Takeover Law���������� 172 8.3.3. The Impediment to Collective Action Created by these Laws����������������������������������������������������������������� 175 8.4. ASIC’s Efforts to Strike a Balance between Corporate Governance and Takeover Regulation����������������������������������������� 176 8.4.1. Modifying the Operation of Takeover Laws�������������������� 176 8.4.2. Regulatory Guide 128 – ASIC’s Revised Approach to the Issue of Collective Action and Takeover Law��������� 177 8.5. The Questionable Corporate Governance Utility of RG 128�������� 180 8.5.1. Lower-intensity Activism Directed at Mainstream Issues is Already Supported by Other Market Developments����������������������������������������������������������������� 181 8.5.2. More Typically, Collective Action is Used by Shareholders for Higher-Intensity Forms of Activism�������������������������������������������������������������������� 182 8.6. The Contestable Nature of ASIC’s Views Regarding the Risks, and Difficulty, of Providing Greater Latitude for Collective Action������������������������������������������������������������������������ 184

Contents  xi 8.6.1. Activism as Influence-Wielding not Control-Seeking Behaviour��������������������������������������������� 185 8.6.2. The Relevance of Capital Market Structure��������������������� 186 8.6.3. Different Activist Tactics have Different Control Implications������������������������������������������������������������������� 187 8.7. Adopting a More Accommodating Regulatory Stance Towards Collective Action: Overseas Initiatives��������������������������� 189 8.7.1. The European Securities and Markets Authority Public Statement on Collective Action����������������������������� 189 8.7.2. The UK Takeover Panel’s Practice Statement No. 26�������� 191 8.8. The Potential for More Expansive Regulatory Relief for Collective Action in Australia����������������������������������������������������� 193 8.9. Conclusion��������������������������������������������������������������������������������� 196 9. Conclusion������������������������������������������������������������������������������������������ 199 9.1. The Nature of Australian Activism: Insights for Australia������������ 199 9.2. The Comparative Relevance of Australia������������������������������������� 201 9.3. The Intricacy of Shareholder Power�������������������������������������������� 203 Bibliography���������������������������������������������������������������������������������������������� 205 Index��������������������������������������������������������������������������������������������������������� 219

xii

Abbreviations and Defined Terms The following abbreviations and defined terms are commonly used in this book: ACCR: the Australasian Centre for Corporate Responsibility, a research and shareholder advocacy organisation. ACSI: the Australian Council of Superannuation Investors, a body representing the interests of Australian industry superannuation funds and certain other pension funds. AGM: a company’s annual general meeting of shareholders. ASIC: the Australian Securities and Investments Commission, the Australian corporate and securities regulator. ASX: ASX Ltd, the operator of Australia’s principal stock market or, as the context requires, the stock market operated by it. ASX Listing Rules: the listing rules applicable to entities listed on the ASX. CAMAC: the Corporations and Markets Advisory Committee, an independent body established under Commonwealth legislation to advise the Commonwealth government on matters of corporate and securities law reform (and which was also known, at one point, as the Companies and Securities Advisory Committee). Company managers or corporate managers: the board of directors and executive managers of a company. Corporations Act: the Corporations Act 2001 (Cth), the principal corporations and securities law statute in Australia. Declaratory resolution: a resolution of a shareholder meeting which states how shareholders would prefer their company’s managers to manage their company. A declaratory resolution may be binding (ie, it will act as an instruction to company managers) or non-binding (ie, it will merely express a wish or opinion of shareholders). ESG, when used as a description of shareholder activism, refers to activism directed at environmental, social and corporate governance issues. FSC: the Financial Services Council, a body representing the interests of fund managers and other financial services organisations. Intervention has the meaning given in chapter four, section 4.1.

xiv  Abbreviations and Defined Terms OECD: the Organisation for Economic Co-operation and Development. Panel: the Takeovers Panel, a non-judicial body given power under the Corporations Act to resolve disputes relating to issues arising under Australian takeover law. Public company: an Australian company whose shares are admitted to trading on the ASX. Shareholder meeting: a general meeting of a company’s shareholders. Two-strikes rule: a shorthand reference to provisions of the Corporations Act which provide that, if a public company receives a ‘no’ vote of at least 25 per cent on its remuneration report resolution at two consecutive AGMs, then, at the second AGM, the company must ask shareholders to vote on whether to hold a further shareholder meeting at which the company’s directors, other than its managing director, will be subject to re-election.

Table of Cases Adsteam Building Industries Pty Ltd v Queensland Cement and Lime Co Ltd (1985) 14 ACLR 456��������������������������������������������������� 170 Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia (2016) 113 ACSR 600������������������39, 134 Australian Securities and Investments Commission v Yandal Gold Pty Ltd (1999) 32 ACSR 317���������������������������������������������� 175 Bank of Western Australia Ltd v Ocean Trawlers Pty Ltd (1995) 16 ACSR 501������������������������������������������������������������������������������ 170 Bentley Capital Ltd 01R [2011] ATP 13������������������������������������������������������� 170 BHP Ltd v Bell Resources Ltd (1984) 8 ACLR 609��������������������������������������� 174 Capricornia Credit Union Ltd v Australian Securities and Investments Commission (2007) 62 ACSR 671�������������������������107, 155 Caravel Resources Ltd [2018] ATP 8����������������������������������������������������������� 183 Edensor Nominees Pty Ltd v ASIC (2002) 41 ACSR 325�������������������������168–69 Flinders Diamonds Ltd v Tiger International Resources Inc (2004) 49 ACSR 199�����������������������������������������������������������������������169, 175 Fraser v NRMA Holdings Ltd (1995) 127 ALR 543���������������������������������������46 John Shaw and Sons (Salford), Ltd v Shaw [1935] 2 KB 113����������������������������������������������������������������������������� 38–39, 134, 165 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722����������������������40 Leigo v Berner [1976] 1 NSWLR 502������������������������������������������������������������46 National Foods Ltd [2005] ATP 8��������������������������������������������������������������� 171 National Roads and Motorists’ Association Ltd v Bradley (2002) 42 ACSR 616��������������������������������������������������������������������������������46 National Roads & Motorists’ Association v Parker (1986) 11 ACLR 1��������� 134 Ngurli Ltd v McCann (1953) 90 CLR 425�����������������������������������������������������40 NRMA v Parker (1986) 11 ACLR 1���������������������������������������������������������������46 NRMA Ltd v Snodgrass (2001) 37 ACSR 382������������������������������������������ 46–47 Perpetual Custodians Ltd v IOOF Investment Management Ltd (2013) 304 ALR 436������������������������������������������������������������������������������ 170 Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457�����������������������40 Qantas Airways Ltd 01 [2007] ATP 1���������������������������������������������������������� 174 Re Kornblums Furnishings Ltd (1981) 6 ACLR 25��������������������������������������� 168 Re Marra Developments Ltd (1976) 1 ACLR 470������������������������������������������46 Re Molopo Energy Ltd (2014) 104 ACSR 46�������������������������������������������49, 108

xvi  Table of Cases The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] (2008) 39 WAR 1������������������������������������������������������������������������������������40 The Gramophone and Typewriter, Ltd v Stanley [1908] 2 KB 89������������������ 165 Turner v Berner (1978) 3 ACLR 272�������������������������������������������������������������46 Whitlam v ASIC (2003) 57 NSWLR 559��������������������������������������������������������46 Winepros Ltd [2002] ATP 18 ���������������������������������������������������������������������� 170

Table of Statutes and Regulations 8 Del Code Ann § 242(b)������������������������������������������������������������������������������40 Australian Securities and Investments Commission Act 2001 (Cth)����������������37 Code of Federal Regulations, Title 17, § 240.14a-8 (US)�����������������������152, 158 Companies Act 1993 (New Zealand)��������������������������������������������133, 151, 154 Companies Act 2006 (United Kingdom)����������������������������������������134, 152, 154 Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth)�����������������������������������������������77 Corporations Act 2001 (Cth)����������������������������� 5, 33, 37–44, 47, 49, 51, 53–55, 57, 63–64, 71–73, 76–78, 106–08, 134, 138–39, 140, 144, 150, 153, 155, 159, 165–71, 173–76, 180, 182–84, 188, 193–94, 196 Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth)�����������������������������������77, 144 Corporations Legislation Amendment (Deregulatory and Other Measures) Act 2015 (Cth)�������������������������������������������������������������������������6 Corporations Regulations 2001 (Cth)��������������������������������������������������������� 171 Corporations (Coronavirus Economic Response) Determination (No. 1) 2020�������������������������������������������������������������������������������������������72 Coronavirus Economic Response Package Omnibus Act 2020 (Cth)��������������72 Explanatory Memorandum, Company Law Review Bill 1997 (Cth)������������� 139 Explanatory Memorandum, Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (Cth)����������77 Securities Exchange Act 1934 (US)�������������������������������������������������������������� 133 Superannuation Industry (Supervision) Act 1993 (Cth)����������������������������������30

xviii

1 Introduction

T

his book explores the nature and regulation of public company shareholder activism. It does so by using the Australian experience of shareholder activism as a case study to highlight and explore important characteristics, developments and regulatory challenges. 1.1.  WHAT IS SHAREHOLDER ACTIVISM?

‘Shareholder activism’ is not a technical term with a precise meaning. It is sometimes closely associated with attempts by shareholders to intervene forcefully in the management of a company; for example, by seeking to replace a company’s directors.1 In particular, ‘shareholder activism’ has come to be closely associated with the ‘hands-on’, assertive governance interventions undertaken by activist investors such as hedge funds.2 However, activism is not a one-dimensional phenomenon. There are many types of shareholder activists, who pursue different strategies for varying reasons.3 As Australian commentators have noted, ‘shareholder activism is a broad term for a range of activities by a variety of actors seeking to advance diverse agendas’.4 The key distinguishing feature of activism is not, therefore, the type of shareholder involved or the type of tactics used by the shareholder. Instead, the key distinguishing feature of shareholder activism is the fact that the activist shareholder seeks to prompt some change in their company’s affairs. As the then chair of the US Securities and Exchange Commission remarked in 2015, ‘[t]o me, the term activism captures the range of efforts by investors to 1 See, eg, The Panel on Takeovers and Mergers, Shareholder Activism and Acting in Concert (Consultation Paper PCP 10, 14 March 2002) [1.2] (‘Shareholder activism often takes the form of a group of shareholders collectively seeking … to make changes to the board of a company or to direct the board to pursue a particular course of action’). 2 See, eg, M West, ‘Boards Under Attack from Activist Funds’ The Sydney Morning Herald (Sydney, 25 November 2013) 21 (‘Shareholder revolution is on the rise as ranks of activist funds swell, unleashing a torrent of campaigns against poorly performing and vulnerable company boards’). 3 WG Ringe, ‘Shareholder Activism: A Renaissance’ in JN Gordon and WG Ringe (eds), The Oxford Handbook of Corporate Law and Governance (Oxford, Oxford University Press, 2018). 4 B Sheehy, H Pender and B Jacobsen, ‘Corporate Social Responsibility/ESG Shareholder Activism in Australia: A Case Study of the Australasian Centre for Corporate Responsibility’ (2021) 36 Australian Journal of Corporate Law 156, 158.

2  Introduction influence a company’s management or decision-making’.5 So conceived, activism is not confined to any particular type of shareholder and encompasses a range of behaviours intended to bring about change in a company’s affairs. This could include the exercise of legal rights (eg, the exercise of voting rights attached to shares) or the use of extra-legal tactics such as publicity campaigns or exerting influence on company managers6 in behind-the-scenes meetings.7 The Australian activist fund manager, Sandon Capital, highlights an additional important characteristic of shareholder activism: The activist investor will often focus on issues or fears that other investors dare not make public for fear of sanction … [An activist’s proposals] are often proposals that other shareholders would like to see but are not prepared to fight for. The activist’s proposals may also be those considered by the board, but not prioritised by management (for many varied reasons).8

That is, the activist shareholder brings a different, critical or independent perspective to bear on a company’s affairs. They do not simply accept the views of a company’s managers and they may pursue issues which a company’s other shareholders have not considered or are unwilling to pursue themselves. It is this approach that distinguishes the activist shareholder from the active shareholder. A shareholder who regularly attends its company’s annual general meeting (AGM) and votes in accordance with the recommendations of directors ‘actively’ participates in its company’s governance. However, in doing so, the shareholder does not challenge the company and its managers. In contrast, the activist shareholder critically evaluates a company’s affairs and seeks to promote some change in those affairs. The reference to ‘seeks to promote some change’ refers to the fact that activism is an exercise in persuasion. A shareholder adopts an activist stance because they do not exercise control over a company and cannot simply force change through unilateral action. They must instead persuade a company’s managers (or, if the relevant decision lies in the hands of shareholders, a company’s other shareholders) of the need to make some change or follow a course of action 5 MJ White, ‘A Few Observations on Shareholders in 2015’ (Harvard Law School Forum on Corporate Governance, 20 March 2015) www.corpgov.law.harvard.edu/2015/03/20/a-few-observations-onshareholders-in-2015/. 6 This book uses the terms ‘company managers’ or ‘corporate managers’ to refer to a company’s directors and executive managers. When it is necessary to distinguish between these corporate officers, the book will use the more specific terms ‘director’ and ‘executive manager’. 7 Other commentators have conceived of activism in similarly broad terms. See, eg, M Becht et al, ‘Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes UK Focus Fund’ (2009) 22 Review of Financial Studies 3093, 3094 (‘a range of actions taken by shareholders to influence corporate management and boards’); and, in the Australian context, Gilbert & Tobin, Shareholder Activism Report (2018) 4 (‘Shareholder activism is an umbrella term that captures active steps taken by shareholders seeking to change the behaviours of the board and management of a company’). 8 Sandon Capital, ‘Australia’s Activist Awakening’ (Ethical Boardroom, Winter 2019) www. ethicalboardroom.com/australias-activist-awakening/.

What is Shareholder Activism?  3 advocated by the activist. Cheffins and Armour describe activism, therefore, as forming part of a ‘market for corporate influence’.9 However, terminology is evolving, and a reader might find that they are encountering various other terms purporting to describe behaviour which might otherwise appear to involve activism. As commentators, regulators and market participants seek to understand and explain this intricate corporate governance phenomenon, they have formulated more specific terminology to highlight the particular identity, style or objectives of different types of activist shareholders. For example, ‘engagement’10 and ‘stewardship’11 are now often used to refer to institutional investors monitoring their companies, diligently exercising their voting rights and engaging in private interactions with companies. Sometimes, the terms ‘engagement’ and ‘stewardship’ are also used to highlight a perceived qualitative difference between engagement and stewardship on the one hand, and shareholder activism on the other hand. Balp and Strampelli, for example, contend that ‘[a]s compared to activism, the milder terms “engagement” and “stewardship” point towards a kind of active … ownership the approach of which to portfolio companies is by far less adversarial, more collaborative, and primarily based on mutual understanding.’12 Another commentator argues that activism undertaken by a hedge fund activist is behaviour that seeks to promote the fund’s self-interest by enhancing the financial value of their investment. She contrasts this with ‘investor stewardship’ which she argues involves institutional investors intervening constructively in companies’ corporate governance to promote sustainable financial performance. In so doing, these investor ‘stewards’ can improve not only the long-term value of their investments but also generate broader economic and social benefits by promoting sustainable economic activity.13

9 BR Cheffins and J Armour, ‘The Past, Present, and Future of Shareholder Activism by Hedge Funds (2011) 37 Journal of Corporate Law 51, 58–60. 10 International Corporate Governance Network, ICGN Guidance on Institutional Investor Responsibilities (2013) 14 (describing engagement as ‘purposeful dialogue with investee companies with the aim of preserving or enhancing value … [it] arises when institutional investors have a close and full understanding of the … investee company and identify concerns … Voting is an element of engagement … but it is only one element of the appropriate activities’). 11 Australian Council of Superannuation Investors, Australian Asset Owner Stewardship Code (May 2018) 5 (‘Stewardship refers to the responsibility asset owners have to exercise their ownership rights to protect and enhance long-term investment value for their beneficiaries by promoting sustainable value creation in the companies in which they invest’). 12 G Balp and G Strampelli, ‘Institutional Investor Collective Engagements: Non-activist Cooperation vs Activist Wolf Packs’ (2020) 14 Ohio State Business Law Journal 135, 148. 13 D Katelouzou, ‘Reflections on the Nature of the Public Corporation in an Era of Shareholder Activism and Stewardship’ in B Choudhury and M Petrin (eds), Understanding the Company: Corporate Governance and Theory (Cambridge, Cambridge University Press, 2017) 121–22. In the Australian context, see Governance Institute of Australia and Sandy Easterbrook, Improving Engagement between ASX-listed Companies and Their Institutional Investors: Principles and Guidelines (July 2014) 3 (‘[H]edge funds and some other institutional investors are not necessarily long-term investors and … [their] business model or investment style does not include engagement’).

4  Introduction Recent commentary has also introduced the terms ‘ESG stewardship’, ‘systematic stewardship’ and ‘activist stewardship’. ‘ESG stewardship’ and ‘systematic stewardship’ describe actions taken by diversified investors to prompt their portfolio companies to address the effects of systemic environmental, social and governance risks on their businesses;14 for example, by requiring their portfolio companies to disclose the steps they are taking to adapt their business models to prepare for the effects of climate change. The term ‘activist stewardship’ has been used to describe assertive forms of investor stewardship – such as initiating a proxy contest – undertaken to compel reluctant companies to address material environmental or social risks confronting their businesses.15 However, even if shareholders who undertake ‘engagement’, ‘stewardship’, ‘systematic activism’, and so on have motives or objectives that might differ from one another, they are all, fundamentally, still taking action to shape their companies’ affairs in some way. This book therefore regards these various types of shareholder-company interaction as forms of ‘shareholder activism’ and explores them as part of its inquiry into the nature and regulation of shareholder activism.16 This terminological complexity does, however, highlight the evolving and nuanced nature of shareholder activism. As this book will show, it is critical that the multifaceted nature of activism is borne in mind when considering its regulatory implications. 1.2.  SHAREHOLDER ACTIVISM AND AUSTRALIA

In the years immediately following the Global Financial Crisis, it appeared that Australia was poised to experience a significant increase in shareholder activism. Several developments contributed to this expectation. The first was the coming into effect in 2011 of laws intended to strengthen shareholder oversight of executive remuneration. These laws, also known as the two-strikes rule, augmented shareholders’ annual ‘say on pay’ vote by enhancing the signalling effect of an

14 See, eg, Sustainalytics, ‘3 Reasons to Skill Up and Scale Up ESG Stewardship in 2022’ (January 2022) www.sustainalytics.com/esg-research/resource/investors-esg-blog/esg-stewardship-2022; JN Gordon, ‘Systematic Stewardship’ (2022) Journal of Corporate Law (forthcoming). 15 R Eccles, A Mastagni and K Jenkinson, ‘An Introduction to Activist Stewardship’ (Harvard Law School Forum on Corporate Governance, 1 March 2021) www.corpgov.law.harvard.edu/2021/ 03/01an-introduction-to-activist-stewardship/. 16 Shareholder activism is sometimes understood to include shareholder litigation and short-selling activism: see, eg, Q Digby and T Stutt, ‘Australia’ in FJ Aquila (ed), Shareholder Rights and Activism Review, 3rd edn (London, Law Business Research, 2018) 1. These forms of activism are not considered in this book, whose focus is on the types of governance-related activism described above; that is, activism which involves attempts by shareholders to become involved in, or to exercise influence over, corporate decision-making as it unfolds. In contrast, shareholder litigation and short-selling activism take place to a large extent outside of a company’s governance process and rely on, respectively, judicial processes and capital market dynamics.

Shareholder Activism and Australia  5 adverse vote.17 In summary, the two-strikes rule provides that, if a company receives a ‘no’ vote of at least 25 per cent at two consecutive AGMs (ie, ‘two strikes’), then, at the second AGM, shareholders must vote on whether to hold a further meeting at which the company’s directors are subject to re-election.18 In the first few years following the rule’s introduction, there were a number of notable examples of shareholders using the rule to deliver a ‘strike’ on companies’ remuneration practices, prompting two academic commentators to herald the advent of a ‘shareholder spring’.19 This period also witnessed a number of high-profile activist campaigns. This included several instances of institutional investors engaging in what is sometimes called ‘deal activism’, that is, activism undertaken to influence the outcome of significant corporate transactions such as takeovers, mergers and capital raisings.20 In 2012, there were two very high-profile cases of activism by two of Australia’s wealthiest individuals. James Packer’s Crown Limited agitated for a change in the management and strategy of the casino and gaming company, Echo Entertainment. Separately, the mining billionaire Gina Rinehart acquired 19 per cent of the media company Fairfax Media, demanded board representation, and refused to agree to the company’s charter of editorial independence. Although these were only two instances of activism, the profile of Mr  Packer and Ms Rinehart, and concerns about their motives,21 meant that these interventions attracted attention from the government and the corporate regulator, the Australian Securities and Investments Commission (ASIC).22 Finally, during this period, Australian commentators began to take note of the increasing levels of hedge fund activism in the United States. Many assumed that it was only a matter of time before this aggressive form of activism

17 Under the Corporations Act 2001 (Corporations Act), s 250R(2), (3), a public company must ask shareholders to vote on the company’s ‘remuneration report’ at each annual shareholder meeting. This is a report, contained in the annual directors’ report, which describes remuneration arrangements for the company’s senior personnel. The vote is advisory only and does not bind the company. 18 Corporations Act, ss 250U, 250V. A company’s managing director is exempt from this requirement. 19 J Corkery and S Medarevic, ‘Executive Remuneration under Scrutiny: The Cutting Edge of the “Shareholder Spring”’ (2013) Corporate Governance eJournal www.epublications.bond.edu.au/ cgej/28. 20 A Emmerich, ‘Deal Activism’ (Wachtell, Lipton, Rosen & Katz, 27 October 2015) www.wlrk. com/webdocs/wlrknew/AttorneyPubs/WLRK.24933.15.pdf. This included the activist interventions involving Spotless Ltd (relating to a proposed takeover), APN News & Media (relating to a proposed capital raising), Roc Oil Limited (relating to a proposed merger), and Westfield Property Group (relating to a proposed restructure): see M Smith, ‘Power to the People’, The Australian Financial Review (26 September 2014) 64. 21 Packer’s Crown Limited was in competition with Echo, particularly in Sydney, where Echo’s flagship casino is located: B Frith, ‘Echo Should take Crown’s Stake Bid to Takeovers Panel’ The Australian (2 March 2012) 22. In the case of Ms Rinehart, there was speculation that she wished to use Fairfax’s newspapers to promote her commercial interests: E Knight, ‘Rinehart Might Influence People but She’s Winning Few Friends in Doing So’ The Sydney Morning Herald (Sydney, 23 June 2012) 6. 22 G Korporaal, ‘ASIC May Push Out Creep Rule to 30pc’ The Australian (12 July 2012) 19; Common­wealth Treasury, Takeovers Issues (Treasury Scoping Paper, 5 October 2012).

6  Introduction reached Australia.23 The Australian financial press keenly reported the activities of a handful of Australian investment funds with similar activist investment strategies.24 These developments prompted commentators, ASIC and the government to consider the appropriateness of Australian law’s regulation of shareholder activism. In some cases, this involved consideration of whether there was scope for regulatory change to harness more fully the potential governance benefits of shareholder activism.25 However, more often it involved consideration of whether activism should be regulated more restrictively.26 Such commentary and analysis frequently assumed that Australian shareholder activism was invariably aggressive and highly interventionist in nature. The financial press, in particular, promoted this conception of activism. In 2012, a press article portrayed aggressive activism as a fundamental change in Australian corporate governance, observing that ‘[o]nce, influential shareholders might have a quiet word in the chairman’s ear’ but that ‘[n]ow directors face all sorts of ­hostility – and it could get worse’.27 A recurring theme in much of this commentary was that Australian law does not sufficiently protect companies and their directors from aggressive activism. Commentators declared that ‘the balance is tipped too much in favour of economic activists’28 and ‘Australian law doesn’t provide sufficient protection for directors’.29 One major law firm claimed that the 23 R Gluyas, ‘Brace for Shareholder Activists, Goldman Warns Clients’ The Australian (8 May 2013) 17; M Smith, ‘Boards Prepare to Keep Activists at Bay’ The Australian Financial Review (7 March 2014) 40. Australian law firms in particular enthusiastically predicted the emergence of US hedge fund activism in Australia: see, eg, Allens, ‘Shareholder Activism on the Rise as Allens Defends Antares Against US Hedge Fund’ (Media Release, 22 July 2014); Clayton Utz, Corporate Head Office Advisory Update (February 2015) 5. 24 See, eg, M Maiden, ‘Shareholder Activism in its Infancy’ The Sydney Morning Herald (Online, 28 November 2012) www.smh.com.au/business/shareholder-activism-in-its-infancy-20121127-2a5pl. html; West, ‘Boards Under Attack from Activist Funds’ (2013). 25 Issues considered included: (i) the relevance of the AGM in light of developments in company– shareholder engagement practices: Corporations and Markets Advisory Committee, The AGM and Shareholder Engagement (Discussion Paper, 2012); (ii) whether the law unduly constrains collective shareholder activism: Australian Securities and Investments Commission, Collective Action by Investors: Update to RG 128 (Consultation Paper 228, February 2015); and (iii) the desirability of law reform to permit shareholders to pass resolutions giving directions or advice to directors regarding their company’s affairs: Australian Council of Superannuation Investors and K Sheehan, Shareholder Resolutions in Australia: Is There a Better Way? (October 2017). 26 Issues considered included: (i) the appropriateness of shareholders’ rights to requisition shareholder meetings: for an overview of this debate, see K Sanyal, ‘Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014’ (Bills Digest No 58, Parliamentary Library, Parliament of Australia, 2014); (ii) whether the law appropriately regulates information disclosure in the course of an activist intervention: R Levy, ‘Aspects of the Law Relating to Contested Elections of Directors’ (2015) 33 Company and Securities Law Journal 404; and (iii) the role of takeover law in constraining aggressive shareholder behaviour: Commonwealth Treasury, Takeovers Issues (2012). 27 J Whyte, ‘Agitators Get to Grip with Boards’ The Australian Financial Review (23 July 2012) 21. 28 D Friedlander, M Fischer and M Ting, ‘Economic Activism: Re-thinking Directors’ Duties and Governance Structures in the Activist Context’ (Paper presented at Supreme Court of New South Wales Annual Corporate Law Conference, Sydney, 23 July 2014) 30. 29 T Binsted, ‘Advisers Warn of Surge in Activism’ The Australian Financial Review (2 June 2014) 28 (quoting lawyer Jeremy Leibler).

Shareholder Activism and Australia  7 imbalance in the law had turned activist interventions into ‘a form of asymmetric warfare’.30 Commentators proposed some notable, and potentially regressive, reform proposals to address these perceived deficiencies. This included a call for the tightening of disclosure laws as they apply to shareholder activists;31 the repeal of the two-strikes rule;32 the introduction of laws to compel activist investors to disgorge profits made from their activism;33 and a call for a reappraisal of how directors’ core duty to act in the best interests of their company applies in the context of a proxy contest.34 However, as the decade continued, it became apparent that fears of a groundswell of aggressive activism were unfounded. Commentators acknowledged that hedge fund activism, in particular, had not become common in Australia35 and that activism seeking to remove company directors was rare.36 It appears instead that Australian shareholder activism is a more nuanced phenomenon. Evidence indicates, for example, that activist shareholders more typically engage in behindthe-scenes interactions with public companies and are particularly focused on engaging with companies in relation to environmental, social and governance (‘ESG’) issues.37 Reflecting this apparent reality of Australian activism, a major investment bank that had previously proclaimed the risks of aggressive hedge fund activism38 sought in 2021 to publicise its expertise in advising companies on the implications of investors’ increasing attention to ESG issues.39 Yet, the conception of activism as an overt and aggressive governance phenomenon continues in some quarters. In the light of some recent high-profile 30 Clayton Utz, Corporate Head Office Advisory Update (2015) 10. See also, Gluyas, ‘Brace for Shareholder Activists’ (2013) (quoting a Goldman Sachs banker who argued that activists benefit from an ‘information asymmetry’, because activists are subject to limited disclosure obligations whereas companies must disclose ‘just about everything’). 31 Friedlander, Fischer and Ting, ‘Economic Activism’ (2014); Levy, ‘Aspects of the Law Relating to Contested Elections of Directors’ (2015). 32 J Colvin, ‘Striking the Wrong Shareholder Chord’, The Australian Financial Review (10  December 2012) 47; Corrs Chambers Westgarth, Executive Remuneration: Results of Spill Meetings Put Effectiveness of Two Strikes in Question (7 March 2013); Friedlander, Fischer and Ting (n 28). 33 Friedlander, Fischer and Ting (n 28). 34 ibid. 35 See, eg, T Featherstone, ‘Index Fund Pressure on Governance to Grow in 2020’ (21 February 2020) www.aicd.companydirectors.com.au/advocacy/governance-leadership-centre/practice-of-governance/ index-fund-pressure-on-governance-to-grow-in-2020 (‘True shareholder activism in Australian [sic] … is limited. Expectations that US hedge funds specialising in shareholder activism would set up in Australia have not been met. Depending on one’s definition of activism, there are few specialist investors in Australia in this field’); Q Digby and T Stutt, ‘Australia’ in FJ Aquila (ed), Shareholder Rights and Activism Review, 4th edn (London, Law Business Research, 2019) 6. 36 M Chandler, ‘2019 Australian Annual General Meeting Season Review’ (2020) 72(1) Governance Directions 9. 37 Discussed in detail in ch 5. 38 Gluyas (n 23). 39 G Korporaal, ‘ESG Drives M&A, Fundraising’ The Australian (9 April 2021) 20 (discussing Goldman Sachs’ views about the significance of ESG considerations in the context of their advisory work for clients).

8  Introduction examples of activism by activist investors, one academic commentator has concluded that these developments mark a ‘turning point’ and herald a new ‘wave of activism’ which will see shareholders ‘ascend as “participatory investors” and exert a substantial level of power in the market’.40 Law makers also continue to focus on shareholder power. The Australian federal parliament conducted an inquiry in 2021 into the ownership of public companies and the implications of increasing institutional investor ownership of such companies.41 The foreword to the inquiry’s report observed that ‘[t]here is concern that a high degree of capital concentration can produce an environment in which these investors – sometimes referred to as ‘mega funds’ – have significant power to influence the market, potentially to the detriment of both ordinary investors and the market as a whole.’42 The dissonance between commentary focused on aggressive and interventionist activism and the apparent, more nuanced reality of Australian activism raises important questions. What form does Australian shareholder activism really take and what is its likely trajectory? What factors are shaping Australian activism? To what extent, if any, do regulatory settings in Australia need to change to respond to this evolving phenomenon? Answering these questions is of considerable importance, given the active debate in Australia regarding the regulation of shareholder activism. Regulation may be ineffective or inefficient if it is based on an incomplete understanding of the activity it seeks to regulate. It is important, therefore, that any consideration of the regulation of shareholder activism is based on a complete and accurate understanding of its nature. This book sets out to ascertain the nature of Australian shareholder activism and answer these questions. 1.3.  THE COMPARATIVE SIGNIFICANCE OF AUSTRALIA

From a comparative perspective, Australia is an ideal case study for exploring shareholder activism. As this book will explain, it has capital market features that are conducive to activism; namely, high levels of share ownership by institutional investors and low levels of share ownership by controlling, non-institutional blockholders.43 Under Australian law, public company shareholders enjoy mandatory governance rights that are generous by international standards.44 Capital market activities are largely concentrated in the major 40 M Jefferies, ‘The Third Wave of Shareholder Influence and the Emergence of Informational Activism in Australia’ (2019) 34 Australian Journal of Corporate Law 305, 306–7. See also Sheehy, Pender and Jacobsen, ‘Corporate Social Responsibility/ESG Shareholder Activism in Australia’ (2021) 163 (‘[F]undamentally, shareholder activism is an effort to exercise shareholder rights.’). 41 House of Representatives Standing Committee on Economics, Parliament of Australia, Report on the Implications of Common Ownership and Capital Concentration in Australia (March 2022). 42 ibid, iii. 43 Ch 3, section 3.3. 44 ibid, section 3.4.

The Comparative Significance of Australia  9 cities of Sydney and Melbourne, meaning that major Australian shareholders potentially face lower coordination costs than shareholders in larger and more geographically dispersed markets such as the United States.45 The nature and trajectory of shareholder activism in such a market has the potential, therefore, to yield important insights for overseas readers interested in the current and future corporate governance implications of shareholder activism. Australia, has not, however, featured significantly in comparative studies of shareholder activism.46 The available analysis mostly focuses on quite specific issues47 or relates to developments in the 1990s or early 2000s.48 Moreover, comparative analyses by overseas scholars have sometimes reached conclusions about Australian activism which are at odds with what might be expected to be the case, given the attributes of the Australian market just described. One study, for example, concludes that Australian shareholder activism is distinguished by ‘flourishing union activism’ and that, ‘[i]n sum, Australia presents a model in which stakeholders, rather than pure shareholders, engage in activism’.49 A recent comparative analysis of institutional investor stewardship codes argues that ‘[o]utside of the UK/US, however, the potential for institutional investors to play the role of a shareholder steward is significantly diminished’50 – inviting the inference that investor stewardship is unlikely to occur in a country such as Australia. This book supplements these existing comparative analyses by providing an overall account of Australian shareholder activism: the principal types of activists in the Australian market, their tactics, their interactions with one another, and the institutions that support them. The picture that emerges from this 45 Tuch suggests that the geographical dispersion of major investors in the United States is one factor that has inhibited US institutional investors from collectivising their influence in the governance of American public companies: AF Tuch, ‘Proxy Adviser Influence’ (2019) 99 Boston University Law Review 1459, 1488–89. 46 It has also been noted that Australia does not feature significantly in more general comparative corporate governance literature: see, eg, B Cheffins, ‘Corporate Governance Convergence Lessons from Australia’ (2002) 16 Transnational Lawyer 13, 19; R Mitchell et al, ‘Shareholder Protection in Australia: Institutional Configurations and Regulatory Evolution’ (2014) 38 Melbourne University Law Review 68, 93; J Varzaly, ‘The Dynamics of Shareholder Dispersion and Control in Australia’ (University of Cambridge Legal Studies Research Paper No 5/2021, January 2021). 47 See, eg, N Locke, ‘Australian Investor Stewardship and Global Themes in Stewardship Regulation’ (2020) 38 Companies and Securities Law Journal 28; T Bowley and JG Hill, ‘Stewardship and Collective Action: The Australian Experience’ in D Katelouzou and DW Puchniak (eds), Global Shareholder Stewardship (Cambridge, Cambridge University Press, 2022) 417. 48 See, eg, JG Hill, ‘Subverting Shareholder Rights: Lessons from News Corp.’s Migration to Delaware’ (2010) 63 Vanderbilt Law Review 1; GP Stapledon, Institutional Shareholders and Corporate Governance (Oxford, Clarendon Press, 1996); J Hill, ‘Institutional Investors and Corporate Governance in Australia’ in Klaus J Hopt, Richard M Buxbaum and Theodor Baums (eds), Institutional Investors and Corporate Governance (Berlin, de Gruyter, 1994) 583. 49 Y Nili, ‘Missing the Forest for the Trees: A New Approach to Shareholder Activism’ (2014) 4 Harvard Business Law Review 157, 186, 188. 50 DW Puchniak, ‘The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense Out of the Global Transplant of a Legal Misfit’ (2022) American Journal of Comparative Law (forthcoming).

10  Introduction inquiry is an intricate one. Australian activism is revealed as a diverse, nuanced and contingent corporate governance phenomenon. This, in turn, raises a fascinating question from a comparative perspective: why is activism such a nuanced phenomenon in a market which, on paper, has such activism-friendly capital market features and regulatory settings? This book will argue that the nuanced nature of Australian activism results from the interplay of a range of additional factors, such as social, political, institutional and transnational influences. By highlighting and exploring these characteristics and influences, this book reveals the complexity and highly contextual nature of shareholder activism. In doing so, it provides a counterpoint to much of the existing academic and regulatory commentary on shareholder activism which explores shareholder activism through broad conceptual models which are often heavily influenced by US market experience – such as ‘agency capitalism’, the incentive structures of index investors, and ‘systematic stewardship’. Although this book does not dispute the significance and utility of these conceptual models, it highlights that details, particularly local details, matter also. 1.4.  STRUCTURE OF THE BOOK

Chapter two starts this book’s analysis by surveying the ongoing international debate about the merits of shareholder activism and how it is best regulated. This discussion outlines key themes and areas of contestation, setting the scene for the book’s subsequent discussion of the Australian experience and its comparative significance. Chapter three provides important context by describing key features of the Australian equity capital market and regulatory environment. Chapters four and five then present empirical evidence regarding the nature and incidence of activism in Australia. Chapter six identifies key insights from the Australian experience of activism and explores their comparative significance; chapter six also develops the argument, introduced above, about the importance of approaching regulatory issues regarding shareholder activism with a careful appreciation of its potentially intricate nature. Chapters seven and eight ­demonstrate the significance of such an analytical approach by using it to explore two regulatory issues that are topical both in Australia and overseas: namely (i) the regulation of directive and precatory shareholder resolutions, particularly in relation to ESG issues; and (ii) the application of takeover laws regulating concerted shareholder behaviour to collective forms of shareholder activism. These chapters show how a more granular analysis yields important insights and conclusions regarding these two topical issues. Chapter nine concludes.

2 The Shareholder Activism Debate

I

nternationally, there is an extensive body of literature exploring shareholder activism and its regulation. By way of illustration, a search of the term ‘shareholder activism’ on a leading corporate governance blog produces 1351 results, taking up 100 web pages.1 The debate forms part of a broader, and more longstanding, debate about the role of shareholders in public company governance.2 In order to set the scene for this book’s analysis of Australian activism and its comparative significance, this chapter provides an overview of these debates and identifies and discusses the key issues and themes raised in relation to shareholder activism. 2.1.  THE BROADER DEBATE ABOUT SHAREHOLDER PARTICIPATION IN CORPORATE GOVERNANCE

By giving shareholders the right to vote on matters relating to a company’s affairs, the basic structure of corporate law recognises an important role for shareholders in corporate governance. However, an individual public company shareholder who wishes to become involved in the company’s governance must grapple with a difficult cost/benefit analysis. That is, the shareholder will need to bear the entire cost of the governance efforts but, as just one of many shareholders in the company, will receive only a proportionate share of any resulting improvement in the company’s value. This share may be insufficient to cover the shareholder’s costs.3 In these circumstances, the shareholder may find it is more rational not to participate in its company’s governance, or to sell its shares and invest elsewhere if dissatisfied with some aspect of the company’s affairs. For a significant part of the twentieth century, there were doubts about whether public company shareholders could ever find it feasible and rational to participate meaningfully in a public company’s governance. In the 1930s, 1 Harvard Law School Forum on Corporate Governance, www.corpgov.law.harvard.edu (search performed in May 2022). 2 The debate is, in fact, centuries old: see S Watson, The Making of the Modern Company (Oxford, Hart Publishing, 2022), describing the debate in relation to early chartered corporations and joint stock companies. In the interests of brevity, this chapter focuses on more recent times. 3 For a detailed discussion of the cost calculus, see EB Rock, ‘The Logic and (Uncertain) Significance of Institutional Shareholder Activism’ (1991) 79 Georgetown Law Journal 445.

12  The Shareholder Activism Debate Berle and Means famously highlighted the highly dispersed nature of share ownership in many public companies; that is, their shares were held by large numbers of relatively small shareholders.4 An individual shareholder in such a company had negligible leverage and therefore poor prospects of convincing the company to make a change desired by the shareholder. Moreover, the individual shareholder’s costs of participating in the company’s governance were likely to far outweigh its small proportionate share in any resulting improvement in its company’s value. Although small shareholders might have made participation in their company’s governance feasible by acting collectively – thereby sharing costs and leveraging their influence – they faced substantial collective action problems and were at the mercy of corporate managers who exercised control over the process of shareholder voting.5 On this account, therefore, the prospect of meaningful shareholder involvement in corporate governance appeared low.6 In the 1970s and 1980s, economists and law and economics scholars pointed out that this state of affairs was not necessarily problematic. They argued that the public company is an ingenious economic mechanism which provides an efficient means of combining capital and other inputs to operate businesses under the guidance of specialised managers.7 According to this conception of the company, shareholders are suppliers of risk capital.8 As suppliers of capital, shareholders stand to realise significant benefits from investing in public companies. This is because limited liability and the separation of ownership from control in public companies enables shareholders to benefit from the skills of specialised managers without being exposed to the risk of unlimited liability for their companies’ actions or having to become closely involved in costly monitoring of managers.9 This frees up shareholders to diversify their investments across multiple companies, thereby diversifying investment risk.10 The economic perspective acknowledged, however, that public companies can also generate material costs for shareholders – referred to as ‘agency costs’ in economic parlance. In particular, a company’s managers may shirk their responsibilities, perform them poorly, or engage in self-serving behaviour, 4 AA Berle and GC Means, The Modern Corporation and Private Property (New York, Harcourt, 1968). As has been pointed out, however, dispersed share ownership and the resulting separation of ownership from control in public companies is not common outside of the United Kingdom and the United States: DW Puchniak, ‘The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense Out of the Global Transplant of a Legal Misfit’ (2022) American Journal of Comparative Law (forthcoming). 5 Berle and Means, The Modern Corporation and Private Property (1968); FH Easterbrook and DR Fischel, ‘Voting in Corporate Law’ (1983) 26 Journal of Law and Economics 395, 395. 6 JG Hill, ‘Visions and Revisions of the Shareholder’ (2000) 48 American Journal of Comparative Law 39, 44. 7 EF Fama and MC Jensen, ‘Separation of Ownership and Control’ (1983) 26 Journal of Law and Economics 301. 8 ibid. 9 AA Alchian and H Demsetz, ‘Production, Information Costs, and Economic Organization’ (1972) 62 American Economic Review 777, 787–88. 10 Easterbrook and Fischel, ‘Voting in Corporate Law’ (1983) 401.

Shareholder Participation in Corporate Governance  13 thereby eroding corporate value. This poses a particular risk to shareholders, since their returns are not fixed in nature and are dependent on a company’s performance.11 However, commentators pointed out that it does not necessarily follow that shareholders need (or ought) to play an active role in corporate governance to mitigate such costs. This is because other factors and mechanisms can exercise a disciplining effect on corporate managers and constrain agency costs; for example, monitoring by independent directors, the use of incentive remuneration to align managers’ interests with shareholders’ interests, and market forces – particularly the market for corporate control.12 Developments in the 1980s and 1990s produced a shift in focus. During this period, it became apparent that institutional investors were becoming significant public company investors in certain markets. Moreover, it became apparent in the United States that the market for corporate control was unlikely to play a significant role in limiting public company agency costs because of efforts by US companies and law makers to constrain unsolicited takeovers.13 Against this background, commentators in the United States and elsewhere began to focus on the increasing significance of institutional investors and explore the potential for such investors to act as diligent monitors of public company managers.14 Many scholars and law makers took the view that investor participation in corporate governance was desirable and explored how law reform could facilitate such participation.15 Such commentary and analysis mostly proceeded from an economic standpoint; that is, it took the view that shareholder participation in corporate governance is desirable because of its potential to promote corporate efficiency and performance. A smaller number of commentators relied on noneconomic considerations to justify a greater role for shareholders in corporate governance. They argued, for example, that greater shareholder participation is desirable because it accords with democratic ideals,16 or because giving shareholders a meaningful ‘voice’ allows for the expression of diverse viewpoints in

11 ibid 403. 12 See, eg, HN Butler, ‘The Contractual Theory of the Corporation’ (1989) 11 George Mason University Law Review 99, 110–20; BS Black and JC Coffee, ‘Hail Britannia: Institutional Investor Behaviour under Limited Regulation’ (1994) 92 Michigan Law Review 1997, 2007; Y Nili, ‘Missing the Forest for the Trees: A New Approach to Shareholder Activism’ (2014) 4 Harvard Business Law Review 157, 163–64. 13 BS Black, ‘Shareholder Passivity Reexamined’ (1990) 89 Michigan Law Review 520 (noting the impact of the ‘poison pill’ and ‘constituency statutes’ and describing takeovers as a costly and disproportionate way of addressing poorly performing company managers). 14 See, eg, Black, ‘Shareholder Passivity Reexamined’ (1990); Black and Coffee, ‘Hail Britannia?’ (1994) and, in the Australian and UK context, GP Stapledon, Institutional Shareholders and Corporate Governance (Oxford, Clarendon Press, 1996). 15 Black (n 13); and, in the Australian context, GP Stapledon, ‘Disincentives to Activism by Institutional Investors in Listed Australian Companies’ (1996) 18 Sydney Law Review 152 and Companies and Securities Advisory Committee, Shareholder Participation in the Modern Listed Public Company (Final Report, 2000). 16 See, eg, J Pound, ‘The Rise of the Political Model of Corporate Governance and Corporate Control’ (1993) 68 New York University Law Review 1003.

14  The Shareholder Activism Debate a company’s governance, thereby legitimising the power and influence of public companies.17 Although the merits of meaningful shareholder participation in corporate governance were broadly accepted in a number of jurisdictions, including Australia, the issue remains contentious in the United States.18 The ‘shareholder empowerment’ debate, as it has become known in the United States, is highly polarised.19 On one side of the debate stand commentators who argue forcefully in favour of shareholder-friendly reforms such as proxy access and majority voting in director elections as a means of promoting corporate efficiency and management accountability.20 On the other side of the debate stand commentators who contend that it is inherently more efficient to centralise corporate power in a company’s professional managers and shield them from shareholder interference.21 Critics of shareholder empowerment also worry that greater shareholder participation in corporate governance provides undue scope for myopic and opportunistic shareholders to promote their shortterm financial interests at the expense of companies’ longer-term financial performance.22 2.2.  THE SHAREHOLDER ACTIVISM DEBATE

As chapter one argued, activist shareholders are shareholders who are more than merely active participants in a company’s governance. The activist shareholder is, instead, a shareholder who critically evaluates a company’s affairs and seeks to promote some change in those affairs.23 Commentators engaged in the broader debate about shareholder participation in corporate governance began to focus their attention on such shareholders in the 1990s, and interest in such shareholders continues to this day. Shareholder activism has been explored and debated in detail over these four decades. Initially, commentators and researchers considered a variety of activist shareholders, ranging from US pension funds24 to UK institutional investors25 17 See, eg, M Rawling, ‘Australian Trade Unions as Shareholder Activists: The Rocky Path Towards Corporate Democracy’ (2006) 28 Sydney Law Review 227. 18 JG Hill, ‘The Trajectory of American Corporate Governance: Shareholder Empowerment and Private Ordering Combat’ (2019) 2019 University of Illinois Law Review 507. 19 For a brief summary of the debate, see MJ Mallow and J Sethi, ‘Engagement: The Missing Middle Approach in the Bebchuk-Strine Debate’ (2016) 12 NYU Journal of Law and Business 385, 386–92. 20 Discussed in Hill, ‘The Trajectory of American Corporate Governance’ (2019) 518–21. 21 ibid. 22 Discussed in Mallow and Sethi, ‘Engagement: The Missing Middle Approach’ (2016) 386–92. 23 Ch 1, section 1.1. 24 For an overview, see SL Gillan and LT Starks, ‘The Evolution of Shareholder Activism in the United States’ (2007) 19 Journal of Applied Corporate Finance 55. 25 See, eg, Black and Coffee (n 12); GP Stapledon, ‘The Structure of Share Ownership and Control: The Potential for Institutional Investor Activism’ (1995) 18 UNSW Law Journal 250; M Becht et al,

The Shareholder Activism Debate  15 and Australian trade union-aligned investors.26 During the last 15 years, however, activist hedge funds and institutional investors have been the subject of considerable attention. Activist hedge funds rose to prominence in the 2000s and 2010s as they targeted many well-known public companies, elevating the profile of shareholder activism as a stand-alone corporate governance topic.27 An extensive body of literature and policy debate emerged regarding this form of activism, particularly in the United States.28 Commentators, law makers and regulators have also focused intently on institutional investors. This reflects the fact that public company share ownership by such investors continues to increase globally, making them the largest public company share owners in a number of markets.29 This four-decade-long debate has produced a significant body of literature and commentary on shareholder activism. It has often been contentious. However, despite its breadth, depth and intensity, it is in fact possible to identify a handful of core themes and areas of concern which lie at the heart of much of this literature and commentary. They are (i) the issue of what factors shape the nature and extent of shareholder activism; (ii) the issue of whether activism is beneficial for companies; and (iii) the issue of whether there are superior alternatives for promoting corporate performance and accountability. These issues, which tend to echo issues raised in the broader debate about shareholder participation in corporate governance, are outlined below. 2.2.1.  Factors that Shape the Nature and Extent of Shareholder Activism Studies of shareholder activism tend to identify two key factors that materially influence the likelihood of shareholders adopting an activist stance and the nature of their activism: regulatory settings30 and equity capital market characteristics. Regulatory settings can have a positive or negative effect on activism. Laws that limit shareholders’ governance role or make shareholders’ governance activities difficult or costly, can restrict shareholder participation in corporate

‘Returns to Shareholder Activism: Evidence from A Clinical Study of the Hermes UK Focus Fund’ (2009) 22 Review of Financial Studies 3093. 26 See, eg, Rawling, ‘Australian Trade Unions as Shareholder Activists’ (2006); K Anderson and I Ramsay, ‘From the Picket Line to the Board Room: Union Shareholder Activism in Australia’ (2006) 24 Company and Securities Law Journal 279. 27 For an overview, see F Partnoy, ‘US Hedge Fund Activism’ in JG Hill and RS Thomas (eds), Research Handbook on Shareholder Power (Cheltenham, Edward Elgar, 2015). 28 ibid. 29 OECD, Owners of the World’s Listed Companies (OECD Capital Market Series, Paris, 2019) 5–6. 30 As this book will show, a variety of legal rules affect shareholder activism, ranging from legislation, case law, stock exchange listing rules, and guidance and decisions of regulators. For ease of exposition, this book refers to them collectively as ‘regulation’ or ‘regulatory settings’.

16  The Shareholder Activism Debate governance.31 Conversely, laws that give shareholders generous governance rights that are straightforward to exercise may encourage shareholder activism.32 Generous governance rights can also enhance the practical leverage that activist shareholders exert in the course of informal interactions with corporate managers.33 Commentators also highlight the critical role played by disclosure laws, which ensure shareholders have sufficient information to monitor the performance of company managers and make informed decisions about how to exercise their governance rights.34 As a consequence of the potential significance of regulatory settings, the issue of law reform is a key area of focus for both proponents and opponents of shareholder activism. In the United States, for example, there has been a fierce debate about regulatory reform and its potential to promote (or constrain) activist shareholder behaviour.35 In Australia, law and policy makers devoted considerable attention in the 1990s and early 2000s to the potential of law reform to facilitate shareholder participation in corporate governance.36 The academic literature also highlights the significant role played by equity capital market characteristics in shaping the nature and extent of activism.37 The size and dispersion pattern of public company shareholdings in a market can be particularly influential. Highly dispersed ownership is not conducive to activism, as highlighted by the insights of Berle and Means. A degree of ownership concentration is, in general, necessary.38 This is because shareholders with larger shareholdings stand to realise a greater proportionate share of any corporate benefits resulting from their activism, which may well exceed the costs of their activism and thereby make activism financially viable.39 Larger shareholders may also find that the size of their shareholdings makes selling

31 See, eg, Black (n 13); Stapledon (n 15). 32 ibid. 33 See, eg, Black (n 13) 522 (‘Much actual oversight [by shareholders] undoubtedly will be informal, but meaningful informal oversight will take place only if the formal power is available should it be needed’). 34 R Kraakman et al, The Anatomy of Corporate Law: A Comparative and Functional Approach, 3rd edn (Oxford, Oxford University Press, 2017) 30, 38. 35 Hill (n 18). 36 See, eg, House of Representatives Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, Corporate Practices and the Rights of Shareholders (1991); Companies and Securities Advisory Committee, Shareholder Participation in the Modern Listed Public Company (2000); Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Better Shareholders – Better Company: Shareholder Engagement and Participation in Australia (2008); Corporations and Markets Advisory Committee, The AGM and Shareholder Engagement, (Discussion Paper, 2012). 37 More generally, it has been argued that ‘capital markets drive the efficient structure of corporate governance’: RJ Gilson and JN Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 863, 869–74. 38 IM Ramsay and M Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153, 157. 39 Black (n 13).

The Shareholder Activism Debate  17 their shares difficult.40 Some large shareholders, such as index tracking fund managers, may be unable to exit companies which are included in the index they are tracking. Where exit is impractical or not possible, it may make sense for a shareholder to address their concerns about a company by participating in the company’s governance.41 Furthermore, in a market where company ownership is concentrated in the hands of relatively small groups of large shareholders, those shareholders should encounter, all other things being equal, less coordination difficulties than in a market with highly dispersed share ownership.42 This should make it more straightforward for such shareholders to leverage their governance influence through collective action.43 However, at a point, the size of shareholders in a market can work against shareholder activism. For example, if a shareholder holds sufficient shares to exercise a measure of control over a company, it will not need to engage in activism to influence its company’s affairs; it can simply bring about change in the company’s affairs by exercising control over the company. Owing to the major shareholder’s capacity to dictate control of the company, the company’s minority shareholders are likely to conclude that it is futile for them to resort to activism.44 For these reasons, an absence of controlling shareholders has been described as a necessary precondition for shareholder activism.45 In this sense, a degree of ownership dispersion is conducive to activism. Another important aspect of capital market structure is the nature of shareholders in a market. Shareholders can differ significantly in terms of their business models, investment objectives and investment timeframes, which can affect their willingness to engage in corporate governance and their objectives in doing so.46 Large, non-institutional shareholders, such as entrepreneurs or trading companies, may be willing activists owing to their significant and generally less diversified equity investments,47 which are often motivated by strategic 40 ibid. 41 V Desloires, ‘Passive Funds Are No Longer the Silent Giants’ The Australian Financial Review (2 November 2016) 17 (quoting a BlackRock representative who notes that, because BlackRock must remain invested in companies in an index, they cannot sell and must therefore engage with companies regarding environmental, social and governance (ESG) concerns). 42 Kraakman et al, The Anatomy of Corporate Law (2017) 46. 43 M Sawyer and M Trevino, ‘Review and Analysis of 2017 US Shareholder Activism’ (2018) 22 NY Business Law Journal 41, 42. 44 Puchniak (n 4). However, in such a situation activism may be feasible for a minority shareholder if the shareholder can leverage mandatory legal rights intended to protect the interests of minority shareholders: K Kastiel, ‘Against All Odds: Hedge Fund Activism in Controlled Companies’ (2016) 2016 Columbia Business Law Review 60. 45 BR Cheffins and J Armour, ‘The Past, Present, and Future of Shareholder Activism by Hedge Funds’ (2011) 37 Journal of Corporation Law 51, 69. 46 I Anabtawi, ‘Some Skepticism About Increasing Shareholder Power’ (2006) 53 UCLA Law Review 561. 47 GP Stapledon, Share Ownership and Control in Listed Australian Companies (Research Paper, August 1999) www.ssrn.com/abstract=164129, 23 (noting how the combination of: (i) a noninstitutional blockholder not aligned with incumbent management; and (ii) institutional investors can result in meaningful and successful activism).

18  The Shareholder Activism Debate or idiosyncratic personal objectives.48 On the other hand, retail shareholders have particularly constrained incentives to engage in corporate governance owing to their typically small shareholdings and limited financial resources and expertise.49 Institutional investors also have limited incentives to engage in corporate governance. This results from factors such as the large numbers of companies in their diversified portfolios, their need to achieve significant economies in their governance activities owing to competitive pressures in relation to fund performance, a desire to avoid confrontation with companies that may award them fund management work, and concerns that other investors will freeride on their efforts and thereby obtain a competitive advantage.50 The incentives of passive fund managers are particularly constrained. Their focus on tracking a particular index at a low cost means they tend to be less sensitive to the performance of individual companies and must achieve significant economies in their operations.51 Some markets have significant levels of public company share ownership by institutional investors.52 Professors Gilson and Gordon describe the concentration of public company share ownership in intermediary financial institutions as ‘agency capitalism’.53 They argue that institutional investors’ constrained incentives make them ‘rationally reticent’ when it comes to the governance of their investee companies. As a consequence, a market with significant levels of institutional investor ownership may experience more limited participation by shareholders in corporate governance – what Professors Gilson and Gordon call a ‘monitoring shortfall’.54 Activist hedge funds, on the other hand, have significant incentives to engage in the governance of their investee companies. In particular, they tend not to be highly diversified and can receive substantial performance fees for achieving superior investment returns in their portfolios, making it easier for them to justify the cost and effort of attempting to improve the performance of their investee companies.55 Professors Gilson and Gordon have argued that, in a market 48 For example, trading companies may seek a strategic toehold or commercial influence and wealthy individuals may pursue idiosyncratic personal objectives: see A Dignam and M Galanis, ‘Australia Inside-Out: The Corporate Governance System of the Australian Listed Market’ (2004) 28 Melbourne University Law Review 623, 629–30. 49 K Kastiel and Y Nili, ‘In Search of the Absent Shareholders: A New Solution to Retail Investors’ Apathy’ (2016) 41 Delaware Journal of Corporate Law 55. 50 See, eg, Rock, ‘The Logic and (Uncertain) Significance of Institutional Shareholder Activism’ (1991); LA Bebchuk, A Cohen and S Hirst, ‘The Agency Problems of Institutional Investors’ (2017) 31 Journal of Economic Perspectives 89. In the Australian context, see Stapledon (n 15). 51 LA Bebchuk and S Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy’ (2019) 119 Columbia Law Review 2029. 52 See above, n 29. 53 Gilson and Gordon, ‘The Agency Costs of Agency Capitalism’ (2013). 54 ibid 867. 55 M Kahan and EB Rock, ‘Hedge Funds in Corporate Governance and Corporate Control’ (2007) 155 University of Pennsylvania Law Review 1021.

The Shareholder Activism Debate  19 where activist hedge funds are active, their activism may even compensate for the governance ‘reticence’ of institutional investors.56 Gilson and Gordon’s insight highlights how the mix of investors in a market can be an important factor shaping the nature and extent of activism in the market.57 Regulatory setting and capital market characteristics are not the only factors that can affect the nature and extent of activism in a market.58 Political pressure (channelled, for example, through the threat of new regulation) may provide shareholders with an incentive to engage in governance activities to forestall the possibility of potentially burdensome regulatory change.59 The prevailing business culture in a market may also play a role. In some markets, investors and corporate managers may seek to avoid confrontation as a result of cultural norms or because of a fear of adverse reputational consequences.60 Certain institutional features of a market may be significant too; for example, the existence of well-resourced representative organisations which collectivise shareholder influence and assist investors to leverage their governance rights may facilitate activism.61 Commentators also note the potential significance of economic factors;62 for example, financing costs may affect the viability of the activist strategies employed by hedge funds.63 Finally, there is evidence that transnational factors may influence activist practices at the national level. This is evident in relation to the global spread of ESG-related activism, which appears to be driven in part by the promotion of ESG activism by international institutions and their agencies, coordination work undertaken by international and

56 Gilson and Gordon (n 37). This is because the hedge funds identify companies that may require a governance intervention, formulate proposals for addressing the perceived problems in those companies’ affairs, and communicate the proposals to the companies and their other shareholders. 57 There is also evidence that, in some markets, foreign institutional investors and local institutional investors achieve synergies by working together in relation to governance activities. These synergies result from shared knowledge, experience and local awareness: T Bowley and JG Hill, ‘The Global ESG Stewardship Ecosystem’ (Unpublished paper, 2022). 58 A Hamdani and S Hannes, ‘Institutional Investors, Activist Funds and Ownership Structure’ in A Afsharipour and M Gelter (eds), Comparative Corporate Governance (Cheltenham, Edward Elgar, 2021) 368, 369 (noting that the role played by institutional investors in public company governance depends on a range of economic, cultural and regulatory factors). 59 See, eg, P Davies, ‘The UK Stewardship Code 2010–2020: From Saving the Company to Saving the Planet?’ in D Katelouzou and DW Puchniak (eds), Global Shareholder Stewardship (Cambridge, Cambridge University Press, 2022) (arguing that the UK government’s indication that it is prepared to take decisive steps to reduce carbon emissions may provide institutional investors with a material incentive to engage voluntarily in ESG-related activism to forestall the possibility of the government attempting to enlist investor support for this objective through burdensome regulatory change). 60 See, eg, M Becht et al, ‘Outsourcing Active Ownership in Japan’ (ECGI Working Paper No 766/2021, June 2021) (noting cultural factors in Japan which constrain public forms of activism). 61 See, eg, G Balp and G Strampelli, ‘Institutional Investor Collective Engagements: Non-activist Cooperation vs Activist Wolf Packs’ (2020) 14 Ohio State Business Law Journal 135 (describing, among other things, the role of the Italian investor association, Assogestioni, in facilitating institutional investor activism). 62 Nili, ‘Missing the Forest for the Trees’ (2014) 172–74. 63 Cheffins and Armour, ‘The Past, Present, and Future of Shareholder Activism’ (2011).

20  The Shareholder Activism Debate regional investor associations, and the cross-border activities of the commercial organisations (such as engagement firms) which assist institutional investors with their corporate governance activities.64 A potentially diverse range of factors can therefore affect the nature and extent of activism in a market. Even so, there is a tendency in contemporary commentary to focus heavily on regulatory settings and capital market characteristics. Nili, for example, argues that the economic incentives of particular shareholders to engage in activism and the ‘rules of the game’ (ie, regulatory settings) are the two factors that ‘determine the likelihood that shareholder activism will play a substantive role in the corporate governance of a widely held corporation.’65 Ringe has claimed that ‘the evolution of shareholder structures, regulatory regimes, and stock markets in the UK, US, and continental Europe has played a crucial role in influencing activist engagements’.66 Recent scholarship on institutional investor stewardship codes has placed particular emphasis on capital market characteristics. Stewardship codes are typically non-binding (ie, ‘soft law’) codes of conduct issued by regulatory bodies, quasi-regulatory bodies or industry organisations which exhort institutional investors to play a more proactive role in corporate governance.67 In view of the non-mandatory nature of such codes, investors are under no legal obligation to engage in stewardship. In these circumstances, the capital market characteristics of countries which adopt stewardship codes will, according to commentators, significantly affect whether investor stewardship occurs in practice.68 In the United States, for example, commentators have expressed considerable scepticism about the potential of investor stewardship codes, owing to the significant presence of fund managers with highly constrained incentives to engage in corporate governance.69 Puchniak has argued that investor stewardship is unlikely to occur in Asian markets because companies in those markets tend to be dominated by controlling shareholders which do not need to engage in stewardship and will generally be in a position to thwart any minority shareholder activism.70

64 T Bowley and JG Hill, ‘Stewardship Codes, ESG Activism and Transnational Ordering’ in T Kuntz (ed), Research Handbook on Environmental, Social and Corporate Governance (Cheltenham, Edward Elgar, forthcoming). 65 Nili (n 12) 165. 66 WG Ringe, ‘Shareholder Activism: A Renaissance’ in JN Gordon and WG Ringe (eds), The Oxford Handbook of Corporate Law and Governance (Oxford, Oxford University Press, 2018) 387, 389. 67 See generally, D Katelouzou and DW Puchniak (eds), Global Shareholder Stewardship (Cambridge, Cambridge University Press, 2022). 68 Puchniak (n 4) [7] (claiming that the capital market structure of ‘almost all’ jurisdictions that have or will adopt institutional investor stewardship codes is a ‘watershed fact’ which will ‘define’ the present and future of investor stewardship). 69 Gilson and Gordon (n 37); Bebchuk, Cohen and Hirst, ‘The Agency Problems of Institutional Investors’ (2017). 70 Puchniak (n 4).

The Shareholder Activism Debate  21 A considerable amount of scholarship focuses specifically on the United States’ equity market characteristics and regulatory issues.71 Important insights about ‘agency capitalism’,72 the ‘rational reticence’ of institutional investors73 and the governance activities of index investors74 have their origins in the US literature. As a consequence, the United States often provides a frame of reference for non-US scholarship and policy initiatives. Australian commentators, for example, paid close attention to the US debate on hedge fund activism and were prompted by developments in US hedge fund activism to propose significant reforms to Australian law.75 Capital market characteristics and regulatory settings are undoubtedly significant factors. However, an excessive focus on these factors runs the risk of obscuring the potential significance of the other relevant factors, such as institutional features, political influences and cultural factors. This risk is exacerbated by the prevalence of US perspectives in much of the literature. The United States is a significant market that has yielded important insights about activism; however, it should not be presumed that the implications of capital market and regulatory developments in the United States will necessarily be the same for other markets. 2.2.2.  Whether Shareholder Activism is Beneficial for Companies This is a fiercely debated issue. On one side of the debate, various commentators argue that shareholder participation in corporate governance creates significant problems. Some commentators argue that it may undermine the efficiency gains of centralising corporate management in a group of specialised managers.76 Others claim that activist shareholders may pursue their own narrow interests rather than the best interests of the company and its other shareholders.77 In the aftermath of the Global Financial Crisis, for example, it was claimed that institutional investors had contributed to the crisis by encouraging financial institutions to engage in risky activities that generated attractive short-term investment returns for shareholders.78 Commentators have also argued that

71 This has led some commentators to raise concerns about a US bias in the literature: Nili (n 12). 72 Gilson and Gordon (n 37). 73 ibid. 74 See above, n 51. 75 Ch 1, section 1.2. 76 See, eg, SM Bainbridge, ‘The Case for Limited Shareholder Voting Rights’ (2006) 53 UCLA Law Review 601. 77 See, eg, I Anabtawi, ‘Some Skepticism About Increasing Shareholder Power’ (2006); and, in the Australian context, D Friedlander, M Fischer and M Ting, ‘Economic Activism: Re-thinking Directors’ Duties and Governance Structures in the Activist Context’ (Paper presented at Supreme Court of New South Wales Annual Corporate Law Conference, Sydney, 23 July 2014). 78 See, eg, JC Coffee, ‘Systemic Risk After Dodd-Frank: Contingent Capital and the Need for Regulatory Strategies Beyond Oversight’ (2011) 111 Columbia Law Review 795.

22  The Shareholder Activism Debate activist hedge funds have a myopic focus on short-term financial performance that causes them to advocate for proposals that are detrimental to companies’ longer-term financial performance.79 A further concern is that shareholders may not have adequate information or expertise to participate constructively in a company’s governance.80 Further, institutional investors’ constrained incentives, noted earlier, may make them inattentive to the affairs of their investee companies or result in them engaging in superficial oversight of their investee companies.81 Index funds are viewed as particularly problematic in this regard as a result of their limited incentives to expend resources on undertaking corporate governance activities.82 The growing significance of institutional investors as public company shareholders has given rise to a further concern in recent years: the ‘common ownership’ concern.83 In short, the concern is that large institutional investors may encourage anti-competitive behaviour by public companies. Common ownership advocates highlight the fact that, as a result of their diversified investment strategies, institutional investors often hold sizeable shareholdings in multiple companies within the same industry or sector. Because such investors therefore effectively ‘own the industry’, it is argued that these investors will prefer their investee companies to engage in behaviour that maximises the value of all companies in the relevant industry or sector, rather than engage in competitive behaviour that only benefits the more successful of those companies.84 According to some commentators, the rise of investors focused on portfolio-level value maximisation rather than company-level value maximisation represents a significant paradigm shift. They argue that it requires a fundamental reassessment of corporate regulation which has generally presumed that shareholders seek to maximise the value of their individual shareholdings.85 Commentators on the other side of the debate see considerable promise in shareholder activism. A common view is that shareholder activists are an

79 See, eg, JC Coffee and D Palia, ‘The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance’ (2016) 41 Journal of Corporation Law 545. 80 ibid 606 (‘Asymmetric information is the basic and unavoidable reality of corporate governance: managers know more than shareholders’). 81 Gilson and Gordon (n 37) 891. See also Bebchuk, Cohen and Hirst (n 50). In Australia, concerns have been raised that, owing to competitive pressures in the fund management industry, some institutional investors may not be sufficiently diligent in voting their shares and, in particular, may be unduly reliant on the advice of proxy advisers: Productivity Commission, Executive Remuneration in Australia (Report No 49, 2009) 302–07, 313–15. 82 See above, n 51. 83 See generally, JG Hill, ‘The Conundrum of Common Ownership’ (2020) 53 Vanderbilt Journal of Transnational Law 881. 84 See, eg, E Elhauge, ‘Horizontal Shareholding’ (2016) 129 Harvard Law Review 1267. 85 L Enriques and A Romano, ‘Rewiring Corporate Law for an Interconnected World’ (2022) 64 Arizona Law Review (forthcoming) (arguing that corporate law should adopt a ‘two-pronged’ approach to shareholder involvement in public companies, differentiating between companies in which the influence of portfolio value-maximising shareholders is likely to be beneficial and companies where it is unlikely to be beneficial).

The Shareholder Activism Debate  23 important mechanism for promoting corporate performance and accountability. Thus, supporters of hedge fund activism argue that these highly incentivised activists prompt under-performing corporate managers to make value-enhancing changes to their companies’ affairs and present empirical evidence refuting critics’ arguments about the detrimental effects of hedge fund activism.86 As already noted, Professors Gilson and Gordon have argued that activist hedge funds may mitigate the effects of institutional investors’ constrained incentives to engage in corporate governance.87 Notwithstanding institutional investors’ constrained incentives, a significant body of commentary and policy takes the view that such investors are still capable of playing a constructive role in corporate governance. Some commentators argue that competitive dynamics in the fund management industry are capable of incentivising institutional investors to engage in activism in order to achieve superior investment performance in their portfolios.88 Others argue that it makes sense for institutional investors to use activism to encourage their investee companies to address significant ESG issues – such as climate change or workforce diversity – because such issues can affect companies’ reputations and financial prospects.89 Institutional investor stewardship codes, which exhort investors to participate in their investee companies’ governance, also rest on an expectation that institutional investors are capable of using their governance rights to drive changes in firm performance and promote managerial accountability.90 For some, the benefits of shareholder participation in corporate governance extend beyond improvements in the financial performance and accountability of individual companies. Commentators who approach corporate governance through a non-economic frame of reference have argued for some time that shareholder participation in governance is capable of promoting broader noneconomic goals, such as the legitimisation of corporate power and promoting democratic decision-making.91 In recent years, mainstream commentary and

86 See, eg, LA Bebchuk, A Brav and W Jiang, ‘The Long-term Effects of Hedge Fund Activism’ (2015) 115 Columbia Law Review 1085. 87 Gilson and Gordon (n 37). Other commentators identify another way in which hedge funds improve corporate accountability. They argue that, by identifying under-performing companies and formulating proposals for them, hedge funds assist independent directors in their role of monitoring company managers: JD Cox and RS Thomas, ‘A Revised Monitoring Model Confronts Today’s Movement Towards Managerialism’ (2021) 99 Texas Law Review 1275. 88 J Fisch, A Hamdani and SD Solomon, ‘The New Titans of Wall Street: A Theoretical Framework for Passive Investors’ (2019) 168 University of Pennsylvania Law Review 17. 89 See, eg, S Gadinis and A Miazad, ‘Corporate Law and Social Risk’ (2020) 73 Vanderbilt Law Review 1401 (arguing that attention to social risk can provide protection against downside risks to corporate value). 90 JG Hill, ‘Good Activist/Bad Activist: The Rise of International Stewardship Codes’ (2018) 41 Seattle University Law Review 497. 91 See, eg, S Bielefeld et al, ‘Directors Duties to the Company and Minority Shareholder Environmental Activism’ (2004) 23 Company and Securities Law Journal 28, 47 (arguing that minority shareholders’ use of statutory rights to requisition shareholder meetings to air concerns is desirable

24  The Shareholder Activism Debate policy initiatives have also begun to envisage activism as achieving more than just the optimisation of an individual company’s performance and maximisation of investors’ investment returns. The latest iteration of the United Kingdom’s stewardship code, for example, notes that ‘asset owners and asset managers play an important role as guardians of market integrity and in working to minimise systemic risks’.92 Some commentators go a step further; they argue that institutional investors’ significance justifies regulating their governance behaviour to ensure it serves the public interest in promoting sustainable wealth creation.93 Commentators have argued that diversified institutional investors in fact have material incentives to prompt public companies to address major social and environmental issues. These commentators start from the same market development as ‘common ownership’ advocates; namely, institutional investors now own material shareholdings in many public companies across entire markets. Whereas common ownership critics see considerable risk in this development, these commentators point out that it makes institutional investors sensitive to market-wide, or ‘systemic’, risks such as climate change and social inequality. The financial impact of such risks cannot be avoided through diversification and therefore pose a threat to institutional investors’ portfolio returns.94 It is argued that such investors therefore have significant incentives to use their governance influence to cause companies to take action to mitigate the impact of these systemic risks; for example, by requiring companies to adapt their business models for a lower carbon economy.95 As the preceding survey demonstrates, the debate about the merits of shareholder activism is controversial and far from straightforward. The potential advantages and disadvantages of activism present law makers and regulators with a conundrum.96 Are activist hedge funds economic vandals, or do they play a systemically important role in catalysing institutional investor participation in corporate governance? Will increasing institutional investor share ownership adversely affect competition in markets as argued by common ownership advocates, or will it result in institutions prompting public companies to address societally significant systemic issues such as climate change? In light of the mix of potential advantages and disadvantages, a nuanced regulatory response

because the articulation of minority perspectives is ‘of fundamental ethical importance not only within the confines of shareholder democracy but also within the broader context of democratic civil society generally’). 92 Financial Reporting Council, The UK Stewardship Code 2020 (2020) 4. 93 See, eg, IHY Chiu and D Katelouzou, ‘Making a Case for Regulating Institutional Shareholders’ Corporate Governance Roles’ (2018) 1 Journal of Business Law 67. 94 See, eg, M Condon, ‘Externalities and the Common Owner’ (2020) 95 Washington Law Review 1. 95 See, eg, JC Coffee, ‘The Coming Shift in Shareholder Activism: From “Firm-Specific” to “Systemic Risk” Proxy Campaigns (and How to Enable Them)’ (Working Paper, 26 August 2021) www.ssrn. com/abstract=3908163; JN Gordon, ‘Systematic Stewardship’ (2022) Journal of Corporation Law (forthcoming). 96 Hill, ‘Good Activist/Bad Activist’ (2018).

The Shareholder Activism Debate  25 seems  necessary. A heavy-handed regulatory response may give rise to the proverbial risk of ‘throwing out the baby with the bath water’, while a ‘hands off’ approach may provide undue scope for detrimental shareholder behaviour. Nonetheless, a distinctive feature of much commentary and analysis in this area is its highly polarised nature. As Hill notes, there are two dominant narratives in this area: one that views shareholder participation in corporate governance favourably and another which considers it highly problematic.97 The former narrative frequently makes sweeping claims about the benefits of shareholder participation in corporate governance98 and the latter often resorts to pejorative language to describe activists.99 Another distinctive feature of much of the literature in this area is its US focus. Much of the literature outlined above concerning the merits of hedge fund activism, the governance incentives and capacity of institutional investors, ‘common ownership’ concerns, and investors’ ‘systemic stewardship’ is focused on developments and practices in the United States.100 2.2.3.  Are there More Appropriate Mechanisms for Promoting Corporate Performance and Accountability? As noted earlier, commentators have pointed out in the course of the broader shareholder empowerment debate that shareholder participation in corporate governance is not the only, or even the most appropriate, mechanism for promoting corporate performance and accountability. Critics of shareholder activism will often make this claim. For example, some commentators have queried the desirability of ‘democratically unaccountable’ investors using activism to prompt companies to address serious externalities such as climate change that are typically the business of elected governments.101 The US lawyer, Martin Lipton, has consistently argued that centralised management authority is the most effective mechanism for promoting corporate performance.102 In recent years, Lipton has adapted this argument to respond to the increasing public focus, in the United States and elsewhere, on issues of ‘corporate purpose’, ‘social licence’ and the importance of companies engaging in ethical, responsible and sustainable business. In this context, Lipton 97 ibid. 98 Ringe, for example, notes how investor stewardship directed at ESG issues is perceived in some quarters ‘as the “holy grail”, with the potential of solving multiple problems of society at large’: WG Ringe, ‘Stewardship and Shareholder Engagement in Germany’ (2021) 22 European Business Organization Law Review 87, 93. 99 Hill (n 90). 100 A similar point is made by Nili (n 12). 101 Condon, ‘Externalities and the Common Owner’ (2020) 73–75. 102 See, eg, M Lipton and W Savitt, ‘The Many Myths of Lucian Bebchuk’ (2013) 93 Virginia Law Review 733, 733 (arguing that shareholder empowerment would ‘discard the management concepts of US corporate law that have nurtured the most successful economy in the world’).

26  The Shareholder Activism Debate has queried whether shareholders’ focus on maximising investment performance is compatible with companies’ attempts to achieve sustainable financial performance and to balance the often-competing interests of their different stakeholders. According to Lipton, the board of directors is better placed to balance ‘interests and choices inherent in a stakeholder-centered model … [and] to manage for sustainable long-term value creation’.103 There are also a range of intermediate perspectives which envisage activism playing a role in promoting corporate accountability and performance in conjunction with other factors and mechanisms.104 Commentators have argued, for example, that shareholder activism may complement the monitoring role performed by independent directors. Cox and Thomas point out that the efforts of activist hedge funds to identify under-performing companies and formulate proposals for change assist independent directors in their role of monitoring the performance of corporate managers.105 The most recent version of the UK stewardship code envisages both shareholder involvement in corporate governance as well as capital allocation decisions by investors (ie, a capital market influence) playing a role in encouraging public companies to engage in sustainable corporate activity.106 2.3.  THE SHAREHOLDER ACTIVISM DEBATE AND THE COMPARATIVE SIGNIFICANCE OF AUSTRALIA

The shareholder activism debate is complex, contentious and evolving. However, as the preceding survey shows, some distinct perspectives and viewpoints figure prominently in much of the commentary and research. This includes an emphasis on capital market characteristics and regulatory settings as key drivers of the nature and extent of activism; the prevalence of polarised viewpoints regarding the merits of shareholder activism; and the significance of US perspectives on the nature, implications and regulation of shareholder activism.107 It is in this regard that Australia has significant potential as a case study. As the next chapter will explain, Australia is a market that, in theory, is highly conducive to shareholder activism. In particular, it has shareholder-friendly 103 M Lipton, ‘Further on the Purpose of the Corporation’ (Harvard Law School Forum on Corporate Governance, 20 July 2021) www.corpgov.law.harvard.edu/2021/07/20/further-on-the-purpose-ofthe-corporation/. 104 See, eg, Coffee and Palia, ‘The Wolf at the Door’ (2016). 105 Cox and Thomas, ‘A Revised Monitoring Model Confronts Today’s Movement Towards Managerialism’ (2021) (noting, in particular, how hedge funds efforts assist independent directors to overcome limitations in the effectiveness of their monitoring which result from information asymmetry between independent directors and corporate managers and constraints on independent directors’ time). 106 Davies, ‘The UK Stewardship Code 2010–2020’ (2022). 107 This has led one commentator to express concerns about the US bias in much of the literature: Nili (n 12).

The Comparative Significance of Australia  27 legal settings and a capital market characterised by substantial levels of institutional investor share ownership and low levels of controlling blockholders. The Australian market is also compact enough to make it feasible to explore the overall nature and extent of activism in the market. Australia, therefore, provides an ideal opportunity to explore, from a non-US perspective, key issues and claims in the shareholder activism debate. In particular: have shareholder-friendly laws and a conducive market structure produced significant levels of activism and, if not, what does this suggest regarding the factors that shape the nature and extent of shareholder activism? Has Australian activism produced the type of benefits (or detriments) described in the international literature? In what ways have high levels of institutional investor share ownership influenced activism in Australia and what does this suggest about key issues in the international debate such as institutional investor ‘stewardship’ and the implications of ‘agency capitalism’? As the following chapters will demonstrate, Australian shareholder activism is an intricate and, in some ways, contingent phenomenon. Although the Australian experience reflects a number of developments noted in other jurisdictions, it also deviates from overseas experience in some important respects. The distinctive nature of the Australian experience suggests the need for greater nuance in the analysis of key issues in the debate about shareholder activism.

3 The Setting for Australian Activism

S

hareholder activism does not occur in a vacuum. Chapter two explained how the nature and extent of shareholder activism in a country can be shaped, in particular by the country’s equity capital market characteristics and regulatory settings.1 In order to provide important context for this book’s discussion of Australian activism, this chapter provides an overview of the Australian equity capital market, share ownership patterns in Australian public companies, and the key legal rules that affect shareholder activism. 3.1.  THE AUSTRALIAN LISTED EQUITIES MARKET

The principal equities market in Australia is operated by the Australian Securities Exchange. As at December 2021, the market consisted of 2136 listed entities and had a total market capitalisation of $2.60 trillion.2 Although there are more than 2000 listed entities, a small number of them account for a very significant proportion of the market by value. One source estimates that the 50 largest companies account for well over half of the market’s total capitalisation.3 The size of listed entities as measured by market capitalisation reduces quickly. The largest company has a market capitalisation of $261 billion.4 The smallest company in the top 500 largest companies has a market capitalisation of $100 million.5 By extension, companies in the remaining three-quarters of the market have even smaller market capitalisations. Given this spread, the market is often broken down for analytical purposes into a number of ‘indices’ comprising companies of different market capitalisations. 1 As ch 2 also noted, these may not be the only factors that shape the nature and extent of activism in a market. The potential relevance of other factors in the Australian context will be considered in ch 6, in light of empirical evidence regarding the nature and extent of Australian activism. 2 ASX Ltd (ASX), ‘Historical Market Statistics’ www2.asx.com.au/about/market-statistics/historicalmarket-statistics (as at March 2022). 3 Market Index, ‘ASX Indices’, www.marketindex.com.au/asx50 (reporting that the top 50 listed entities accounted for 63% of the market’s capitalisation as at December 2020). 4 S&P Dow Jones, ‘S&P/ASX 50 Factsheet’ www.spglobal.com/spdji/en/indices/equity/sp-asx50/#overview (as at April 2022). 5 S&P Dow Jones, ‘S&P/ASX All Ordinaries Factsheet’ www.spglobal.com/spdji/en/indices/equity/ all-ordinaries/#overview (as at 1 April 2022).

Public Company Share Ownership Trends  29 The principal indices include the S&P/ASX 20 (the 20 largest and most liquid listed entities), the S&P/ASX 50 index (the 50 largest and most liquid listed entities), the S&P/ASX 200 index (the 200 largest and most liquid listed entities), the S&P/ASX 300 index (the 300 largest and most liquid listed entities) and the S&P/ASX All Ordinaries index (the 500 largest listed entities).6 3.2.  PUBLIC COMPANY SHARE OWNERSHIP TRENDS

Direct share ownership by households has declined over recent decades to below 20 per cent of all listed equities.7 Recent research focused on share ownership in the S&P/ASX 300 index suggests that household ownership may in fact be lower than 10 per cent.8 Over the same period, institutional investors have grown in significance, now holding a substantial majority of listed equities by number9 and by value.10 The growth in institutional investment reflects the remarkable growth of the Australian funds management industry over the last three decades. By one calculation, the industry had total funds under management in 2021 of $2.5 trillion, making it one of the largest in the world.11 The sector’s growth is largely attributable to the significant (and increasing) pool of retirement savings generated by Australia’s compulsory superannuation (pension) system.12

6 ASX, ‘Types of Indices’ www2.asx.com.au/investors/learn-about-our-investment-solutions/indices/ types/capitalisation-indices. 7 Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Better Shareholders – Better Company: Shareholder Engagement and Participation in Australia (2008) [2.14] (noting evidence that from June 1988 to March 2007 household investment declined from 36.1% to 23.7%); S Black and J Kirkwood, Ownership of Australian Equities and Corporate Bonds (RBA Bulletin, Reserve Bank of Australia, 2010) 26–27 (noting that household ownership dropped from 20% prior to the Global Financial Crisis to approximately 16% by early 2010). 8 C Comerton-Forde, An Analysis of S&P/ASX 300 and NZX 50 Share Ownership (Australasian Investor Relations Association, 2021) 11 (finding that in 2020 household ownership accounted for 5% of the shares of entities in the S&P/ASX 300). 9 Parliamentary Joint Committee on Corporations and Financial Services, Better Shareholders – Better Company (2008) [2.14] (noting evidence that from June 1988 to March 2007 domestic institutional share ownership rose from 23.1% to 40.4% and that a ‘significant proportion’ of the 32.5% of equities held by foreign investors would be held by foreign institutional investors); Black and Kirkwood, ‘Ownership of Australian Equities and Corporate Bonds’ (2010) 27 (noting that by early 2010 Australian institutional investors held approximately 40% of listed equities and foreign investors approximately 40%). 10 The Australian Competition and Consumer Commission (ACCC) estimates, based on source data from the Australian Bureau of Statistics, that as of March 2021 domestic institutional investors owned more than half the value of equities and foreign investors, including foreign institutional investors, owned approximately one-third the value of equities: ACCC, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (Common Ownership Inquiry) (8 September 2021) 2. 11 Deloitte Access Economics (Deloitte), Competition in Funds Management (September 2021), 26–27 (noting that in 2018, Australia’s fund management industry was fifth largest in the world when measured by funds under management). 12 ibid 28–29; ACCC (n 10) 2.

30  The Setting for Australian Activism Superannuation assets amounted to more than $3 trillion as at June 2021,13 a significant proportion of which is invested in Australian listed equities.14 The Australian superannuation sector is currently consolidating through mergers as fund operators seek economies of scale and respond to policy settings designed to encourage fund consolidation.15 Australia’s superannuation sector has a distinctive structure. It is comprised of funds operated by banks and other financial services conglomerates as well as funds colloquially known as industry superannuation funds. The industry superannuation funds have some unique institutional characteristics that warrant emphasis. They originated in initiatives of trade unions in the 1980s to extend pension coverage throughout the Australian workforce.16 They are not-for-profit organisations that do not form part of financial conglomerates17 and their governing boards consist of members appointed by employer organisations and unions (or, sometimes, employee vote).18 Once founded, the funds established an institutional support-structure to enable them to operate independently of Australia’s commercial financial industry.19 This included the establishment of a representative body for fund trustees, an asset manager, an asset consultant, and a body that advocates for funds’ interests in matters of corporate governance (both at a company and market-wide level).20 They have grown significantly over time,21 creating commercial tension with the superannuation funds operated by financial services conglomerates.22 As this book will show, the industry superannuation funds play a significant role in Australian shareholder activism. In line with developments in other markets, passive investment managers have become significant share owners in Australia. It is claimed that more than half of all assets held in equities-focused mutual funds are in passively managed

13 Australian Prudential Regulation Authority, Quarterly Superannuation Performance Statistics Highlights (June 2021) (August 2021) 3, 6. 14 ACCC (n 10) 2–3. 15 ibid 4. 16 See generally, B Mees and C Brigden, Workers’ Capital: Industry Funds and the Fight for Universal Superannuation in Australia (Sydney, Allen & Unwin, 2017). 17 See T Bowley and JG Hill, ‘Stewardship and Collective Action: The Australian Experience’ in D Katelouzou and DW Puchniak (eds), Global Shareholder Stewardship (Cambridge, Cambridge University Press, 2022) 419–22. 18 Superannuation Industry (Supervision) Act 1993 (Cth), Pt 9. 19 B Mees and SA Smith, ‘Corporate Governance Reform in Australia: A New Institutional Approach’ (2019) 30 British Journal of Management 75, 80. 20 ibid 77, 80–81; Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (20 September 2021) 32 (D Neal, IFM Investors). 21 Industry superannuation funds have tripled their market share since the mid-1990s: Mees and Smith, ‘Corporate Governance Reform in Australia’ (2019) 75–77. Their market share continues to increase and is forecast to reach 33% by 2025: KPMG, Super Fund Merger Activity Drives Move to ‘Mega-funds’ (2 May 2021) www.home.kpmg/au/en/home/media/press-releases/2021/05/super-fundmerger-activity-drives-move-to-mega-funds-2-may-2021.html. 22 Bowley and Hill, ‘Stewardship and Collective Action’ (2022) 421.

Ownership at the Firm Level  31 equity funds.23 State Street, Vanguard and BlackRock dominate index investing and are now three of the largest fund managers in Australia.24 As a result of fund mergers in the superannuation sector and the growth of index investors (particularly State Street, Vanguard and BlackRock), it is likely that in coming years institutional investment in Australia will become increasingly concentrated in the hands of a relatively small number of large institutional investors.25 Research also indicates the presence of another significant shareholder type in the Australian market: non-institutional blockholders such as wealthy families, entrepreneurs, company executives, and trading companies. The presence of this type of shareholder is revealed by research focused at the firm-level, which is examined in the next section. 3.3.  OWNERSHIP AT THE FIRM LEVEL

Firm-level ownership patterns vary along a spectrum, ranging from companies exhibiting very high levels of ownership concentration at one end (eg, companies with a controlling blockholder) to companies with highly dispersed share ownership at the other end.26 Firm-level ownership of Australian public companies tends to occupy an intermediate position on this spectrum.27 3.3.1.  Absence of Controlling Blockholders The number of Australian companies with a controlling shareholder is not significant. In its 2021 Corporate Governance Factbook, the Organisation for Economic Cooperation and Development (OECD) reports that Australia has one of the lowest incidences of a single shareholder holding more than 50 per cent of a public company’s issued shares.28 Similarly, there are few companies in

23 R Henderson, ‘Passive Funds Pushing Aside Active Managers’ The Australian Financial Review (16 June 2021) 33. In 2019, State Street, Vanguard and BlackRock were three of the six largest fund managers in Australia measured by funds under management: Deloitte, Competition in Funds Management (2021) 32, 70. 24 Deloitte (n 11) 48. 25 A similar conclusion is reached in House of Representatives Standing Committee on Economics, Parliament of Australia, Report on the Implications of Common Ownership and Capital Concentration in Australia (March 2022) 13. 26 See, eg, R La Porta, F Lopez-de-Silanes and A Shleifer, ‘Corporate Ownership Around the World’ (1999) 54 The Journal of Finance 471; Organisation for Economic Co-operation and Development (OECD), OECD Corporate Governance Factbook (2021). 27 V Chen, I Ramsay and M Welsh, ‘Corporate Law Reform in Australia: An Analysis of the Influence of Ownership Structures and Corporate Failure’ (2016) 44 Australian Business Law Review 18, 21–22. 28 OECD, Corporate Governance Factbook (2021) 25.

32  The Setting for Australian Activism Australia where the three largest shareholders hold more than 50  per  cent of issued share capital.29 3.3.2.  Ownership Concentrated in Groups of Significant Shareholders This does not mean, however, that Australian public companies have highly dispersed share ownership. Instead, the typical ownership pattern in an Australian public company involves a relatively small group of shareholders holding a large proportion of a company’s shares.30 A number of studies covering different periods between 1990 and 2011 found that the 20 largest shareholders in various samples of Australian public companies held between 60 and 80 per cent of a company’s shares.31 Varzaly reports that in 2016 the top three shareholders in entities in the S&P/ASX 50 held on average 54 per cent of an entity’s shares.32 This research focuses, however, on ownership concentration at the registered shareholding level. It does not capture the true nature of a company’s share ownership, owing to the significance of nominee shareholders as registered shareholders. A nominee is an intermediary that is contracted to hold shares in its own name on behalf of another person (the beneficiary). It is common practice in Australia for shares to be registered in the name of a nominee shareholder.33 A beneficiary will typically appoint a nominee because it does not wish to hold shares in its own name or it may be required by law to have shares held by a custodian.34 The significance of nominees in the Australian market obscures the true nature of a company’s share ownership in two ways. First, only a handful of

29 ibid. In their well-known study, La Porta, Lopez-de-Silanes and Shleifer, defining a shareholding of 20% or more as a controlling shareholding, found that Australia had one of the lowest incidences of controlling shareholders in its largest public companies: La Porta, Lopez-de-Silanes and Shleifer, ‘Corporate Ownership Around the World’ (1999) 491–92. 30 Chen, Ramsay and Welsh, ‘Corporate Law Reform in Australia’ (2016) 21–22. 31 A Dignam and M Galanis, ‘Australia Inside-Out: The Corporate Governance System of the Australian Listed Market’ (2004) 28 Melbourne University Law Review 623, 628 (citing a study from the 1990s which reported that the top 20 registered holders held 63% of the issued shares of the largest Australian companies); C Comerton-Forde and J Rydge, ‘Director Holdings, Shareholder Concentration and Illiquidity’ (Research Paper, January 2006) www.ssrn.com/abstract=713181 20–1, 34 (reporting that the top 20 shareholders in companies in the All Ordinaries Index between 1998 and 2003 held on average 63.72% of a company’s shares); R Monem, ‘Determinants of Board Structure: Evidence from Australia’ (2013) 9 Journal of Contemporary Accounting and Economics 33, 38 (reporting that in 2006 across the listed market as a whole the top 20 shareholders held on average 63.68% of a company’s issued shares); Comerton-Forde, An Analysis of S&P/ASX 300 and NZX 50 Share Ownership (2021) 6, 15 (reporting that in 2020 the top 20 registered holders in S&P/ ASX 300 companies on average held 77%). 32 J Varzaly, ‘The Dynamics of Shareholder Dispersion and Control in Australia’ (University of Cambridge Legal Studies Research Paper No 5/2021, January 2021) 16. 33 ibid 19 (noting that, in 2016, nominees accounted for 97% of the disclosed three largest shareholders for all of the entities in the S&P/ASX 50). 34 ibid 20.

Ownership at the Firm Level  33 nominees operate in the Australian market,35 with the result that registered holdings data are likely to overstate ownership concentration, since a handful of nominees are likely to hold shares for a variety of beneficiaries. Second, under typical nominee arrangements, the beneficiary retains control of the rights attaching to the shares.36 A focus on registered holdings therefore does not illuminate the identity of persons who ultimately control those holdings. It is therefore necessary to look behind registered holdings to obtain a complete picture of the ownership of Australian companies. This task is complicated, because there is no general requirement in Australia for the disclosure of beneficial ownership of shares.37 A researcher must instead infer the likely situation from alternative data. Although alternative data does not provide complete transparency, it makes it reasonably apparent that, on average, groups of institutional investors control a significant proportion of the issued shares of larger Australian public companies. The underlying significance of institutional investors is indicated in several ways. First, the preponderance of nominee holders of shares at the registered holdings level is largely attributable to institutional investors because such investors typically use nominee holders in order to satisfy regulatory requirements that fund assets be held by a custodian or to outsource complex asset settlement, clearing and reporting functions.38 Disclosures under Australia’s substantial shareholding disclosure laws also highlight the significance of underlying institutional investor ownership. Under these laws, a person who is not a registered holder must disclose their interest in shares where they and/or their associates have control over the voting or disposal of shares representing 5  per  cent or more of the entity’s shares.39 Varzaly reports that institutional investors make up a significant proportion of the ‘substantial shareholders’ in the largest public companies.40 Further underscoring the significance of institutional investors, 2021 research by the Australasian Investor Relations Association into the underlying ownership of entities in the S&P/ASX 300 found that the top 10 owners

35 This reflects the fact that significant investments in systems and expertise are required to operate a nominee shareholding business: Deloitte (n 11) 116, 126. 36 See GP Stapledon, ‘The Duties of Australian Institutional Investors in Relation to Corporate Governance’ (1998) 26 Australian Business Law Review 331, 339–40. 37 Corporations Act, ch 6C does, however, contain a ‘tracing notice’ regime that permits a listed company or ASIC to serve a notice on a registered holder requesting details of other persons who have a ‘relevant interest’ in their shares. Although a company must maintain a public register of information obtained pursuant to tracing notices, the comprehensiveness of such information is dependent on the extent to which the company has issued tracing notices. Moreover, the complex information frequently included in responses to tracing notices can be very difficult to analyse: Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (11 October 2021) 4 (D Paatsch, Ownership Matters). 38 Deloitte (n 11) 116–17. 39 Corporations Act, s 671B. 40 Varzaly (n 32) 26–27 (finding that in 2016 there were 93 ‘substantial shareholders’ in 38 of the 50 companies in the S&P/ASX 50 index, 91 of which were institutional shareholders).

34  The Setting for Australian Activism control, on average, 42  per  cent of a company’s issued share capital.41 Index investors and superannuation funds accounted for a significant majority of this ownership share.42 Institutional ownership, however, tends to be concentrated in larger public companies. Studies report that institutional investors concentrate their investments in companies included in the S&P/ASX 200 index,43 which the ASX describes as ‘the investable benchmark for the Australian equity market [which] addresses the needs of investment managers to benchmark against a portfolio characterised by sufficient size and liquidity’.44 In addition to liquidity benefits, a focus on larger capitalisation companies enables institutional investors to achieve economies of scale by investing their capital in fewer, larger companies.45 The Australian experience in this regard is consistent with international trends. The OECD has recently noted how institutional investors across the globe are concentrating their ownership in large, listed companies and has expressed concern that stock markets now primarily serve the interests of large companies and the institutional investors that invest in them.46 There is one other type of shareholder that is significant in the Australian market. Several older studies noted that ‘non-institutional blockholders’, such as wealthy families, entrepreneurs, executives and trading companies, were significant public company shareholders. Stapledon found that more than 40 per cent of companies in the All Ordinaries Index in 1993 had a non-institutional blockholder with a shareholding interest of 20 per cent or more;47 and that 45 per cent of companies in the All Ordinaries Index in 1996 had a non-institutional blockholder which controlled 20 per cent or more of the company’s shares.48 Lamba and Stapledon examined 240 companies selected from the total population of listed companies in 1998, comprising 80 companies from the top 100 companies by market capitalisation, 80 from companies ranked 101-500, and 80 from the 41 Australasian Investor Relations Association, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (13 September 2021) 6. 42 ibid. Other researchers have also noted the significance of major US index investors and Australian industry superannuation funds: Varzaly (n 32) 27; Principles for Responsible Investment, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (2021) 6. 43 See, eg, SD Marshall, K Andersen and I Ramsay, ‘Are Superannuation Funds and Other Institutional Investors in Australia Acting Like “Universal Investors”?’ (2009) 51 Journal of Industrial Relations 439, 454; Comerton-Forde and Rydge, ‘Director Holdings, Shareholder Concentration and Illiquidity’ (2006) 6, 16. 44 ASX, ‘Capitalisation Indices’ www.asx.com.au/products/capitalisation-indices.htm. 45 IM Ramsay and M Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153, 186. 46 OECD (n 26) 18. 47 GP Stapledon, ‘The Structure of Share Ownership and Control: The Potential for Institutional Investor Activism’ (1995) 18 UNSW Law Journal 250, 270. 48 GP Stapledon, ‘Share Ownership and Control in Listed Australian Companies’ (Research Paper, August 1999) www.ssrn.com/abstract=164129 16.

Ownership at the Firm Level  35 remaining population. 72 per cent of those companies had a non-institutional blockholder holding 10 per cent or more.49 A slightly more recent study, albeit with a narrower focus, found that directors of companies in the All Ordinaries Index in the period 1998–2003 held on average 15.7  per  cent of a company’s issued shares.50 Although this research predates the present decade, the significance of noninstitutional blockholders is unlikely to have diminished significantly with the passage of time.51 Recent research and industry commentary suggests that noninstitutional blockholders remain significant, especially in smaller-capitalisation companies. Based on its research, the Principles for Responsible Investment reports that small-capitalisation companies in Australia are characterised by ‘a disparate substantial shareholder registry, with a lower holding by institutional investors and an increased number of individual investors or other private companies’.52 The share registry provider, Computershare, publishes voting data from shareholder meetings managed by it on behalf of Australian public companies. This data indicates that significantly more shares are voted on the floor of shareholder meetings of companies outside of the S&P/ASX 50 than at shareholder meetings of companies in the S&P/ASX 50.53 Computershare concludes that ‘[t]he voting difference between the ASX 50 and all [other] companies can be explained by the composition of the smaller companies, where shares are held by major individuals/private company stakeholders who attend and vote at the meeting’.54 In summary, at the registered holdings level a company’s top 20 shareholders hold, on average, more than three-quarters of a company’s issued share capital. However, registered holdings data does not reflect the true nature of public company ownership owing to the significance of nominee shareholders. Ascertaining the underlying ownership of companies is made difficult by the lack of a general obligation to disclose beneficial ownership of shares. Nonetheless, other data and research, outlined above, indicates that, on average, the underlying owners and controllers of a majority of a public company’s shares are likely to comprise non-institutional blockholders and relatively concentrated groups of institutional investors – with the former more prevalent in small capitalisation companies and the latter more prevalent in large capitalisation companies.55 49 A Lamba and G Stapledon, ‘The Determinants of Corporate Ownership Structure: Australian Evidence’ (Research paper, 1999) www.ssrn.com/abstract=279015 21. 50 Comerton-Forde and Rydge (n 31) 21 (although noting that director holdings tended to be smaller in larger companies). 51 For a similar conclusion, see Chen, Ramsay and Welsh (n 27) 22. 52 Principles for Responsible Investment (n 42) 23. 53 See, eg, Computershare, Intelligence Report: Insights from Annual General Meetings held in 2017 (March 2018) 19. 54 ibid. See also Computershare, Intelligence Report: Insights from Annual General Meetings 2018 (Australia) (2018) 5 (noting the significance of ‘cornerstone investors, founders and executives’ in companies outside the S&P/ASX 300). 55 Research by the OECD draws a somewhat different conclusion. It finds that ‘institutional investors’ own on average 29% of an Australian public company. However, it would appear that this lower

36  The Setting for Australian Activism 3.3.3.  Retail Ownership Remains Significant in Some Large Companies but Influence is Marginal Although in overall terms direct share ownership by households has declined, there are some companies that still have significant levels of retail share ownership. National Australia Bank Ltd, for example, reports that, as at September 2021, retail shareholders accounted for 42.7  per  cent of its issued shares and domestic and foreign institutions for 57.3 per cent.56 Retail shareholders would appear, however, to be a latent constituency in the normal course of a company’s governance. National Australia Bank reports that approximately 95 per cent of shares voted at its 2020 AGM were owned by institutional investors.57 Other publicly traded banks also report low voting turnout by retail investors at their AGMs.58 Submissions to a 2012 inquiry into the role and relevance of the AGM also noted the immaterial effect of retail shareholders’ votes on the outcome of resolutions at AGMs.59 However, in the event of an activist intervention, a large retail shareholder base has the potential to play a determinative role. This was highlighted in 2017 during the high-profile campaign waged by the large activist hedge fund, Elliott Management, against the listed mining and resources group, BHP. BHP has a significant proportion of its shares held by retail shareholders. As part of its defence strategy, BHP wooed its substantial retail shareholder base through webcasts, increased dividends and a general advertising campaign.60

percentage can be explained by the fact that the OECD limits the definition of ‘institutional investor’, for this purpose, to institutional investors that are required to disclose their holdings which, in Australia, means investors who own 5% or more and have filed a substantial holding notice. Institutional investors who do not file such a notice are included in the category ‘other free-float including retail investors’, which the OECD reports owns on average 45%. See OECD, Owners of the World’s Listed Companies (OECD Capital Market Series, Paris, 2019) 35, 38. 56 National Australia Bank, Answer to Question on Notice CO-NAB04QW, House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (2021). 57 National Australia Bank, Answer to Question on Notice CO-NAB02QON, House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (2021). 58 See, eg, ANZ Banking Group, Answer to Question on Notice ANZ01QON, House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (2021) (reporting that only 1.1% of the bank’s retail shareholders voted at its 2020 AGM); Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (9 September 2021) 33 (P King, Westpac) (testifying that of the shares voted at the bank’s AGM, ‘[a] large part … are institutional shares rather than retail shareholdings’). 59 Chartered Secretaries Australia, Submission, Corporations and Markets Advisory Committee, The AGM and Shareholder Engagement (19 December 2012) 2–3 (presenting voting data and concluding that ‘[b]y and large, retail shareholders neither attend nor vote’); Governance for Owners, Submission, Corporations and Markets Advisory Committee, The AGM and Shareholder Engagement (2012) 17. 60 See M Jefferies, ‘The Third Wave of Shareholder Influence and the Emergence of Informational Activism in Australia’ (2019) 34 Australian Journal of Corporate Law 305; R Gottliebsen, ‘Big Australian Back in Bed with Shareholders’ The Australian (16 May 2017) 28.

The Australian Regulatory Setting  37 3.4.  THE AUSTRALIAN REGULATORY SETTING

As noted in chapter two, regulation can facilitate or restrict shareholder activism. Comparative analysis has highlighted that Australia ‘has a ­decidedly shareholder-centric model of corporate law when measured against the systems of some other similar economies’.61 This section outlines the Australian legal setting for shareholder activism. Its focus is on describing key features of Australian law; more granular regulatory details will be explored in subsequent chapters. 3.4.1.  Key Sources of Australian Corporate Law The principal components of Australian corporate law are the common law and a federal statute, the Corporations Act 2001 (Corporations Act).62 The statute regulates, among other things, the formation and internal affairs of companies, financial reporting, capital raising, takeovers and corporate insolvency. Public companies incorporated under the legislation are permitted to issue shares in public offerings63 and may apply to have their shares admitted to trading on the ASX. Companies admitted to the ASX are subject to the ASX Listing Rules which take effect as a contract between a listed entity and the ASX;64 the rules are also enforceable under the Corporations Act by the regulator, the ASX or any other person who is aggrieved by a breach of the rules.65 The ASX Listing Rules supplement the common law and the Corporations Act with, among other things, periodic and ongoing disclosure requirements, rules concerning the calling and conduct of shareholder meetings and director elections, and requirements for shareholder approval of significant transactions. The Australian Securities and Investments Commission (ASIC) is the corporate and securities regulator.66 Its powers and responsibilities include incorporation of companies, investigation and enforcement of certain breaches of the Corporations Act, and powers to modify the operation of the Corporations Act in certain situations.67 Notably, ASIC’s enforcement role extends to breaches of 61 R Mitchell et al, ‘Shareholder Protection in Australia: Institutional Configurations and Regulatory Evolution’ (2014) 38 Melbourne University Law Review 68, 69. See also H Anderson et al, ‘The Evolution of Shareholder and Creditor Protection in Australia: An International Comparison’ (2012) 61 International and Comparative Law Quarterly 171. 62 In 2001, the Australian states referred their constitutional powers in relation to company and securities law matters to the Commonwealth in order to facilitate the enactment of a single legislative scheme with nation-wide application. As a result, state legislation does not address corporate and securities law matters. See Ford, Austin and Ramsay’s Principles of Corporations Law [3.060]–[3.070]. 63 Corporations Act, s 113 (restrictions on securities offerings apply only to private companies). 64 ASX Listing Rules, Introduction. 65 Corporations Act, s 793C. 66 Established under the Australian Securities and Investments Commission Act 2001 (Cth). 67 See generally, Ford, Austin and Ramsay’s Principles of Corporations Law [3.140].

38  The Setting for Australian Activism directors’ duties. Under Australian law, directors are subject to parallel duties of loyalty and care under common law and the Corporations Act.68 The statute empowers ASIC to enforce the statutory duties in civil proceedings, leading to ASIC playing a significant role in civil actions for breach of directors’ duties.69 In contrast, ASIC plays a more limited role in relation to shareholder activism. ASIC has enforcement powers in relation to aspects of the legislation which may indirectly affect activism, such as insider trading, market manipulation, shareholding disclosure, and ‘acting in concert’ laws. However, unlike the United States, Australia does not have a detailed regulatory regime dealing with proxy solicitation and the filing of shareholder proposals and ASIC therefore does not play a significant role in such matters.70 ‘Soft law’ is also a feature of the regulatory landscape. Australia has a corporate governance code, the Corporate Governance Principles and Recommendations, issued by the ASX-convened ASX Corporate Governance Council. The code requires ASX-listed entities to apply, or explain any deviation from, the best practice principles contained in it.71 Australia also has two institutional investor stewardship codes issued, respectively, by the representative organisation for asset managers and a representative organisation for major superannuation funds. The codes, which apply on a ‘comply or explain’ basis, exhort investors to play a meaningful role in the governance of their investee companies.72 3.4.2.  The Basic Governance Framework of an Australian Public Company In an Australian company, two bodies have original decision-making authority: the company’s board of directors and its shareholders assembled in a shareholder meeting.73 The Corporations Act mandatorily allocates certain specific powers to the shareholder meeting, such as the power to remove directors,74 amend the corporate constitution,75 and approve significant matters such as a related

68 Corporations Act, s 185. 69 See Ford, Austin and Ramsay’s Principles of Corporations Law [8.360]. Private suits for breach of duty involving public companies are less common. See generally, RM Jones and M Welsh, ‘Toward a Public Enforcement Model for Directors’ Duty of Oversight’ (2012) 45 Vanderbilt Journal of Transnational Law 343. 70 In 2000, the Companies and Securities Advisory Committee, a body established under federal legislation to advise the federal government on corporate and securities law reform, explored the possibility of introducing a proxy solicitation filing requirement. It concluded that there was insufficient evidence of abuses in the context of proxy solicitation to warrant the introduction of such a regime ‘at this time’: Companies and Securities Advisory Committee, Shareholder Participation in the Modern Listed Company (Final Report, June 2000) 44. 71 ASX Corporate Governance Council, Corporate Governance Principles and Recommendations, 4th edn (2019) 2. 72 See further, ch 5, section 5.3.2. 73 John Shaw and Sons (Salford), Ltd v Shaw [1935] 2 KB 113, 134. 74 Corporations Act, s 203D. 75 ibid s 136(2).

The Australian Regulatory Setting  39 party transaction.76 The allocation of general management power is, however, a matter for incorporators to address in a company’s constitution. The usual practice is for a public company constitution to allocate management power exclusively to the board of directors.77 Where this occurs, a shareholder meeting cannot itself seek to exercise management powers, issue directions to the board regarding the exercise of management powers, or even pass non-binding (ie, precatory) resolutions regarding the board’s exercise of management.78 If shareholders wish to do any of these things, they must amend their company’s constitution to allocate themselves an express power to do so. Among other things, this causes complications when activist shareholders wish to propose and vote on a directive or precatory resolution. As later chapters will show, Australian activists need to frame such resolutions as a constitutional amendment, creating a degree of legal complexity not associated with directive and precatory resolutions in some other jurisdictions.79 The Corporations Act does not impose mandatory rules regarding board structure, beyond a requirement that a public company must have at least three directors.80 However, the Corporate Governance Principles and Recommendations issued by the ASX Corporate Governance Council express some important recommendations. In particular, they recommend that the board of a public company have a majority of independent directors and that the board chair be an independent director, noting that this ‘maximises the likelihood that the decisions of the board will reflect the best interests of the entity as a whole’.81 As the recommendations apply on an ‘if not, why not’ basis, they are not mandatory. However, 2016 research indicates substantial compliance in larger capitalisation companies.82 3.4.3.  The Central Place of Shareholders in Australian Corporate Law Although shareholders typically do not play a direct role in the exercise of management power, various aspects of Australian corporate law enable shareholders and 76 ibid s 208. In addition, as noted already, ASX listing rules require approval of certain other significant transactions, such as the disposal of the entity’s main undertaking: ASX Listing Rules, r 11.2. 77 Ford, Austin and Ramsay’s Principles of Corporations Law [7.091]. 78 John Shaw and Sons (n 73); Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia (2016) 113 ACSR 600. 79 This has in fact led to calls for law reform to provide shareholders with a mandatory statutory right to propose and pass directive and precatory resolutions. This law reform debate is the subject of ch 8. 80 Corporations Act, 201A(2). 81 ASX Corporate Governance Council, Corporate Governance Principles and Recommendations (2019) 15. To comply with this recommendation, the roles of the chair and the chief executive officer should be held by separate persons. 82 Australian Council of Institutional Investors, Board Composition and Non-executive Director Pay in ASX200 Companies (November 2016) 13, 25 (noting that independent directors comprised 77% of all directors in the top 100 companies and 66% in companies in the 101–200 group; and only 39 companies in the top 200 companies had board chairs who were executives or not otherwise independent).

40  The Setting for Australian Activism their interests to play a key role in public company governance. Shareholders’ interests, for example, guide directors’ core duty of loyalty which requires directors to act in good faith in the best interests of their company. For the purpose of this duty, Australian courts have equated the interests of a company with the interests of its shareholders as a whole.83 In exercising this duty, directors can also consider stakeholder interests, albeit only to the extent that doing so produces a benefit for shareholders.84 The ASX Listing Rules enshrine a ‘one share, one vote’ principle,85 preventing unequal voting structures that skew shareholder decision-making in favour of founders or other blockholders. Shareholders are also made gate-keepers in takeover transactions. Australian takeover law incorporates a ‘no frustration rule’,86 which restricts boards from frustrating takeover offers and thereby effectively enables shareholders to determine whether a takeover offer will proceed.87 These rules, together with an ASX Listing Rule requirement to obtain shareholder approval for significant issues of shares,88 effectively rule out the use of poison pills in Australia. Furthermore, the specific decision-making powers mandatorily allocated to shareholders by the Corporations Act include two particularly significant governance powers. First, s 136(2) of the Corporations Act permits shareholders to amend or replace a company’s constitution by special resolution.89 This provision follows the English model of permitting shareholders to amend a company’s constitution without the involvement of the board, in contrast to Delaware law, where the board acts as a gate-keeper to the alteration of a company’s charter.90 Second, the Corporations Act gives shareholders a mandatory right to remove directors, by ordinary resolution,91 without cause and at any time during their tenure.92 Relatedly, the rules for nominating board candidates, which are

83 Ngurli Ltd v McCann (1953) 90 CLR 425; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722. 84 The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] (2008) 39 WAR 1, [4391]–[4395]; Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report (Vol 1, 2019) 403 (noting, in particular, that directors have a discretion to adopt a longterm timeframe when assessing value accretive strategies and that this provides leeway for promoting stakeholder interests in a way that enhances a company’s longer-term value for shareholders). 85 ASX Listing Rules, r 6.9. 86 R Kraakman et al, The Anatomy of Corporate Law: A Comparative and Functional Approach, 3rd edn (Oxford, Oxford University Press, 2017) 212. 87 Australian Takeovers Panel, Frustrating Action (Guidance Note 12, 1 December 2016). 88 ASX Listing Rules, r 7.1. 89 That is, a resolution approved by at least 75% of votes cast on it: Corporations Act, s 9 (definition of ‘special resolution’). There is no requirement that the company’s directors must also approve the amendment. A company cannot deprive shareholders of this power either by agreement or by a provision contained in its constitution: Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457, 479. 90 8 Del Code Ann § 242(b). 91 An ordinary resolution is a resolution passed by a simple majority of votes cast. 92 Corporations Act, s 203D. One important consequence of this provision is that there are no ‘staggered boards’ in Australian public companies.

The Australian Regulatory Setting  41 contained in a company’s constitution, are far from onerous. They typically require that a candidate must consent in writing and (sometimes, but not always) also require that the candidate’s nomination be supported by a shareholder.93 Subject to satisfying these minimal requirements, the candidate will be permitted to stand in the election. Shareholders can include their candidates on the company’s proxy,94 in contrast to the United States where ‘proxy access’ for the nomination of director candidates has been a long-running controversy.95 Shareholders also have a number of approval rights over significant transactions, such as related party transactions,96 capital returns,97 and the disposal of a company’s main undertaking.98 Public company shareholders also have a unique annual ‘say on pay’ which, according to one commentator, provides the lowest threshold for shareholder voting leverage in the world.99 Under the Corporations Act, a listed company must seek shareholder approval at each annual shareholder meeting (AGM) of a report outlining the remuneration of its key management personnel.100 The vote is advisory only and is not binding on the company.101 However, a collection of additional statutory rules, collectively known as the ‘two strikes rule’, provide that where a company’s ‘say on pay’ resolution receives a ‘no’ vote of 25 per cent or more at two consecutive AGMs, shareholders must vote at the second AGM on whether to hold a further meeting at which all of the company’s directors (other than its managing director) are subject to re-election.102 A ‘no’ vote on ‘say on pay’, even if not large enough to defeat the resolution, is therefore given legal significance under these provisions and is colloquially referred to as the receipt by the company of a ‘strike’. As this book will demonstrate, Australian shareholders have enthusiastically used this feature of the law to signal dissatisfaction to corporate managers.

93 In such a case, there is generally no requirement that the shareholder hold a minimum number of shares. See Q Digby and T Stutt, ‘Australia’ in FJ Aquila (ed), Shareholder Rights and Activism Review, 3rd edn (London, Law Business Research, 2018) 4; E Boros, ‘How Does the Division of Power between the Board and the General Meeting Operate?’ (2010) 31 Adelaide Law Review 169, 179. 94 Shareholders can obtain ‘proxy access’ in two ways. First, the ASX Listing Rules, r 14.5 requires that a listed entity hold an election of directors at each AGM. A shareholder can nominate a candidate using the nomination procedure set forth in the company’s constitution in which case the nominee will appear in the meeting material circulated by the company. Second, shareholders can use s 249N of the Corporations Act (discussed below) to propose a resolution to elect a director at the meeting; a company is obliged to notify shareholders of such a resolution. In addition, ASX Listing Rules r 14.2 effectively obliges a company to issue a universal proxy ballot. 95 See, eg, JG Hill, ‘The Trajectory of American Corporate Governance: Shareholder Empowerment and Private Ordering Combat’ (2019) 2 University of Illinois Law Review 507. 96 Corporations Act, ch 2E. 97 ibid ch 2J. 98 ASX Listing Rules, ch 11. 99 D Friedlander, ‘Shareholder Self-Protection and Activism in Australia’ [2014] (1) Law Society of New South Wales Journal 75, 75. 100 Corporations Act, s 250R(2). 101 ibid s 250R(3). 102 ibid ss 250U, 250V, 250W.

42  The Setting for Australian Activism 3.4.4.  Initiating Shareholder Decision-making The general rule is that powers given to shareholders must be exercised collectively through a shareholder meeting. In the ordinary course, shareholder decision-making will be initiated by the board of directors in order to comply with applicable legal requirements, such as the requirement to hold an AGM103 or to seek shareholder approval of a significant corporate transaction. However, the Corporations Act also provides shareholders with rights to initiate shareholder decision-making.104 Section 249N allows shareholders to propose a resolution to be considered at a shareholder meeting that the company is proposing to hold. The proposal must be made by at least 100 shareholders or by shareholder(s) holding at least 5 per cent of the relevant company’s voting shares. Where the requirements of s 249N are satisfied, the company must notify shareholders of the proposed resolution at the company’s cost.105 If shareholders wish to cause a shareholder meeting to be held especially for addressing their proposed business, rather than wait for a meeting convened by the company in the ordinary course, they have two options open to them. Section 249F of the Corporations Act allows shareholders holding at least 5 per cent of a company’s voting shares to convene a shareholder meeting themselves at their own cost. Alternatively, s 249D enables shareholders holding at least 5 per cent of a company’s voting shares to require the board to convene a shareholder meeting at the company’s cost, which must be held within two months of the shareholders’ requisition.106 Finally, under s 249P, at least 100 shareholders or shareholder(s) holding at least 5  per  cent of a company’s voting shares can submit a written statement not exceeding 1000 words regarding any item of business to be considered at any shareholder meeting, which the company must circulate at its cost to shareholders ahead of the meeting. These provisions provide shareholders with various options for initiating shareholder decision-making without the cost and legal complexity faced by shareholders in some other jurisdictions. Further, as already noted, there are no proxy solicitation and filing rules107 or ‘proxy access’ difficulties.108 103 Under Corporations Act s 250N(2), a public company must hold an AGM every calendar year within five months of the end of its financial year. 104 Where shareholders use these rights to initiate shareholder decision-making, they must ensure that proposed items of business are referrable to a decision-making power allocated to them under the company’s constitution or the Corporations Act. See nn 73–79 above and accompanying text for a discussion regarding the decision-making powers typically given to public company shareholders. 105 Corporations Act s 249O. 106 Although ss 249D and 249F appear to be of similar effect, there are important differences between them in terms of who controls the convening of the meeting and who bears the costs of the meeting. Under s 249D, the company convenes the meeting pursuant to a requisition of shareholders; the company is consequently responsible for convening and holding the meeting and bears the costs of doing so. Under s 249F, shareholders are responsible for convening the meeting but they bear the costs of doing so: s 249F(1). 107 See above, n 70. 108 See above, n 94 and accompanying text.

The Australian Regulatory Setting  43 The  Corporations Act also entitles any person to inspect and take copies of a company’s share register,109 providing a means for an activist to contact and solicit support from a company’s shareholders. 3.4.5.  Disclosure Requirements Under Australian law, public companies are subject to extensive disclosure obligations. The disclosure obligations of activist shareholders, on the other hand, are much more limited in scope and nature. Shareholders are conceived of primarily as recipients of information rather than providers of information. Both the Corporations Act and the ASX Listing Rules require public companies to prepare and file various information, which becomes publicly available via websites maintained by ASIC and the ASX. This includes annual and halfyearly financial reports110 and details regarding share capital,111 directors,112 and an up-to-date copy of the company’s constitution.113 Companies must maintain registers of shareholders, option holders and debentures and make them available for public inspection.114 The Corporations Act also gives a shareholder (irrespective of the size of their shareholding) a statutory right to apply to a court for an order permitting inspection of a company’s non-public information.115 In addition, public companies are subject to a strict ongoing (or ‘­continuous’) disclosure obligation; that is, an obligation to notify the ASX immediately of information that a reasonable person would expect to have a material effect on the price or value of the company’s securities.116 Disclosed information is made available publicly through the ASX’s Market Announcements Platform.117 The regime seeks to promote market integrity by ensuring that all market participants have equal access to price-sensitive information regarding public-traded securities. This regime is co-regulatory in nature; the primary disclosure obligation is contained in ASX Listing Rule 3.1 and is augmented by s 674 of the Corporations Act, which imposes a statutory obligation on listed entities to disclose information that is not generally available in accordance with the 109 Corporations Act, s 173. 110 Corporations Act, ch 2M; ASX Listing Rules, ch 4. 111 Corporations Act, Pts 2D.5, 2H.6; ASX Listing Rules, chs 3, 7. 112 Corporations Act, Pt 2D.5; ASX Listing Rules, r 3.16. 113 Corporations Act, s 136(5) 114 Corporations Act, ch 2C. 115 Corporations Act, s 247A. The legislation regulates access by giving the court discretion to determine whether access is appropriate, and the courts have generally exercised their discretion purposively to facilitate shareholder monitoring of corporate managers. See T Bowley and JG Hill, ‘Shareholder Inspection Rights: Lessons from Australia’ (2022) Journal of Corporate Law Studies (forthcoming). 116 ASX Listing Rules, r 3.1. For this purpose, ‘immediately’ means promptly and without delay, not instantaneously: ASX, Continuous Disclosure: Listing Rules 3.1-3.1B (Guidance Note 8, 5 June 2021). 117 ASX, ASX Market Announcements Platform. (Guidance Note 14, 6 August 2018).

44  The Setting for Australian Activism listing rules. A listed entity that breaches its statutory obligation is exposed to significant criminal and civil liability,118 including the prospect of enforcement action by ASIC and investor suits brought individually or pursuant to a class action.119 The continuous disclosure regime is regarded as being particularly strict by international standards.120 The disclosure obligations of shareholders are, in contrast, minimal. The only positive disclosure obligation applicable to shareholders in the context of an activist intervention is the obligation to file a ‘substantial shareholding notice’; that is, a shareholder must notify its company and the ASX when its voting power in the company reaches 5 per cent and, thereafter, of any prescribed changes in its shareholding.121 A notifying shareholder is not, however, required to disclose its intentions regarding its investment in the company. 3.5. CONCLUSION

Chapter two highlighted how research into shareholder activism frequently identifies favourable legal settings and capital market characteristics as two of the most important determinants of activism in a market. On this basis, Australia should offer ideal conditions for shareholder activism. Australian law provides public company shareholders with generous governance rights that can be exercised without the complications associated with the exercise of corresponding rights in certain other jurisdictions. When exercising their governance rights, shareholders can draw on detailed information disclosed under Australia’s periodic disclosure requirements and its strict (and actively enforced) ‘continuous’ disclosure regime. Further, the Australian market has significant levels of ownership by large institutional investors, and low levels of controlling blockholders which might otherwise thwart activists’ efforts. The share ownership data examined in this chapter indicates that, in many companies, relatively small groups of institutional investors are likely to control a substantial proportion of those companies’ issued shares. This includes a significant constituency of home-grown asset owners – the Australian superannuation funds. These funds are forecast to grow significantly in coming years as a result of capital in-flows and industry consolidation.122 As one industry representative noted in evidence

118 See generally, O Dixon and JG Hill, ‘Australia: The Protection of Investors and the Compensation for their Losses’ in PH Conac and M Gelter (eds), Global Securities Litigation and Enforcement (Cambridge, Cambridge University Press, 2019). 119 ibid (noting also that class actions for breach of the continuous disclosure regime have become a prominent feature of securities law practice in Australia). 120 ibid. See also G Golding and N Kalfus, ‘The Continuous Evolution of Australia’s Continuous Disclosure Laws’ (2004) 22 Company and Securities Law Journal 385. 121 Corporations Act, s 671B. After the initial filing, additional filings must be made if the shareholder’s voting power moves up or down by 1% or more, or if it falls back below 5%. 122 See nn 12 and 15 and accompanying text.

Conclusion  45 before the 2021 parliamentary inquiry into the ownership of Australian public companies: As the superannuation sector continues to grow and our government policies lead the sector to become more concentrated, it is simply the case that institutional investors will wield greater influence in the Australian economy and over Australia’s largest companies, and the implications of this should be explored.123

The following chapters will reveal, however, that this ostensibly activist-friendly setting gives rise to a nuanced and contingent variety of shareholder activism. This has important implications for our understanding of activism as a corporate governance phenomenon.

123 Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (11 October 2021) 7 (B Briggs, Financial Services Council).

4 The Evidence of Australian Shareholder Activism (I)

T

his book commences its empirical examination of Australian ­shareholder activism by focusing on a form of activism that has attracted significant attention in recent Australian commentary: that is, an overtly aggressive ‘campaign’ undertaken by a shareholder activist in order to compel a company to implement a change desired by the activist. This form of activism has existed for some time in Australia. One need look no further than the law reports to find some notable older examples that arose from bitter corporate in-fighting. The efforts of the Marra Shareholders Action Group to prompt change in the management and affairs of the financially challenged Marra Developments Ltd generated a series of judgments in the 1970s.1 A long-period of in-fighting amongst the New South Wales motoring association, the National Roads and Motorists Association Ltd, also produced multiple court judgments on activism-related legal issues.2 In the 1980s, several highprofile entrepreneurs engaged in notable interventions against public companies.3 In the late 1990s, Australian trade unions coordinated multiple campaigns against large public companies with unionised workforces.4 The unions utilised 1 In Re Marra Developments Ltd (1976) 1 ACLR 470, the Marra Shareholders Action Group brought proceedings against Marra Developments on the grounds that the company had not made fair disclosure in a notice of meeting. Only a matter of weeks later, the group brought further proceedings concerning omissions in the notice of meeting: Leigo v Berner [1976] 1 NSWLR 502. Two years later, in Turner v Berner (1978) 3 ACLR 272, Marra Developments brought proceedings to invalidate shareholder resolutions proposed by the Action Group. 2 See, eg, NRMA v Parker (1986) 11 ACLR 1 and National Roads and Motorists’ Association Ltd v Bradley (2002) 42 ACSR 616 (ability of shareholders in general meeting to issue directions to directors and pass advisory resolutions); Fraser v NRMA Holdings Ltd (1995) 127 ALR 543 (obligation of directors to provide proper disclosure to members); NRMA Ltd v Snodgrass (2001) 37 ACSR 382 (ability of general meeting to amend the corporate constitution so as to regulate the conduct of the company’s affairs); Whitlam v ASIC (2003) 57 NSWLR 559 (proxy voting at general meetings). 3 M Maiden, ‘Shareholder Activism in its Infancy’ The Sydney Morning Herald (Sydney, 28 November 2012) 1 (referring to activism by 1980s entrepreneur Robert Holmes à Court); M West, ‘Boards under Attack from Activist Funds’ The Sydney Morning Herald (Sydney, 25 November 2013) 21 (referring to activism by Sir Ron Brierley and Gary Weiss). 4 See generally, K Anderson and I Ramsay, ‘From the Picket Line to the Board Room: Union Shareholder Activism in Australia’ (2006) 24 Company and Securities Law Journal 279; M Rawling, ‘Australian Trade Unions as Shareholder Activists: The Rocky Path towards Corporate Democracy’ (2006) 28 Sydney Law Review 227.

The Evidence of Australian Shareholder Activism (I)  47 provisions of the Corporations Act which enable not less than 100 shareholders to table resolutions for consideration at shareholder meetings.5 As a result of their large membership bases and organisational capabilities, the unions found it relatively straightforward to identify at least 100  shareholders who were prepared to support the tabling of resolutions addressing the unions’ labourmarket or workplace safety concerns. Environmental organisations used similar tactics in an attempt to pressure public companies to address their environmental concerns.6 Australia has also produced some notable individual activists, or what are known in the United States as ‘gadflies’.7 One of the most well-known (or, in some eyes, most notorious) was the late Jack Tilburn, who described himself as the ‘corporate terminator’ and claimed he had attended in excess of 500 annual general meetings.8 His arguable successor as Australia’s best known corporate gadfly, Stephen Mayne, has been labelled an ‘AGM flea’.9 These forms of shareholder activism were frequently regarded as idiosyncrasies or abnormalities of Australian corporate governance. According to one group of commentators, activism in the 1980s and 1990s was ‘the near-exclusive domain of independently wealthy gadflies with bones to pick or neuroses to assuage’10 or ‘the pastime of wealthy individuals seeking to gain control of, or influence over, a particular corporation’.11 In NRMA Ltd v Snodgrass, Windeyer J described the in-fighting affecting the National Roads and Motorists Association as ‘a cross the members must bear’.12 Trade union and environmental activism was also regarded as a corporate governance aberration. In 2000, a senior government minister expressed concern that such activism ‘[forces] boards to deal with issues way outside their normal ken and that have nothing to do with creating shareholder wealth’.13 Shareholder activism emerged from the periphery in the years following the Global Financial Crisis and became a mainstream corporate governance concern in Australia. As chapter one noted, this development was spurred by an increase in institutional investor activism, high-profile activist interventions 5 See generally, ch 3, section 3.4.4. 6 See generally, S Shearing, ‘Raising the Boardroom Temperature? Climate Change and Shareholder Activism in Australia’ (2012) 29 Environmental and Planning Law Journal 479. 7 K Kastiel and Y Nili, ‘The Giant Shadow of Corporate Gadflies’ (2021) 94 Southern California Law Review 569. 8 J Whyte and J Gardner, ‘Jack Tilburn, Corporate Terminator, Has Asked Last Question’, The Australian Financial Review (10 October 2018) 2. 9 ‘Flea on a Bike Loses Squillions’ Crikey (8 March 2005) www.crikey.com.au/2005/03/08/flea-on-abike-loses-squillions. 10 D Friedlander, M Fischer and M Ting, ‘Economic Activism: Re-thinking Directors’ Duties and Governance Structures in the Activist Context’ (Paper presented at the Supreme Court of New South Wales Annual Corporate Law Conference, Sydney, 29 July 2014), 2. 11 ibid 4. 12 NRMA v Snodgrass (n 2), 392. 13 J Hockey, Minister for Financial Services and Regulation, ‘Wealth Not Politics’ (Press Release, FSR/083, 18 December 2000).

48  The Evidence of Australian Shareholder Activism (I) undertaken by some of Australia’s wealthiest individuals, and concerns about the arrival of hedge fund activism in Australia.14 Recent years have witnessed further examples of these varieties of activism. For example, the prominent US hedge fund, Elliott Management, launched a high-profile campaign against BHP in 2017 seeking to bring about change in its strategy and corporate structure.15 Local activist investors have launched campaigns against the construction materials group Boral, the ‘blue chip’ financial services company, AMP, and mining company, Iluka Resources.16 In recent years, institutional investors have sought to pressure a number of prominent companies to address perceived deficiencies in their affairs. This included a high-profile intervention led by Australian institutional investors against the Anglo-Australian resources company, Rio Tinto Ltd, as a result of its destruction of 46,000-year-old indigenous rock art in Western Australia in the course of mine expansion work.17 Overt interventionist campaigns by shareholders are, therefore, a feature of the Australian corporate governance landscape. Yet, the true extent of this form of activism is unclear. Commentators in the years following the Global Financial Crisis considered that it had become an increasingly significant development in Australia. However, as chapter one noted, commentators have recently begun to query its prevalence.18 This chapter explores the incidence and nature of this form of activism. It starts by examining the author’s hand-collected data of activism between 2013 and 2016 and then reviews third-party data and research covering various periods spanning 2002–20. 4.1.  INVESTIGATING INTERVENTIONIST CAMPAIGNS IN 2013–16

Systematically investigating activism in a market consisting of more than 2000 listed entities presents a logistical challenge. The task is made more difficult by the fact that Australian activists are not under any obligation per se to notify the market when they propose to engage in activism.19 In the absence of an activism-triggered disclosure regime, a researcher needs to find an alternative (and practical) way to uncover examples of activism. One way to do this is to identify and investigate a readily identifiable proxy for overt, interventionist activism. In Australia, attempts by shareholders to use their generous rights to change the composition of their company’s board or 14 Ch 1, section 1.2. 15 Discussed in M Jefferies, ‘The Third Wave of Shareholder Influence and the Emergence of Informational Activism in Australia’ (2019) 34 Australian Journal of Corporate Law 305. 16 Discussed in Q Digby, T Stutt and B Wang, ‘Australia’ in FJ Aquila (ed), The Shareholder Rights and Activism Review, 5th edn (London, Law Business Research, 2020) Section III. 17 N Toscano and E Knight, ‘Colonial Rabble Rousers: How a Group of Australian Funds Toppled Rio’s Chief’, The Sydney Morning Herald (Sydney, 19 September 2020) 4. 18 Ch 1, section 1.2. 19 Ch 3, section 3.4.5.

Investigating Interventionist Campaigns in 2013–16  49 alter the terms of their company’s constitution are such a proxy.20 This chapter refers to these actions as ‘Interventions’. It is appropriate to treat Interventions as a suitable proxy for aggressive activism because they provide shareholders with significant scope to affect a company’s governance. First, shareholders can exercise their rights to replace directors and change the corporate constitution proactively; that is, they can choose to exercise them of their own accord and without the consent or cooperation of a company’s board. In contrast, shareholders’ other governance rights under the Corporations Act and the ASX Listing Rules are largely ‘reactive’ in nature; that is, shareholders only exercise them in response to a proposal formulated by company managers.21 Second, shareholders’ rights to change the composition of their company’s board and amend the corporate constitution provide scope for making fundamental changes to a company’s governance arrangements.22 Shareholders can use these powers to change the composition of the body that is charged with overseeing the management of their company, or to alter the terms of the corporate constitution in a way that circumscribes, conditions or directs the exercise of corporate managers’ powers.23 This prompts the following hypothesis: if Australian shareholders favour aggressive, interventionist forms of activism, one should expect to see shareholders frequently relying on these core governance rights. This chapter investigates this hypothesis by exploring the nature and extent of Interventions in Australia. A significant practical advantage of focusing on Interventions is that they are readily identifiable owing to public companies’ mandatory disclosure obligations. Among other things, a public company must disclose details of shareholder requisitions in relation to Interventions,24 information regarding general meetings at which Interventions occur,25 copies of

20 For this purpose, an ‘attempt’ includes any threatened or actual attempt to initiate a change in a company’s board or an amendment to its constitution, regardless of whether the attempt proceeded to a vote or was successful. 21 A point illustrated by Re Molopo Energy Ltd (2014) 104 ACSR 46, in which the court held that the power of a shareholder meeting to approve a capital reduction under Corporations Act, ch 2J only extends to the approval of a capital reduction proposed by directors (ie, it does not permit a shareholder meeting to propose and approve a capital reduction of its own initiative). 22 An ASIC Commissioner has described these forms of intervention as ‘one of the few ways shareholders have to effect significant timely change in the management and direction of their company’: J Price, ‘Holding the Board to Account – General Meetings Requested by Shareholders’ (December 2016) www.asic.gov.au/regulatory-resources/corporate-governance/corporate-governance-articles/ holding-the-board-to-account-general-meetings-requested-by-shareholders/. 23 This contrasts with shareholders’ other governance rights which relate to quite specific issues (eg, the approval of a capital return) that may have little bearing on issues of real concern to an activist shareholder. 24 Under ASX Listing Rules, r 3.17A.1, a listed company must notify the ASX of any notice received under Corporations Act, ss 249D (shareholder-requisitioned meeting), 249F (shareholdercalled meeting) or 249N (shareholder-requisitioned resolution). 25 Under ASX Listing Rules, r 3.17.1, a listed company must give the ASX a copy of a notice of meeting and any associated explanatory materials. In addition, under r 3.13.2, a listed company must announce the outcome of voting at the meeting.

50  The Evidence of Australian Shareholder Activism (I) correspondence sent to shareholders in connection with an Intervention,26 and material developments in relation to Interventions.27 This information is filed with the ASX’s Market Announcements Platform which is publicly accessible through the ASX’s website and research databases.28 4.1.1.  Incidence of Interventions in the All Ordinaries Index 2013–16 This section presents the results of the author’s research into the nature and incidence of Interventions in relation to companies in the ASX/S&P All Ordinaries Index (All Ordinaries Index) over the four-year period from 1 January 2013 to 31 December 2016. The All Ordinaries Index is regarded as a proxy for the Australian listed equities market as a whole.29 Although it includes only a quarter of all listed entities, the spread in market capitalisation of its constituents means that it provides a broad perspective on the market.30 Owing to the different rules governing their internal governance, trusts and foreign entities were removed from the sample, reducing the sample size to approximately 450 Australian public companies over each year of the research period. ASX filings of these companies in the period 2013–16 were reviewed to identify Interventions. This revealed only 44 Interventions. They are categorised by type of Intervention and by year in Table 1 below. Table 1  Summary of types of Intervention, by category and by year Category of Intervention

2013

2014

2015

2016

Remove/appoint director(s)

9

16

8

3

Amend constitution

0

 4

3

0

1

–

–

–

Combined Intervention Remove/appoint director(s) + amend constitution

As Table 1 indicates, there were significantly more Interventions in 2014 than in the other years during the research period. However, this is largely explained by the fact that two well-known, non-commercial activists undertook multiple interventions that year.31 26 ASX Listing Rules, r 3.17.1. 27 As a result of a public company’s mandatory ‘continuous’ disclosure obligation to publicly disclose information which a reasonable person would expect to have a material effect on the price or value of the company’s securities: see ch 3, section 3.4.5. 28 ASX Ltd, ASX Market Announcements Platform (Guidance Note 14, 6 August 2018). 29 S&P Dow Jones, ‘S&P/ASX Australian Indices: Methodology’ (April 2019) 4. 30 As of April 2022, the capitalisation of its constituents ranges from $243 billion to $100 million: S&P Dow Jones, ‘S&P/ASX All Ordinaries Factsheet’ (April 2022) www.spglobal.com/spdji/en/ indices/equity/all-ordinaries/#overview. 31 The activists were Stephen Mayne and the Australasian Centre for Corporate Responsibility – further details are provided below. In 2014, Stephen Mayne undertook five Interventions and the Australasian Centre for Corporate Responsibility undertook three Interventions.

Investigating Interventionist Campaigns in 2013–16  51 Given the cross-section of the market studied (approximately 450 companies) and the four-year research period, the number of Interventions identified is surprisingly few in number. Most of the Interventions involved attempts to appoint and/or remove directors (37 Interventions). Shareholders attempted to amend their company’s constitution in eight Interventions. Further details are provided in the next two sections. 4.1.2.  Nature of Interventions (i)  Attempts to Appoint and/or Remove Directors The 37 Interventions involving shareholders attempting to appoint or remove directors took various forms. Sixteen involved shareholders attempting to appoint directors, five involved shareholders attempting to remove directors, and 16 involved shareholders attempting both to appoint and remove directors. These results indicate that activists seek board influence in different ways – sometimes by appointing directors, sometimes by removing directors, and sometimes by simultaneously appointing and removing directors. Notably, 29 of the 37 Interventions only sought to change a minority of a company’s directors. Although shareholder activism is often portrayed as a struggle for corporate supremacy, this finding suggests that activists may secure meaningful influence over boards by making changes that fall short of a majority board spill. A majority of the 37 Interventions (21 in total) occurred pursuant to the routine director elections at a company’s AGM. In these cases, the activists proposed candidates for election and/or sought to unseat incumbents standing for re-election. This finding highlights how even the routine business of an AGM can provide scope for activist interventions. The remainder of the board-related Interventions involved resolutions tabled by shareholders, or shareholder meetings requisitioned or convened by shareholders, pursuant to ss 249D, 249F and 249N of the Corporations Act.32 No Interventions occurred pursuant to the board spill procedure under the two-strikes rule. (ii)  Attempts to Amend the Corporate Constitution The eight Interventions involving constitutional amendments took one of two forms. Two involved shareholders attempting to restrict the management powers of their company’s directors by requiring directors to obtain shareholder approval in order to undertake a particular corporate transaction. The other six Interventions involved activists attempting to amend their company’s constitution in order to require (or give shareholders a power to require) more extensive

32 These

legislative provisions are explained in ch 3, section 3.4.4.

52  The Evidence of Australian Shareholder Activism (I) disclosure regarding the environmental implications of their company’s business operations. These eight Interventions did not involve activists using the constitutional amendment power to obtain prescriptive control over a company’s business operations. The two Interventions which were targeted at particular corporate transactions only sought to give shareholders a power of veto over the relevant transactions rather than power to prescribe how company managers should undertake those transactions. The other six Interventions involved shareholders seeking disclosure regarding the environmental implications of a company’s operations rather than an attempt to control those operations directly. 4.1.3.  Nature of the Activists Behind the Interventions The activists involved in the Interventions fell into three broad categories: • shareholders aligned to an activist organisation pursuing environmental, social or political objectives (‘Issue Group Activists’); • individuals pursuing activism in furtherance of a personal agenda (‘Individual Activists’); and • shareholders pursuing commercial objectives (‘Commercial Activists’). Of the 44 Interventions identified, six involved Issue Group Activists, 11 involved Individual Activists, 25 involved Commercial Activists and two involved activists who could not be categorised owing to the absence of information about their objectives.33 No Interventions were brought jointly by activists from different categories. Further details are provided in the following sections. (i)  Issue Group Activists All six Issue Group Activist Interventions were led by the Australasian Centre for Corporate Responsibility (ACCR). ACCR describes itself as a not-for-profit research and shareholder advocacy organisation focused on environmental, social and governance (ESG) issues.34 In 2014 and 2015, it coordinated four Interventions against three major banks, seeking more complete disclosure 33 In 2014, Paul Dougas nominated for election to the board of Calibre Group Ltd. The company’s notice of meeting provided brief biographical details but no information regarding his reasons for standing for election. In 2015, James Howard nominated as a candidate for election to the board of Kingsgate Consolidated Ltd. Again, the company’s notice of meeting provided brief biographical details but no information about his reasons for standing for election. The absence of an election platform suggests neither case was an example of Individual Activism or Issue Group Activism which invariably involve activists publicising their agenda. However, the absence of details meant that it was not possible to make a definitive categorisation for the purpose of this research. 34 Australasian Centre for Corporate Responsibility, ‘About Us – What We Do’ www.accr.org.au/ about/.

Investigating Interventionist Campaigns in 2013–16  53 regarding their financing of greenhouse gas emitting businesses. In 2015, it also coordinated Interventions against two energy companies seeking more complete disclosure regarding the impact of climate change on their business models. ACCR and its supporters were not significant shareholders in the companies they targeted. Company filings reveal that the average percentage shareholding of ACCR and the shareholders associated with it was 0.059 per cent (median 0.010 per cent). Each Intervention brought by ACCR involved the ACCR tabling a resolution at the targeted company’s AGM which sought to amend the company’s constitution. In each case, the resolution was tabled under s 249N of the Corporations Act which allows at least 100 shareholders or shareholder(s) with voting power of at least 5 per cent to propose a resolution for consideration at a shareholder meeting. ACCR satisfied the 100 shareholder requirement in its Interventions. In each case, ACCR was attempting to achieve a constitutional change that would enable shareholders to give a direction, or express an opinion, to their company’s managers. In effect, ACCR was seeking to propose what are known as directive and precatory resolutions in other jurisdictions. As chapter three explained, Australian shareholders do not have an inherent general law right or a statutory right to pass resolutions giving directions or expressing an opinion or request relating to the management of their company.35 Shareholders can only propose and vote on such a resolution if they are given a power to do so in their company’s constitution. As public company constitutions do not typically give shareholders such a power, activists can only propose a directive or precatory resolution for consideration by a shareholder meeting by framing it as a constitutional amendment.36 In five of ACCR’s Interventions, the relevant resolution sought to amend the company’s constitution by inserting a provision that specifically directed the board to provide annual reporting on climate change issues. Four of these Interventions proceeded to a shareholder vote. The average ‘for’ vote was 4.45 per cent (median 4.19 per cent). In the sixth Intervention, ACCR adopted a different approach, proposing two separate, but related, resolutions. The first resolution sought to amend the relevant company’s constitution to include a general power for a shareholders’ meeting to pass resolutions giving non-binding directions to the company’s board or requesting that the company disclose information. The second resolution, which was conditional on the passage of the first resolution, expressed a specific request to be given under this new power; namely, it requested that the company (a bank) provide disclosure regarding its lending exposure to carbon intensive businesses. The company disclosed that the ‘for’ vote for the constitutional amendment resolution was 10.52  per  cent. As this was not sufficient



35 Ch

3, section 3.4.2.

36 ibid.

54  The Evidence of Australian Shareholder Activism (I) to approve the constitutional amendment, the second, climate change-related precatory resolution was not put to a vote.37 This tactical innovation required shareholders to consider the constitutional amendment issue separately from the climate change-related precatory resolution. This innovation appeared to be designed to address the issue that public company shareholders have limited incentives to investigate and approve nonstandard changes to corporate constitutions.38 By formulating the proposal as two separate resolutions, the activist gave the company’s shareholders an opportunity to consider the merits of the climate change-related precatory resolution free from any concerns they might have had about non-standard constitutional change. Of course, the climate change-related resolution is not voted on if shareholders do not approve the constitutional amendment. However, the proxy votes lodged before the meeting in relation to the climate change-related resolution prior to the meeting may be disclosed at the meeting39 and are often notified to the ASX following the meeting.40 This can provide an avenue for shareholders to reveal their position on the precatory resolution as distinct from their views regarding the constitutional amendment.41 As will be shown later in this chapter, this tactical innovation has been used with increasing success by Issue Group Activists in recent years. (ii)  Individual Activists Individual Activists were responsible for 11 of the 44 Interventions. Three individuals accounted for the 11 Interventions: Stephen Mayne (six), David Barrow (three) and Ian Dunlop (two). Stephen Mayne is a journalist, local government politician and corporate governance activist.42 He targeted, in 2014, Cabcharge Australia, Commonwealth Bank, Fairfax Media, Ten Network and Woolworths and, in 2015, Macquarie Group. Mayne’s stated objectives ranged from improving corporate governance, advancing the interests of retail shareholders, and addressing issues of corporate social responsibility or media diversity.

37 The company did not disclose the proxy votes received on the climate change-related resolution. 38 LA Bebchuk, ‘Limiting Contractual Freedom in Corporate Law: The Discernible Constraints on Charter Amendments’ (1989) 102 Harvard Law Review 1820, 1839 (noting that rational shareholders will generally favour standardised governance arrangements because they will generally have limited incentives to undertake the necessary careful analysis to understand the potential companyspecific implications of a novel constitutional rule). 39 Although Corporations Act, s 250J(1A) only requires this if the resolution is actually put to a vote. 40 Corporations Act, s 251AA requires notification of proxy votes in relation to resolutions passed at a meeting, although in practice companies will often make disclosure in respect of all resolutions on the agenda of meeting. 41 The tactical significance of this approach will be explored further in ch 7, section 7.5. 42 Crikey, ‘Stephen Mayne’ www.crikey.com.au/author/stephenmayne/.

Investigating Interventionist Campaigns in 2013–16  55 David Barrow is a lawyer and accountant who has campaigned against poor consumer practices of Australian banks.43 He targeted three of Australia’s large retail banks in 2013 in relation to concerns regarding fees charged by banks to their customers. Ian Dunlop is a former senior executive of the oil and gas company, Royal Dutch Shell, and former chief executive officer of the Australian Institute of Company Directors.44 He targeted BHP Billiton in 2013 and again in 2014, seeking to raise concerns about how BHP Billiton was addressing the impact of climate change on its business model. These activists either did not have significant shareholdings or chose not to draw attention to their shareholdings. David Barrow disclosed that he held only a single share in each of the banks he targeted. Although no disclosure was made in relation to Ian Dunlop’s 2013 Intervention, BHP disclosed in 2014 that Dunlop’s nomination had been supported by three shareholders holding 0.06  per  cent of BHP’s voting shares. Neither Mayne nor the companies he targeted disclosed the extent of his shareholdings. Each of these activists stood for election to the board of directors, using the annual board elections of the companies they targeted. This form of Intervention is a particularly feasible tactic for activists with very small shareholdings for two reasons. First, as explained in chapter three, the constitutions of Australian companies do not impose onerous conditions in relation to nominating board candidates. Relevantly, the constitutions of the companies targeted by Mayne, Barrow and Dunlop either: (a) required that a candidate be nominated by a person holding at least one share; or (b) did not require a candidate or their nominator to be a shareholder and simply specified that the candidate must submit a signed nomination notice. Second, companies will typically include biographical details of candidates and a description of their election platform in the meeting documents prepared and circulated by the company. This practice is recommended by the Corporate Governance Principles and Recommendations of the ASX Corporate Governance Council.45 It assists activists with small shareholdings who might otherwise struggle to avail themselves of shareholders’ statutory rights to require companies to circulate shareholder-produced information in connection with a shareholder meeting.46 43 According to biographical details provided by Mr Barrow to one of the banks targeted: National Australia Bank Ltd, ‘2013 Notice of Annual General Meeting’ (ASX Announcement, 18 November 2013) 15. 44 According to biographical details contained in BHP Billiton Ltd, ‘Notice of Meeting 2013’ (ASX Announcement, 12 September 2013) 42. 45 ASX Corporate Governance Council, Corporate Governance Principles and Recommendations, 4th edn (2019) Recommendation 1.2(b). 46 Corporations Act, s 249P entitles shareholders who hold at least 5% of a company’s voting shares or at least 100 shareholders entitled to vote at a meeting to request a company to circulate, at

56  The Evidence of Australian Shareholder Activism (I) In terms of voting outcomes, these Interventions were far from successful. For Stephen Mayne and Ian Dunlop, the average ‘for’ vote was only 2.43 per cent (median 2.25 per cent). David Barrow withdrew his nomination in relation to two of the three banks he targeted (for reasons which were not disclosed in the ASX filings or press reports) and received a ‘for’ vote of 4.71 per cent at the one shareholder meeting at which he stood for election. However, these Interventions were demonstrably successful in terms of drawing attention to the individual activists. By standing for election, these activists, with small shareholdings, were able to highlight their causes in a prominent manner, using shareholder meetings organised and paid for by the targeted companies. (iii)  Commercial Activists Commercial Activists were responsible for 25 of the 44 Interventions. This was a larger and more diverse category of activist than the other two categories. Table 2 provides an overview of the different types of shareholders in this category. Table 2  Types of Commercial Activist Type of commercial activist

Number of Interventions

Strategic/trade investor

12

Institutional/professional investor

11

Company founder/senior executive

 2

The nature of shareholders included in the Company Founder/Senior Executive category is self-explanatory. However, a brief explanation is required regarding the first two categories. Strategic/Trade Investors comprised large trading companies, entrepreneurs, and persons who were joint venture or business partners of the target company. Institutional/Professional Investors were investment specialists: hedge funds, fund managers, an industry superannuation fund and private investment vehicles of high net-worth individuals. Notably, only two large institutional investors were included in this category – the fund manager, Perpetual Investment Management, and the industry superannuation fund, HOSTPLUS Superannuation. In each case, they undertook the relevant Intervention jointly with a smaller Institutional/Professional Investor with an active investment style (MH Carnegie & Co Pty Ltd and Allan Gray, respectively). This category also included two investors whom the financial press described as hedge funds. It was not possible to determine from the public filings whether any of the other the company’s cost, a written statement not exceeding 1000 words regarding an item of business at a shareholder meeting, provided certain timing and other requirements are satisfied by the requisitioning shareholders.

Investigating Interventionist Campaigns in 2013–16  57 investors in this category were hedge funds. However, the category did not include any of the prominent, internationally active hedge funds. ASX filings and press reports were reviewed to determine the voting power of Commercial Activists. In 21 of the Interventions, this information was obtained from the activists’ most recent substantial holder notice filed prior to the date of first mention of their Intervention in the ASX filings.47 In the remaining four Interventions, the activists did not have sufficient voting power to trigger the requirement to lodge a substantial holder notice. In those cases, details of the activists’ voting power were obtained from disclosures made by the target companies or from press reports. The results were as follows: • The overall average voting power of Commercial Activists was 17 per cent (median 13 per cent). • The average voting power of each sub-category of Commercial Activist was Strategic/Trade Investor (average 28 per cent, median 19 per cent) and Institutional/Professional Investor (average 7  per  cent, median 6  per  cent). There were not enough activists in the Company Founder/Senior Executive sub-category to provide meaningful average data: the actual disclosed shareholdings of the activists in those cases were 1.31 per cent and 6.18 per cent respectively. It is possible to trace back through substantial holding notices to determine the date on which a shareholder first became a substantial holder.48 Although this will not establish the date on which they first became a shareholder (which may have preceded the date they became a substantial holder), it provides an indication of the timeframe of their investment. As already noted, 21 of the 25 Interventions involving Commercial Activism were undertaken by shareholders which had filed substantial holding notices at the time their Intervention was first disclosed in the ASX filings. For nearly two-thirds of the shareholders undertaking those 21 Interventions, the date on which they became a substantial holder was at least one year before the date when their Intervention was first disclosed in the ASX filings; for approximately one-half, the period was at least two years; and for approximately one-quarter, the period was at least five years. Thus, a majority of the Commercial Activists were either medium or long-term investors in the companies they targeted. 47 Under Corporations Act, s 671B, a shareholder is required to file a notice with a company and the ASX disclosing its interests in a company’s shares when certain ownership thresholds are triggered: ch 3, section 3.4.5. These thresholds may be triggered some time before or after a shareholder decides to pursue an activist strategy. As a result, shareholding data extracted from these notices may not precisely reflect an activist’s shareholding at the time they decided to pursue an Intervention. Nonetheless, the data still provides a sense of the size of an activist’s investment. 48 A substantial shareholding notice must specify the date of the shareholder’s previous substantial holder notice: Corporations Act, s 671B(3) (requirement for prescribed information to be included in notice). Using these dates, it is possible to trace back through ASX filings to find the first notice filed by a substantial holder.

58  The Evidence of Australian Shareholder Activism (I) Eight of the Interventions by Commercial Activists had a transactional focus; that is, they were undertaken in objection to transactions proposed by the target company or were undertaken in an attempt to force the target company to pursue a transaction proposed by the activists. In the remaining Interventions, activists sought to address concerns regarding the target companies’ business strategies or performance or did not publicly disclose the rationale for their Intervention.49 The overwhelming majority of Interventions by Commercial Activists involved an attempt to change the composition of the target company’s board (used in 24 cases). Two Interventions involved Commercial Activists seeking to have the relevant company’s general meeting pass a constitutional amendment which, if it had been passed, would have constrained the way in which the relevant company’s affairs were managed.50 Further details are provided below. (iv)  Commercial Activists and Constitutional Amendments The two Interventions involving constitutional amendments both sought to amend the relevant company’s constitution in order to give shareholders a power to approve a major transaction proposed by the relevant company. In the first case, a US hedge fund, Coastal Capital (Coastal), requisitioned a general meeting to consider a series of proposed amendments to the constitution of Billabong International Ltd (Billabong), an Australian surfwear company experiencing strategic, operational and financial problems. Coastal was critical of a restructuring transaction which Billabong had agreed with a consortium of investment firms and wanted other options to be explored. The amendments proposed by Coastal would have required shareholder approval for significant equity and debt finance transactions or the sale of material assets. The proposed amendments received an average ‘for’ vote of 22.36 per cent. In the second case, the activist fund manager, Allan Gray, and the industry superannuation fund, HOSTPLUS, sought to amend the constitution of Roc Oil Limited (Roc). Roc had proposed a scrip merger with Horizon Oil Limited (Horizon) which, because of the way the merger had been structured, did not involve a vote by Roc shareholders. Allan Gray and HOSTPLUS argued that Roc shareholders should have an opportunity to vote on the merger. The constitutional amendment they proposed required Roc to obtain shareholder approval before making a significant issue of shares. As the scrip merger with Horizon would involve a significant issue of Roc shares, the constitutional amendment would therefore, in effect, give Roc shareholders a vote on the merger. The proposed change received a ‘for’ vote of 51.15 per cent. Although this represented

49 It may seem unusual that an activist’s rationale was not disclosed in relation to an Intervention. However, this results from the fact that Australian law does not impose any obligation per se on an activist shareholder to disclose their intentions: ch 3, section 3.4.5. 50 The number of tactics sums to 26 because one Intervention involved both an attempt to change a company’s constitution and an attempt to change the composition of the company’s board.

Investigating Interventionist Campaigns in 2013–16  59 a majority of shares voted, it fell short of the 75 per cent threshold required to pass a constitutional amendment. (v)  Commercial Activists and Proposals Seeking to Change the Board This was the most common proposal of Commercial Activists. Although changing the composition of a majority (or all) of a board would seem to be a certain way for activist shareholders to bring about change in their company’s affairs, this was sought by Commercial Activists in only a minority of Interventions. Table 3 summarises the different board-change tactics and their outcomes. Table 3  Characteristics of Board-change Interventions by Commercial Activists

Type of board change

No. of Success rate Interventions involving Wholly Partially Wholly such a change successful successful unsuccessful

Reconstitute majority of board

 8

Reconstitute minority of board

16

3

1

4

Appoint single director

 3

0

–

3

Remove single director

 3

2

–

1

Multiple changes (yet resulting in activist nominees constituting less than a majority)

10

4

1

5

Total

24

Note: For the purpose of this table, where, in the face of an Intervention, a company agreed to appoint an activist’s candidate, or a director targeted by an activist for removal agreed to resign, such an outcome is treated as a success for the activist.

The fact that, in a majority of these Interventions, Commercial Activists were prepared to incur the cost and effort associated with a proxy contest to change a minority of the board suggests that it is not necessary for activists to alter the composition of a majority of a company’s board in order to achieve their objectives. Some of these minority-change Interventions targeted a prominent director for removal;51 some were part of a show of force by a very large investor52 or a shareholder with significant commercial or financing connections 51 Eg, in the 2014 Intervention involving Collins Food Ltd, a major shareholder urged shareholders to vote against the re-election of Collins’ chairman and the company’s remuneration report owing to concerns about the company’s corporate governance and strategy under the chairman’s leadership. 52 Eg, in 2013, the Irish media company, Independent News and Media PLC, which was a longstanding, major (30.96%) shareholder in APN News and Media Ltd, sought to remove six of the company’s 10 directors over a disagreement regarding a proposed capital raising. In 2015, the large construction company, CIMIC Group Ltd (formerly Leighton Holdings), which held 36.66% of the

60  The Evidence of Australian Shareholder Activism (I) to the relevant company;53 and some sought to install as a director a potentially influential individual such as a founder or former senior executive.54 These circumstances suggest that contextual factors, including the identity of director(s) being appointed or removed, or the commercial significance of the activist, may enhance the overall impact of even partial changes to the composition of a company’s board. As revealed by the voting outcomes noted in Table 3, these Interventions experienced mixed results. This is consistent with third party research. Activist Insight has reported data on the outcome of contested board votes at Australian companies between 2015 and 2020. In each of those years, activists failed to win any board seats in the majority of contests.55 It would seem, therefore, that it cannot be assumed that board-change Interventions are only launched when activists are confident of success. The data presented above instead reveals this form of Intervention as, on average, an uncertain exercise. Nonetheless, Commercial Activists used board-related activism in a majority of their Interventions. Why would Commercial Activists choose a tactic whose outcome is uncertain? One possible answer is that a board-related Intervention can bring about change in a company’s affairs even if it does not succeed; for example, because it catalyses more intense shareholder-monitoring of corporate managers. 4.1.4. Summary Table 4 summarises the information presented above, highlighting the number and different types of Interventions pursued by the different types of activist. Table 4 highlights some interesting patterns in the nature of activism pursued by the three categories of activist. First, each category of activist favoured specific types of Intervention. Interventions by Individual Activists exclusively involved attempts to stand for election to a company’s board of directors; Issue Group Activists exclusively undertook Interventions seeking to pass resolutions amending companies’ constitutions in order to require the company to make disclosure about an environmental issue; and Commercial Activists

smaller engineering firm, Sedgman Ltd, brought about the defeat of six resolutions at Sedgman’s AGM, including the re-election of three directors. 53 Eg, in 2015, three shareholders who were involved in financing and constructing a mine for Cudeco Ltd, who held approximately 35%, sought to remove a director of Cudeco Ltd, who was also its founder. 54 Eg, in 2015 the former chairman/CEO/co-founder and the former CFO of Infomedia Ltd sought election to the company’s board over a disagreement regarding corporate strategy; and in 2015 the founder/CEO and a substantial shareholder of Money3 Corporation Ltd sought the election of himself and one other candidate to the company’s board only months after he left the employment of the company as a result of a disagreement over commercial strategy. 55 Activist Insight, The Activist Investing Annual Review (2021) 13. Moreover, if ‘success’ is measured as at least one board seat being won, Activist Insight reports that, on average, only 30% of campaigns were ‘successful’ in this sense in each year of the period 2015–20.

Investigating Interventionist Campaigns in 2013–16  61 Table 4  Overview of tactics of different activists Type of Intervention Category of activist

No. Of Interventions

Appoint/remove directors

Amend constitution

Issue Group Activism

 6

0

6

Individual Activism

Commercial Activism

11

25

11

241

0

 21

Market capitalisation strata in which targeted companies located2 ASX50

100%

MidCap50

0%

SmallOrds

0%

Unranked

0%

ASX50

73%

MidCap50

0%

SmallOrds

27%

Unranked

0%

ASX50

0%

MidCap50

4%

SmallOrds

52%

Unranked

44%

Notes: 1. These figures sum to more than 25 because one Intervention involved both an attempt to change a company’s constitution and an attempt to change the composition of its board. 2. There are indices which divide the listed equities market into different ‘strata’ according to market capitalisation: the S&P/ASX 50, which comprises the largest 50 entities by market capitalisation; the S&P/ASX Mid Cap 50, which comprises entities which are included in the S&P/ASX 100 but not in the S&P/ASX 50; and the S&P/ASX Small Ordinaries, which represents entities included in the S&P/ASX 300 but not the S&P/ASX 100.56

overwhelmingly undertook Interventions which sought to change the composition of a company’s board. Second, Table 4 shows how the different types of activist tended to focus on different ‘strata’ of the market. Interventions by Individual Activists and Issue Group Activists primarily targeted large capitalisation companies in the highest ‘strata’ of the ASX. In contrast, Commercial Activists focused predominantly on companies with smaller market capitalisations. Moreover, Table 4 highlights that a sizeable majority of the total number of Interventions were clustered in the small-capitalisation ‘strata’ of the market. These dispersion patterns suggest that Interventions, especially commercially motivated Interventions, are more typically a small-capitalisation company phenomenon. Notwithstanding the four-year research period and broad cross-section of the market examined, the relatively small number of Interventions identified by this dissertation’s research is notable. Interventions represent a form of activism

56 ASX

Ltd, ‘Types of Indices’ www.asx.com.au/products/capitalisation-indices.htm.

62  The Evidence of Australian Shareholder Activism (I) which has escalated to a stage where activists decide to take steps to change the composition of their company’s board or amend its governance rules. The results of the research presented above suggest that Australian shareholder activism does not commonly reach this stage. 4.2.  THIRD PARTY DATA AND RESEARCH ON INTERVENTIONS

Several other studies have explored Interventions over the last 20 years and report consistent findings regarding the nature and incidence of such activism in Australia. Chia and Ramsay examined shareholder-proposed resolutions in the largest 300 listed companies over the period 2004–13.57 Chia and Ramsay identified 877  resolutions, an average of approximately 88 resolutions a year.58 Approximately 40 per cent of the resolutions occurred in the two-year period 2008–09 (ie, coinciding with the Global Financial Crisis and its aftermath). Moreover, the figure of 877 refers to individual resolutions, not Interventions or companies targeted. The fact that there were 877 resolutions does not mean there were 877 separate Interventions or that 877 different companies were targeted. It is likely that the numbers of Interventions and companies targeted were smaller in number. Relevantly, Chia and Ramsay note that 92 per cent of the resolutions concerned the election or removal of directors, which raises the possibility that a number of those resolutions would have formed part of a single Intervention aimed at reconstituting a company’s board (ie, involving multiple resolutions aimed at removing and replacing multiple directors).59 Chia and Ramsay also note that only 23 companies accounted for 37 per cent of the resolutions they identified, further supporting the view that the 877 resolutions were clustered in significantly fewer than 877 companies.60 Chia and Ramsay examined the characteristics of the 23 companies that accounted for 37 per cent of the resolutions. They were unable to obtain data to classify eight companies; however, of the remaining 15 companies, two had a market capitalisation in excess of $1 billion, two had a market capitalisation of between $100 million and $1 billion, and 11 had a market capitalisation of less than $100 million.61 Although this is not a significant sample, it is consistent with the results of the research outlined in the previous section; namely, it suggests that, to the extent they occur, Interventions are more typically a smallcapitalisation company phenomenon.

57 HX Chia and I Ramsay, ‘An Analysis of Shareholder Resolutions Involving Australian Listed Companies from 2004 to 2013’ (2016) 34 Company and Securities Law Journal 618. 58 ibid 619. 59 ibid 620–21. 60 ibid 622. 61 ibid 623.

Third Party Data and Research on Interventions  63 The law firm, Gilbert & Tobin, examined instances of shareholders requisitioning or calling meetings or tabling resolutions at meetings of ASXlisted entities in 2016.62 Gilbert & Tobin found this occurred in relation to only 29 companies. The meetings (or resolutions) went ahead in only 11 cases and, of those, ‘only 8 were successful to any degree’.63 Freeburn and Ramsay examined shareholder-proposed directive and precatory resolutions addressing ESG issues filed between 2002 and 2019.64 They identified 83 such resolutions in this period, the majority of which related to climate change concerns.65 Freeburn and Ramsay conclude that in recent years such activism ‘has increased in terms of number, prominence and impact’.66 Consistently, they report that 80  per  cent (66) of these resolutions occurred in the three-year period 2017–19.67 However, further details of their research indicate that, in overall terms, this form of activism is not widespread.68 Only seven proponents were responsible for the 83 resolutions and just 24 (generally large) companies were targeted by these resolutions.69 In fact, two proponents accounted for 84 per cent of these resolutions70 and five companies were the targets of 45  per  cent of the filed resolutions.71 Further, a quarter of the 83 r­esolutions were constitutional amendment resolutions which, as explained earlier in this chapter,72 are now often paired with a separate ESG-related resolution for tactical reasons.73 The number of activist interventions represented by these resolutions is therefore materially less than 83 in number. The filing

62 Gilbert & Tobin, Shareholder Activism – More Than One Way to Skin a Cat (16 December 2016). 63 ibid. 64 L Freeburn and I Ramsay, ‘An Analysis of ESG Shareholder Resolutions in Australia’ (2021) 44(3) UNSW Law Journal 1142. 65 ibid 1150, 1157. Freeburn and Ramsay do not specifically identify the legal mechanism used to file the resolutions. However, they comment, at 1157, that proponents of resolutions ‘typically only held a small proportion of the total shares of the respective companies.’ This suggests that proponents typically filed the resolutions under Corporations Act, s 249N, which enables proponents with de minimis shareholdings to file if the filing is supported by not less than 100 shareholders. 66 ibid 1144. 67 ibid 1150, 1157. 68 Research published by the Australian Council of Superannuation Investors (‘ACSI’) in 2017 into shareholder-proposed resolutions in relation to ESG issues similarly notes that that ‘[f]ew shareholder proposed resolutions (outside director removals and director elections) have been included on meeting agendas in Australia’s recent history’. It identifies 19 shareholder meetings of companies in the S&P/ASX 200 at which such resolutions were tabled in the period 2012 to October 2017, the majority of which related to environmental issues: ACSI and K Sheehan, Shareholder Resolutions in Australia: Is There a Better Way? (2017) 12. 69 Freeburn and Ramsay, ‘An Analysis of ESG Shareholder Resolutions in Australia’ (2021) 1150–57. 70 Namely, Australasian Centre for Corporate Responsibility and Market Forces: ibid 1155. 71 Namely, Origin Energy Ltd (15 resolutions), ANZ Banking Group Ltd (seven resolutions), Woolworths Group Ltd (five resolutions), Santos Ltd (five resolutions) and Rio Tinto Ltd (five resolutions): ibid 1152. 72 See above, section 4.1.3(i). 73 Freeburn and Ramsay (n 64) 1158.

64  The Evidence of Australian Shareholder Activism (I) of ESG-related shareholder resolutions is, at least for now, not a widespread activity. The proponents responsible for these proposals were Issue Group Activists. ACCR and Market Forces were the most prolific, accounting for nearly 84 per cent of the proposed resolutions.74 In some cases, institutional investors supported these organisations by signing (or ‘co-filing’) the requisitions required under the Corporations Act to table the resolutions at a shareholder meeting.75 However, such co-filers tended to be religious funds, specialist ethical or responsible fund managers, foundations or public pension funds.76 Some of these investors were foreign, such as the Church of England Pensions Board, Mercy Investment Services and the Swedish National Pension Fund.77 Apart from a small number of industry superannuation funds, mainstream Australian institutional investors did not act as co-filers.78 Freeburn and Ramsay observe that voting support for these resolutions ‘has been small in percentage terms, barely rising above single figures’.79 They acknowledge that there is some evidence that voting support for such resolutions is trending upwards, but conclude that it is too early to express a definitive view about any such trend.80 However, this does not mean this is a wholly inconsequential form of activism. First, as Freeburn and Ramsay note, voting data does not necessarily capture the full impact of these resolutions. There is evidence that these proposals may influence change in other ways, such as by generating publicity and creating an incentive for targeted companies to reach a compromise with the shareholder proponents to avoid a shareholder vote.81 Relevantly, the companies targeted by the resolutions were prominent, large-capitalisation companies,82 which potentially increases the impact of the publicity generated by these interventions. Second, there have been some exceptional cases indicating that these proposals are capable of attracting significant support from institutional investors in the right circumstances. Freeburn and Ramsay acknowledge that there were several AGMs in 2018 and 2019 where climate change related resolutions received voting support in excess of 20 per cent and note that further examples occurred subsequent to their 2002–19 research period.83 An interesting development in ESG-related shareholder proposals became apparent in 2021, when shareholders filed proposals seeking an annual advisory vote on their company’s response to climate change. These proposals echo public 74 ibid 1155. 75 ibid. 76 A point also made by B Sheehy, H Pender and B Jacobsen, ‘Corporate Social Responsibility/ESG Shareholder Activism in Australia’ (2021) 36 Australian Journal of Corporate Law 156, 160. 77 Freeburn and Ramsay (n 64) 1156. 78 ibid. 79 ibid 1145. 80 ibid. 81 ibid 1167–69. 82 ibid 1153–54. 83 ibid 1165. These recent voting trends are explored in more detail in the next chapter.

Other Evidence of Interventionist Activist Campaigns  65 company shareholders’ annual ‘say on pay’ and have accordingly become known as ‘say on climate’ proposals.84 In the Australian context, they involve a constitutional amendment which requires the targeted company to issue an annual climate change report and table an advisory resolution at each AGM seeking shareholder approval of the report.85 So far, these proposals have been filed in relation to only a handful of prominent oil and gas and energy companies and have not been passed.86 In 2021, the peak representative body for Australian industry superannuation and pension funds published a policy that called for shareholders to have an annual ‘say on climate’. In recognition of growing investor support for an annual ‘say on climate’, some companies have sought to take the initiative and have voluntarily agreed to give shareholders a ‘say on climate’ at their forthcoming AGMs.87 In summary, shareholder-proposed ESG resolutions have become noteworthy in recent years. However, in overall terms, this form of activism is undertaken by a limited number of activists and is presently confined to a small number of large public companies. 4.3.  OTHER EVIDENCE OF INTERVENTIONIST ACTIVIST CAMPAIGNS

The research described above focuses on a particular type of activist ­intervention – namely, the exercise or attempted exercise of shareholders’ legal governance rights. Some of the research also focuses on particular strata of the listed company market, rather than the market as a whole. Does this create the risk that this research is too narrowly focused? More specifically, is it possible that interventionist activist campaigns use other tactics or target other parts of the listed company market, and are therefore not captured by this research? There is evidence, for example, of activists using ‘extra-legal’ tactics to prosecute highprofile campaigns; that is, tactics that do not involve the exercise or attempted exercise of shareholders’ governance rights. For example, in its 2017 campaign against BHP, Elliott Management did not exercise any rights to requisition a shareholder meeting or propose a shareholder resolution. Instead, among other things, Elliott published a ‘BHP Shareholder Value Unlock Plan’, created a ‘fixingbhp.com’ website, commissioned a report from an advisory firm regarding its proposals for BHP, and took out advertisements to promote its campaign,

84 See, eg, Institutional Shareholder Services, ‘Proxy Season Climate-Related Voting Trends Report’ (Harvard Law School Forum on Corporate Governance, 29 September 2021) www.corpgov.law.harvard. edu/2021/09/29/proxy-season-climate-related-voting-trends-report/. In the Australian context, see ACSI, Climate Change Policy (26 April 2021) www.acsi.org.au/policies/climate-change/. 85 See, eg, Santos Ltd, ‘Notice of Annual General Meeting’ (ASX Announcement, 12 March 2021). 86 See T Bowley and JG Hill, ‘Stewardship Codes, ESG Activism and Transnational Ordering’ in T Kuntz (ed), Research Handbook on Environmental, Social and Governance (Cheltenham, Edward Elgar, forthcoming). 87 ibid.

66  The Evidence of Australian Shareholder Activism (I) including one which wrapped an entire Melbourne tram with adverts critical of BHP.88 Elliott also reportedly engaged in private discussions with BHP over an eight-month period.89 Various commercial organisations have published research which explores the nature and incidence of such other forms of interventionist activism. This research has the potential, therefore, to provide a broader perspective on what is happening in the Australian market. In 2016, investment bank JP Morgan published research on the incidence of ‘shareholder campaigns’ in the period 2011–16.90 JP Morgan defined shareholder campaigns as interventions by activists focused on board representation, corporate governance enhancements, proposals to maximise shareholder value, the removal of directors or officers, or opposing a merger.91 JP Morgan’s research considered the Australian listed company market as a whole and drew its data from proprietary databases, company filings and press reports.92 JP Morgan reports that there were 351 ‘campaigns’ in the period 2011–16.93 The data provider Activist Insight, together with Australian law firm Arnold Bloch Leibler (ABL), published a report in 2016 into ‘public demands’ by shareholders in the period 2013 to 30 June 2016.94 The report defines ‘public demands’ as demands made by shareholders regarding financial or governance-related matters, but excluding environmental or social proposals and short-selling activism.95 The report examined the Australian listed company market as a whole and drew its data from Activist Insight’s databases. Although the report does not state the number of ‘public demands’ identified, it discloses that 197 Australian companies received a public demand during the period 2013 to 30 June 2016.96 Activist Insight has also published annual reviews of worldwide activism levels which disclose more recent data for Australia. These reviews cover the public company market as a whole and draw on data from Activist Insight’s databases. In relation to Australia, Activist Insight reports that there were 60, 58, 78, 72 and 62 ‘demands’ in 2016, 2017, 2018, 2019 and 2020, respectively.97 88 Jefferies (n 15) 331–32. 89 ibid 332. 90 JP Morgan, Shareholder Activism in Australia: Navigating the Evolving Landscape (November 2016). 91 ibid 4. 92 ibid. 93 ibid. 94 Activist Insight and Arnold Bloch Leibler (‘Activist Insight/ABL’), Shareholder Activism in Australia: A Review of Trends in Activist Investing (2016). 95 ibid 2. 96 ibid 6. 97 Activist Insight, Activist Investing: An Annual Review of Trends in Activist Investing (2017) 20 (relating to 2016); Activist Insight, The Activist Investing Annual Review 2018 (2018) 6–7 (relating to 2017); Activist Insight, The Activist Investing Annual Review 2019 (2019) (relating to 2018) 6–7; Activist Insight, The Activist Investing Annual Review (2020) 6–7 (relating to 2019); Activist Insight, The Activist Investing Annual Review (2021) 6–7 (relating to 2020). The reports do not define a ‘demand’.

Other Evidence of Interventionist Activist Campaigns  67 These reports invariably conclude that activism has become a significant part of Australian corporate governance. JP Morgan, for example, observed that Australian companies ‘find themselves increasingly on the radar for activists looking to expand their influence’.98 Activist Insight/ABL’s report proclaimed that ‘[s]hareholder activism has begun to shake the foundations of the Australian listed company landscape’.99 However, a closer examination of this research reveals a more nuanced image of interventionist activism in Australia. 4.3.1.  The Reported Data does not Indicate that Interventionist Activism is Widespread or Inexorably Increasing JP Morgan reports a significant increase in activity in 2013 but activity thereafter remains at relatively constant levels through 2016.100 The Activist Insight/ABL report does not provide data regarding year-on-year trends. The Activist Insight reports addressing the years 2016–20 reveal an increase in demands between 2017 and 2018 and then modest decreases through 2020.101 Although this data, overall, suggests there was a step-up in interventionist campaigns in the early part of last decade, it is difficult to discern a clear trend in the later years. In the context of a market of more than 2000 listed entities, the incidence rates of ‘campaigns’ and ‘demands’ reported by this research are not numerically significant. Even in the early part of the previous decade during which levels of interventionist activism appeared to increase, JP Morgan reports an average of only 73 activist events a year.102 The data in the Activist Insight reports provides an average of 66 interventions a year between 2016–20.103 4.3.2.  Other Notable Findings The JP Morgan, Activist Insight/ABL and Activist Insight reports reveal that activist interventions predominantly involved small capitalisation companies. Activist Insight/ABL report that target companies consisted predominantly of small capitalisation stocks (6 per cent), micro-capitalisation stocks (12 per cent) and, notably, nano-capitalisation stocks (73 per cent).104 JP Morgan reports that 98 JP Morgan, Shareholder Activism in Australia (2016) 3. 99 Activist Insight/ABL, Shareholder Activism in Australia (2016) 3. 100 JP Morgan reports 48 interventions in 2012, 71 in 2013, 72 in 2014, 79 in 2015 and 71 in 2016 (the last figure being an annualised estimate since the data was only current to 30 September 2016): JP Morgan (n 90) 4. 101 See above, n 97. 102 JP Morgan (n 90) 4. 103 See above, n 97. 104 Activist Insight/ABL (n 94) 6. The report only provides qualitative descriptions of these categories although at 5 it gives an indication of the size of companies included in the micro- and

68  The Evidence of Australian Shareholder Activism (I) target companies consisted of companies with a market capitalisation under $100 million (77  per  cent), companies with a market capitalisation between $100  million and $1 billion (14  per  cent) and companies with a market capitalisation greater than $1 billion (9  per  cent).105 Activist Insight reports that 53 per cent of the 58 companies targeted in 2017 and nearly two-thirds of the 78 companies targeted in 2018 were ‘nano-capitalisation’ stocks, which it defines as companies with a market capitalisation of less than US$50 million.106 They describe this as a ‘historical pattern’ in Australia.107 This research also makes several interesting observations regarding the nature of activists. First, Activist Insight/ABL and JP Morgan report that activists were predominantly domestic investors.108 Second, their reports indicate that specialist activist investors (eg, hedge funds) only accounted for a modest proportion of activism. JP Morgan reports that ‘dedicated’ funds accounted for 22 per cent of campaigns in 2016, up from 13 per cent in 2014. It observes that ‘activism is in the nascent stages as an asset class’, and notes that ‘Australia has not yet received the same influx of U.S. activist investors as other regions.’109 JP  Morgan also notes that institutional investor support for campaigns by specialist activist investors is still evolving.110 Activist Insight reports that US-based activist investors undertook only 6  per  cent of ‘proxy contests’ in 2017 and none in 2018 and 2019.111 Activist Insight/ABL claim that the capital available to Australian activist investors is ‘scarce’ and, in particular, that Australian superannuation funds do not tend to invest in domestic activist funds.112 The relatively modest funds of Australian activist investors would limit the size of companies they can target. Relevantly, Activist Insight reports that the average market capitalisation of companies targeted in 2018 by the prominent Australian activist investor, Sandon Capital, was US$89 million.113 This research suggests that, for now at least, specialist activist investors play a limited role in activist interventions in Australia.114 nano-capitalisation categories when it discloses that 85% of companies targeted had a market capitalisation of less than $331 million. 105 JP Morgan (n 90) 6. 106 Activist Insight, The Activist Investing Annual Review 2018 (2018) 30; Activist Insight, The Activist Investing Annual Review 2019 (2019) 23. 107 Activist Insight, The Activist Investing Annual Review 2019 (2019) 23. 108 JP Morgan (n 90) 7 (reporting that 89% of activists were domestic investors); Activist Insight/ ABL (n 94) 5 (reporting a figure of 86%). 109 JP Morgan (n 90) 8. 110 ibid 9. 111 Activist Insight, The Activist Investing Annual Review 2020 (2020) 13. 112 Activist Insight/ABL (n 94) 5. Reticence of superannuation funds to support specialist activist investors has been noted by others: see D Rogers, ‘ASX Ripe for Activist Investors: Credit Suisse’ The Australian (15 June 2017) 27 (noting a similar view expressed by Credit Suisse). 113 Activist Insight, The Activist Investing Annual Review 2019 (2019) 18. 114 See also Clayton Utz, ‘Shareholder Activism: How Can Companies Protect Themselves?’ (10 May 2018) www.claytonutz.com/knowledge/2018/may/shareholder-activism-how-can-companiesprotect-themselves (‘Australia has relatively few domestic activist funds’); and Gilbert & Tobin,

Conclusion  69 Third, Activist Insight/ABL and JP Morgan note that institutional investors do not play a prominent role in these interventions. Activist Insight/ABL describe institutional investors as supporters rather than instigators of activism.115 JP Morgan observes that activism by institutional investors is ‘evolving’.116 If specialist activist investors and institutional investors were not responsible for significant levels of the activism tracked by this research, what type of shareholders were? JP Morgan finds that ‘occasional dissidents’ are responsible for the ‘bulk’ of activist campaigns in Australia.117 JP Morgan defines ‘occasional dissidents’ as ‘usually existing investors’ who are ‘often one-time activists’ and primarily target small-capitalisation companies.118 Activist Insight/ABL do not directly answer this question. However, their finding that institutional investors and specialist activist investors are not responsible for significant amounts of activism119 suggests that another type of shareholder is responsible for much of the activism identified by their research. Relevantly, their research reports that most activism occurred in relation to small capitalisation companies.120 The share ownership data presented in chapter three indicates that such companies tend to have material levels of ownership by non-institutional blockholders. Accordingly, although Activist Insight/ABL do not directly identify non-institutional blockholders as significant activists, it is an inference that is open to be drawn from their findings. 4.4. CONCLUSION

Insofar as it occurs, aggressive activism is a multifaceted activity. The activists who undertake this form of activism are a diverse group, including individuals, social and environmental organisations and non-institutional blockholders. Although there have been some noteworthy examples in recent years of interventionist activism by institutional investors,121 the evidence in this chapter of limited institutional investor involvement in activist campaigns suggests that these examples are the exception rather than the norm. Those shareholders who resort to aggressive forms of activism draw on a range of tactics. This includes nominating or removing directors in annual director elections, tabling resolutions seeking to replace directors outside of the annual election cycle, tabling non-binding resolutions addressing ESG issues, and

Shareholder Activism Report (2018) 6 (‘Australia has a relatively low number of pure domestic activist funds’). 115 Activist Insight/ABL (n 94) 5–6. 116 JP Morgan (n 90) 9. 117 ibid 8. 118 ibid. 119 See above nn 112, 115 and accompanying text. 120 See above n 104 and accompanying text. 121 See above n 17 and accompanying text.

70  The Evidence of Australian Shareholder Activism (I) generating public relations momentum through the use of the media, websites and advertising. Activists’ tactical specialisation is also notable. Environmental and social organisations typically seek to have shareholder meetings of large capitalisation companies pass non-binding resolutions addressing ESG issues; individuals seek election in annual director elections; and commercially-driven activists favour changing the composition of company boards. The fact that different types of activists draw on varying tactics suggests there is no ‘one size fits all’ when it comes to activist tactics. However, in overall terms, the evidence in this chapter yields a subdued account of interventionist activism. Although there is some evidence of an increase in this form of activism in the early years of last decade, the data indicates that it is still not commonplace. To the extent it occurs, it is largely a small-company phenomenon. Activist hedge funds are not prevalent and large institutional investors eschew overt and aggressive forms of activism. Although there have recently been some prominent examples of shareholder proposals addressing ESG concerns, this form of activism is pursued by a handful of proponents and targets a small number of large capitalisation companies. Yet, this does not mean that Australian public company shareholders are not activist in nature. As the next chapter will demonstrate, Australian public company shareholders generally tend to influence their companies’ affairs in other less overt and interventionist ways.

5 The Evidence of Australian Shareholder Activism (II)

T

he evidence presented in the previous chapter focused on overtly interventionist activism, such as shareholders proposing resolutions at a shareholder meeting or undertaking public ‘campaigns’ against companies. There are, however, less overt methods by which shareholders can intervene in their companies’ governance. As this chapter demonstrates, public company shareholders rely significantly on these alternative methods, especially institutional investors. 5.1.  PARTICIPATION IN ROUTINE COMPANY-CONVENED SHAREHOLDER MEETINGS

Routine company-convened shareholder meetings are a significant means by which public company shareholders exert influence over their companies’ governance. However, shareholders do not tend to use routine shareholder meetings to engage in direct dialogue with corporate managers. Instead, shareholders use the opportunity to exercise voting power at such meetings to exert influence over corporate managers. Shareholders’ use of routine company-convened meetings is explored below. 5.1.1. Background In the normal course, an Australian company must hold at least one shareholder meeting each year. Specifically, section 250N of the Corporations Act requires a public company to hold an AGM each calendar year, within five months of the end of the company’s financial year.1 As most companies have financial years ending on 30 June, the majority of public company AGMs are held in the latter months of the year, during what is known as the ‘AGM season’.2 From a 1 Corporations Act, s 250N(2). 2 Given the time that must be allowed for finalising and posting notice materials and the requisite 28-day notice period, most AGMs are held in October and November each year.

72  The Evidence of Australian Shareholder Activism (II) policy perspective, the AGM is considered a critical feature of public company corporate governance. For example, the Corporate Governance Principles and Recommendations issued by the ASX Corporate Governance Council state that shareholder meetings ‘are an important forum for two-way communication between a listed entity and its security holders’.3 5.1.2.  Shareholders Eschew Physical Attendance at AGMs Evidence indicates, however, that shareholders do not favour the AGM as a forum for direct discussion and debate with corporate managers. The share registry services provider, Computershare, which manages a substantial proportion of public company shareholder meetings in Australia,4 has compiled average attendance data for meetings in 2012–20. The data show that an immaterial number of shareholders attend shareholder meetings. Specifically, the average proportion of a company’s shareholders who attended a shareholder meeting in 2012–20 ranged from a low of 0.09 per cent in 2020 to a ‘high’ of 0.18 per cent in 2018.5 It may seem unsurprising that the lowest attendance rate occurred in 2020 during the Covid-19 pandemic. However, it should be noted that emergency legislation was passed in early 2020 to permit virtual AGMs6 and a significant number of meetings were held that year in virtual or hybrid physical-virtual formats.7 Attendance rates still declined in 2020 despite the opportunity for shareholders to participate virtually. Computershare also reports that the overwhelming majority of votes cast at a shareholder meeting are cast remotely (eg, by proxy) rather than in person at a meeting. In 2020, 93.6 per cent of votes were lodged pre-meeting and 6.4 per cent at meetings,8 which Computershare reports is consistent with previous years’ data.9 A possible explanation for the low levels of physical participation at shareholder meetings is that shareholders do not regard the format of shareholder meetings as conducive to constructive dialogue with corporate managers. Submissions made to a 2012 inquiry into the relevance of the AGM noted that the 3 ASX Corporate Governance Council, Corporate Governance Principles and Recommendations, 4th edn (February 2019) 24. 4 Computershare states that in 2019 it managed 1039 shareholder meetings in Australia: Computershare, 2020 AGM Intelligence (2020) 5. 5 Computershare, 2021 AGM Intelligence Report (2021) 5. 6 Coronavirus Economic Response Package Omnibus Act 2020 (Cth). This legislation amended the Corporations Act by including a provision which authorised the Treasurer to make determinations to mitigate the economic impact of the pandemic. The Treasurer made a determination in May 2020 which permitted virtual and hybrid meetings: Corporations (Coronavirus Economic Response) Determination (No. 1) 2020. 7 Computershare (n 5) 3 (reporting that 68% of AGMs managed by Computershare in 2020 were held in virtual or hybrid formats). 8 ibid 8. 9 ibid.

Participation in Routine Company-Convened Shareholder Meetings  73 formal, and often highly choreographed, agenda of AGMs discourage m ­ eaningful discussion between shareholders and corporate managers.10 5.1.3.  However, AGMs Provide Shareholders with the Opportunity to Exercise Voting Influence Although shareholders may not favour shareholder meetings as a forum for discussion and debate, voting data indicate that shareholders are active voters at AGMs. A company’s AGM provides shareholders with the opportunity to vote on potentially significant items of business. The ASX Listing Rules require a public company to hold an election of directors at each AGM in which some of the company’s incumbent directors must stand for re-election.11 The Corporations Act requires shareholders to be given the opportunity to have a non-binding ‘say on pay’.12 In addition, companies will often seek shareholder approval at their AGM for increases in directors’ fees or grants of equity incentives to executive directors.13 Over the last two decades, public company shareholders have become more active voters at shareholder meetings. One study based on proxy data showed that, in 1999, 35 per cent of shares were voted on director election resolutions and 32 per cent on ‘controversial’ resolutions at AGMs of a sample of ‘widely held’, large listed companies.14 In contrast, a 2003 study of shareholder voting at 100 ‘widely held’ listed companies found that 44  per  cent of issued shares were voted on director re-election resolutions.15 2008 research showed that, on average, 54–57 per cent of issued shares were voted on resolutions at shareholder meetings of the 300 largest public companies.16 However, voting rates vary across different strata of the market. Computershare has compiled the average percentage of a company’s issued shares voted at

10 See, eg, Chartered Secretaries Australia, Submission to CAMAC, Inquiry into the AGM and Shareholder Engagement (19 December 2012) 3; Australian Shareholders Association, Submission to CAMAC, Inquiry into the AGM and Shareholder Engagement (21 December 2012) 1–2. 11 ASX Listing Rules, r 14.5. 12 Corporations Act, s 250R(2). 13 As required under ASX Listing Rules, rr 10.11 and 10.17. 14 G Stapledon et al, ‘Proxy Voting in Australia’s Largest Companies’ (Research Paper, 29 May 2000) www.ssrn.com/abstract=1435175. A ‘widely held’ company was defined as a company without a non-institutional shareholder holding 20% or more of the company’s shares. A ‘controversial’ resolution was defined as a resolution which had attracted a ‘vote against’ recommendation from a proxy adviser. 15 Data from 2003 proxy voting research by Corporate Governance International, cited in A Dignam and M Galanis, ‘Australia Inside-Out: The Corporate Governance System of the Australian Listed Market’ (2004) 28 Melbourne University Law Review 623, 629.’ Widely held’ companies were defined as companies without a major non-institutional shareholder. 16 Productivity Commission, Executive Remuneration in Australia (Report No 49, 2009) 302–3 (citing research by the Australian Council of Superannuation Investors and Egan Associates).

74  The Evidence of Australian Shareholder Activism (II) meetings in 2015–20 by reference to different strata of the market.17 The data is summarised in Table 5. Table 5  Average Percentage of a Company’s Issued Shares Voted at Meetings in 2015–20 2015

2016

2017

2018

2019

2020

All listed companies

49.0

56.4

48.0

44.9

44.6

41.6

Companies in S&P/ASX50

60.0

61.5

64.0

65.3

65.5

65.3

Companies in S&P/ASX300

59.0

61.4

61.7

62.5

61.7

64.1

Companies outside of these indices

45.0

54.6

43.1

38.7

39.0

34.4

The data reveal that, across the market as whole, the average issued capital voted has declined over 2015–20 from 49.0 per cent to 41.6 per cent. However, this trend is not reflected across all strata of the market. Between 2015 and 2020, the voting rate actually increased in larger capitalisation companies included in the S&P/ASX 50 and S&P/ASX 300 indices. Notably, the voting rate has consistently been highest in the largest capitalisation companies included in the S&P/ASX 50 index. In contrast, the voting rate has been the lowest (and has been declining) for smaller capitalisation companies outside of these major indices. Computershare attributes the higher levels of voting in the upper strata of the market to the significant presence of institutional investors in large capitalisation companies. Computershare notes that ‘an increased number of institutions, custodians and super funds are voting more because many members and beneficiaries have an expectation that they will vote on their behalf’.18 As a practical matter, choosing not to vote is not a viable option for institutional investors. Over the last decade, the voting practices of institutional investors have been subject to increased scrutiny by government inquiries and commentators.19 This scrutiny reflects a concern that these substantial investors, responsible for investing a large share of the public’s retirement and other longterm savings, should act as diligent stewards of those savings. In response to this scrutiny, institutional investors now routinely emphasise that they recognise 17 See Computershare, Intelligence Report: Insights from Annual General Meetings held in 2017 (2018) 18 (2015–17 data); Computershare, Intelligence Report: Insights from Annual General Meetings 2018 (Australia) (2019) 4 (2018 data); Computershare (n 4) 9 (2019 data); Computershare (n 5) 8 (2020 data). 18 Computershare, Intelligence Report: Insights from Annual General Meetings 2018 (2019) 8. A similar observation is also made in Computershare (n 5) 8. 19 See, eg, GP Stapledon, ‘Should Institutional Shareholders Be Required to Exercise Their Voting Rights?’ (1999) 17 Company and Securities Law Journal 332; Companies & Securities Advisory Committee, Shareholder Participation in the Modern Listed Public Company (June 2000) 63–66; Productivity Commission, Executive Remuneration in Australia (2009) 305–6; JJ Spigelman, ‘Institutional Shareholders and Corporate Governance’ (2010) 28 Company and Securities Law Journal 235.

Participation in Routine Company-Convened Shareholder Meetings  75 the importance of exercising their voting rights in a diligent manner.20 Each of Australia’s institutional investor stewardship codes also emphasises the importance of institutions exercising their voting rights.21 Institutional investors adopt different approaches to how they exercise their right to vote. Some asset owners retain the ability to vote (or direct the voting of) shares, whereas others allow asset managers to determine voting decisions.22 Those institutions which have control of share voting decisions generally use proxy advisers to inform their voting decisions, with some relying on multiple advisers.23 5.1.4.  Increased Levels of Dissent Expressed Through Voting Evidence also indicates that public company shareholders are becoming more critical voters, using ‘no’ votes in particular to signal dissatisfaction and to prompt corporate change. A 2008 parliamentary inquiry heard evidence that between 2005 and 2006 the average level of dissent on controversial resolutions more than doubled for the top 200 listed companies.24 In a 2011 research report, the Australian Institute of Company Directors reported that approximately 60  per  cent of superannuation funds and managed funds surveyed by the Institute believed that voting dissent had increased over the previous 10 years.25

20 See, eg, Perpetual Investments, Responsible Investment Policy (August 2020) 3 (noting that voting rights are a valuable asset and that Perpetual aims to vote on all resolutions, regardless of materiality). 21 Australian Council of Superannuation Investors (‘ACSI’), Australian Asset Owner Stewardship Code (May 2018) 9. Financial Services Council (‘FSC’), FSC Standard 23: Principles of Internal Governance and Asset Stewardship (July 2017) 10 emphasises the importance of shareholders using ‘the tools available to them’ and cross-refers to FSC Standard 13: Voting Policy, Voting Record and Disclosure (27 May 2020) 6 which states that voting is a way in which asset managers can ‘contribute to improving and upholding the governance of entities and markets in which they invest.’ The stewardship codes are discussed in detail below in section 5.3.2. 22 Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (Common Ownership Inquiry) (20 September 2021) 50 (I Matheson, Australasian Investor Relations Association) (hereafter, ‘Matheson Evidence’). 23 Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (11 October 2021) 3 (D Paatsch, Ownership Matters) (hereafter, ‘Paatsch Evidence). 24 Parliamentary Joint Committee on Corporations and Financial Services, Better Shareholders – Better Company: Shareholder Engagement and Participation in Australia (July 2008) 12 (citing evidence from Riskmetrics). ‘Controversial resolutions’ related to matters which deviated from accepted standards of corporate governance. 25 Australian Institute of Company Directors (‘AICD’), Institutional Share Voting and Engagement: Exploring the Links between Directors, Institutional Shareholders and Proxy Advisers (September 2011) 31. The survey data was based on survey responses received from 84 superannuation funds and managed funds.

76  The Evidence of Australian Shareholder Activism (II) Recent industry commentary indicates that shareholders continue to be critical voters. One governance advisory firm has referred to a trend in recent years of ‘investors … becoming more comfortable voting against directors when companies have not demonstrated robust risk management systems and frameworks’.26 Institutional investors have indicated that they are prepared to vote against the re-election of directors at AGMs if they consider that a company’s board has not been sufficiently responsive to shareholders’ concerns.27 Proxy advisers are also prepared to make voting recommendations to this effect.28 ASIC has published research based on voting data from the AGMs of companies in the S&P/ASX 200 held during the ‘AGM season’ in 2016, 2017 and 2018. ASIC’s research indicates increasing voting dissent over that period. ASIC reports that the average ‘no’ vote in relation to resolutions for the election of directors in each of 2016, 2017 and 2018 was 2.37 per cent, 3.23 per cent and 4.06 per cent, respectively.29 ASIC reports that the average ‘no’ vote in relation to other resolutions (excluding the remuneration report resolution) was 4.95  per  cent, 3.58 per cent and 6.58 per cent, respectively.30 In absolute terms, these dissent levels are small and suggest that on average there is a low risk of resolutions not being passed by a comfortable majority. As a result, some commentators query whether shareholders are sufficiently critical when it comes to voting their shares, particularly in relation to director elections.31 Other commentators insist that these developments send a clear signal that ‘investors are increasingly holding boards accountable’.32 Certainly, in circumstances where resolutions are typically approved by an overwhelming majority of votes, it is conceivable that even small increases in dissent levels will stand out and signal to companies an atypical level of shareholder dissatisfaction. 5.1.5.  Expressing Dissent Through ‘Say on Pay’ The evidence of shareholder dissent is clearer still in relation to shareholders’ annual ‘say on pay’. Since 2004, the Corporations Act has required a public company to propose a non-binding resolution at its AGM seeking shareholder approval of 26 Morrow Sodali, 2020 AGM Season Review – Australia (February 2021) 6. 27 R Williams, ‘Fund Giant’s Warning for Local Boards’ The Sydney Morning Herald (Sydney, 6 November 2017) 20 (quoting a BlackRock representative). 28 See, eg, Institutional Shareholder Services, Australia Proxy Voting Guidelines (13 December 2021) 18; Glass Lewis, 2021 Policy Guidelines (Australia) (2021) 17. 29 ASIC, Annual General Meeting Season 2018 (Report No 609, January 2019) 7. 30 ibid. Dissent levels on the remuneration report resolution are discussed below. 31 See, eg, Ownership Matters, Many Are Called, Few Are Chosen: An Analysis of the Composition of ASX 300 Boards from 2005–2020 (October 2020) 6. 32 Morrow Sodali, 2020 AGM Season Review (2021) 6 (noting also that in 2020, across the S&P/ ASX 300, 39 directors attracted dissent levels in excess of 20% and average support on director election resolutions declined to 91% from 95% in 2019).

Participation in Routine Company-Convened Shareholder Meetings  77 the company’s annual remuneration report.33 The vote is advisory only and does not bind the company or its directors.34 The remuneration vote was introduced in order to encourage ‘improved shareholder activism’ and ensure that ‘shareholders will be better equipped to hold directors accountable for their decisions regarding remuneration’.35 In 2011, law-makers augmented the non-binding remuneration vote with a package of rules known collectively as the ‘two-strikes rule’.36 These rules, also contained in the Corporations Act, provide that if a company receives a ‘no’ vote on its remuneration report of 25  per  cent or more at two consecutive AGMs then, at the second meeting, shareholders must vote on whether to convene a further meeting at which all of the company’s directors (other than the managing director) are subject to re-election.37 By imposing a consequence at the 25 per cent threshold, the two-strikes rule seeks to enhance the signalling effect of an adverse vote.38 Shareholders have demonstrated an evident willingness to use ‘say on pay’ and the associated ‘two strikes’ rule as a way of communicating dissatisfaction with a company’s management.39 Voting data suggest that dissent has trended upwards since the middle of last decade, at least in relation to larger capitalisation companies. Computershare reports the following average ‘no votes’ for S&P/ ASX 50 companies: 2014 (4.5 per cent), 2015 (6.3 per cent), 2016 (8.5 per cent), 2018 (15.0 per cent) and 2020 (9.1 per cent).40 Several sources report data for broader cross-sections of the market which show a broadly comparable trend since 2016.41 Such dissent levels make ‘say on pay’ one of the most, if not the most, contentious item of business at AGMs. ASIC reports that the remuneration vote attracted the highest average ‘no’ vote of all resolution types considered

33 Corporations Act, s 250R(2). A company’s remuneration report is a section of the directors’ report which accompanies a company’s annual financial statements. It contains details of the remuneration of a company’s key management personnel. 34 ibid s 250R(3). 35 Explanatory Memorandum, Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (Cth) 3. 36 Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth). 37 Corporations Act, ss 250U, 250V. 38 Productivity Commission (n 16) 362 (proposing the two-strikes rule on the basis that there was a need for ‘appropriate signalling mechanisms and sanctions through effective voting processes’). 39 See generally, Q Digby, T Stutt and B Wang, ‘Australia’ in FJ Aquila (ed), The Shareholder Rights and Activism Review, 5th edn (London, Law Business Research, 2020) Section V; M Chandler, ‘2019 Australian Annual General Meeting Season Review’ (2020) 72(1) Governance Directions 9. 40 See Computershare, Intelligence Report: Insights from Annual General Meetings held in 2016 (2017) 13 (2014–16 data); Computershare (n 18) 16 (2018 data); Computershare (n 5) 20 (2020 data). Computershare does not disclose data for 2017 and 2019. 41 ASIC discloses that the average ‘no’ vote for companies in the S&P/ASX 200 was 7.40%, 6.58% and 9.18% in 2016, 2017 and 2018, respectively: ASIC (n 29). Chandler reports that 2019 voting dissent in the S&P/ASX 200 was broadly in line with dissent levels in 2018: Chandler, ‘2019 Australian Annual General Meeting Season Review’ (2020). See also Morrow Sodali (n 26) 4.

78  The Evidence of Australian Shareholder Activism (II) at AGMs of companies in the S&P/ASX 200 in 2016, 2017 and 2018.42 Industry commentary claims that it remains contentious.43 These voting trends do not simply mean that shareholders are dissatisfied with public companies’ remuneration practices. It is claimed that ‘say on pay’ and the two-strikes rule also serve a broader governance role; namely, as a general outlet for shareholder dissatisfaction with company performance.44 The fact that ‘say on pay’ is a non-binding vote on the remuneration of a company’s key management personnel as outlined in the directors’ report provides shareholders with an ideal opportunity to direct their displeasure at corporate managers without the potential disruption that would attend a binding vote removing a director from office. According to the head of one of Australia’s largest industry superannuation funds, ‘say on pay’ has become a ‘de facto poll on how well the board is doing in standing up for the shareholders’.45 Although shareholders use their ‘say on pay’ to communicate dissent, they have rarely chosen to use the board spill feature of the two-strikes rule. As explained earlier, if a company receives a ‘no’ vote on its remuneration report of 25 per cent or more at two consecutive AGMs then, at the second meeting, shareholders must vote on whether to convene a further meeting (generally known as a ‘spill meeting’) at which the company’s directors must stand for re-election.46 Bugeja et al report that in the period 2011–14, across the listed market as a whole, only 60 firms received two strikes and were therefore required to ask shareholders to vote on whether to convene a spill meeting.47 Fifty-one of the companies disclosed the results of this vote. The resolution passed in only 12 of those firms.48 Only nine of those 12 firms actually proceeded to hold the board spill meeting.49 Bugeja et al report that only one of those firms changed 42 ASIC (n 29) 7. 43 Morrow Sodali (n 26) 4 (‘Board and executive remuneration continued to be a highly contentious issue in 2020 …’); Computershare (n 5) 20 (‘[Shareholders have] shown few reservations in voting against the remuneration report when it is appropriate to do so’). 44 See M Chandler (n 39); Gilbert + Tobin, Shareholder Activism Report (3 September 2018) 10; Minter Ellison, A Sign of Shifting Shareholder Expectations on Executive Remuneration (22 October 2018). 45 A White, ‘Second Strikes on Remuneration Show Boards Still Don’t Get It’ The Australian (3 December 2016) 32. Consistently, when examining shareholder voting in the first two years of the two-strikes rule, Grosse et al found that no measure of CEO pay (such as quantum or structure) was associated with the receipt by a company of a ‘strike’ or the level of shareholder dissent. Instead, they found that high book-to-market and leverage ratios were associated with strikes, from which they concluded that, when casting their vote, shareholders had focused more closely on firm value than remuneration: M Grosse, S Keane and T Scott, ‘Shareholder Say on Pay and CEO Compensation: Three Strikes and the Board is Out’ (2017) 57 Accounting and Finance 701. However, cf M Bugeja et al, ‘Life after a Shareholder Pay “Strike”: Consequences for ASX-listed Firms’ (Working Paper No 130, Centre for International Finance and Regulation, November 2016) (finding a closer link between voting outcomes and companies’ remuneration practices). 46 Corporations Act, ss 250U, 250V. This requirement does not apply to a company’s managing director. 47 Bugeja et al, ‘Life after a Shareholder Pay “Strike”’ (2016) 21. 48 ibid 33. 49 ibid 21.

Participation in Routine Company-Convened Shareholder Meetings  79 its board significantly while the other eight firms had most or all of their directors re-elected.50 Industry research and commentary indicates that shareholders remain reluctant to use the board spill feature of the two strikes rule. In 2020, Computershare reported that shareholders in one company delivered a ‘second strike’ and then voted in favour of holding a spill meeting. According to Computershare, this was the first time this had occurred since 2014.51 These results indicate that shareholders are reluctant to address remuneration concerns through the mechanism of a board spill. 5.1.6.  Expressing Dissent by Voting in Favour of Shareholder-Proposed Resolutions Addressing ESG Issues In recent years, an additional item of AGM business has emerged as a mechanism for shareholder voting influence; namely, shareholder-proposed directive or precatory resolutions addressing ESG issues. Chapter four noted various instances of activists filing ESG-related precatory or directive resolutions at the AGMs of large capitalisation public companies.52 These resolutions are typically proposed by non-commercial, activist organisations pursuing environmental or social policy objectives, rather than institutional investors.53 However, once a resolution has been proposed by an activist organisation, institutional investors appear to be using the opportunity to vote on the resolution as a way of pressuring companies to address material ESG issues affecting their businesses. Based on their analysis of shareholder-proposed ESG resolutions between 2002 and 2019, Freeburn and Ramsay conclude that, in overall terms, ‘support [for such resolutions] may be increasing over time’, although they caution that it is still too early to identify a definitive trend.54 However, when they examine voting support by reference to the subject matter of resolutions, they note a more discernible increase in support for resolutions addressing climate change.55 Freeburn and Ramsay also note that there were several AGMs in 2018 and 2019 where climate change-related precatory resolutions received voting support in excess of 20  per  cent.56 They further acknowledge that there were AGMs 50 ibid. 51 Computershare (n 5) 20. The governance advisory firm, Morrow Sodali, claims that this was in fact the first time ever that shareholders had voted in favour of a spill meeting in a S&P/ASX 300 company: Morrow Sodali (n 26) 4. 52 Ch 4, section 4.2. 53 ibid. 54 L Freeburn and I Ramsay, ‘An Analysis of ESG Shareholder Resolutions in Australia’ (2021) 44 UNSW Law Journal 1142, 1145 (expressing concern that low numbers of proposals in some years and a decrease in support between 2018–19 make it difficult to infer a clear trend in voting patterns over their research period). 55 ibid 1163 (although they again state that voting patterns need to be observed over a longer period before any firm conclusion regarding voting trends can be reached). 56 ibid 1165.

80  The Evidence of Australian Shareholder Activism (II) occurring after their 2002–19 research period at which shareholder-proposed precatory resolutions received very significant levels of support, prompting them to note that a pattern of increased voting support appeared to be emerging.57 Subsequent industry analysis reviewing 2020 in its entirety confirms Freeburn and Ramsay’s assessment. This analysis reports higher levels of shareholder support in 2020 than in 2019,58 particularly for climate change related precatory resolutions.59 Two such resolutions (targeting major oil and gas companies) in fact received voting support in excess of 40 per cent.60 This voting support is notable given that these resolutions are typically not endorsed by company boards.61 The companies targeted by these resolutions tend to be prominent, large capitalisation companies,62 which typically have significant levels of institutional investor ownership.63 When a precatory resolution receives a high level of voting support in such a company, this indicates that the resolution attracted significant support from institutional investors.64 Institutional investors’ willingness to use their voting power to influence how companies address ESG issues is further highlighted by the fact that a representative body for superannuation funds, the Australian Council of Superannuation Investors (ACSI), has called for Australian companies to introduce an annual ‘say on climate’ vote at their AGMs. ACSI notes that such a vote would ‘provide further focus, transparency and accountability’ in relation to how companies are addressing the challenges of climate change.65 5.1.7.  Use of ‘Abstain’ Votes The ASX Listing Rules require a public company to include a proxy form with a notice of shareholder meeting.66 The form must enable shareholders to direct their proxy to vote ‘for’ or ‘against’ a resolution or abstain from

57 ibid. 58 Morrow Sodali (n 26) 8–10; Computershare (n 5) 16. 59 Morrow Sodali (n 26) 10. 60 ibid. 61 Computershare (n 5) 23 (speculating, in turn, on whether this might prompt Australian boards to alter their approach and recommend that shareholders support such resolutions). 62 Freeburn and Ramsay, ‘An Analysis of ESG Shareholder Resolutions in Australia’ (2021) 1153–54 (listing the targeted companies). 63 Ch 3, section 3.3.2. 64 See also T Stutt and M Smyth, ‘New Frontiers in Climate Activism’ (Australian Institute of Company Directors, 24 August 2021) www.aicd.companydirectors.com.au/membership/memnershipupdate/new-frontiers-in-climate-activism (acknowledging a ‘noticeable increase in institutional shareholder support for ESG-related activism’). 65 ACSI, Climate Change Policy (26 April 2021) www.acsi.org.au/policies/climate-change/. 66 ASX Listing Rules, r 14.2.

Participation in Routine Company-Convened Shareholder Meetings  81 voting on a resolution.67 There is some evidence that shareholders use an abstain direction as an intermediate means of signalling concern to a company. For example, the institutional investor, AMP Capital, revealed in 2018 a number of instances where it had given abstain directions to highlight issues of concern.68 The proxy adviser, ISS, has stated that ‘[s]ome investors may take the view that dissent should be taken to mean both active abstentions and votes against … [C]ompanies may wish to consider viewing [abstentions] as indicating a low level of support from investors’.69 5.1.8.  Voting Coordination Among Investors As a result of institutional investors’ significant shareholdings in Australian public companies, one might expect to see such investors enhancing their governance leverage by coordinating their voting at shareholder meetings. The share ownership data presented in chapter three indicates that, on average, a handful of institutional investors will collectively hold a significant proportion of a public company’s voting shares. A voting bloc of this magnitude could play a determinative role given that, on average, only 40–65 per cent of a company’s shares are voted at a shareholder meeting.70 Institutional investors do not appear, however, to routinely coordinate their voting. In part, this may be a consequence of Australian takeover laws, which significantly constrain shareholders’ ability to act in concert in relation to a company’s affairs.71 However, these laws would not appear to be the main reason for investors’ unwillingness to coordinate their share voting. In co-authored research, this author has pointed out that a safe-harbour from these laws existed for nearly 20 years, which actually permitted institutional investors to coordinate their share voting at shareholder meetings.72 In 2015, ASIC declined to renew the safe-harbour because it was aware of only one instance of institutions relying on the safe-harbour over that period.73 67 ibid. 68 AMP Capital, 2017 Review: Proxy Voting & ESG Investment Research (March 2018) 5. The report classifies both ‘no’ votes and ‘abstain’ directions as ‘against management’ voting decisions, although it indicates that an ‘abstain’ direction is a more intermediate form of voting signal than a ‘no’ vote. The report describes, for example, how AMP abstained on a resolution regarding an oil and gas company’s climate change reporting in order to signal that it believed that the company needed to continue its ongoing efforts to improve its disclosure practices. 69 Institutional Shareholder Services, Australia Proxy Voting Guidelines (September 2018) 5. 70 See above, n 17 and accompanying text. 71 These laws and their potential to constrain collective action by shareholders are discussed in ch 8. 72 T Bowley and JG Hill, ‘Stewardship and Collective Action: The Australian Experience’ in D Katelouzou and DW Puchniak (eds), Global Shareholder Stewardship (Cambridge, Cambridge University Press, 2022) 417. The safe-harbour was contained in Australian Securities and Investments Commission, ‘Collective Action by Institutional Investors’ (Class Order 00/455, 4 October 2013). 73 Bowley and Hill, ‘Stewardship and Collective Action’ (2022) 427–28.

82  The Evidence of Australian Shareholder Activism (II) ASIC ventured two explanations for investors’ unwillingness to use the safeharbour. First, ASIC claimed that institutional investors no longer use shareholder meetings as a primary mechanism for engaging with companies.74 This assessment is not supported, however, by the evidence above which reveals that shareholders have become more active and critical voters at shareholder meetings. Another explanation noted by ASIC is that shareholders objected to the safe-harbour’s requirement that shareholders publicly disclose in advance their intention to coordinate their voting. This suggests a reluctance on the part of investors to have their activism highlighted publicly. A further possible explanation, not explored by ASIC, is whether the emergence of proxy advisers may have contributed to a degree of standardisation in institutions’ voting practices, negating the need for institutions to directly coordinate their voting on a range of matters.75 5.1.9. Summary Although Australian shareholders tend not to use shareholder meetings for direct interactions with corporate managers, they use their right to vote at shareholder meetings as a means of exerting influence over the governance of their companies. They seek to do so through voting dissent, particularly in relation to their annual ‘say on pay’. More recently, investors in large capitalisation companies have also indicated a willingness to apply pressure by voting in favour of ESG-related resolutions proposed by activist organisations. The fact that shareholders have become more active and critical voters has prompted a further, important corporate governance development: meaningful levels of engagement between large shareholders and their companies outside of shareholder meetings (behind-the-scenes engagement). Government inquiries, industry commentary and research have all noted a significant increase in behind-the-scenes engagement. This development is generally attributed to the fact that companies wish to engage with their shareholders owing to the leverage shareholders now wield because of their more proactive and critical approach to voting.76 For example, according to a chair of two S&P/ASX 100 companies, ‘the introduction of the “two strikes” rule … was a catalyst for greater engagement

74 ibid. 75 ibid. The role of proxy advisers in Australia is examined in section 5.3.4 below. 76 See, eg, Productivity Commission (n 16) 281–82 (noting evidence that the remuneration vote has encouraged companies to engage closely with major shareholders); Australian Institute of Company Directors, Institutional Share Voting and Engagement (2011) III (noting how the research report came about because ‘Australia’s chairmen … were keen to meet with the actual “decision-makers” in the share voting process’); ACSI and K Sheehan, Shareholder Resolutions in Australia: Is There A Better Way? (2017) 9 (citing feedback from interviews with institutional investors and referring to government and parliamentary inquiries which have noted how the remuneration vote has encouraged companies to engage more closely with their major shareholders).

Behind-the-Scenes Engagement Practices  83 and the focus has since expanded’.77 The next section explores shareholders’ behind-the-scenes engagement practices. 5.2.  BEHIND-THE-SCENES ENGAGEMENT PRACTICES

Industry research and anecdotal evidence indicate that behind-the-scenes interactions between companies and their large shareholders are now common and that this is one of the main ways in which institutional investors participate in corporate governance.78 In evidence to the 2021 parliamentary inquiry into institutional investor ownership of Australian public companies, the chief executive of Australia’s largest industry superannuation fund made the following observation: Interestingly, the overwhelming majority of interactions we have with companies are sought by the companies. We’re a big shareholder in many of them, so, frankly, if they didn’t knock on our doors we’d be knocking on theirs. Companies want to engage with shareholders to explain their strategy and answer any queries, and it’s a healthy process, I think.79

The journal of the Australian Institute of Company Directors reported in 2018 that the chair of an S&P/ASX 200 company may have 20–30 meetings with investors and their intermediaries leading up to the company’s AGM.80 It also noted that an investor relations professional was of the view that within the next five years, chairs of large public companies would spend up to 20 per cent of their time on shareholder engagement tasks.81 In evidence to the aforementioned parliamentary inquiry, the peak industry body for investor relations professionals referred to a 2021 survey of companies drawn from the S&P/ASX 300 and the NZX 5082 which indicated that boards and senior management of such companies typically spend between 10–15  per  cent of their time speaking to shareholders ‘in the normal course of business’.83 Consistently, representatives

77 Quoted in T Featherstone, ‘Rise of the Active Investor’ (2018) 34(3) Company Director 56, 60. See also Chandler (n 39) (claiming that ‘say on pay’ ‘continues to exist as a motivator for open and extensive engagement between company directors and governance stakeholders’). 78 It has been claimed that Australia has a ‘strong engagement culture’: ACSI and Sheehan, Shareholder Resolutions in Australia (2017) 3. 79 Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (20 September 2021) 16 (I Silk, Australian Super) ­(hereafter, ‘Silk Evidence’). For a similar sentiment expressed by another large superannuation fund, see Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (20 September 2021) 16 (D Graham, Aware Super, noting that ‘[w]e can generally access CEOs or boards’) (hereafter, ‘Graham Evidence’). 80 Featherstone, ‘Rise of the Active Investor’ (2018) 59. 81 ibid 58. 82 The NZX 50 is the principal market capitalisation index for entities listed on the New Zealand Stock Exchange. 83 Matheson Evidence (n 22) 47.

84  The Evidence of Australian Shareholder Activism (II) of institutional investors and public companies gave evidence to the inquiry which highlighted the significance of shareholders’ behind-the-scenes engagement activities.84 Organisations which assist large investors in their engagement activities with companies also report significant levels of behind-the-scenes engagement activity.85 Engagement is a preferred strategy of institutional investors.86 The two principal representative bodies for institutional investors in Australia, ACSI and the Financial Services Council (FSC), have both issued stewardship codes which strongly encourage shareholder engagement with companies. ACSI’s code states that asset owners should engage with companies, be prepared to escalate their engagement activities if a company is initially unresponsive, and provide public disclosures regarding their approach towards engagement.87 The FSC’s code states that asset managers should ‘use the tools available to them’ to encourage companies to meet the highest standards of corporate governance and should publicly disclose their approach to engaging with companies, including how they will escalate unresolved concerns.88 Evidence indicates that engagement is also used by other significant investors, including specialist activist investors.89 A representative of one activist investor is reported as claiming that ‘the well-publicised and notable examples of activism in the public domain represent only a small portion of the action’.90 Shareholders engage with companies on a broad range of issues. The Australian Institute of Company Directors’ journal reports that topics covered include strategy, succession planning, remuneration, board skills and diversity, 84 See, eg, Silk Evidence (n 79) 16; Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (11 October 2021) 16 (I Davila, BlackRock) (hereafter, ‘Davila Evidence); Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (23 September 2021) 3 (M  Comyn, Chief Executive, Commonwealth Bank Group, agreeing with the 10–15% estimate referred to above) (hereafter, ‘Comyn Evidence’). 85 These organisations and their activities are examined below in section 5.3.3. 86 See, eg, S Marshall, K Anderson and I Ramsay, ‘Are Superannuation Funds and Other Institutional Investors in Australia Acting Like “Universal Investors”?’ (2009) 51 Journal of Industrial Relations 439, 451 (interview study with 12 prominent institutional investors noting their use of private meetings); Featherstone (n 77) 59 (noting that engagement involves superannuation funds, active and passive fund managers, proxy advisers, and firms that undertake engagement on behalf of institutional investors). 87 ACSI (n 21) 10–11. 88 FSC (n 21) 10. 89 Activist Insight and Arnold Bloch Leibler, Shareholder Activism in Australia: A Review of Trends in Activist Investing (2016) 10; Clayton Utz, Shareholder Activism: How Can Companies Protect Themselves? (10 May 2018) www.claytonutz.com/knowledge/2018/may/shareholderactivism-how-can-companies-protect-themselves. This has also been noted in the international context: JA McCahery, Z Sautner and LT Starks, ‘Behind the Scenes: The Corporate Governance Preferences of Institutional Investors’ (2016) 71 The Journal of Finance 2905, 2913 (finding that engagement is not restricted to particular investor types and is a general phenomenon). 90 John Ho, founder of activist investor, Janchor Partners, which has reportedly intervened in relation to Medibank Private, Aurizon and Veda Advantage in recent years, quoted in Boston Consulting Group, Shareholder Value Creation Through Persistent Uncertainty: Analysis of ASX 200 Company Performance (March 2017) 20.

Behind-the-Scenes Engagement Practices  85 digital disruption, climate change risks, human rights issues in relation to a company’s supply chain, corporate culture, health and safety, and human resources issues (such as staff turnover and sexual harassment policies).91 However, ESG issues are an area of increasing focus for institutional investors. One prominent company chair has claimed that up to half the time he spends with shareholders involves discussion of ESG issues.92 Reflecting the significance of ESG issues in this context, the Australasian Investor Relations Association issued detailed guidelines in November 2017 to assist companies in their engagement with investors regarding ESG issues.93 Evidence presented at the 2021 parliamentary inquiry into the ownership of Australian public companies highlights how different types of investors adopt different engagement practices. Corporate managers noted that they tend to meet more frequently with active investors than passive investors.94 Industry superannuation funds were described as particularly proactive.95 According to the chief executive of one of Australia’s major banks, ‘[s]ome of the most engaging and strategic discussions we have are with some of the large industry funds’.96 The largest industry superannuation fund, Australian Super, disclosed that in the 2018/19 financial year it had approximately 80 direct engagements with companies and ‘attended or supported’ a further 264 meetings with 190 companies undertaken by ACSI.97 Evidence presented to the inquiry indicated that actively-engaging investors may in fact operate two engagement ‘streams’: one focusing on company performance, which involves investor representatives meeting with senior company executives at the time company results are announced, and the other focusing on ESG issues, which involves investor representatives meeting with company directors at other times of the year.98 The head 91 Featherstone (n 77) 59. 92 ibid 58 (quoting David Crawford). A point recently echoed by the chief executive of one of Australia’s largest banks: Comyn Evidence (n 84). 93 Australasian Investor Relations Association, New Guidelines Getting Set for Companies to Better Handle Environmental, Social and Governance Challenges (Media Release, 10 April 2017). 94 Comyn Evidence (n 84) (noting that meetings with BlackRock and Vanguard tend to be less frequent than meetings with other investors); Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (23 September 2021) 32 (S Elliott, Australia and New Zealand Banking Group, noting that the bank does not ‘have a particularly strong engagement’ with Vanguard and that ‘BlackRock are similar’) (hereafter, ‘Elliott Evidence’). 95 Elliott Evidence (n 94) (noting that Vanguard and BlackRock are ‘relatively low-touch investors, as opposed to an Australian Super or Aware Super or others’); Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (20 September 2021) 43 (L Baird, Prime Super, noting that the index funds ‘will remain fairly passive’ and ‘are not as active at shareholder votings’ but that ‘[t]he larger super funds are more active in their voting and are taking a greater interest in the underlying company’). 96 Comyn Evidence (n 84). 97 Australian Super, Stewardship Statement: 1 July 2018 to 30 June 2019 (November 2019) 3. The role of the Australian Council of Superannuation Investors in relation to shareholder-company engagement is explained below. 98 Silk Evidence (n 79) 16; Elliott Evidence (n 94) 32. This ‘two-stream’ approach to engagement is also noted in Computershare (n 4) 34.

86  The Evidence of Australian Shareholder Activism (II) of Australia’s largest industry superannuation fund also noted that its interactions with companies may increase in frequency if a company is experiencing ‘particular issues’.99 It has also been suggested that industry superannuation funds may be more willing to escalate their engagement efforts than other investors. In a notable recent example, industry superannuation funds took the lead in pressuring Rio Tinto to implement senior management changes in the aftermath of the company’s destruction of ancient indigenous rock art in the course of mine expansion work.100 It was reported that the funds’ efforts eventually prompted initially reticent overseas investors to join in the call for Rio Tinto to respond more comprehensively to this serious incident.101 Index investors are reported to engage less intensively. Vanguard, for example, engaged with approximately 27 Australian companies in 2020, which contrasts with the activities of superannuation funds noted above.102 This ‘lighter touch’ approach is consistent with index investors’ business model, which involves tracking the investment performance of a broad cross-section of the market, rather than seeking to outperform the market by making investment decisions by reference to the circumstances and performance of particular companies. Insofar as they engage with companies, index investors also tend to focus on broader, ‘thematic’ issues which have portfolio-wide relevance. According to BlackRock, ‘[t]he stewardship practices of fund managers are usually focused on broad issues such as governance standards, reporting transparency, ESG risks, and how the board and management are addressing associated relevant risks at their particular firm’.103 This enables BlackRock’s fund managers to ‘promote best practices across industries and geographies and contribute to policy and good governance’.104 Owing to the broad, governance-related nature of these issues, BlackRock reported that it tends to meet with board representatives, rather than company management. Such meetings take place ‘definitely once a year and potentially twice a year’, generally in the lead-up to a company’s AGM in order to inform BlackRock’s voting decisions.105 Index investors’ staff resources reflect the limited nature of their engagement activities in Australia. 99 Silk Evidence (n 79) 16. 100 N Toscano and E Knight, ‘Colonial Rabble Rousers: How a Group of Australian Funds Toppled Rio’s Chief’ The Sydney Morning Herald (Sydney, 19 September 2020) 4. 101 ibid. 102 Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (22 September 2021) 25 (R Bowerman, Vanguard) (hereafter, ‘Bowerman Evidence’). 103 BlackRock, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (17 September 2021) 7 (hereafter, ‘BlackRock Submission’). To similar effect, see Vanguard, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (13 September 2021) 3. 104 BlackRock Submission (n 103) 7. A point echoed in Vanguard’s testimony: ‘[O]ur activities, including direct engagement discussions with directors and management, remain squarely focused on promoting well-established market norms for good corporate governance that are relevant to long-term value’: Bowerman Evidence (n 102) 20. 105 Davila Evidence (n 84) 16.

Behind-the-Scenes Engagement Practices  87 BlackRock disclosed to the parliamentary inquiry that it has two stewardship staff based in Australia;106 Vanguard has no Australian stewardship personnel and conducts its Australian engagement activities from a team based in the United Kingdom.107 It is unclear to what extent institutional investors seek to leverage their influence by forming ad hoc coalitions to engage privately with companies. Instances of such collective action occasionally emerge into the public domain through press reports.108 Investors’ public disclosures, however, often refer to such behaviour in non-specific and circumspect terms. For example, the fund manager, Colonial, states that ‘[t]he vast majority of our engagement is conducted by each team directly with companies’, although it acknowledges that, as part of its escalation approach, ‘we might collaborate on further engagement with other like-minded investors’.109 Australian Super’s stewardship disclosures emphasise the fund’s participation in investor networks addressing investors’ ‘thematic’ concerns such as climate change,110 rather than in ad hoc coalitions of shareholders formed in response to specific concerns regarding an investee company.111 Some international commentary suggests that investors may use behindthe-scenes interactions with companies as a substitute for share voting.112 The Australian experience, however, indicates that investors use these governance techniques in a complementary fashion.113 That is, they use voting dissent to indicate to a company that it has failed to address concerns previously raised by shareholders in discussions with the company,114 and they use behind-the-scenes engagement to resolve investor concerns revealed through voting dissent.115

106 ibid. 107 Bowerman Evidence (n 102) 20. 108 See, eg, E Knight, ‘Shareholders Ignored Bluff and Raised the Stakes’ The Sydney Morning Herald (Sydney, 27 November 2019) 22 (noting how a ‘wall of shareholders’ demanded board change at the bank, Westpac, in light of its alleged serious breaches of money laundering laws). 109 Quoted in Bowley and Hill (n 72) 428. 110 These networks are discussed below. 111 Australian Super, ESG and Stewardship Policy (May 2018) 3 (‘While the Fund is responsible for the implementation of its ESG and stewardship programme, participation in broader industry networks and forums can also help advance its objectives in a collaborative manner.’). 112 BS Black and JC Coffee, ‘Hail Britannia: Institutional Investor Behaviour Under Limited Regulation’ (1994) 92 Michigan Law Review 1997, 2038–39 (noting the possibility that behindthe-scenes engagement may be an alternative to voting); WG Ringe, ‘Shareholder Activism: A Renaissance’ in JN Gordon and WG Ringe (eds), The Oxford Handbook of Corporate Law and Governance (Oxford University Press, Oxford, 2018) 387, 394–95 (comparing voting and behindthe-scenes engagement as alternative strategies). 113 A point also acknowledged by the Australian engagement firm, Regnan: Engagement Impact Report 2021 (August 2021) 22. 114 Williams (n 27) 20 (quoting a BlackRock representative who states that BlackRock votes against the re-election of directors at Australian companies if they have not been responsive to shareholders’ concerns). 115 Thus, a chair of two S&P/ASX 100 companies has been reported as acknowledging that ‘the introduction of the “two strikes” rule … was a catalyst for greater engagement [between companies and shareholders] and the focus has since expanded’: Featherstone (n 77) 60.

88  The Evidence of Australian Shareholder Activism (II) 5.3.  THE ROLE OF GOVERNANCE INTERMEDIARIES IN LEVERAGING SHAREHOLDER INFLUENCE

In order to obtain a complete picture of how investors, especially institutional investors, exert influence in public company governance, it is necessary to refer to the industry of intermediary organisations that supports investors’ corporate governance activities. These intermediaries include representative bodies, investor networks, engagement firms, proxy advisers and data providers. As this section will show, they play a significant role in facilitating shareholders’ voting and engagement activities and leveraging the influence investors exert on public companies. 5.3.1.  Representative Bodies Several organisations represent the interests of public company shareholders in relation to matters of corporate governance. The oldest such association is the Australian Shareholders Association (ASA), which represents the interests of retail shareholders.116 The ASA also provides investment education services and a ‘company monitoring’ service for its members. According to the ASA, the latter involves monitoring ‘most of Australia’s ASX200 companies, along with a number of other companies of interest to members’.117 As part of this service, the ASA engages with companies in relation to issues of concern to its members and provides voting recommendations to members ahead of companies’ AGMs.118 ASA members can also appoint ASA representatives to vote their shares at AGMs. The ASA claims that this often gives its representatives voting power equivalent to the voting power of a top 20 shareholder.119 It is difficult, however, to reconcile this claim with the data noted in chapter three regarding low voting turnout by retail shareholders.120 One would expect that, in practice, low voting turnout by retail shareholders limits the influence exercised by the ASA in corporate governance. ACSI and FSC represent the interests of institutional investors in relation to issues of corporate governance. Although not as old as the ASA, both ACSI and the FSC have been active for over 20 years.121 The FSC describes itself as a ‘peak’ industry body which represents over 100  members drawn from the financial services sector.122 The FSC can trace 116 Australian Shareholders Association (ASA), ‘About Us’ www.australianshareholders.com.au/ about-us. The website notes that the ASA has been representing retail investors since 1960. 117 ASA, ‘About Company Monitoring’ www.australianshareholders.com.au/advocacy. 118 ibid. 119 ASA, ‘Why Appoint the ASA as Your Proxy?’ www.australianshareholders.com.au/your-proxycounts. 120 Ch 3, section 3.3.3. 121 As explained below, both bodies can trace their origins to organisations established in the 1990s. 122 FSC, ‘About’ www.fsc.org.au/about/.

Role of Governance Intermediaries in Leveraging Shareholder Influence  89 its origins to a representative organisation established in 1990.123 Its membership comprises retail and wholesale fund managers, superannuation funds, insurers and financial advisers,124 including major Australian and overseas-headquartered fund managers.125 The FSC undertakes lobbying functions, engages in research and policy debates, and issues standards and guidelines relevant to the activities of its members.126 Some of these activities relate to corporate governance matters. For example, the FSC is a member of the ASX Corporate Governance Council, the body which produces the Corporate Governance Principles and Recommendations applicable to public companies.127 Several standards and guidelines issued by the FSC relate to important corporate governance matters. Guidance Note 30, for example, sets out expectations regarding how companies publicly report material ESG risks.128 Standards 13 and 20 address share voting practices of asset managers, asset owners, life insurers and superannuation funds.129 Standard 23 is a stewardship code, applicable to FSC members engaged in asset management functions.130 This code is discussed in the next section. ACSI was formally created in 2001 to assist industry superannuation funds in relation to their corporate governance activities but can trace its origins to a corporate governance advisory service for superannuation funds established in the mid-1990s.131 Its membership now also includes some public sector, corporate and overseas pension funds.132 According to ACSI, its members manage over $2.2 trillion in assets and own on average 10 per cent of every company in the S&P/ASX 200 index.133 ACSI’s activities focus on identifying and helping its members to address financially material ESG risks in relation to Australian public companies.134 ACSI pursues this objective in several ways. It undertakes research on material ESG issues for its members and engages in public advocacy to draw attention to such issues and ensure they are adequately addressed by companies. It has focused, in particular, on executive remuneration, board diversity and corporate ESG risk reporting.135 ACSI also engages directly with public companies on behalf of its members in relation to material ESG issues and provides 123 Bowley and Hill (n 72) 429. 124 ibid. 125 FSC, ‘FSC Full Members’ www.fsc.org.au/about/fsc-members. 126 See generally, Bowley and Hill (n 72) 420–21, 429. 127 ASX, ‘ASX Corporate Governance Council’ www2.asx.com.au/about/regulation/asx-corporategovernance-council. 128 FSC, ESG Reporting Guide for Australian Companies (Guidance Note 30, February 2016). 129 FSC, Voting Policy, Voting Record and Disclosure (Standard No 13, July 2021); FSC, Superannuation Governance Policy (Standard No 20, March 2013). 130 FSC (n 21). 131 See generally, B Mees and SA Smith, ‘Corporate Governance Reform in Australia: A New Institutional Approach’ (2019) 30 British Journal of Management 75. 132 ACSI, ‘Who Our Members Are’ www.acsi.org.au/members/who-our-members-are/. 133 ACSI, ‘About Us’ www.acsi.org.au/section-heading/about-us.html. 134 ACSI, ‘Who We Are?’ www.acsi.org.au/about/what-we-do/. 135 Mees and Smith, ‘Corporate Governance Reform in Australia’ (2019).

90  The Evidence of Australian Shareholder Activism (II) proxy advice to members which subscribe for this service.136 Like the FSC, ACSI represents its members’ interests on the ASX Corporate Governance Council.137 ACSI also participates in law reform and policy debates; in recent years it has called for law reform to facilitate the filing of shareholder resolutions138 and is currently advocating for companies to introduce an annual ‘say on climate’.139 Finally, ACSI issues policies and guidance regarding corporate governance issues; this includes governance guidelines addressing its members’ expectations regarding companies’ governance practices140 and a stewardship code.141 ACSI will also speak out over governance concerns involving particular companies, thereby engaging in a form of direct activism on behalf of its members. In recent years, for example, it has publicly criticised and called for governance changes at major companies such as Rio Tinto, AMP and Westpac Banking Group as a result of significant governance failings in those firms.142 In light of such activism, the financial press has described ACSI as ‘an activist superannuation outfit with more muscle than ever before’.143 Other commentary also acknowledges ACSI’s influence. It is claimed, for example, that ACSI has ‘significant access’ to public companies and that most companies initiate discussions with ACSI than vice versa.144 Mees and Smith claim that ACSI’s campaigns to improve companies’ executive remuneration practices, ESG reporting and board diversity have enjoyed significant success.145 They suggest that ACSI’s influence stems from a combination of several factors: a clear brief to proactively represent the interests of its members, the support of members with very significant public company shareholdings, and a preparedness to undertake sustained campaigns to achieve the objectives of its members.146 In a clear sign of ACSI’s significance, it became a political target in 2021. Australia’s conservative federal government has for some time harboured concerns about the political allegiances of the industry superannuation funds represented by ACSI, owing to their origins in the Australian trade union movement.147 In 2021, the government 136 ACSI, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (13 September 2021) 1 (hereafter, ‘ACSI Submission’). 137 ASX (n 127). 138 ACSI and Sheehan (n 76). 139 See above n 65 and accompanying text. 140 ACSI, ‘ACSI Governance Guidelines’ www.acsi.org.au/publications/governance-guidelines/>. 141 Discussed below. 142 See, eg, P Durkin, ‘Quiet Achievers Who Felled a Bank Boss’ The Australian Financial Review (28 November 2019) 36; ACSI, ‘ACSI Statement on Rio Tinto Board Review of Destruction of 46,000 Year Old Caves in the Juukan Gorge’ (Media Release, 24 August 2020). 143 Durkin, ‘Quiet Achievers Who Felled a Bank Boss’ (2019). 144 See below, n 179 and accompanying text. 145 Mees and Smith (n 131) 82–86. See also G Radzyminski, ‘Australia’s Activist Awakening’ (Ethical Boardroom, 2019) www.ethicalboardroom.com/australis-activist-awakening/ (highlighting the effectiveness of the superannuation sector’s efforts to address suboptimal remuneration practices by Australian public companies). 146 ibid. 147 J Kehoe, ‘High Stakes in Ownership Investigation’ The Australian Financial Review (5 August 2021) 36.

Role of Governance Intermediaries in Leveraging Shareholder Influence  91 announced a package of reforms to increase the regulatory requirements applicable to proxy advisers.148 One requirement was that proxy advisers must have an arm’s-length relationship with their clients. It was reported that this requirement was intended to prevent ACSI, which is owned by its industry superannuation fund members, from providing proxy advice to those members.149 5.3.2.  Representative Bodies and Stewardship Codes ‘Stewardship codes’ are a notable contemporary corporate governance development. They are typically non-mandatory codes of conduct (or ‘soft law’) which seek to encourage institutional investors to monitor and engage with portfolio companies in order to promote corporate performance and accountability.150 They have been adopted (or are about to be adopted) in over 20 jurisdictions.151 Australia has two stewardship codes, issued by ACSI and the FSC, respectively.152 ACSI’s code applies to ACSI members who choose to become signatories to the code.153 The FSC’s code applies to FSC members which undertake asset management functions.154 Each code sets out recommendations for how investors should participate in the governance of their investee companies. This includes recommendations which exhort investors to vote their shares, engage with companies and publicly disclose how they approach their stewardship activities.155 The FSC’s code also sets out guidelines regarding the internal governance of asset managers.156 Both codes apply on a ‘comply or explain’ basis; that is, investors who are subject to the codes are given the choice of complying with their provisions or providing a written explanation for their decision not to comply.157 The origins and contents of the two codes provide some revealing insights into ACSI and the FSC. First, international researchers have found that the contents and style of the codes differ significantly from the content and style of

148 J Frydenberg MP and Senator J Hume, ‘Reforms to Bring Greater Transparency and Accountability to Proxy Advice’, Media Release (17 December 2021). 149 N Khadem, ‘Proxy Advice Law Which Sparked Fears It Would Reduce Investor Activism Defeated in the Senate’ ABC News (online) (10 February 2022) www.abc.net.au/news/2022-02-10/ proxy-advice-regulation-by-josh-frydenberg-defeated-in-senate/100819906. 150 See generally, JG Hill, ‘Good Activist/Bad Activist: The Rise of International Stewardship Codes’ (2018) 41 Seattle University Law Review 497. 151 DW Puchniak, ‘The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense Out of the Global Transplant of a Legal Misfit’ (2022) American Journal of Comparative Law (forthcoming). 152 ACSI (n 21); FSC (n 21). 153 ACSI (n 21) 5. 154 FSC (n 21) 4. 155 See generally, Bowley and Hill (n 72). 156 Eg, it requires asset managers to make disclosures regarding their ownership, structure, internal governance, and the experience and competencies of their key personnel: ibid 422. 157 ACSI (n 21) 6; FSC (n 21) 8.

92  The Evidence of Australian Shareholder Activism (II) overseas codes.158 This appears to reflect the fact that when ACSI and the FSC issued their codes, they were self-consciously taking a different approach to the issuers of codes in other jurisdictions.159 ACSI proclaimed that its code was the first stewardship code to ‘focus exclusively on the activities of Australian asset owners’.160 The FSC code notes that ‘unlike other stewardship codes which focus on asset stewardship and conflicts of interest, the [FSC code] takes a broader view and also includes the internal governance of the Asset Manager’.161 In co-authored research, this author has argued that the distinctive approach adopted by ACSI and FSC reflects their longstanding involvement in the formulation of corporate governance policy and practice in Australia.162 This experience would have provided ACSI and the FSC with sufficient confidence and experience to chart their own course in relation to the formulation of their stewardship codes. Second, the fact that Australia has two stewardship codes, issued by organisations representing different sectors of the fund management industry, highlights a lack of consensus amongst Australian institutional investors about how to approach investor stewardship. The ACSI code is a more detailed and prescriptive document than the FSC code.163 The ACSI code also places considerably more emphasis on the weight investors should attribute to ESG considerations when undertaking their stewardship activities.164 Further highlighting the divergent ACSI and FSC approaches towards stewardship, ACSI called in 2019 for a reappraisal of Australia’s approach towards stewardship codes, including consideration of the introduction of a single code applicable to all institutional investors.165 The FSC has not endorsed any such change. 5.3.3.  Engagement Firms Several organisations assist institutional investors to undertake their behind-thescenes engagement with companies. They do so by engaging with companies on behalf of their investor clients.166 When they undertake these assignments, these 158 D Katelouzou and M Siems, ‘The Global Diffusion of Stewardship Codes’ in D Katelouzou and DW Puchniak (eds), Global Shareholder Stewardship (Cambridge, Cambridge University Press, 2022) (noting that, in contrast, overseas codes often have notable similarities). 159 Bowley and Hill (n 72) 421. 160 ACSI, ‘First State Super Endorses Stronger Stewardship’ (Media Release, 1 May 2019). 161 FSC (n 21) 7. 162 Bowley and Hill (n 72) 421–22. 163 ibid 422–24. 164 T Bowley and JG Hill, T Bowley and JG Hill, ‘Stewardship Codes, ESG Activism and Transnational Ordering’ in T Kuntz (ed), Research Handbook on Environmental, Social and Corporate Governance (Edward Elgar, forthcoming). 165 ACSI, ‘Towards Stronger Investment Stewardship’ (May 2019) www.acsi.org.au/images/stories/ ACSIDocuments/ACSI-Towards-Stronger-Investment-Stewardship-May-2019.pdf. 166 See generally, AICD (n 25) 38, 44–45; Governance Institute of Australia (GIA) and S Easterbrook, Improving Engagement Between ASX-listed Companies and their Institutional Investors: Principles

Role of Governance Intermediaries in Leveraging Shareholder Influence  93 organisations often do so on behalf of multiple institutional investor clients.167 Thus, rather than a dozen investors each individually attending a separate meeting with company managers, a single engagement firm acting on behalf of those investors will meet with company managers and advocate for those investors’ collective interests. Several organisations provide these services in Australia, including Regnan, ACSI and Federated Hermes.168 These organisations focus on issues of particular concern to their institutional investor clients – generally issues regarding companies’ governance systems and practices, such as board diversity, risk management systems and executive remuneration practices, and environmental and social issues relating to companies’ operations.169 Their engagement meetings are generally held with senior company representatives, including a company’s chairperson or other directors.170 Following material year-on-year increases between financial years 2013/14 and 2016/17,171 Regnan’s activities appear to have levelled in recent years at between 80 and 90 engagement assignments per financial year.172 ACSI reports that it holds over 200 meetings with S&P/ASX 300 companies each year.173 By using engagement firms, institutional investors reduce the extent to which they need to develop their own capacity and expertise to undertake engagement activities, enabling investors to achieve economies in their corporate governance activities.174 One large industry superannuation fund reports an almost equal split between its direct engagements with investee companies and engagements undertaken on its behalf by ACSI.175 AustralianSuper states that using ACSI’s engagement services enables AustralianSuper to ‘expand the breadth of our engagement coverage and strengthen our voice and influence’.176 In addition to enabling investors to achieve scale and cost economies in their engagement activities, engagement firms may also help to leverage shareholder influence. Research by the Australian Institute of Company Directors has claimed that engagement firms can be ‘highly influential’ in developing the

and Guidelines (July 2014) 7–10 and Improving Engagement Between ASX-listed Companies and Their Institutional Investors: Background Paper (February 2014) 21–23. 167 GIA and Easterbrook, Background Paper (February 2014) 22. 168 AICD (n 25) 38. 169 See, eg, Regnan, ‘What We Do’ www.regnan.com/what-we-do and ACSI, Our Services www. acsi.org.au/section-heading/our-services-v2.html. 170 AICD (n 25) 45; Regnan, Engagement Impact Report 2021 (August 2021) 5 (‘[W]e meet with directors and company leaders as our primary engagement method’). 171 Regnan, Annual Report 2016/2017 (2017) 3. 172 Regnan, Engagement Impact Report FY2019 (August 2019) 7 (reporting 89 assignments); Regnan, Engagement Impact Report FY2020 (August 2020) 7 (reporting 83 assignments); Regnan (n 170) 4 (reporting 87 assignments). 173 Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (22 September 2021) 27 (L Davidson, ACSI). 174 GIA and Easterbrook (n 167) 22. 175 Graham Evidence (n 79) 23. 176 Quoted in Bowley and Hill (n 72) 20.

94  The Evidence of Australian Shareholder Activism (II) views of institutional investors into consensus positions on issues of corporate governance.177 A Governance Institute report also notes that institutional investors believe that engagement firms obtain more meaningful levels of engagement with companies than would be the case if investors separately engaged with companies.178 As ACSI’s chief executive has observed: Our members account for over 10 per cent of the listed company vote. So that’s quite a loud voice to speak with … [C]ompanies have understood the power that we have … in fact most of the meetings that we have with companies are at their request.179

5.3.4.  Proxy Advisers Proxy advisers assist institutional investors by analysing, and issuing recommendations in relation to, items of business at shareholder meetings. Four proxy advisers operate in Australia: Glass Lewis, Institutional Shareholder Services, Ownership Matters, and ACSI (which provides voting recommendations to its members which subscribe for this service).180 Institutional investors will often subscribe for advice from more than one proxy adviser.181 Proxy advisers facilitate voting by institutional investors.182 Institutional investors can receive voting proposals from up to 300 companies each year, the majority of which need to be addressed within the short ‘AGM season’ which occurs in October and November each year.183 This makes share voting a highvolume, time-constrained exercise for institutional investors.184 By analysing and issuing recommendations on voting proposals, proxy advisers ameliorate the workload for institutional investors and reduce the extent to which those investors need to develop in-house resources to handle share-voting activities. Although it is generally accepted that proxy advisers play an important role in facilitating shareholder voting, the precise impact of their voting recommendations remains a matter of debate. Institutional investors insist that proxy advisers’ recommendations are a useful input into their voting decisions but are not determinative.185 Corporate managers, however, claim that institutions

177 AICD (n 25) 45. 178 GIA and Easterbrook (n 167) 22. 179 Quoted in Mees and Smith (n 131) 85. See also Silk Evidence (n 79) 14 (noting that ‘ACSI has pretty significant access, because a lot of companies find it more efficient to deal with ACSI than to deal with each of ACSI’s members’). 180 23 of ACSI’s members currently subscribe for the service: ACSI Submission (n 136) 2. 181 The Association of Superannuation Funds of Australia, Submission to House of Represen­ tatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (13 September 2021) 9; ACSI Submission (n 136) 2. 182 See generally, GIA and Easterbrook (n 167) 22–23; AICD (n 25) 37–41. 183 AICD (n 25) 3. At 71, the report notes that at the peak of the AGM season there may be 30 or more company meetings a week. 184 ibid, 3–4. 185 ibid 6, 27.

Role of Governance Intermediaries in Leveraging Shareholder Influence  95 outsource their voting decisions to proxy advisers.186 In its submission to the Common Ownership Inquiry, BlackRock openly acknowledged the significance of proxy advisers, noting that ‘[p]roxy advisers such as ISS and Glass Lewis, which make recommendations to shareholders on how to vote, carry considerable influence’.187 In 2018, ASIC released research which noted some correlation between proxy advisers’ recommendations and voting outcomes at AGMs. However, ASIC noted that other factors may have contributed to such outcomes and did not suggest that they supported claims that institutions invariably follow advisers’ voting recommendations.188 ACSI analysed the voting behaviour of three randomly selected client funds on ‘contentious’ resolutions in 2018 and found that the funds did not reach the same voting decision in relation to 58 per cent of the resolutions, which ACSI claims ‘clearly demonstrates that ACSI members take their own decisions’.189 Some of ACSI’s clients have separately reported how they deviate from ACSI recommendations, albeit not to a material extent. For example, the superannuation fund, Hostplus, reports that on average it would vote against ACSI’s recommendations between 2.5 and 3 per cent of the time.190 In summary, there is insufficient evidence to suggest that institutions slavishly adhere to proxy advisers’ recommendation. Nonetheless, it is probable that proxy advisers have contributed to some standardisation in how both investors and companies approach a number of corporate governance issues. A key point to appreciate here is the role played by the detailed policies which proxy advisers publish to explain how they reach their voting recommendations.191 These policies enable investors to ascertain in advance the advisers’ methodology and form a view as to whether they need to second-guess advisers’ recommendations. This makes it possible for investors to rely on advisers’ recommendations in many cases and focus their attention only on difficult issues or issues where their views are different from the proxy adviser.192 In addition, proxy advisers’ policies indicate to companies the likely expectations of institutional investors and the proxy advisers that advise them.193 186 ibid 6–7. 187 BlackRock Submission (n 103) 7. 188 ASIC, Annual General Meeting Season 2017 (Report No 564, January 2018) 9. In a separate interview, an ASIC Commissioner has expressed scepticism as to whether institutional ­investors invariably adopt advisers’ recommendations: B Power, ‘Proxy Music’ (2018) 34(2) Company Director 42, 45 (quoting John Price). 189 ACSI Submission (n 136) 2. 190 Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (20 September 2021) 5 (David Elia, Hostplus). The industry fund, Cbus, reports that it deviates from ACSI’s recommendations approximately 5% of the time: Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (22 September 2021) 41 (Justin Arter, Cbus). 191 See, eg, above n 28. 192 AICD (n 25) 68–9. 193 Power, ‘Proxy Music’ (2018) 45 (quoting an ASIC commissioner observing that proxy advisers ‘play an important role … promoting a focus on corporate governance issues relevant to shareholders’);

96  The Evidence of Australian Shareholder Activism (II) Companies reportedly take account of proxy advisers’ expectations. Corporate managers note, for example, how proxy advisers ‘inform the conversation’ within companies regarding their approach to matters that will be put to shareholders at their AGMs.194 Taking this into account, one would expect that companies will generally table resolutions at their AGMs which address matters which they have endeavoured to align with proxy advisers’ published policies. In turn, those policies, as noted above, are in many cases likely to be broadly consistent with the views of proxy advisers’ institutional investor clients. This may in part explain the high number of uncontroversial shareholder votes revealed by AGM voting data presented earlier in this chapter. 5.3.5.  Investor Networks Institutional investors are involved in various investor networks which seek to address issues of concern to such investors. Some of these are local or regional, such as Investors Against Slavery and Trafficking APAC and the Investor Group on Climate Change (IGCC). The former seeks to encourage companies in the Asia-Pacific region to address modern slavery, labour exploitation and human trafficking in their businesses and supply chains.195 The IGCC is a network of Australian and New Zealand investors which seeks to address the impact of climate change on the financial value of their equity investments.196 The IGCC helps investors develop resources and know-how to manage the investment consequences of climate change and coordinates a ‘corporate engagement’ programme.197 The latter programme involves IGCC coordinating investors’ engagement with 15 listed companies on climate change risks and opportunities. The programme also aims to assist investors to improve their capacity to undertake such engagements by providing them with relevant research and training.198 Investors also participate in international and transnational networks. IGCC’s corporate engagement programme forms part of the global Climate

RB Thompson, ‘The Power of Shareholders in the United States’ in JG Hill and RS Thomas (eds), Research Handbook on Shareholder Power (Cheltenham, Edward Elgar, 2015) 441, 452 (noting how proxy advisers meet with and seek input from their clients when preparing voting recommendations and therefore play a role in developing and articulating a consensus position of their clients on major corporate governance issues). 194 Computershare, Intelligence Report: Insights from Annual General Meetings held in 2017 (2018) 9. Relevantly, the proxy adviser, Ownership Matters, reports that it meets with approximately two-thirds of entities in the S&P/ASX300 each year, generally once or twice a year, highlighting how companies are attentive to the views of proxy advisers: Paatsch Evidence (n 23) 4. 195 Investors Against Slavery and Trafficking Asia-Pacific, ‘Homepage’ www.iast.fastinitiative.org. 196 The Investor Group on Climate Change, ‘Who We Are’ www.igcc.org.au/who-we-are/. 197 The Investor Group on Climate Change, ‘Projects and Collaborations’ www.igcc.org.au/projects/. 198 The Investor Group on Climate Change, ‘IGCC Corporate Engagement’ www.igcc.org.au/corporateengagement/.

Role of Governance Intermediaries in Leveraging Shareholder Influence  97 Action 100+ project,199 which describes itself as an investor-led initiative that seeks to compel the world’s largest corporate greenhouse gas emitters to take action to mitigate the effects of climate change.200 The United Nations-sponsored Principles for Responsible Investment (‘PRI’) has 197 investor and service provider signatories based in Australia.201 Other transnational networks that include Australian investors among their members are the Workforce Disclosure Initiative202 and the Carbon Disclosure Project.203 Through these activities, investor networks support investors’ activism in relation to material ESG issues. The networks bring together investors with common concerns, provide resources and know-how to assist investors to act on such concerns, and assist in the coordination of investor activism in relation to those concerns. As one of the largest industry superannuation funds, notes, ‘[w]orking with industry investors and groups gives us better insights and more influence in shared ESG issues.’204 5.3.6.  The Broader Corporate Governance Industry In addition to the various intermediaries described above, a range of other organisations provide information, know-how and analysis to assist investors to undertake their governance activities. This includes research relating to companies’ ESG performance,205 bespoke analysis of governance issues in their investee companies206 and analytical tools for use when monitoring their investee companies.207

199 The Investor Group on Climate Change, ‘Working Groups’ www.igcc.org.au/working-groups/. 200 Climate Action 100+, ‘About Climate Action 100+’ www.climateaction100.org/about/. 201 Principles for Responsible Investment, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (September 2021) 1. 202 Workforce Disclosure Initiative, ‘Existing Signatories’ www.shareaction.org/workforce-disclosureinitiative/become-an-investor-signatory. This initiative seeks to promote improved labour practices by encouraging companies to disclose comparable and comprehensive data of their workforce practices. 203 Eg, the industry superannuation fund, Australian Super, reports that it is a member of this project: Australian Super, ‘Environmental, Social and Governance’ www.australiansuper.com/investments/ how-we-invest/esg-management. 204 ibid. 205 See, eg, Institutional Shareholder Services, ‘ISS in Australia’ www.issgovernance.com/australia/ (describing the activities of ISS ESG); RepRisk, ‘Approach’ www.reprisk.com/approach#scopeand-scale (reporting how it offers ESG data in relation to more than 170,000 companies across ‘all countries’). 206 Ownership Matters, ‘Services’ www.ownershipmatters.com.au/services/. 207 Transition Pathway Initiative, ‘Overview of the TPI’ www.transitionpathwayinitiative.org/overview. The Transition Pathway Initiative is a global initiative led by asset owners, supported by asset managers and drawing on the resources of FTSE Russell and the London School of Economics to develop resources for assessing companies’ preparedness for the transition to a low-carbon economy. The industry superannuation fund, HESTA, was the first Australian investor to pledge support for the initiative: HESTA, ‘HESTA First Australian Backer of Global Climate Action Initiative’ (Media Release, 12 March 2020).

98  The Evidence of Australian Shareholder Activism (II) 5.3.7.  The Role of Governance Intermediaries: Summary Organisations such as representative bodies, proxy advisers, engagement firms and investor networks play a critical role in supporting the governance activities of institutional investors. They assist investors with their share voting and behind-the-scenes engagement, coordinate or support interventions against particular companies, and provide data and analysis to support these activities. They also help to collectivise and channel institutional investors’ influence in Australian corporate governance. They do this at both the market level and at the company level. At the market level, representative organisations advocate for the interests of investors in corporate governance policy and law reform. Representative organisations and proxy advisers influence market practice by issuing guidelines directed at investors’ and public companies’ corporate governance practices.208 At the company-level, engagement firms speak for multiple clients when engaging with companies, representative bodies publicly criticise problematic companies on behalf of their investor members, and investor-networks coordinate and support investors’ engagement with companies in relation to material ESG issues. It is arguable that proxy advisers’ voting policies have produced a degree of standardisation in investors’ voting decisions. In that sense, their policies, in effect, coordinate and collectivise investors’ voting power.209 5.4. CONCLUSION

Shareholders in Australian public companies are activist, albeit not in the stereotypical way envisaged in much recent commentary. This chapter demonstrates how shareholders use less overtly assertive and interventionist methods to influence their company’s governance; in particular, voting at regularly convened shareholder meetings and private engagement with companies outside of shareholder meetings.210 These less overt methods are particularly favoured by the 208 Power (n 188) 45 (quoting an ASIC commissioner observing that proxy advisers ‘play an important role … promoting a focus on corporate governance issues relevant to shareholders’). Mees and Smith argue that ACSI is a ‘key driver’ of institutional investor activism in Australia and ‘has greatly increased the number of institutional investors becoming actively concerned with the governance practices of Australian listed companies’: Mees and Smith (n 131) 84–85, 87. 209 At the international level, the OECD has raised the issue of whether proxy advisers effectively create ‘voting blocs’ of institutional investors: OECD, Common Ownership by Institutional Investors and its Impact on Competition (OECD Secretariat Background Note, 5 December 2017) 36. 210 A point noted by others: see, eg, Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Better Shareholders – Better Company (2008) 12 (noting institutions’ preference for private discussions); Productivity Commission (n 16) 303 (noting that activism in connection with shareholder meetings does not provide a complete measure of the extent to which shareholders are engaging in corporate governance); ASIC, Collective Action by Investors: Update to RG 128 (Consultation Paper 228, February 2015) [16] (noting the significance of behind-thescenes shareholder-company engagement).

Conclusion  99 institutional investors which are significant shareholders in Australian public companies. This chapter has also highlighted how institutions’ voting and engagement activities are facilitated to a significant extent by an extensive industry of governance intermediaries such as representative bodies, proxy advisers and engagement firms.

6 The Nuances and Significance of Australian Shareholder Activism

A

s chapter one highlighted, much recent Australian commentary and analysis has rested on a relatively narrow conception of shareholder activism. That is, it has frequently perceived of activism as an overtly interventionist form of behaviour which threatens to undermine or overwhelm a company’s governance processes. The previous chapters have provided a more complex account of Australian activism. It is important to highlight the key nuances of Australian activism that emerge from this account before turning to explore their regulatory and comparative significance. 6.1.  THE NUANCES OF AUSTRALIAN ACTIVISM

6.1.1. Diversity Australian activists are a diverse class, comprising individuals, social activist organisations, institutional investors and non-institutional blockholders. There is also considerable diversity within some of these individual categories. Non-institutional blockholder activists, for example, include company founders, senior executives and trading companies.1 Institutional investors differ in multiple ways, including by function (asset owner versus asset manager), investment style (eg, active versus passive), investment focus (eg, large capitalisation companies or small capitalisation companies), and geographic origins (domestic or overseas).2 Australia’s industry superannuation funds, which are some of the largest investors in the Australian market, have particularly distinct characteristics. This includes the fact that they do not form part of commercial financial conglomerates and have employer and employee representation on their governing boards.3 Their founders’ experience in the trade union movement motivated

1 Ch 4, section 4.1.3(iii). 2 On the issue of the diversity of institutional investors, see generally JC Coates, ‘Thirty Years of Evolution in the Roles of Institutional Investors in Corporate Governance’ in JG Hill and RS Thomas (eds), Research Handbook on Shareholder Power (Cheltenham, Edward Elgar, 2015) 79. 3 Ch 3, section 3.2.

The Nuances of Australian Activism  101 them to ensure that the funds avoided capture by the for-profit funds management industry. The industry funds therefore established a system of supporting organisations including an asset manager, asset consultant and ACSI.4 The latter now plays a significant role in assisting industry superannuation funds to wield influence in matters of corporate governance, both at a company level and a market-wide level. Australian activists pursue varying objectives. The previous chapters have highlighted how individuals and social activist organisations typically focus on environmental and social issues. Institutional investors are generally focused on issues which impact investment returns and risks.5 Some will focus on these issues in relation to specific companies, whereas others may only focus on such issues to the extent they are material at a portfolio level.6 The motives of non-institutional blockholders are more eclectic and not necessarily confined to realising an appropriate return on their investment.7 For example, trading companies may engage in activism to seek commercial influence over a competitor company, wealthy individuals may pursue idiosyncratic personal objectives, and founders may be influenced by the prestige associated with their involvement in a company.8 6.1.2.  Tactical Variation and Specialisation Australian activists’ tactics vary considerably. The previous chapters have highlighted, for example, how social activist organisations primarily propose resolutions at the AGMs of large capitalisation companies. Individual activists typically seek board representation by standing as candidates in companies’ annual board elections. Institutional investors favour voting at shareholder meetings and behind-the-scenes engagement, although the evidence presented in chapter five indicates that they often go about these activities in different ways. Non-institutional blockholders appear to be more willing to launch campaigns to replace company directors than other activists.9 These different tactics reflect activists’ varying objectives and incentives. For individual activists who tend to have small shareholdings and limited resources,

4 ibid. 5 The relevance of ESG considerations for institutional investors, in this regard, is examined below in section 6.1.6. 6 Ch 5, section 5.2 (contrasting the focus of industry superannuation funds on specific companies and the focus of index funds on thematic or market-wide issues). 7 See generally, A Dignam and M Galanis, ‘Australia Inside-Out: The Corporate Governance System of the Australian Listed Market’ (2004) 28 Melbourne University Law Review 623, 629–30. 8 ibid 629. Concerns about the idiosyncratic objectives of non-institutional blockholders featured prominently in commentary about the high-profile, aggressive interventions undertaken in 2012 by James Packer and Gina Rinehart, two of Australia’s wealthiest individuals: see ch 1, section 1.2. 9 Ch 4, section 4.1.4.

102  The Nuances and Significance of Australian Shareholder Activism standing for election in a company’s annual director elections is a low-cost, straightforward and high-profile form of activism, owing to the public nature of such elections and the ease with which candidates can nominate themselves for election.10 For social activist organisations, targeting large company AGMs with shareholder-proposed resolutions is a practical and high-profile way of highlighting their cause. Such organisations typically find it feasible to satisfy the ‘100 shareholder’ filing threshold as a result of their organisational capabilities and broad membership bases.11 A further, and more recent, advantage of this tactic is that shareholder-proposed resolutions addressing ESG issues are beginning to attract greater levels of voting support from institutional investors,12 providing important momentum for social activist organisations’ campaigns. Non-institutional blockholders’ willingness to resort to boardfocused campaigns may reflect the fact that their significant and generally less diversified shareholdings, combined with their potentially idiosyncratic investment motivations, makes it easier for them to justify the cost and effort of this more aggressive form of activism.13 For institutional investors with constrained incentives to participate in corporate governance, voting at shareholder meetings and behind-the-scenes engagement with companies have some important advantages. Share voting, for example, is an economical form of activism compared to higher-intensity forms of activism. Institutional investors do not need to develop any form of activist proposal or campaign. Instead, they vote on a resolution proposed by corporate managers or, occasionally, a social activist organisation, and can inform their decision by taking into account mandatory disclosures made by the company and the voting recommendations of proxy advisers. Voting on non-binding resolutions such as shareholders’ annual ‘say on pay’ and precatory ESG-related resolutions is also a low-risk form of activism. This is because such resolutions do not lead to immediate consequences for a company unlike, for example, a successful proposal to replace a company’s board.14

10 ibid, section 4.1.3(ii). 11 Under Australian law, a shareholder-proposed resolution must be filed by shareholder(s) holding at least 5% of a company’s voting shares or not less than 100 shareholders; social activist organisations typically satisfy the 100-shareholder threshold. See ch 3, section 3.4.4 for a discussion of the filing requirements and ch 4, sections 4.1.3(i) and 4.2 for evidence of activist organisations’ reliance on the 100-shareholder threshold. 12 Ch 5, section 5.1.6. 13 For a similar assessment of blockholders’ potentially significant incentives to engage in forceful activism, see GP Stapledon, Share Ownership and Control in Listed Australian Companies (Research Paper, 1999) www.ssrn.com/abstract=164129, 23 (making this point in the context of noting how the combination of: (i) a non-institutional blockholder not aligned with incumbent management; and (ii) institutional investors, can result in meaningful and successful activism). 14 P Durkin, ‘Shareholders Use Two-strikes Rule Judiciously’ The Australian Financial Review (23 November 2011) 4 (quoting Australian proxy adviser, Dean Paatsch, who notes that shareholders’ annual ‘say on pay’ has ‘succeeded in lowering the outrage constraint’).

The Nuances of Australian Activism  103 Behind-the-scenes engagement also has important advantages for institutional investors. As behind-the-scenes engagement is not a mandatory legal requirement,15 investors can determine the intensity and frequency of their behind-the-scenes engagement activities. The private nature of behind-the-scenes interactions may also facilitate constructive interactions between shareholders and companies; in particular, the periodic nature of engagement enables issues and concerns to be explored iteratively and without the pressure and potential reputational consequences that might arise if the interaction took place under the scrutiny of the market.16 Investors are also assisted in their engagement activities by the engagement firms that operate in the Australian market.17 6.1.3.  Different Patterns of Activism Across the Market The previous chapters have also highlighted how the nature of activism varies across different strata of the Australian market. Larger capitalisation companies do not commonly experience overtly interventionist activism such as board spills or public campaigns.18 Instead, the evidence presented in chapter five suggests that they more typically experience activism in the form of shareholder voting pressure at their AGM or behind-the-scenes interactions with major shareholders and their advisers, reflecting the fact that these tactics are particularly favoured by the institutional investors which tend to concentrate their investments in larger capitalisation companies.19 A larger capitalisation company’s experience of shareholder activism is therefore more likely to involve an ongoing, iterative and often private interaction with its existing major shareholders and their advisers, rather than a public and hostile activist ‘campaign’. The previous chapters suggest that smaller capitalisation companies have a somewhat different experience of shareholder activism. First, voting data indicates that voting turnout at smaller companies’ shareholder meetings tends to be lower than at shareholder meetings of larger capitalisation companies.20 Second, lower levels of institutional investor share ownership in smaller companies21 may mean that small companies do not experience the same pattern of ongoing, behind-the-scenes interactions with major institutional investors which 15 Although engagement is encouraged by Australia’s institutional investor stewardship codes, such codes operate only on a ‘comply or explain’ basis and do not contain mandatory legal rules, as explained in ch 5, section 5.3.2. 16 BS Black and JC Coffee, ‘Hail Britannia: Institutional Investor Behaviour Under Limited Regulation’ (1994) 92 Michigan Law Review 1997, 2054–55; MJ Mallow and J Sethi, ‘Engagement: The Missing Middle Approach in the Bebchuk-Strine Debate’ (2016) 12 NYU Journal of Law and Business 385, 393–94. 17 Ch 5, section 5.3.3. 18 Ch 4, sections 4.1.4 and 4.3.2. 19 Ch 3, section 3.3.2. 20 Ch 5, section 5.1.3. 21 Ch 3, section 3.3.2.

104  The Nuances and Significance of Australian Shareholder Activism large companies experience. Third, shareholder-proposed resolutions addressing ESG issues do not (as yet) target smaller capitalisation companies.22 Finally, the evidence in chapter four indicates that, to the extent it occurs, overtly interventionist activism tends to involve small capitalisation companies rather than large capitalisation companies. One possible explanation for this phenomenon is the fact that smaller capitalisation companies appear to have higher levels of ownership by non-institutional blockholders23 which, as just explained, will generally find it more feasible to adopt an activist stance compared to institutional investors. Moreover, the market for smaller capitalisation companies’ shares will generally be less liquid than the market for shares in larger capitalisation companies.24 This makes it harder for blockholders with substantial holdings to exit small-capitalisation companies, providing them with a further incentive for resorting to more forceful forms of activism to address their governance concerns. 6.1.4.  Low Levels of Aggressive Activism A particularly notable finding to emerge from the previous chapters is that although aggressive activism does occur in Australia, it is not, in overall terms, a common feature of the Australian corporate governance landscape. On one view, this state of affairs is attributable to the potency of Australian shareholders’ mandatory governance rights, which include relatively generous rights to replace directors and amend the terms of a company’s constitution. On this account, the mere fact that shareholders have the right to replace directors or amend their company’s constitution creates a powerful incentive for corporate managers to be attentive to shareholders’ interests and thereby minimises the occasions on which shareholders must actually exercise these rights.25 However, it is apparent from the previous chapters that Australia is not a corporate governance idyll in which strong law ‘on the books’ consistently exerts a pre-emptive disciplinary effect on corporate managers, avoiding the need for shareholder interventions. The previous chapters reveal various examples of discord between shareholders and companies. In particular, chapter five highlighted increasing voting dissent at shareholder meetings, including

22 Ch 4, sections 4.1.4 and 4.2. 23 Ch 3, section 3.3.2. 24 A point recognised by the fact that institutional investors tend to focus their investments in large capitalisation companies for reasons that include the fact that the market for shares in such companies is more liquid than the market for shares in small capitalisation companies: ch 3, section 3.3.2. 25 This logic has underpinned arguments in favour of shareholder empowerment in the United States: see, eg, LA Bebchuk, ‘The Case for Increasing Shareholder Power’ (2005) 118 Harvard Law Review 833; LA Bebchuk and S Hirst, ‘Private Ordering and the Proxy Access Debate’ (2010) 65 The Business Lawyer 329, 336.

The Nuances of Australian Activism  105 material levels of dissent pursuant to shareholders’ annual ‘say on pay’ and gradually increasing voting support for shareholder-proposed ESG resolutions. In recent years, shareholders have also called for reform to provide shareholders with additional governance rights for holding corporate managers accountable. ACSI, for example, has recently called for companies to introduce an annual, non-binding ‘say on climate’.26 Why does shareholder dissent not translate instead into more aggressive and interventionist forms of activism, such as the removal of directors or amendments to the corporate constitution? Why are shareholder representatives instead asking for additional and more intermediate governance rights such as a nonbinding ‘say on climate’? Several factors appear to explain this state of affairs. (i)  The Difficulties Associated with Replacing Directors and Amending Constitutions First, shareholders’ rights to replace directors and amend their company’s constitution can be impractical governance tools. Consider the director removal power. Removing directors may cause instability and distraction;27 potentially significant corporate knowledge may be lost with the departing directors;28 and new directors may take time to settle into their roles.29 There is also no guarantee that a change in board personnel will result in a change in company policy. The new directors may make similar decisions to their predecessors once they have access to the company’s non-public information regarding the issue of concern to shareholders. Shareholders, therefore, can face considerable uncertainty regarding whether a change in their company’s directors will improve corporate value.30 ACSI has noted feedback from institutional investors to the effect that they consider this tactic difficult and risky.31 Moreover, as chapter five highlighted, much contemporary activism focuses on broader issues of corporate policy and strategy, such as ESG issues, or on quite specific issues, such as the remuneration arrangements for a company’s executive managers. These issues may not raise concerns about the competence of directors per se. There may be little sense in shareholders threatening

26 Ch 5, section 5.1.6. 27 J Colvin, ‘Striking the Wrong Shareholder Chord’ The Australian Financial Review (10 December 2012) 47. In its voting guidelines, the Australian Shareholders Association notes that ‘[c]alling an EGM to spill an entire board can be a highly disruptive event for a company’: Australian Shareholders’ Association, ASA Voting and Engagement Guidelines for ASX 200 Companies (June 2020) [36]. 28 L Byrnes and L Chapple, ‘How Should Regulators Deal with Entrenched Company Executives?’ (2015) 33 Company and Securities Law Journal 266, 275. 29 ibid. 30 Bebchuk, ‘The Case for Increasing Shareholder Power’ (2005) 857. 31 Australian Council of Superannuation Investors (ACSI) and K Sheehan, Shareholder Resolutions in Australia: Is There a Better Way? (October 2017) 5, 9, 17.

106  The Nuances and Significance of Australian Shareholder Activism to remove otherwise competent directors in circumstances where shareholders simply wish, for example, to encourage better disclosure on climate change issues or raise concerns about a particular executive’s remuneration arrangements. As a fund manager has noted, ‘[r]emoval of directors, change of management is a pretty blunt tool if you’re unhappy’.32 The social and environmental activist organisation, ACCR, has described the removal of directors in order to address ESG concerns as ‘unproductive and unwarranted’.33 Taking action to replace directors can also involve significant cost and effort. An activist shareholder will need to identify and brief alternative candidates, justify the case for change to other shareholders, and contend with counterarguments raised by the company’s incumbent managers. Those incumbent managers can draw on the resources of the company to respond to any attempt to unseat them.34 The activist shareholder, however, will not have access to the company’s resources in order to fund the cost of its activism. Moreover, the activist will only share proportionately in any improvement in corporate value that results from a change in the company’s directors. This proportionate share (assuming that board change improves shareholder value) may be insufficient to cover the activist’s costs. Shareholders even regard small changes to a company’s board as a difficult course of action. Institutional investors point out that they often lack the necessary information to assess whether to vote individual directors off company boards.35 In the words of one fund manager: [It’s] the hardest thing, the thing we probably are most ill-equipped to do. It [sic] just something we don’t have enough information on at the end of the day … What’s the dynamic in the boardroom? We don’t have any visibility on that.36

Shareholders’ constitutional amendment power is also challenging to use in practice. First, an amendment to a company’s constitution requires approval as a special resolution, that is, by at least 75 per cent of the votes cast on the resolution.37 Second, activists need to be able to express their objective in the form of a written term to be included in the company’s constitution. This may be challenging. If, for example, an activist wishes its company to pursue a

32 ibid. 33 Supporting Statement provided by ACCR in relation to resolution proposed at 2017 AGM of BHP Billiton: BHP Billiton Ltd, ‘BHP Billiton Ltd Notice of Meeting 2017 Addendum’ (ASX Announcement, 20 September 2017) 8. See also B Sheehy, H Pender and B Jacobsen, ‘Corporate Social Responsibility/ESG Shareholder Activism in Australia: A Case Study of the Australasian Centre for Corporate Responsibility’ (2021) 36 Australian Journal of Corporate Law 156, 172. 34 However, directors’ duties do place some limits on how directors use corporate resources in these circumstances: see generally, R Levy, ‘Aspects of the Law Relating to Contested Elections of Directors’ (2015) 33 Company and Securities Law Journal 404. 35 ACSI and Sheehan, Shareholder Resolutions in Australia (2017) 17. 36 ibid. 37 Corporations Act, ss 9 (definition of ‘special resolution’), 136(2).

The Nuances of Australian Activism  107 particular line of business, the activist would need to determine how to express in a written constitutional term what could be a complex commercial issue. An amendment that is too prescriptive may leave little room for a company’s managers to respond to new information or changes in a company’s circumstances, thereby constraining directors’ future decision-making in ways that might not be in the interests of the company. An amendment that is not prescriptive enough may be ineffective to ensure that directors comply with shareholders’ wishes. Third, activists proposing constitutional amendments may encounter resistance to change from other shareholders. As public company constitutions typically allocate management power exclusively to a company’s board,38 an attempt to curtail those powers, if successful, would represent a novel change to a public company’s constitution. The novelty of such a proposal makes it difficult for shareholders to ascertain how the proposal would operate in practice. Although detailed research might shed light on a proposal’s likely effect, many shareholders have limited incentives to participate in corporate governance, including to undertake careful analysis of voting proposals put before them.39 Faced with a novel constitutional amendment proposal of uncertain effect, shareholders may simply decide not to engage with the proposal.40 Finally, activists may find that the tactical utility of the constitutional amendment power is curtailed by the legal limits of that power. Of particular relevance in the activism context are court decisions which have found that mandatory provisions of the Corporations Act can constrain shareholders’ attempts to amend a company’s constitution in order to interfere in board decision-making.41 In Capricornia Credit Union Ltd v Australian Securities and Investments Commission,42 the Federal Court noted that shareholders have no power to relieve directors from their statutory duties of care and good faith under the Corporations Act.43 The Court indicated, obiter, that this may mean that a constitutional amendment designed to give directions to a board is invalid if it requires directors to take action which is inconsistent with their statutory

38 Ch 3, section 3.4.2. 39 LA Bebchuk, ‘Limiting Contractual Freedom in Corporate Law: The Discernible Constraints on Charter Amendments’ (1989) 102 Harvard Law Review 1820, 1839. Bebchuk argues that these limited incentives can even cause shareholders to adopt a standardised approach to voting which can lead them to vote in favour of proposals that harm their interests. 40 This contrasts with the situation where a shareholder is asked to consider a proposal which has been more widely adopted by companies. In this situation, a shareholder is likely to be more familiar with the proposal, reducing the work required to analyse it. For this reason, commentators have argued that the adoption of governance rules is influenced by ‘network externalities’: Bebchuk (n 25) 890. 41 Boros has noted that, although Anglo-Australian law traditionally provided shareholders with considerable freedom to determine matters of internal governance, the prescriptive nature of modern corporations legislation in Australia has curtailed that freedom: E Boros, ‘Altering the Division of Power Between the Board and the General Meeting’ (2015) 33 Company and Securities Law Journal 129, 131–32. 42 (2007) 62 ACSR 671. 43 ibid 691, 693.

108  The Nuances and Significance of Australian Shareholder Activism duties.44 In Re Molopo Energy Ltd,45 the Court held that shareholders could not validly propose a constitutional amendment which shifted the decision to initiate a capital reduction from a company’s board to its shareholders assembled in a shareholder meeting. The Court reasoned that the relevant provisions of the Corporations Act intend that company boards, not shareholders, should be responsible for the decision to initiate a capital reduction.46 (ii)  Cultural and Social Factors May Constrain Aggressive Activism Cultural and social considerations would also appear to constrain aggressive forms of activism. In the context of commenting on the high-profile intervention of Elliott Management against BHP Billiton in 2017, an Australian fund manager was reported as saying: I think there’s no real general flavour that suggests this type of stuff is going to come through en masse … Culturally, I don’t think shareholder activism will play a big part here.47

Another fund manager has observed that activism is ‘not quite the mentality of Australians, as much as it is of Americans.’48 The governance advisory firm, Morrow Sodali, argues that the close-knit nature of the Australian business community complicates matters for activists: With only 30 million people and a smaller economy [than the United States], publicly traded companies and their boards in Australia have interlocking board members. While a shareholder activist may be raising good points about improving a company, board members and even shareholders in the country often consider their social network before criticizing management or voting against them.49

This social dynamic may pose particular challenges for activism that seeks to change the composition of a company’s board. Commentators have noted that

44 ibid 693–94. After examining this issue, Boros concludes that using the constitutional amendment power to curtail the power of the board is ‘fraught with legal uncertainty’: E Boros, ‘How Does the Division of Power between the Board and the General Meeting Operate?’ (2010) 31 Adelaide Law Review 169, 184. 45 (2014) 104 ACSR 46. 46 ibid 60–61. The court noted that this intention is evidenced by the fact that, among other things, the legislation imposes obligations on directors in connection with capital reductions (but not on shareholders). 47 M Robin, ‘Share Activism “not part of Australian Investors’ Mentality”’ The Canberra Times (Canberra, 12 May 2017) 35 (quoting representative of Australian fund manager, Benelong). 48 ibid (quoting representative of Kardinia Capital). For a similar view, see T Boyd, ‘Activists Have All the Tools to Act’ The Australian Financial Review (24 June 2015) 44 (claiming that foreign activist investors have not been active in Australia because of, among other things, the reluctance of Australian institutional investors to embrace activism). 49 Morrow Sodali, ‘Corpgov: Shareholder Activism in Australia Requires a Softer Touch’ (7 October 2019) www.morrowsodali.com/news-events/articles/corpgov-shareholder-activism-in-australia-requiresa-softer-touch.

The Nuances of Australian Activism  109 a relatively small ‘cadre’ of professional non-executive directors holds a m ­ aterial proportion of board positions in Australia’s largest public companies.50 It has been suggested that a desire to remain a member of this relatively exclusive community of professional directors may result in company directors seeking to avoid the controversy that might otherwise result from their involvement in an activist’s board spill campaign.51 Commentators claim that activists can therefore find it difficult to recruit suitable candidates for a slate of alternative directors.52 (iii)  Political Context In Australia, there has been political consensus for many years regarding the merits of shareholder participation in corporate governance.53 However, this has begun to change. Australia’s most recent conservative federal government was particularly concerned about the increasing significance of Australia’s industry superannuation funds. During the 2021 parliamentary inquiry into the ownership of Australian public companies, the committee chairperson, a member of the government, expressed concern about ‘collusion among super funds’ and the fact that the growing size of the sector may result in ‘too much power … in the hands of too few people’.54 The government’s concerns appear to be founded in part on a perception that the industry superannuation funds were not supportive of the government’s conservative policies owing to the funds’ historical ties to the Australian trade union movement.55 Media sources reported that the government saw the parliamentary inquiry as a means of targeting ‘unionbacked industry super funds’.56 Interestingly, the inquiry’s final report contained comments which indicated that the governments’ concerns may in fact have grown to encompass institutional investors generally. For example, the introduction to the government members’ section of the report refers disparagingly to

50 Discussed further in sub-section (v) below. 51 T Stutt and M Smyth, ‘New Frontiers in Climate Activism’ (Australian Institute of Company Directors, Membership Update, 24 August 2021) www.aicd.companydirectors.com.au/membership/ membership-update/new-frontiers-in-climate-activism; G Radzyminski, ‘Australia’s Activist Awakening’ (Ethical Boardroom, 2019) www.ethicalboardroom.com/australis-activist-awakening/. 52 ibid. 53 See, eg, H Anderson et al, ‘The Evolution of Shareholder and Creditor Protection in Australia: An International Comparison’ (2012) 61 International and Comparative Law Quarterly 171, 192–93 (noting how significant pro-shareholder reforms in Australia have occurred when each of the major political parties was in power and concluding that ‘[t]here is therefore no obvious relationship between the political party in power and corporate law reform that increases shareholder protection’). 54 Proceedings of House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (‘Common Ownership Inquiry’) (20 September 2021) 1, 17 (T Wilson MP). 55 Ch 3, section 3.2 (noting how the funds arose from initiatives of trade unions in the 1980s). 56 J Kehoe, ‘High Stakes in Ownership Investigation’ The Australian Financial Review (5 August 2021) 36.

110  The Nuances and Significance of Australian Shareholder Activism institutional investors’ commonly used strategy of investment diversification as ‘the strategy of institutional or passive and lazy capital’.57 Notably, concerns about institutional investors were not confined to government members of the inquiry. Opposition party members raised concerns during the inquiry about a different type of investor, the index fund,58 and stated in their section of the inquiry’s report that ‘these index investors have the potential to exercise a disproportionate influence over Australian firms’.59 This changing political context subjects institutional investors to a real risk of regulatory backlash. This was highlighted in December 2021 when the federal government announced significant reforms to the regulation of proxy advisers which, among other things, would have increased advisers’ licence obligations, required them to provide an advance copy of their voting recommendations to public companies, and obliged them to be independent of their clients.60 The last requirement would have threatened ACSI’s ability to provide proxy advice to its superannuation fund clients, since it is owned by industry superannuation funds.61 Although these reforms were ultimately defeated in the upper house of parliament,62 they form part of an overall shift in political context which may well constrain how large investors choose to exercise their governance power. (iv)  The Nature of Public Company Shareholders in Australia At this point, it is important to remember that two of the three most significant shareholder types in the Australian market are institutional investors and retail investors,63 which have significantly constrained incentives to participate in corporate governance.64 For such investors, the practical, social and political issues associated with shareholders’ most potent governance rights are likely to prove particularly challenging. Consistently, the evidence in the previous chapters indicates that institutional investors and retail investors do not play a significant role in the more aggressive forms of activism in Australia.

57 House of Representatives Standing Committee on Economics, Parliament of Australia, Report on the Implications of Common Ownership and Capital Concentration in Australia (March 2022) 2. 58 See, eg, Proceedings of House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (20 September 2021) 5 (A Leigh MP). 59 House of Representatives Standing Committee on Economics, Report on the Implications of Common Ownership (2022) 40. 60 J Frydenberg MP and Senator J Hume, ‘Reforms to Bring Greater Transparency and Accountability to Proxy Advice’ (Media Release, 17 December 2021). 61 N Khadem, ‘Proxy Advice Law Which Sparked Fears It Would Reduce Investor Activism Defeated in the Senate’, ABC News (online) (10 February 2022) www.abc.net.au/news/2022-02-10/ proxy-advice-regulation-by-josh-frydenberg-defeated-in-senate/100819906. 62 ibid. 63 Ch 3, section 3.2. 64 Ch 2, section 2.2.1 (describing the limited incentives of institutional and retail investors to engage in corporate governance).

The Nuances of Australian Activism  111 (v)  The Structure of Australian Public Company Boards There is one further factor that may explain why Australian shareholders tend to eschew more aggressive forms of activism. It concerns the distinctive reputational incentives of Australian public company directors. These reputational incentives, which arise as a result of the typical structure of an Australian public company board, would appear to make public company directors particularly sensitive to shareholder pressure. Shareholders may therefore find that in many cases less aggressive forms of activism are quite adequate for achieving their objectives. In Australia, the Corporate Governance Principles and Recommendations issued by the ASX Corporate Governance Council recommend that the board of a public company have a majority of independent directors and that the board chair be an independent director, noting that this ‘maximises the likelihood that the decisions of the board will reflect the best interests of the entity as a whole’.65 Research indicates substantial compliance with these recommendations in larger capitalisation companies.66 Research also indicates that these independent directors tend to be recruited from a relatively small ‘cadre’ of established professional company directors.67 A significant consequence of this conservative recruitment practice is that many Australian professional directors hold multiple public company directorships. Recent research by one of Australia’s proxy advisers concludes that ‘[t]here is a strong bias toward appointing existing ASX300 directors to [board] vacancies’.68 The research notes that 38.2 per cent of board vacancies in S&P/ASX 300 companies between 2005 and 2020 were filled by candidates who already held a directorship in an S&P/ASX 300 company.69 Reputation is a significant asset for skilled workers such as professional directors70 and a desire to maintain the value of that asset can materially influence a director’s behaviour.71 The reputational stakes are particularly high in a market like Australia where companies conservatively recruit from a small 65 ASX Corporate Governance Council, Corporate Governance Principles and Recommendations, 4th edn(February 2019) 15. 66 Ch 3, section 3.4.2. 67 L Nottage and F Aoun, ‘The Rise of Independent Directors in Australia: Adoption, Reform, and Uncertainty’ (2016) 23 University of Miami International and Comparative Law Review 571, 594–95. In 2019, Graeme Samuel, a former regulator and prominent member of Australia’s corporate community, caused controversy by claiming that female non-executive directors of Australia’s largest companies are drawn from a particularly small talent pool: J Durie, ‘Shrinking Director Gene Pool a Worry’ The Australian (29 March 2019) 17. 68 Ownership Matters, Many Are Called, Few Are Chosen: An Analysis of the Composition of ASX 300 Boards from 2005–2020) (October 2020) 2. 69 ibid. For similar data, see Computershare, 2021 AGM Intelligence Report (2021) 18. 70 DA Skeel, ‘Shaming in Corporate Law’ (2001) 149 University of Pennsylvania Law Review 1811, 1859–60. 71 JN Gordon, ‘The Rise of Independent Directors in the United States, 1950–2005: Of Shareholder Value and Stock Market Prices’ (2007) 59 Stanford Law Review 1465, 1488 (noting that the incentive effects of reputation include a desire to avoid professional embarrassment and a desire to maximise available business opportunities, including the possibility of other directorships).

112  The Nuances and Significance of Australian Shareholder Activism pool of professional directors. In these circumstances, a director who becomes embroiled in a dispute with their company’s major shareholders faces the risk of being relegated from this exclusive pool of well-regarded candidates. As an Australian corporate lawyer has noted: The issue in Australia is that directors and boards engage [with shareholders] too much … One of the reasons, I believe, is the limited pool of non-executive directors in this country. Everyone is interconnected. Everyone knows everyone. The result is that people’s reputations are extremely important to them to operate as a nonexecutive director. They don’t want to be targeted by activists.72

A 2017 research paper by ACSI quotes an Australian fund manager who claims that when shareholders indicate to directors that they are contemplating requisitioning a shareholder meeting, it is a ‘come to Jesus moment’ which ‘seems to get a lot of action because [directors] hate seeing these things’.73 It is also important to appreciate that if a director becomes embroiled in a dispute with their company’s shareholders, the reputational fall-out from that dispute is unlikely to be confined to that particular company. Two factors are significant in this regard: first, as noted above, Australian professional directors tend to hold multiple public company directorships and, second, institutional investors tend to be widely invested across the Australian market.74 In these circumstances, institutional investors are in a position to amplify their displeasure at a director they believe is unsatisfactory by registering voting dissent at the various companies in which the director holds (or is seeking) a directorship.75 Relevantly, proxy advisers state that they may recommend that their institutional investor clients vote against the election or re-election of a director to a company’s board if the director has displayed disregard for shareholders’ interests in that company or any other company in which they hold a directorship.76 This policy is, in effect, the corporate governance equivalent of a ‘cross-default’ clause in a finance agreement. 72 M Roddan, ‘Funds Lash Directors, Auditors’, The Australian (20 March 2018) 20 (quoting Jeremy Leibler). The article also quotes an Australian fund manager who claims that the Australian community of professional directors is ‘incestuous’. 73 ACSI and Sheehan (n 31) 12. 74 As highlighted by the market-wide share ownership data in ch 3, section 3.2. 75 This was recently highlighted by the experience of Catherine Brenner. Ms Brenner resigned as chairperson of the financial services company, AMP, in 2018 as a result of concerns regarding how that company had addressed compliance failures. In March 2022, it was reported that Ms Brenner was attempting to return to public company directorships. However, her proposed appointment at ASX-listed Scentre Group was resisted by the Australian Shareholders Association and CGI Glass Lewis on account of the events at AMP in 2018: M Roddan, ‘Retail Army Wants to Block Catherine Brenner’s Scentre Seat’ Australian Financial Review (online) (27 March 2022) www. afr.com/companies/financial-services/retail-army-wants-to-block-catherine-brenner-s-scentreseat-20220325-p5a816; B Wilmot, ‘Brenner Faces Shareholder Opposition to Westfield Place’ The Australian (28 March 2022) 15. 76 Glass Lewis, 2021 Policy Guidelines: Australia (2021) 17. See also Ownership Matters, Ownership Matters Voting Guidelines (February 2022) 1; Institutional Shareholder Services, Australia: Proxy Voting Guidelines: Benchmark Policy Considerations (December 2021) 18.

The Nuances of Australian Activism  113 These characteristics of the Australian market are likely to make directors particularly sensitive to the reputational consequences of conflict with shareholders and therefore more susceptible to shareholder pressure wielded in less overt ways, such as voting dissent on resolutions at AGMs. This is highlighted by Australian directors’ response to shareholders’ annual ‘say on pay’ and the associated ‘two strikes’ rule. Notwithstanding that voting data makes it clear that shareholders have little appetite for triggering the board spill feature of the ‘two strike’ rule, Australian commentators report that ‘say on pay’ has nonetheless been a significant catalyst for closer engagement between company directors and shareholders77 and has prompted boards to be more sensitive regarding executive remuneration practices.78 6.1.5.  The Limited Role of Hedge Fund Activism In contrast to the constrained incentives of institutional investors and retail investors, activist hedge funds have significant incentives to engage in forceful governance interventions.79 Professors Gilson and Gordon argue that hedge funds can in fact compensate for the governance ‘reticence’ of institutional investors.80 However, the previous chapters indicate that activist hedge funds are not prevalent in Australia. This would not appear to be due to inadequate opportunities. Market commentary suggests there are multiple companies that would benefit from the type of restructuring and ‘turn around’ strategies pursued by activist hedge funds in other markets.81 Instead, several other reasons appear to account for low levels of hedge fund activism in Australia. First, domestic activist investors are reported to have limited

77 Ch 5, section 5.1.9. 78 R Monem and C Ng, ‘Australia’s Two-Strikes Rule and the Pay-Performance Link: Are Shareholders Judicious?’ (2013) 9 Journal of Contemporary Accounting and Economics 237, 252 (finding that firms’ pay-for-performance link improved between the first and second years following the introduction of the two-strikes rule, both for firms which received a strike in year 1 as well as in control firms, from which Monem and Ng infer that the first year voting results may have prompted firms in general to align pay with performance). See also Activist Insight and Arnold Bloch Leibler, Shareholder Activism in Australia: A Review of Trends in Activist Investing (2016) 11 (‘There’s an aversion to reputational damage. Directors really want to avoid a strike even if their position is safe’). 79 See, eg, M Kahan and EB Rock, ‘Hedge Funds in Corporate Governance and Corporate Control’ (2007) 155 University of Pennsylvania Law Review 1021. 80 RJ Gilson and JN Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 863. 81 In a 2017 research note, for example, investment bank, Credit Suisse, concluded that there was significant scope for activist investors to make attractive returns in Australia and identified eight well-known companies that it said would make ideal targets: Credit Suisse, Activist Alpha (Research Note, 13 June 2017) 1, 6. The Australian activist investor, Sandon Capital, has also claimed that there are ‘phenomenal opportunities’ for activism in Australia: T Kaye, ‘Activist Shareholders Playing a Greater Role’ The Australian (19 February 2019) 23.

114  The Nuances and Significance of Australian Shareholder Activism funds under management82 – in part because Australian institutional investors do not make significant investments in them.83 Second, overseas hedge funds reportedly regard Australia as a challenging market in which to undertake interventions. This is attributed to factors such as time zone differences, lack of economies of scale arising from the small number of large capitalisation companies, and lack of support from Australian institutional investors.84 Overseas markets are also said to provide more lucrative opportunities.85 The social constraints referred to earlier may also constrain hedge fund activity. Activists claim that their aggressive style of activism is frowned upon in the small and relatively tight-knit Australian market.86 According to an Australian activist investor: Not many people would want to be activists every day of the week. We are ultimately a small market, including fund managers and company management, that operates with one degree of separation. We’re on the outside.87

The challenge of finding suitable board candidates who are willing to stand in a contested election, referred to earlier, would also frustrate a hedge fund’s efforts to assemble a credible alternative slate of directors for a board spill. 6.1.6.  The Increasing Significance and Sophistication of ESG-related Activism A notable development in Australian activism over the period covered by this book’s research is the increase in ESG-focused activism and its growing sophistication. In the early 2000s, this form of activism was practised primarily by trade unions and environmental organisations88 and was not a major focus for 82 S McNally, M Chambers and C Thompson, Financial Stability Review: The Australian Hedge Fund Industry (Report, Sept 2004) www.rba.gov.au/publications/fsr/2004/sep/pdf/0904-2.pdf (noting the small size of the domestic hedge fund sector and arguing that it is likely to remain a ‘niche industry’ for some time). 83 Credit Suisse observed in 2017 that ‘[w]e have long thought Australian funds management was underweight activism’, although it noted that there had appeared signs that this was changing: Credit Suisse, Activist Alpha (2017) 2. See also Activist Insight and Arnold Bloch Leibler, Shareholder Activism in Australia (2016) 5. 84 Boyd, ‘Activists Have All the Tools to Act’ (2015). 85 M Chandler, ‘Easy Does It: Shareholder Activism in Australia’ (Listed@ASX, Summer 2019/2020) www.asx.com.au/documents/resources/listed-at-asx-summer-oct-shareholder-activism.pdf (‘Global activist investors rarely consider Australia given its geographic distance and the multitude of ­opportunities abroad’). 86 See, eg, P Garvey, ‘Short-selling Attack Intensifies’ The Australian (24 March 2017) 23. See also Morrow Sodali, ‘Corpgov: Shareholder Activism in Australia Requires a Softer Touch’ (2019) (quoting a US activist who remarked in the aftermath of a campaign in Australia that ‘[t]he social issues complicated the transaction’, and ‘I would expect it to look more like the US someday but we’re still far away from that’). 87 Activist Insight and Arnold Bloch Leibler (n 78) 10. 88 M Rawling, ‘Australian Trade Unions as Shareholder Activists: The Rocky Path towards Corporate Democracy’ (2006) 28 Sydney Law Review 227; S Shearing, ‘Raising the Boardroom Temperature? Climate Change and Shareholder Activism in Australia’ (2012) 29 Environmental and Planning Law Journal 479.

The Nuances of Australian Activism  115 institutional investors.89 It not infrequently involved activists tabling legally invalid resolutions at shareholder meetings.90 Those resolutions that made it to a vote generally received very low levels of support.91 In the early 2000s, some commentators derided ESG-related activism as a peripheral issue; for example, a senior government minister claimed in 2000 that such activism involved ‘issues … that have nothing to do with creating shareholder wealth’.92 Today, mainstream institutional investors routinely emphasise the relevance of ESG considerations to their decision-making regarding their investment and corporate governance activities. ACSI’s stewardship code, for example, states prominently that its members ‘are committed to incorporating environmental, social and governance (ESG) considerations into their investment strategies and engaging collaboratively with companies to improve their ESG performance’.93 More than 100 Australasian institutional investors are now signatories to the Principles of Responsible Investment,94 guidelines for responsible investment practices issued by the PRI Association. Shareholder-proposed resolutions addressing ESG issues are now generally structured in a legally valid manner by their shareholder proponents95 and are gradually beginning to receive material ‘yes’ votes, reflecting material levels of support from institutional investors.96 Evidence also indicates that institutional investors pursue their ESG-related concerns through their behind-the-scenes interactions with companies.97 Reflecting this, the Australasian Investor Relations Association issued detailed guidance for listed companies in 2017 on how to engage with investors on ESG issues.98 The relevance of ESG considerations from an investment perspective varies along a spectrum.99 At one end of the spectrum are investors who consider them

89 S Marshall, K Andersen and I Ramsay, ‘Are Superannuation Funds and Other Institutional Investors in Australia Acting Like “Universal Investors”?’ (2009) 51 Journal of Industrial Relations 439, 453 (noting the ‘nascency’ of institutional investors’ focus on ESG issues in the early 2000s). 90 M Rawling, ‘Australian Trade Unions as Shareholder Activists’ (2006); S Shearing, ‘Raising the Boardroom Temperature?’ (2012). 91 ibid. 92 J Hockey, Minister for Financial Services and Regulation, ‘Wealth Not Politics’ (Press Release, FSR/083, 18 December 2000) www.ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/ 2000/083.htm&pageID=003&min=jbh&Year=2000&DocType=0. 93 ACSI, Australian Asset Owner Stewardship Code (May 2018) 4. 94 Principles of Responsible Investment, ‘About the PRI’ www.unpri.org/about-us/about-the-pri. 95 Ch 4, section 4.2. ACSI itself has acknowledged that declaratory resolutions addressing ESG issues have become more sophisticated over time: quoted in L Freeburn and I Ramsay, ‘An Analysis of ESG Shareholder Resolutions in Australia’ (2021) 44 UNSW Law Journal 1142, 1178. 96 Ch 5, section 5.1.6. 97 ibid, section 5.2. 98 Australasian Investor Relations Association, ESG Engagement Guidelines Recommended Practices for Australasian Listed Entities: Navigating the New Landscape of Heightened Investor Scrutiny (2017). 99 On this point, see T Bowley and JG Hill, ‘Stewardship Codes, ESG Activism and Transnational Ordering’ in T Kuntz (ed), Handbook of Environmental, Social and Corporate Governance (Cheltenham, Edward Elgar, forthcoming) 6.

116  The Nuances and Significance of Australian Shareholder Activism only insofar as they are relevant to investment risk and return. On this approach, an investor may take into account climate change because of its potential to adversely affect the business model of a company operating a carbon-intensive business. At the other end of the spectrum are investors who take into account ESG considerations for non-financial reasons; for example, a faith-based investor may be motivated by their religious beliefs to prioritise certain social issues when making and managing their investments. Between these ends of the spectrum lie intermediate approaches which consider ESG issues relevant for a mix of financial and non-financial reasons. In overall terms, Australian investors would appear to lie predominantly towards the financial materiality end of this spectrum. The Responsible Investment Association Australasia, which describes itself as the largest and most active network of responsible investors in Australia and New Zealand, describes responsible investment as the consideration of ‘a broad range of risks and value drivers as part of the investment decisionmaking process … [including] considering ESG factors … acknowledging that these factors can be critical in understanding the full value of an investment’.100 Australian investors’ focus on ESG issues because of their potential financial materiality is consistent with trends observed in other major markets.101 6.1.7.  Shareholder Activism as an Exercise in Influence-wielding In light of the preceding discussion, it is apparent that Australian shareholder activism is more appropriately conceived of as an exercise in influencing corporate managers, rather than an attempt to replace them or direct them. This influence-wielding most commonly occurs through registering voting dissent at shareholder meetings and behind-the-scenes engagement, which are used in a complementary and iterative manner to signal concerns and influence change in corporate behaviour. Investors tend not to use their considerable voting power to trigger sudden and potentially significant changes. Chapter four revealed, for example, that proxy contests are not common. Chapter five highlighted how shareholders express material levels of dissent pursuant to their ‘say on pay’ vote but rarely use the board-spill mechanism under the two-strikes rule.102 Similarly, although voting dissent rates on director re-election resolutions have increased over time, they are generally not at levels which would actually threaten the re-election of a director.103 Shareholders’ preference for non-disruptive, ‘communicative’ voting is further highlighted by their support for shareholder-proposed

100 Responsible Investment Association Australasia, Responsible Investment Benchmark Report: Australia 2021 (2021) 11. 101 Bowley and Hill, ‘Stewardship Codes, ESG Activism and Transnational Ordering’ (forthcoming). 102 Ch 5, section 5.1.5. 103 ibid, section 5.1.4.

The Nuances of Australian Activism  117 precatory resolutions addressing ESG concerns and their recent call for companies to introduce a non-binding annual ‘say on climate’.104 Activist shareholders’ influence-wielding may also be directed at a company’s other shareholders. This reflects the fact that Australian public company shareholders typically hold non-controlling shareholdings and will therefore need to obtain the support of other shareholders in order to maximise the effect of their influence-wielding. As a consequence, a company’s other large shareholders can play a determinative role in the outcome of activists’ influence-wielding. Owing to their significant public company shareholdings, institutional investors are recognised as being particularly well-placed to act as ‘gate-keepers’ in respect of activist interventions. Commentators have claimed that ‘[i]n Australia, the real power lies with superannuation funds’105 and that major index funds now hold the ‘balance of power’ in the corporate governance of large Australian companies.106 This insight suggests that, rather than being an uneven contest between over-reaching activists and a company’s harried managers and uncoordinated shareholder base, an activist intervention in Australia is more likely to involve a less asymmetrical interaction between an activist, a company’s managers and a relatively small and influential group of large shareholders. Chapter five indicates that a significant amount of this influence-wielding occurs in behind-the-scenes interactions. It also highlights that this form of private influence-wielding is particularly favoured by one of the largest shareholder types in the Australian market: institutional investors. Yet, there is no general requirement under Australian law for companies or shareholders to disclose the fact that they are engaging, the subject matter of their engagement, or its outcome.107 This significant practice is therefore currently unobservable to law makers, regulators and researchers. This opacity complicates the task of understanding the implications of increasing institutional investor share ownership and the exercise of power and influence by major shareholders. In these circumstances, regulatory reform to provide greater transparency warrants careful consideration. 6.1.8.  The Corporate Governance Ecosystem Supporting Institutional Investors Australian institutional investors do not draw solely on their own resources, experience and expertise when engaging in corporate governance activities. They 104 ibid, section 5.1.6. 105 Activist Insight and Arnold Bloch Leibler (n 78) 6. 106 V Desloires ‘BlackRock, Vanguard, State Street Are Not Passive on Corporate Governance’ The Sydney Morning Herald (online) (1 November 2016) www.smh.com.au/business/markets/ blackrock-vanguard-state-street-are-not-passive-on-corporate-governance-20161031-gseb74.html (quoting Dean Paatsch from Ownership Matters). 107 Ch 3, section 3.4.5.

118  The Nuances and Significance of Australian Shareholder Activism are instead assisted by various intermediaries, including representative bodies, investor networks and service providers. As chapter five highlighted, these intermediaries assist investors with their share voting and behind-the-scenes engagement, coordinate or support interventions against particular companies, and provide data and analysis to support these activities. However, intermediaries do more than simply assist investors with the workload of their governance activities. Chapter five highlighted how they also help to coordinate and channel institutional investors’ collective influence at both the market level and the company-level. In this sense, these governance intermediaries act as a collective action mechanism for institutional investors.108 In performing this role, an intermediary addresses various challenges that would otherwise confront investors who wish to act collectively. First, the intermediary organisation, rather than individual investor(s), bears the effort and expense of coordinating or representing a group of investors.109 Second, free-riding concerns will be mitigated where the intermediary organisation has a significant membership or client base which can contribute to its operating costs.110 Third, intermediaries are ‘repeat players’ which specialise in servicing the needs of investors. They are therefore likely to accumulate knowledge and expertise that will enable them to achieve economies and expertise that would be unavailable to ad hoc coalitions of investors.111 Fourth, the use of an intermediary organisation may neutralise competitive tensions which might otherwise impede investors from acting collectively. Commentators have noted how investors are sometimes reluctant to join investor coalitions because their participation may reveal their trading intentions to other coalition members, which might then exploit that information for their own advantage.112 However, it is possible that investors may be less concerned about their competitors obtaining direct insights into their trading strategies where an intermediary organisation is the interface between investors. Fifth, the interposition of an intermediary means that individual investors are able to avoid direct confrontation with companies, a potentially important benefit in light of the social and cultural complications noted earlier.113 Finally, in the Australian context, the activities of intermediaries will generally fall outside of the scope of takeover laws which regulate concert party behaviour by shareholders and which can significantly restrict collective action by investors.114 108 T Bowley and JG Hill, ‘Stewardship and Collective Action: The Australian Experience’ in D Katelouzou and DW Puchniak (eds), Global Shareholder Stewardship (Cambridge, Cambridge University Press, 2022). 109 Black and Coffee, ‘Hail Britannia’ (1994) 2055–59 (noting the coordination costs involved when investors form coalitions). 110 Bowley and Hill, ‘Stewardship and Collective Action (2022) 432. 111 ibid. 112 Black and Coffee (n 16) 2061–62; P Davies, ‘Shareholders in the United Kingdom’ in JG Hill and RS Thomas, Research Handbook on Shareholder Power (Cheltenham, Edward Elgar, 2015) 355, 370–71. 113 Bowley and Hill (n 108) 432. 114 ibid. These laws are discussed in detail in ch 8.

The Significance of the Australian Experience  119 6.1.9.  International Influences A number of the developments outlined in the previous chapters trace their origins to overseas developments. For example, ACSI and the FSC’s publication of stewardship codes is part of a broader international trend which has seen stewardship codes adopted (or about to be adopted) in over 20 jurisdictions.115 Australia’s fund management industry had in fact initially resisted the introduction of a stewardship code in Australia, arguing that a code was unnecessary because industry-promulgated guidelines already covered many of the matters addressed in stewardship codes and because Australia already had a strong culture of company-shareholder engagement.116 However, the industry relented in the face of criticism that it was becoming an international outlier, with the FSC and ACSI issuing their codes in 2017 and 2018, respectively.117 Offshore influences are also shaping investors’ ESG activism. In recent years, international investors have acted as co-filers of shareholder-proposed resolutions addressing ESG-related issues.118 In 2021, an overseas investor, which had been active in ‘say on climate’ campaigns in foreign markets, joined with an Australian social activist organisation to file shareholder resolutions at several major Australian companies calling for an annual ‘say on climate’.119 In 2021, ACSI lent its support to this campaign, calling for companies facing material climate-related risks to give shareholders an annual ‘say on climate’.120 Australian investors and their service providers have also joined international investor networks which have been formed to encourage and assist ESG-related activism by institutional investors. As noted earlier, for example, more than 100 Australasian institutional investors are signatories to the Principles of Responsible Investment.121 6.2.  THE SIGNIFICANCE OF THE AUSTRALIAN EXPERIENCE

As chapter one noted, Australia has not featured significantly in comparative corporate governance literature, including comparative analysis of shareholder

115 DW Puchniak, ‘The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense Out of the Global Transplant of a Legal Misfit’ (2022) American Journal of Comparative Law (forthcoming). 116 Bowley and Hill (n 108) 420. 117 ibid. 118 Ch 4, section 4.2. 119 Australasian Centre for Corporate Responsibility, ‘Say on Climate launches with resolutions to Santos and Woodside’ (February 2021) www.accr.org.au/news/say-on-climate-launches-withresolutions-to-santos-and-woodside/. The overseas investor was the Children’s Investment Fund Foundation, founded by UK hedge fund manager, Chris Hohn. 120 Ch 4, section 4.2. 121 See above, n 94.

120  The Nuances and Significance of Australian Shareholder Activism activism. Australia, however, is a fascinating case study. With its shareholderfriendly regulatory settings and favourable capital market features, Australia offers seemingly favourable conditions for potent shareholder activism. Yet, as the preceding discussion has shown, Australian activism is a complex and contingent phenomenon, shaped by a mix of domestic and offshore factors. The distinctive Australian experience of activism has important implications for both the Australian and international debates about activism and its regulatory implications. The key implications are explored below. 6.2.1.  The Need for a Particularised Approach in Regulatory Debates Whereas much of the recent Australian debate has focused intently on overt forms of activism such as board spills and other public campaigns, Australian activism is in reality a multifaceted phenomenon. Activist shareholders are a diverse group, with varying objectives and incentives. They draw on a range of tactics and their activism affects different strata of the Australian market in varying ways. In these circumstances, the Australian regulatory debate needs to adopt a more subtle and responsive analysis of the regulatory implications of activism. In particular, rather than a blinkered focus on aggressive activism, regulatory discussions need to be guided by a more detailed understanding of the different types of activism in the Australian market, their relative significance, the factors that shape them, and their respective benefits, limitations and risks. 6.2.2.  Appreciating the Potentially Complex Mix of Factors that Shape Activism A significant theme in the international debate about activism relates to the determinants of shareholder activism. Commentators have identified a range of factors that can affect the nature and extent of activism in a market, including social, economic, political and institutional factors.122 Much commentary, however, focuses on regulatory settings and capital market characteristics and treats these two factors as major determinants of the nature and extent of activism in a market.123 As chapter two acknowledged, regulatory settings and capital market characteristics are potentially significant factors. However, the intricate form of activism which has emerged in Australia notwithstanding Australia’s seemingly activist-friendly market characteristics and regulatory settings highlights the



122 Ch

2, section 2.2.1.

123 ibid.

The Significance of the Australian Experience  121 need for a more subtle analysis. The Australian experience reveals, in particular, the uncertain relationship between strong shareholder rights ‘on the books’ and the nature and incidence of shareholder activism ‘on the ground’. Although Australian shareholders have, by international standards, generous rights to replace directors and amend their company’s constitution, they routinely describe these rights as disproportionate and impractical and express a preference for less interventionist governance mechanisms, such as their non-binding annual ‘say on pay’. Australian activists’ tactical specialisation, noted earlier, in fact suggests that there is no ‘universal’ or ‘gold standard’ governance tool and that the utility of governance rights instead varies considerably from the perspective of different types of activists. For law makers and researchers interested in the implications of law reform to promote shareholder activism, this insight highlights the importance of carefully considering the utility of a proposed reform from the perspective of the major shareholder types in the market. In a market dominated by shareholders with constrained incentives to engage in corporate governance, such as Australia, seemingly potent governance rights may be impractical; such shareholders may instead prefer more intermediate, ‘communicative’ governance tools, such as a non-binding vote on some aspect of a company’s performance or affairs. For countries which already provide shareholders with favourable governance rights, the Australian experience indicates that the issue of regulatory reform to enhance shareholder participation in corporate governance should not be regarded as a closed issue. The evidence of activists’ tactical specialisation raises the possibility that there may be scope for further reform to provide additional governance rights that are better suited to the circumstances of particular shareholders. The Australian experience also highlights the potential significance of factors other than capital market structure and regulatory settings. This chapter has noted, for example, the significance of social or cultural factors associated with the relatively small and interconnected nature of the Australian market. Australia’s geographical isolation and relatively small equity capital market are also said to explain low levels of hedge fund activism.124 Politics and national economic policy also play a role, although their influence on Australian activism would appear to have changed over time. For much of the last four decades, these factors laid the groundwork for contemporary shareholder influence-wielding in Australian corporate governance, producing shareholder-friendly law reform125 and creating the industry superannuation funds.126 However, more recently, the political context has begun to change. In 2021, institutional investors in

124 See above, section 6.1.5. 125 See n 53 above and accompanying text. 126 Ch 3, section 3.2. In this regard, the Australian experience highlights the point made by Gelter, in the US context, regarding how changes in pension policy can have material corporate governance implications: M Gelter, ‘The Pension System and the Rise of Shareholder Primacy’ (2013) 43 Seton Hall Law Review 909.

122  The Nuances and Significance of Australian Shareholder Activism Australia were subject to an occasionally hostile parliamentary inquiry into the ownership of Australian public companies and to the threat of onerous changes to the regulation of proxy advisers.127 This change in political context is likely to have particular implications for Australia’s domestic institutions, such as the industry superannuation funds, which may be more vulnerable to local regulatory developments than investors which originate from outside Australia. As overseas commentators have noted, less overt forms of activism may occur ‘not only in countries where social norms discourage open confrontation, but also where political sentiment run against concentration of power in the hands of a few powerful financial actors’.128 The influence of offshore developments is also evident in Australia. As noted earlier in this chapter, the adoption of stewardship codes by the Australian funds management industry and the recent introduction of ‘say on climate’ proposals have their origins in overseas developments. Overseas practices and norms may also enter the Australian market through Australian investors’ membership of international investor networks such as the Principles of Responsible Investment and the activities of overseas investors in Australia. The Australian experience highlights, therefore, the impact of transnational influences on corporate governance. It is consistent with international commentary which notes how cross-border capital flows can lead to cross-border transmission of corporate governance norms and practices and create pressure for corporate governance changes in recipient countries.129 Yet, the Australian experience also highlights that this is not a simple process of cross-border harmonisation, or ‘convergence’ as it is called in comparative corporate governance literature.130 Some offshore developments have undergone transformation as they have been adopted into Australian regulation and market practice. Researchers have noted, for instance, how the structure and content of Australia’s two stewardship codes are distinctly different from codes adopted in other jurisdictions.131 It has been suggested that ACSI and the FSC’s history of local advocacy and policy development in relation to corporate governance resulted in them adopting a distinctive approach to stewardship when they formulated their stewardship codes.132 It remains to be seen whether Australia’s

127 See above, section 6.1.4(iii). 128 A Hamdani and S Hannes, ‘Institutional Investors, Activist Funds and Ownership Structure’ in A Afsharipour and M Gelter (eds), Comparative Corporate Governance (Cheltenham, Edward Elgar, 2021) 371. 129 MB Fox, ‘The Rise of Foreign Ownership and Corporate Governance’ in JN Gordon and WG Ringe (eds), The Oxford Handbook of Corporate Law and Governance (Oxford, Oxford University Press, 2018) 784, 784–85. 130 See, eg, JN Gordon, ‘Convergence and Persistence in Corporate Law and Governance’ in JN Gordon and WG Ringe (eds), The Oxford Handbook of Corporate Law and Governance (Oxford, Oxford University Press, 2018) 32. 131 Ch 5, section 5.3.2. 132 ibid. This is an example of what Gordon has called ‘divergence within convergence’: Gordon ‘Convergence and Persistence in Corporate Law and Governance’ (2018) 41–44.

The Significance of the Australian Experience  123 significant domestic funds management sector, particularly its sizeable superannuation funds, acts as a modifying influence as other offshore developments (such as ESG-related activism) are adopted in Australia. The significance of the Australian corporate governance industry is also notable. Organisations such as proxy advisers, engagement firms and data providers enable investors to undertake governance activities efficiently across the many companies in their diversified portfolios and also assist investors to collectivise and leverage their governance influence. Although researchers have explored in detail the capacity and incentives of individual types of institutional investors to engage in corporate governance,133 relatively less attention has been devoted to the role and implications of the various representative bodies, investor networks, service providers and non-governmental organisations that support the governance activities of institutional investors. Certain individual elements of this ecosystem have been considered, including proxy advisers,134 representative organisations135 and investor networks.136 In the United States, Lund and Pollman have sought to ‘enlarg[e] the aperture’ by exploring the overall context in which shareholders undertake their governance activities.137 In doing so, they draw attention to the overall US corporate governance industry, a ‘vast array of institutional players’ which includes proxy advisors, stock exchanges, ratings agencies and investor associations. Lund and Pollman argue that the US corporate governance industry, in combination with US corporate law and certain cultural factors, exert considerable influence over corporate governance in the United States.138 The Australian experience also highlights the need to ‘enlarge the aperture’. This book’s analysis highlights that Australian institutional investor activism is not simply the product of the individual resources and activities of investors. The role and influence of the corporate governance industry is an important local factor that both supports and leverages investor influencewielding in Australian corporate governance. Finally, the Australian experience indicates that public company board structure and the way in which directors are recruited may also be relevant. The Australian practice of recruiting public company directors from a relatively small cadre of well-regarded directors means that directors face potentially significant

133 Ch 2, section 2.2. 134 See, eg, S Choi, JE Fisch and M Kahan, ‘The Power of Proxy Advisors: Myth or Reality?’ (2010) 59 Emory Law Journal 869; AF Tuch, ‘Proxy Adviser Influence’ (2019) Boston University Law Review 1459. 135 See, eg, G Balp and G Strampelli, ‘Institutional Investor Collective Engagements: Non-Activist Cooperation vs Activist Wolf Packs’ (2019) 14 Ohio State Business Law Journal 135; M Becht et al, ‘Outsourcing Active Ownership in Japan’ (ECGI Finance Working Paper No 766/2021, 2021); Bowley and Hill (n 108). 136 E Dimson, O Karakas and X Li, ‘Coordinated Engagements’ (ECGI Finance Working Paper No 721/2021, 2021). 137 DS Lund and E Pollman, ‘The Corporate Governance Machine’ (2021) 121 Columbia Law Review 2563, 2565 138 ibid 2565–66.

124  The Nuances and Significance of Australian Shareholder Activism reputational downside if they become embroiled in a dispute with their company’s major shareholders. Evidence indicates that this makes Australian directors sensitive to shareholder pressure, thereby making it feasible for Australian shareholders to utilise less aggressive and difficult forms of activism. In summary, the Australian experience highlights the potentially complex and jurisdiction-specific mix of factors that can shape the nature and extent of shareholder activism. This insight underscores the need for researchers, law makers and regulators to adopt a highly contextualised analysis when exploring activism developments in their own market and considering the potential local implications of developments in offshore markets. 6.2.3.  Although Increasing Institutional Investor Share Ownership is a Global Trend, Local Implications May Vary The Australian experience highlights that the need for a jurisdiction-specific perspective is particularly important when considering one of the major themes in the international literature on shareholder activism: the corporate governance implications of increasing institutional investor share ownership. Some commentators argue that this trend will result in an under-supply of shareholder monitoring and oversight of public companies owing to institutional investors’ constrained incentives to participate in corporate governance.139 Others challenge the view of institutional investors as rationally reticent participants in corporate governance. Some scholars have raised the controversial concern that institutional investors may in fact directly or indirectly influence their investee companies to engage in anti-competitive behaviour – that is, the ‘common ownership’ concern.140 Other commentators adopt a more positive assessment of institutional investors’ influence in corporate governance, highlighting the potentially significant benefits (at both the company level and market level) of institutional investor stewardship and pointing out the material incentives of institutional investors to undertake ‘systematic’ stewardship in relation to ESG issues.141 On one level, the Australian experience reflects a number of these themes and issues. Institutional investor share ownership in Australia is significant and increasing, led largely by the growth in superannuation funds and index-based investors.142 The more muted style of activism in Australia practised by institutional investors is consistent with international commentary regarding the constrained incentives of investors to engage in more costly and difficult forms



139 Ch

2, section 2.2.

140 ibid. 141 ibid. 142 Ch

3, section 3.2.

The Significance of the Australian Experience  125 of corporate monitoring and oversight. Consistent with overseas experience, Australia is also witnessing an increase in ESG-related stewardship by institutional investors. However, as other commentators have noted, institutional investors are diverse in nature and it should not be assumed that developments in institutional investment in one market will necessarily be replicated in another market.143 The Australian experience highlights this point in several ways. First, Australia provides a notably different example of what Gilson and Gordon term ‘agency capitalism’.144 Gilson and Gordon use this term to refer to the fact that public company share ownership in the United States is largely concentrated in the hands of institutional investors which manage those investments on behalf of underlying beneficiaries. They argue that, in light of institutional investors’ constrained incentives to participate in corporate governance, this concentration has the potential to produce an undersupply of shareholder monitoring of US public companies. They note, however, that institutional investors are ‘rationally reticent’ and not ‘apathetic’ and will therefore respond to and support well-developed governance proposals for their investee companies. Gilson and Gordon point out that activist hedge funds have identified significant opportunity in this state of affairs. They invest in a public company, formulate proposals for change, leverage support from the company’s large institutional investors, and then profit when corporate managers succumb to the sustained pressure and adopt their proposals, leading to an uplift in the company’s share price. According to Gilson and Gordon, the rise of hedge fund activism in the United States is an ‘endogenous market response’ to the concentration of share ownership in the hands of ‘rationally reticent’ institutional investors.145 Although Australia has high levels of institutional investment, it has not experienced an endogenous market response to this development in the form of hedge fund activism. As this book has demonstrated, Australia experiences low levels of hedge fund activism, suggesting that the latter is not an inevitable product of increasing institutional investor share ownership. Instead, governance intermediaries such as investors’ representative bodies, investor networks and engagement firms play a significant role in catalysing the governance influence of institutional investors in Australia. The Australian experience highlights, therefore, that the corporate governance implications of broadly similar evolutionary shifts in capital market structure can differ materially between countries. Second, the Australian experience of institutional investor activism is significantly influenced by a unique form of domestic investor: the industry

143 Hamdani and Hannes, ‘Institutional Investors, Activist Funds and Ownership Structure’ (2021) 370 (arguing that ‘multi-dimensional differences’ between jurisdictions ‘question the extent to which findings about institutional investors in one country can be generalized to offer a single theory with universal application’). 144 Gilson and Gordon (n 80). 145 ibid 873.

126  The Nuances and Significance of Australian Shareholder Activism superannuation fund. Although pension funds are present in markets across the globe, Australia’s industry superannuation funds have unique institutional origins and characteristics, as explained earlier. The preceding chapters have highlighted how the industry funds have charted their own distinctive approach to corporate governance. They have developed their own stewardship code which is more extensive and places a greater emphasis on ESG considerations than the code issued by the representative body for the for-profit financial services industry.146 Evidence presented to the 2021 Australian parliamentary inquiry into the ownership of Australian public companies also noted the distinctive engagement practices of industry superannuation funds, which witnesses contrasted with the engagement practices of index funds.147 The distinctive role played by the industry superannuation funds raises intriguing questions about other ways in which they may shape emerging developments in Australian corporate governance. For example, evidence presented to the aforementioned parliamentary inquiry highlighted the interplay between industry superannuation funds and large index funds. It was noted, for example, that index funds undertake asset management functions for industry superannuation funds pursuant to mandates negotiated by the industry superannuation funds.148 It was also noted that Vanguard is preparing to enter the superannuation market in Australia, with plans to offer a superannuation product in 2022.149 How will this interplay between the more activist industry funds and the large index funds affect the behaviour of the latter? Is it possible that the implications of increasing share ownership by index funds in Australia may differ, as a result of this interaction, from the implications raised, for example, in the extensive US literature on index funds? Third, as noted already, institutional investors in Australia are serviced by a significant corporate governance industry. A number of the intermediaries that make up this industry are local organisations. This includes the two major representative bodies (ACSI and the FSC), two of the four proxy advisers and the two major engagement firms.150 This book has highlighted the important role played by this industry in facilitating and leveraging institutional investors’ influence wielding in corporate governance.

146 Ch 5, section 5.3.2. 147 ibid, section 5.2. 148 See, eg, Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (20 September 2021) 2 (D Elia, Hostplus Superannuation Fund), 20 (D Graham, Aware Super); Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (22 September 2021) 21 (R Bowerman, Vanguard Investments Australia) (‘Bowerman Evidence); Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Common Ownership Inquiry (11 October 2021) 15 (I Davila, BlackRock). 149 Bowerman Evidence (n 148) 21. 150 The two local proxy advisers are Ownership Matters and ACSI and the two engagement firms are ACSI and Regnan.

The Significance of the Australian Experience  127 The distinctive Australian experience of institutional investor activism highlights the need for caution when considering the implications for a particular jurisdiction of the international debate about increasing institutional investor share ownership. Important concepts developed in that literature such as ‘agency capitalism’ provide useful starting points for policy makers and researchers when considering country-specific implications. However, local context is important and may limit the explanatory and predictive power of these concepts when exploring local implications of increasing institutional investor share ownership.151 6.2.4.  Approach Overseas Insights and Experience with Care The preceding observations also highlight a broader point; namely, national corporate governance developments are highly contextual.152 As has been pointed out in comparative corporate governance literature, this means that one must be careful when seeking to explain or predict national corporate governance developments by reference to general theories, models or arguments.153 This insight has particular significance in the context of the international debate on shareholder activism. As chapter two highlighted, that debate features a number of broadly-stated theoretical insights, concepts and normative perspectives which often draw heavily on US market developments. This includes the concepts of ‘agency capitalism’, ‘common ownership’, ‘systematic stewardship’, arguments for and against hedge fund activism, and analysis regarding the implications of increasing share ownership by index funds.154 This is not to say that insights from the international literature have little local relevance. As the preceding analysis has highlighted, transnational developments can play a role in shaping the nature of activism in a market. International insights may therefore provide useful guidance for local law makers, regulators and researchers. However, any assessment of the local implications of international insights must take careful account of local context.

151 Puchniak makes a similar point in the Asian context about the utility of seeking to understand local corporate governance developments through an ‘American lens’: DW Puchniak, ‘Multiple Faces of Shareholder Power in Asia: Complexity Revealed’ in JG Hill and RS Thomas (eds), Research Handbook on Shareholder Power (Cheltenham, Edward Elgar, 2015) 511, 512–13. 152 On this point, see CM Bruner, ‘Methods of Comparative Corporate Governance’ in A Afsharipour and M Gelter (eds), Comparative Corporate Governance (Cheltenham, Edward Elgar, 2021) 20, 29–31; Hamdani and Hannes (n 128) 370. 153 R Mitchell et al, ‘Shareholder Protection in Australia: Institutional Configurations and Regulatory Evolution’ (2014) 38 Melbourne University Law Review 68, 118; M Pargendler, ‘Controlling Shareholders in the Twenty-First Century: Complicating Corporate Governance Beyond Agency Costs’ (2020) 45 Journal of Corporation Law 953. 154 Ch 2, section 2.2.

128  The Nuances and Significance of Australian Shareholder Activism 6.2.5.  Influence-Wielding Activism and its Regulatory Implications A major theme in the international debate about activism is the issue of whether activism is beneficial for companies. As chapter two noted, commentators have presented substantial arguments and evidence both for and against major forms of activism, making this a controversial and far from straightforward issue.155 This leaves law makers and regulators with difficult decisions about whether and how to adapt regulatory settings to address major activist trends. Inappropriately permissive settings may provide undue latitude for detrimental forms of activism, while inappropriately restrictive settings may curtail desirable forms of shareholder oversight of public companies. The analysis of these difficult regulatory issues may benefit from a more explicit recognition that, as highlighted by Australia, activism is often an exercise in influence-wielding, rather than an attempt to replace or direct corporate managers. Acknowledging that activism is an exercise in influence-wielding enlarges our analytical frame of reference. Rather than a narrow focus on the activist and their behaviour, our attention is also directed at the targets of an activist’s influence-wielding: namely, a company’s managers and other shareholders. Influence-wielding activism will achieve results only if a company’s managers and other shareholders are in fact influenced to make (or support) the change sought by the activist shareholder. Thus, as two Australian commentators have pointed out, concerns raised by common ownership critics that institutional investors are using their investment power to pressure companies to pursue anti-competitive practices rest on the crucial assumption that corporate managers acquiesce to such pressure.156 In order to understand fully the risks or benefits of influence-wielding activism, researchers and law makers therefore need to understand the capacity and incentives of a company’s managers and other shareholders to respond to activists’ influence-wielding. The Australian experience highlights two particular issues that warrant closer consideration in this regard. The first relates to the board of directors and its capacity and incentives to withstand influence-wielding activists. As noted earlier, Australian public company directors face potentially significant reputational downside if they become embroiled in a dispute with their company’s major shareholders. Commentators have raised concerns that boards are therefore more likely to comply with the expectations of major shareholders than resist them in order to maintain their personal reputation and good standing.157 This raises the 155 Ch 2, section 2.2. 156 A Leigh and A Triggs, ‘Common Ownership of Competing Firms: Evidence from Australia’ (2021) 97 Economic Record 333, 343. 157 J Durie, ‘Pioneer Earmarked for a New Chief’, The Australian (12 February 2014) 19 (‘[D]irectors don’t want to test their powers … When confronted, they often walk’); T McCrann, ‘Big End of Town Loses Its Nerve Under Pressure’, The Weekend Australian (26 August 2017) 37 (considering whether ‘the big … end of town [has] caved to the same pressure of opinion polling that has crippled the political process’).

The Significance of the Australian Experience  129 possibility that reputation-conscious professional directors may be unwilling to resist questionable shareholder influence-wielding. Insofar as there are concerns about questionable shareholder influence wielding – for example, common ownership concerns – this insight indicates that law makers and regulators must focus as much on company boards as they do on activist shareholders. A second, and related, issue concerns the role of a company’s other shareholders in relation to activist influence-wielding. In a market like Australia in which relatively small groups of significant investors collectively own a substantial proportion of a company’s shares, those investors could potentially play a ‘gate-keeper’ role in relation to questionable activist influence-wielding. However, an important caveat here relates to the role of the corporate governance industry in collectivising institutional investor influence. Intermediaries such as representative organisations, engagement firms, investor networks and proxy advisers assist institutional investors to speak with a collective voice on various material issues. In the US context, Lund and Pollman highlight the role played by the corporate governance ‘machine’ in generating a level of homogeneity in US corporate governance norms and practice.158 Australian commentators have also noted the role of governance intermediaries in creating consensus amongst institutional shareholders on material corporate governance issues.159 Does this create a degree of alignment between a company’s major institutional shareholders which limits the potential for those shareholders to act as ‘gate keepers’ in respect of contestable shareholder influence-wielding, particular where the activist is (as is likely to be the case in Australia) another institutional investor? It is possible that the answer is that it depends on the subject matter of such influence-wielding. Doidge et al argue that governance intermediaries will generally find it more difficult to develop consensus on company-specific issues, such as commercial strategy, compared to ‘process proposals’ in relation to mainstream issues of corporate governance, such as board composition guidelines.160 According to Doidge et al, the former are more likely to involve finer issues of commercial judgement on which investors’ opinions may differ, whereas the latter are easier to distil into general standards or guidelines.161 This raises the possibility that the potential for a company’s larger shareholders to

158 Lund and Pollman, ‘The Corporate Governance Machine’ (2021) 2620–23 (noting this homogeneity in relation to issues such as board independence, structure of executive compensation, and shareholder voting rights). 159 See, eg, Australian Institute of Company Directors, Institutional Share Voting and Engagement: Exploring the Links between Directors, Institutional Shareholders and Proxy Advisers (September 2011) 45 (noting how engagement firms assist institutions to develop consensus on governance issues); B Power, ‘Proxy Music’ (2018) 34(2) Company Director 42, 45 (quoting an ASIC commissioner observing that proxy advisers ‘play an important role … promoting a focus on corporate governance issues relevant to shareholders’). 160 C Doidge et al, ‘Collective Action and Governance Activism’ (2019) 23 Review of Finance 893. 161 Another reason why consensus may be harder to achieve on company-specific issues is that some investors, such as index investors, are likely to be agnostic regarding company-specific issues since they simply seek to track the overall performance of an index.

130  The Nuances and Significance of Australian Shareholder Activism mediate activist influence-wielding will vary according to the subject matter of such influence-wielding. On some issues they may bring a different or critical perspective and therefore act as a ‘gate-keeper’; on others, their views may be aligned with those of the activist shareholder. Any assessment of the risks of influence-wielding activism therefore needs to pay careful attention to the role played by public company’s other major shareholders and the various intermediaries which support their participation in corporate governance. 6.3. CONCLUSION

This chapter highlights that details and context matter when analysing shareholder activism. Activism is not a simple phenomenon and must be analysed with due regard for its intricacies and jurisdiction-specific characteristics. This insight has important implications for the regulatory debate about shareholder activism. Regulation may be ineffective or inefficient if it is based on an incomplete understanding of the activity it seeks to regulate. It is important, therefore, that any consideration of the regulation of shareholder activism is based on a complete and accurate understanding of its nature. To illustrate the analytical significance of the nuances and intricacies of shareholder activism, the following two chapters will draw on them to guide a reappraisal of two issues that have featured significantly in the recent Australian regulatory debate about shareholder activism, namely: (i) whether there should be law reform to give shareholders a guaranteed statutory right to pass resolutions giving directions or advice to corporate managers; and (ii) to what extent Australian takeover law should be relaxed to permit shareholders to leverage their influence in corporate governance by acting collectively. These issues are also salient in overseas markets where shareholder-proposed resolutions have become a notable form of activism and regulators have attempted to address the often-complex interaction of takeover laws and collective shareholder activism. When these issues have been considered previously in Australia by law makers, law reform bodies and the regulator, the outcome has not been favourable for activist shareholders. Law reform bodies, for example, have concluded that giving shareholders a guaranteed statutory right to pass resolutions giving directions or advice to corporate managers would be otiose. ASIC has taken the view that providing Australian shareholders with greater latitude to engage in collective activism free from takeover laws would provide inappropriate scope for shareholders to covertly seize control of public companies. These conclusions jar with the preceding account of Australian shareholder activism. Chapters seven and eight will demonstrate how the analysis of these two regulatory issues changes considerably when it is undertaken in a manner that plays close regard to the nuances and intricacies of shareholder activism.

7 Revisiting the Regulatory Debate (I) Shareholder Resolutions Law Reform

T

he first regulatory issue which will be reconsidered in light of the analysis and insights from the previous chapters is the issue of whether there should be law reform to give Australian shareholders a mandatory statutory right to pass resolutions giving directions or advice to corporate managers. 7.1. INTRODUCTION

The previous chapters have highlighted how activist shareholders sometimes seek to influence corporate managers by proposing directive or precatory resolutions relating to the management of their company for consideration at a shareholder meeting. These resolutions seek to direct corporate managers to take some action regarding the management of the company (a directive resolution) or express a non-binding wish or request regarding how their company is managed (a precatory resolution). For ease of reference, this chapter uses the term ‘declaratory resolution’ to refer to directive and precatory resolutions, in recognition of the fact that these resolutions seek to articulate shareholders’ preference regarding how their company is managed.1 In recent years, declaratory resolutions have emerged as a notable global activist tactic. This global trend is related, to a significant extent, to the international rise in ESG-related shareholder activism. Social activist organisations and institutional investors are actively seeking to prompt companies in various markets to address material ESG issues.2 They will often use declaratory

1 Recent Australian commentary refers to such resolutions as ‘shareholder resolutions’: see Australian Council of Superannuation Investors (‘ACSI’) and K Sheehan, Shareholder Resolutions in Australia: Is There a Better Way? (October 2017). This chapter does not use this phrase because it considers it is too general in nature, in the sense that any resolution passed by a shareholder meeting is a ‘shareholder resolution’. 2 See generally, T Bowley and JG Hill, ‘Stewardship Codes, ESG Activism and Transnational Ordering’ in T Kuntz (ed), Handbook on Environmental, Social and Corporate Governance (Cheltenham, Edward Elgar, forthcoming).

132  Revisiting the Regulatory Debate (I) resolutions as a tactic to draw attention to their cause and apply pressure to corporate managers;3 for example, by proposing a resolution at a company’s AGM calling for the company to provide disclosure about the implications of climate change for the company’s business model. ESG-related declaratory resolutions have become prominent in Europe4 and are also on the rise in the Asia Pacific.5 In the United States, declaratory resolutions have traditionally been used by shareholders to pressure companies to adopt pro-shareholder governance rules.6 However, ESG-related declaratory resolutions became the predominant form of declaratory resolution in the 2021 proxy season.7 Investors’ enthusiasm for this style of governance intervention is also highlighted by their recent attempts in various markets to compel companies to offer shareholders a periodic ‘say on climate’ vote.8 These votes are intended to provide shareholders with an opportunity to periodically express a view on their companies’ progress in managing climate change-related risks.9 ESG-related declaratory resolutions have also become a notable feature of Australian activism. Chapter four described how such resolutions have been tabled at the AGMs of a number of large capitalisation Australian companies in recent years and how some of these resolutions have received material levels of voting support.10 However, as noted earlier in this book, this tactic involves some legal complexity under Australian law.11 This is because a shareholder meeting does not have a statutory or an inherent general law power to pass declaratory resolutions. In order for a shareholder meeting to consider and vote on such a resolution, it must be framed as an amendment to the company’s constitution.12 There has been ongoing debate in Australia about law reform to provide shareholders with a straightforward, mandatory statutory right to propose and

3 ibid. 4 See, eg, Simmons & Simmons, ‘More Hot News: Climate-related Shareholder Resolutions’ (22 January 2021) www.simmons-simmons.com/en/publications/ckk8k0rnl1hik0918wl0w6qwr/morehot-news-climate-related-shareholder-resolutions. 5 See, eg, L Lewis, ‘How an AGM Defeat on Climate Signals the Rise of ESG in Japan’, Financial Times (online) (23 July 2020) www.ft.com/content/433e2662-afeb-11ea-94fc-9a676a727e5a. 6 K Kastiel and Y Nili, ‘The Giant Shadow of Corporate Gadflies’ (2021) 94 Southern California Law Review 569, 583. 7 Sullivan & Cromwell, ‘2021 Proxy Season Review: Part 1 – Rule 14a-8 Shareholder Proposals’ (27 July 2021) www.sullcrom.com/sc-publication-2021-Proxy-Season-Review-Part-1-Rule14a-8; Kastiel and Nili, ‘The Giant Shadow of Corporate Gadflies’ (2021) 583 (noting that in recent years US investors ‘have shifted their attention towards social and environmental proposals’). 8 Simmons & Simmons, ‘More Hot News’ (2021). 9 See, eg, Say on Climate, ‘Template AGM Resolutions’ www.sayonclimate.org/template-agmresolution/. 10 Ch 4, section 4.2. See also L Freeburn and I Ramsay, ‘An Analysis of ESG Shareholder Resolutions in Australia’ (2021) 44 UNSW Law Journal 1142. 11 Ch 3, section 3.4.2. 12 ibid.

Background  133 vote on declaratory resolutions.13 The debate has intensified in recent years as investors and social activist organisations have begun to place greater reliance on declaratory resolutions as an activist tactic. The case for law reform received significant support in 2017 when ACSI issued a detailed discussion paper highlighting its members’ support for reform.14 It is evident from the previous chapters that shareholders regard some of their core legal governance rights as impractical, raising the possibility that a straightforward statutory right to propose declaratory resolutions may be a useful addition to shareholders’ governance ‘toolkit’. However, it is also evident that activist shareholders already use a variety of alternative tactics to wield influence in the governance of public companies. In addition, shareholders already have an ability under Australian law to give themselves a right to pass declaratory resolutions by using their constitutional amendment power to include such a right in their company’s constitution. Is law reform necessary in these circumstances? Moreover, would giving shareholders a further mandatory governance right create inefficiency in the governance of Australian public companies? This chapter evaluates the case for law reform in light of the evidence and insights outlined in the previous chapters. It highlights how the governance utility of declaratory resolutions, when viewed against that important background, becomes readily apparent and concludes that there is a strong case for law reform. However, the chapter’s analysis also reveals potential disadvantages associated with declaratory resolutions and argues that there are legitimate grounds for a statutory right to be subject to limitations. In addition to its relevance in the Australian context, this chapter’s analysis has comparative relevance, particularly for researchers, law makers and regulators in overseas jurisdictions experiencing increasing levels of ESG-related declaratory resolutions. 7.2. BACKGROUND

The laws of various jurisdictions expressly permit shareholders to propose and pass declaratory resolutions. This includes certain continental European jurisdictions,15 the United States16 and New Zealand.17 UK companies legislation

13 See below, section 7.2. 14 ACSI and Sheehan, Shareholder Resolutions in Australia (2017). 15 See generally, S Cools, ‘Shareholder Proposals Shaking Up Shareholder Say: A Critical Comparison of the United States and Europe’ in A Afsharipour and M Gelter (eds), Comparative Corporate Governance (Cheltenham, Edward Elgar, 2021) 307–12. 16 Rule 14a-8 of the Securities Exchange Act 1934 permits shareholders to require a company to include a resolution in its own proxy materials subject to certain requirements. See generally, Kastiel and Nili (n 6). 17 Companies Act 1993, s 109(2), (3) (permitting a resolution relating to the management of a company; such a resolution is non-binding unless the company’s constitution provides otherwise).

134  Revisiting the Regulatory Debate (I) provides a default constitutional rule that permits a shareholder meeting to pass a special resolution issuing directions to a company.18 In Australia, there is neither an express statutory right nor a default constitutional rule permitting shareholders to pass declaratory resolutions. The courts have also refused to recognise an implied right in the legislation.19 The issue is instead governed by the general law. In what has come to be known as the ‘organic principle’ of corporate power,20 the Australian courts have held that the decision-making ‘organs’ of a company – the board of directors and the shareholders assembled in a shareholder meeting – only have such power as is granted to them by a company’s constitution or legislation.21 As the Corporations Act does not give shareholders a power to pass declaratory resolutions, the issue of whether shareholders can pass such resolutions is therefore dependent on the terms of a company’s constitution. However, the common form of constitution adopted by Australian public companies allocates management power exclusively to the board of directors and does not make express provision for declaratory resolutions.22 The courts have held that, where this is the case, a shareholder meeting has no power to involve itself in the board’s exercise of its management powers by passing declaratory resolutions.23 This extends even to non-binding (ie, precatory) declaratory resolutions.24 If shareholders wish to pass declaratory resolutions, they must amend their company’s constitution to allocate themselves an express power to do so. As a consequence, activist shareholders who wish to put a declaratory resolution before a shareholder meeting must currently frame it as a constitutional amendment.25 Whether the law should be reformed to give shareholders a straightforward statutory right to propose and vote on declaratory resolutions has been considered periodically in Australia.26 Some commentators have argued

18 Clause 4 of the model articles for public companies and private companies limited by shares prescribed under Companies Act 2006, s 19. Some commentators claim that it is also permissible under the general law for a shareholder meeting to pass a non-binding ordinary resolution: Simmons & Simmons (n 4). 19 Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia (2016) 113 ACSR 600. 20 Ford, Austin and Ramsay’s Principles of Corporations Law [7.070.3]. 21 Australasian Centre for Corporate Responsibility (n 19). 22 Ford, Austin and Ramsay’s Principles of Corporations Law [7.091]. 23 John Shaw and Sons (Salford), Ltd v Shaw [1935] 2 KB 113; National Roads & Motorists’ Association v Parker (1986) 11 ACLR 1. 24 Australasian Centre for Corporate Responsibility (n 19) 608–10. For a detailed analysis of this decision, see S Bottomley, ‘Rethinking the Law on Shareholder-Initiated Resolutions at Company General Meetings’ (2019) 43 Melbourne University Law Review 93. 25 As highlighted by the empirical research presented in ch 4, sections 4.1.3 and 4.2. 26 The issue was considered in 2000 by CAMAC, the federal government’s corporate law advisory body: Companies and Securities Advisory Committee, Shareholder Participation in the Modern Listed Public Company, (Final Report, 2000) 35–38. CAMAC again raised the issue for consideration in 2012, in the course of its inquiry into the role and relevance of AGMs: Corporations and Markets Advisory Committee, The AGM and Shareholder Engagement (Discussion Paper, 2012) 83–84. CAMAC did not issue a final report on that occasion because, as part of budget measures

Background  135 that law reform is necessary in order to ensure that corporate governance is appropriately democratic.27 However, most commentary has adopted a more utilitarian perspective on the issue and has focused, predominantly, on two key points relating to the effectiveness of Australian public company governance. The first relates to whether there exists a ‘utility gap’ in Australian shareholders’ existing governance tools that could be addressed by giving shareholders a statutory right to pass declaratory resolutions. In its 2000 report on the issue, the federal government’s corporate law advisory body, the Corporations and Markets Advisory Committee (CAMAC), considered that there was no such gap. CAMAC noted that shareholders already have a range of governance tools available to them to address governance concerns, including their statutory right to remove directors.28 In contrast, ACSI’s 2017 discussion paper argued that there is a significant utility gap. Although ACSI acknowledged that there is a strong culture of engagement between companies and their institutional shareholders, it pointed out that, if engagement reaches an impasse, shareholders need to be able to escalate their concerns.29 According to ACSI, shareholders’ core governance rights to remove directors and amend their companies’ constitutions are impractical and disproportionate ways of escalating shareholder concerns.30 ACSI argued that a right to pass declaratory resolutions would provide shareholders with a more proportionate mechanism for escalating their concerns.31 Stephen Bottomley has argued that declaratory resolutions provide shareholders with a mechanism for holding corporate managers accountable ‘that is visible and open to deliberation [by shareholders generally]’, which he contrasts with shareholders’ favoured tactic of behind-the-scenes engagement.32 The debate’s second area of focus concerns the issue of whether a guaranteed right to pass declaratory resolutions would compromise the efficiency of corporate decision-making. According to CAMAC, giving shareholders a right to pass declaratory resolutions could lead to inefficiency as a result of shareholders attempting to run a company ‘through shareholder plebiscite’, unduly pressure

announced in the 2014–15 Commonwealth budget, the Federal Government decided to abolish CAMAC and CAMAC’s operations ceased before it could issue a final report. 27 See, eg, B Jacobsen and H Pender, ‘The Controversy Continues: The Case for Regulatory Reform on Members’ Resolutions in Australia’ (2016) 34 Company and Securities Law Journal 292 (arguing at 296 in favour of law reform to aid ‘participatory democratic deliberation [which] could allow for social choices on climate change to be revealed’). 28 CAMAC, Shareholder Participation in the Modern Listed Public Company (2000) 37. 29 ACSI and Sheehan (n 1) 18. 30 ibid 5. 31 ibid 7. 32 Bottomley, ‘Rethinking the Law on Shareholder-initiated Resolutions at Company General Meetings’ (2019) 125. Bottomley elaborates at 129 that such resolutions represent a useful addition to shareholders’ governance powers because they provide a ‘mechanism for the open and visible exercise of “voice” rather than the less visible options of exiting the company, taking informal action “behind the scenes,” or simply doing nothing’.

136  Revisiting the Regulatory Debate (I) directors to accede to shareholder preferences, and diminish the accountability of directors.33 In a 2018 discussion paper, the Governance Institute of Australia, an industry body for governance professionals, raised concerns about shareholders proposing nuisance or spurious resolutions or advocating proposals which, if implemented, may adversely affect corporate value.34 The Governance Institute pointed out that shareholders do not, as a general rule, owe duties to their company or one another and therefore would not be accountable for their resolutions.35 The research presented in the previous chapters provides a basis for exploring the ‘utility gap’ and efficiency claims. 7.3.  WHETHER THERE IS A ‘UTILITY GAP’ AND HOW A RIGHT TO PASS DECLARATORY RESOLUTIONS MIGHT ADDRESS IT

Two key findings from the previous chapters are particularly relevant to the ‘utility gap’ argument. First, Australian activists do not commonly pursue aggressive and interventionist tactics. This finding calls into question CAMAC’s conclusion that a right to pass declaratory resolutions would be redundant because Australian shareholders can already address their governance concerns by replacing a company’s directors. It suggests that shareholders might instead see benefit in having a more intermediate means of intervening in their company’s governance. Second, the tactical specialisation of different activists revealed in the previous chapters suggests that the utility of governance tools varies according to the circumstances of activist shareholders. This indicates that there may be scope for further innovation in shareholders’ governance rights to provide activists with governance tools that better suit their particular circumstances. These issues are examined below. 7.3.1.  The Questionable Utility of Shareholders’ Core Governance Rights under Australian Law Chapter six highlighted how board-related activism can be a difficult, costly and risky governance tactic. Removing directors may cause instability and distraction;

33 CAMAC (n 28) 37. CAMAC’s claim that declaratory resolutions could diminish the accountability of directors involved an argument that a court may find that directors have not breached their duties if directors were simply giving effect to a declaratory resolution (ie, the resolution would serve to relieve directors of their duties in respect of its subject matter). 34 Governance Institute of Australia (‘GIA’), Shareholder Resolutions: Is there a Case for Change? (2018) 4, 5. The GIA is an organisation that represents company secretaries, governance professionals and risk managers. 35 ibid 5.

Whether there is a ‘Utility Gap’  137 potentially significant corporate knowledge may be lost with the departing directors; and there is no guarantee that a change in directors will result in a change in company policy. Taking action to replace directors can also involve significant cost and effort on the part of an activist shareholder. Seeking board change can also be a disproportionate response to shareholder concerns. If shareholders are focused on an issue that does not implicate concerns about the competence of directors per se – for example, if there is simply a difference of opinion between shareholders and directors over strategy – it may be irrational for shareholders to remove otherwise competent directors in order to address such a specific concern. Shareholders point out that even ‘targeted’ board changes, such as the replacement of a small number of directors, can be difficult because shareholders have limited visibility over internal board dynamics and cannot be certain that replacing a small number of individuals will produce significant governance change.36 Chapter six also noted how shareholders’ power to amend the terms of the corporate constitution is subject to significant limitations. First, amendments to a company’s constitution require approval as a special resolution, that is, by at least 75 per cent of the votes cast on the resolution. Second, activists will need to be able to express their objective in the form of a written term to be included in the company’s constitution, which may be challenging in relation to more complex matters regarding the management of a company’s affairs. Third, activists proposing constitutional amendments may encounter resistance to change from other shareholders who are wary of bespoke, company-specific constitutional amendments. Finally, activists may find that the tactical utility of the constitutional amendment power is curtailed by the limits of that power under Australian law.37 It might be argued that activists do not need to confront the challenges associated with board or constitutional change because, in practice, the threat of such change should be sufficient to ensure that company managers are attentive to shareholders’ preferences.38 However, as noted in chapter six, the Australian experience indicates that the mere existence of these rights does not consistently exert a pre-emptive disciplinary effect on corporate managers and that significant disagreements still arise between shareholders and corporate managers.39 When this occurs, the practical and legal challenges associated with shareholders’ rights to replace directors and amend the corporate constitution mean that they will often be an impractical and disproportionate mechanism for addressing company-shareholder disagreements.

36 Ch 6, section 6.1.4. 37 ibid. 38 See, eg, LA Bebchuk and S Hirst, ‘Private Ordering and the Proxy Access Debate’ (2010) 65 Business Lawyer 329, 336. 39 Ch 6, section 6.1.4.

138  Revisiting the Regulatory Debate (I) 7.3.2.  The Limitations of Shareholders’ Other Governance Tools Australian shareholders’ governance tools are not confined to their rights to replace directors and amend the corporate constitution. Any assessment of whether there is a ‘utility gap’ in their governance rights also needs to explore the relative utility of their other governance tools. The previous chapters highlight that two of Australian shareholders’ preferred governance tactics are voting on management-sponsored resolutions at shareholder meetings and behind-the-scenes engagement. Shareholders’ reliance on these tactics indicates that they have significant utility in many cases. However, closer examination reveals that they are subject to several not insignificant limitations. For example, voting ‘no’ on a management-sponsored resolution can be an inefficient method of registering concerns about a company’s affairs. Although a ‘no’ vote signals dissatisfaction, it does not, of itself, reveal exactly what lies behind that dissatisfaction or which of a companies’ shareholders are dissatisfied.40 Given the prevalence of company–shareholder engagement, it seems unlikely that a company would remain unaware of the reasons behind a significant ‘no’ vote for long. However, although a company’s managers may subsequently discern the reasons behind voting dissent, there is no general obligation on a company to disclose these insights publicly.41 This may leave the market uninformed about the precise reasons for voting dissent. It is possible that this might hinder further co-operation among shareholders for the purpose of applying concerted pressure on a company’s managers to address shareholders’ underlying concerns. In contrast, shareholders argue that one important feature of declaratory resolutions is the fact that their public nature helps to develop and coalesce shareholder opinion on issues of concern.42 There may also be dissonance between the basis for shareholders’ concerns and the resolution against which shareholders register their dissent. If shareholders’ concerns relate to an issue which is unrelated, or only indirectly related, to a resolution, it may in fact be irrational for shareholders to vote against the resolution. For example, why would shareholders who are concerned about a company’s approach to managing climate change vote against the re-election of an otherwise competent director? Even if shareholders were prepared to do so, there is an issue as to whether it is appropriate, or indeed efficient, governance to put the passage of a resolution at risk simply because shareholders seek an outlet for expressing unrelated, or only indirectly related, concerns. 40 Productivity Commission, Executive Remuneration in Australia (Report No 49, 2009) 287; ACSI and Sheehan (n 1) 33. 41 With one limited exception: a company that receives a ‘strike’ in relation to its remuneration report must disclose in the following year’s report the action that it has taken in response: Corporations Act s 300A(1)(g). This disclosure may shed light on what the company understands were the concerns of shareholders. 42 See below, section 7.3.3.

Whether there is a ‘Utility Gap’  139 Behind-the-scenes engagement also has limitations. It is generally only available to large shareholders who have sufficient leverage to gain direct access to a company’s managers.43 It often involves bilateral, rather than multilateral, discussions between companies and shareholders.44 This, together with the non-public nature of these discussions, may hinder the development of a coordinated, consensus position among a company’s shareholders. In contrast, as one Australian fund manager has argued, the advantage of a declaratory resolution is that ‘you’d put it on the agenda and see what other shareholders think and send a message’.45 ACSI also argues that engagement is of limited utility if discussions with company managers reach an impasse.46 In such a case, shareholders will need to explore alternative means of escalating their concerns. When CAMAC concluded in its 2000 report that there was no case for law reform to give shareholders a right to pass declaratory resolutions, CAMAC also cited the availability of shareholders’ statutory rights to ask questions and make comments at AGMs as one of the reasons why it had formed this conclusion.47 However, the utility of these rights is debatable. Each of the relevant provisions only requires ‘shareholders as a whole’ to be given a ‘reasonable opportunity’ to ask questions or make comments; they do not bestow a right on each member present.48 Although the reference to ‘reasonable opportunity’ implies an objective test, the practical reality, on the floor of a shareholder meeting, is that the chairperson will determine the scope of the opportunity afforded to shareholders. Moreover, these rights provide an imperfect mechanism for ascertaining the overall views of a company’s shareholders. This is because voting and attendance data indicate that few shareholders attend shareholder meetings in person and that those who do represent only a very small fraction of a company’s shares.49 An alternative option is provided by section 249P of the Corporations Act. This provision enables shareholders to request their company to circulate to the company’s shareholders, at the company’s cost, a written statement about a resolution or ‘any other matter that may properly be considered at a [shareholder] meeting’.50 Given that the business of an AGM includes consideration of a

43 A point acknowledged in GIA, Shareholder Resolutions (2018) 4. 44 Ch 5 noted how a handful of engagement firms collectivise some shareholder engagement activities. However, the evidence noted there indicates that there still occur many separate interactions between companies and shareholders. 45 ACSI and Sheehan (n 1) 9. 46 ibid 18. 47 CAMAC (n 28) 37. These rights are contained in Corporations Act ss 250S, 250SA and 250T and relate, respectively, to asking questions and making comments in relation to a company’s management, its remuneration report and the audit of its financial statements. 48 A point acknowledged in Explanatory Memorandum, Company Law Review Bill 1997 (Cth) [10.78]. 49 Ch 5, section 5.1.2. 50 In order to be valid, the request must be made by shareholder(s) with voting power of at least 5% or by at least 100 shareholders entitled to vote at the meeting: Corporations Act s 249P(2).

140  Revisiting the Regulatory Debate (I) company’s financial report, directors’ report and auditor’s report,51 section 249P provides scope for shareholders to circulate a statement addressing the potentially material aspects of a company’s affairs outlined in those reports. However, section 249P statements do not appear to be used as a stand-alone means of communicating shareholders’ preferences to company managers. This author’s empirical research presented in chapter four found no instances of shareholders using section 249P statements independently of attempts to replace directors or change a company’s constitution. This finding suggests that shareholders do not regard section 249P statements as a general mechanism for highlighting their concerns. One possible explanation is that a section 249P statement which is not filed in connection with an actual attempt to propose a resolution at a shareholder meeting is an inconclusive course of action. A company is under no obligation to respond to it and the relevant shareholder meeting will not vote on it. Selling shares (or ‘exit’, as it is often called) is another course of action open to a shareholder which is dissatisfied with the conduct of its company’s affairs.52 It is sometimes regarded as a form of activism, with one Australian commentator describing the act of selling as ‘the ultimate form of shareholder activism’.53 However, for many large investors exit from a company will not be a viable course of action. This is because their need to maintain diversification in their investment portfolio and liquidity challenges associated with selling large shareholdings may significantly constrain their ability to exit an investment.54 Exit may be particularly difficult for index investors whose investment strategies require them to be invested in companies in a certain index. Such investors may therefore see considerable merit in an alternative governance mechanism which is not subject to the limitations associated with the other mechanisms described above.55 7.3.3.  The Precise Nature of the Utility Gap Although it is apparent that shareholders’ existing governance tools have limitations, the precise nature of the resulting ‘utility gap’ would appear to vary according to different types of activist shareholders. For institutional investors, the ‘utility gap’ relates to the absence of an intermediate form of escalation tactic. In Australia, institutions’ primary means of 51 Corporations Act s 250R(1). 52 AO Hirschman, Exit, Voice, and Loyalty Responses to Decline in Firms, Organizations and States (Cambridge MA, Harvard University Press, 1970). 53 J Walker, ‘The 100-member Rule May be Gone, but Shareholder Activism is here to Stay’ (The Conversation, 30 October 2014) www.theconversation.com/the-100-member-rule-may-begone-but-shareholder-activism-is-here-to-stay-33539. 54 BS Black, ‘Shareholder Passivity Reexamined’ (1990) 89 Michigan Law Review 520, 572–73. 55 Bottomley (n 24) 132.

Whether there is a ‘Utility Gap’  141 participating in corporate governance are behind-the-scenes engagement and voting at AGMs. However, as the preceding discussion has shown, these governance tools can be imperfect mechanisms for escalating governance concerns. On the other hand, resorting to more interventionist tactics, such as replacing directors, can be a disproportionate, risky and difficult response to governance concerns, particularly for incentive-constrained institutional investors. In the words of one investor, institutions ‘need a place that is halfway between the extremes [of] closed door engagement on one hand and voting directors off the board on the other’.56 Seen in this light, a right to pass declaratory resolutions would complement institutions’ primary governance activities by providing an intermediate escalation mechanism to address concerns not resolved through those activities. Accordingly, ACSI has argued that a right to pass declaratory resolutions would give institutions ‘a nuanced mechanism to complement what is already a strong and generally effective strategy of institutional investors seeking change by engaging directly with Australian company boards’.57 ACSI argues that a statutory right to pass declaratory resolutions would assist institutional investors to address their concerns in two ways. First, when an activist shareholder tables a resolution, companies may enter into constructive negotiations with the activist in order to secure the withdrawal of the resolution.58 Second, if there are no negotiations, or if negotiations are not fruitful, the resolution will be formally considered at a shareholder meeting. This can pressure corporate managers to justify publicly their opposition to the resolution, thereby exposing their reasoning to public scrutiny.59 According to a representative of one of Australia’s largest superannuation funds, ‘[putting a proposal] to a poll of shareholders creates a degree of tangibility that really focuses discussion with the company’.60 The act of publicly submitting a voting proposal may also assist to coalesce shareholder opinion on material governance issues. A representative of the engagement firm, Regnan, has observed that a declaratory resolution ‘sends a message at least to the company, and very likely other interested parties’ and that therefore institutions need to think

56 GIA (n 34) 12. 57 ACSI and Sheehan (n 1) 7. See also AMP Capital, 2017 Review: Proxy Voting & ESG Investment Research (March 2018) 5, which also highlights how declaratory resolutions can complement engagement activities (noting that AMP would normally expect to have engaged privately with companies on matters the subject of declaratory resolutions and therefore will decide how to vote on such a resolution taking into account ‘the progress of our engagement with the company’). 58 ACSI and Sheehan (n 1) 9. 59 ibid. For similar claims about how declaratory resolutions can prompt corporate change, see Australasian Centre for Corporate Responsibility (‘ACCR’), ‘Shareholder Resolutions’ www.hub. accr.org.au/shareholder-resolutions/. 60 R Williams, ‘Standing up at AGMs – Saving the World or a Waste of Time?’ The Sydney Morning Herald (Sydney, 14 October 2017) 6 (quoting a representative of AustralianSuper).

142  Revisiting the Regulatory Debate (I) carefully about how they vote on such resolutions to avoid sending an ‘unhelpful message’.61 ACSI has pointed out that declaratory resolutions provide an important opportunity for a company’s shareholders to disclose (through their voting decision) their views on an issue and that this in turn can promote stronger shareholder engagement on the issue.62 Although institutional investors have indicated that they see utility in declaratory resolutions, their need to achieve economies in their corporate governance activities is likely to constrain the extent to which they would table declaratory proposals. ACSI argues in its discussion paper that a right to pass declaratory resolutions would complement institutional investors’ engagement with companies on ESG issues, pointing out that ‘[u]ltimately, we want to see all companies better managing climate-related, labour and human rights or disclosure risks’.63 These observations are consistent with research which highlights how diversified institutional investors have material incentives to focus on ESG issues. This is because institutional investors’ diversified investment strategies generally cannot eliminate the risks associated with material ESG issues – for example, the impact of climate change – because such risks are likely to affect all or many companies in a market.64 It is much less clear, however, to what extent institutional investors would be prepared to expend effort tabling declaratory resolutions addressing detailed, company-specific issues (eg, issues concerning a particular company’s operations or commercial strategy). The ‘utility gap’ is different for issue group activists pursuing environmental, social or political concerns. Shareholders’ existing governance tools are not ideally suited to the objectives and circumstances of such activists. Behind-the-scenes engagement is unlikely to be an option owing to issue group activists having insufficient leverage to acquire meaningful access to company managers as a result of their small shareholdings.65 Seeking to register dissent on unrelated resolutions can send an ambiguous message. As such activists tend to hold small parcels of shares,66 any dissent they register would be immaterial in any event. Although chapter four revealed how standing for election as a director can be a straightforward way for small activists to highlight their concerns, it found no instance of environmental or social groups using this tactic. One likely

61 ibid. 62 Quoted in Freeburn and Ramsay, ‘An Analysis of ESG Shareholder Resolutions in Australia’ (2021) 1171. 63 ACSI and Sheehan (n 1) 3. 64 See, eg, M Condon, ‘Externalities and the Common Owner’ (2020) 95 Washington Law Review 1; JC Coffee, ‘The Coming Shift in Shareholder Activism: From “Firm-Specific” to “Systemic Risk” Proxy Campaigns (and How to Enable Them)’ (Working Paper, 26 August 2021) www.ssrn. com/abstract=3908163; JN Gordon, ‘Systematic Stewardship’ (2022) Journal of Corporation Law (forthcoming). 65 GIA (n 34) 4 (noting that existing company-shareholder engagement practices provide little scope for special interest groups, non-governmental organisations and other stakeholders to engage with companies). 66 As noted in ch 4, section 4.1.3.

Whether there is a ‘Utility Gap’  143 explanation for such groups’ reluctance to nominate board candidates is that it would expose the groups’ candidates to significant personal scrutiny. It would also conflate issues of personality (ie, the credentials of the candidate) with the environmental or social cause being pursued by the activist, potentially detracting from that cause. For issue group activists, then, a right to table and pass declaratory resolutions has the potential to serve as a primary governance tool.67 The activist group, ACCR, has argued that recent debate in Australia has ‘overstate[d] the practical power of shareholders’ and that shareholders’ existing governance rights ‘fail to adequately protect shareholder interests’.68 It claims that a guaranteed right to pass declaratory resolutions would represent a significant enhancement of shareholders’ governance rights.69 Like institutional investors, issue activists emphasise how the public and explicit nature of a declaratory resolution can assist to build momentum for change in companies’ affairs.70 In summary, the preceding analysis supports the claims of proponents of advisory resolutions that there exists a ‘gap’ in Australian shareholders’ governance toolkit. However, taking into account the nature of Australian activists and their objectives, the analysis also highlights that this gap is relatively particular in nature. For institutional investors, the significance of a statutory right to pass declaratory resolutions is that it would serve as an intermediate form of escalation to address concerns not resolved through their routine engagement and voting activities. For issue group activists, a right to pass declaratory resolutions has the potential to provide a more direct and straightforward means of highlighting and developing support for their ESG-related causes. Both institutional investors and issue activists emphasise that the governance potential of declaratory resolutions lies in their public and targeted nature; that is, declaratory resolutions can be used to bring pressure to bear on companies and develop shareholder consensus by drawing attention to a particular issue in a prominent fashion. The preceding analysis also suggests that both issue activists and institutions would use declaratory resolutions in connection with ESG-related activism. The extent to which declaratory resolutions would be used to address more granular, company-specific financial or commercial issues is less clear. The relevance of a right to pass declaratory resolutions for the other significant type of activist in the Australian market, non-institutional blockholders, is less evident. The empirical evidence presented earlier in this book

67 ACSI also acknowledges that issue activists would be likely to be frequent users of a guaranteed right to table declaratory resolutions: ACSI and Sheehan (n 1) 32. 68 ACCR, Submission to CAMAC, The AGM and Shareholder Engagement (December 2012) 3. 69 ibid. 70 ACCR (n 68). See also Freeburn and Ramsay (n 10) 1172 (quoting a representative of the activist organisation, Market Forces, who claims that filing a declaratory resolution forces shareholders to consider and form a view on the resolution, thereby contributing to a consensus position in support of the underlying issue).

144  Revisiting the Regulatory Debate (I) records no instance of such a shareholder proposing a declaratory resolution. Chapter four instead highlighted how such shareholders appeared to be more willing to engage in board-related activism, suggesting that non-institutional blockholders do not experience the same ‘utility gap’ in connection with shareholders’ existing governance tools as institutional investors and issue group activists. 7.4.  SHAREHOLDERS’ ANNUAL SAY ON PAY: HIGHLIGHTING THE UTILITY OF DECLARATORY RESOLUTIONS

Australian law already provides public company shareholders with an opportunity to pass a particular kind of declaratory resolution as part of their annual ‘say on pay’. Specifically, the Corporations Act requires a public company to propose a non-binding resolution at its AGM seeking shareholder approval of the company’s annual ‘remuneration report’ (hereafter, ‘remuneration vote’).71 In 2011, law-makers augmented the remuneration vote with rules collectively known as the two-strikes rule.72 These rules exclude the votes of company managers and their closely related parties which might otherwise distort voting outcomes on a company’s remuneration report.73 They also provide that, if a company receives a ‘no’ vote on its remuneration report of 25 per cent or more at two consecutive AGMs then, at the second meeting, shareholders must vote on whether to convene a further meeting at which the company’s directors must stand for re-election.74 This book has highlighted the prominent role now played by the remuneration vote and two-strikes rule in Australian corporate governance. The remuneration vote is on average the most contentious item of business at AGMs, measured in terms of voting dissent. Evidence suggests that shareholders use it to express dissent on a range of issues not limited to remuneration concerns. Commentators generally consider that the remuneration vote and two-strikes rule have also been instrumental in encouraging increased levels of engagement between companies and shareholders – in relation to both remuneration issues and other aspects of companies’ affairs. Notably, the remuneration vote and two strikes rule have had this effect despite the fact that shareholders have shown little appetite to use the associated board spill mechanism to escalate their concerns about executive remuneration.75

71 Corporations Act s 250R(2); s 250R(3) provides that the vote is non-binding. 72 Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth). 73 Corporations Act s 250R(4). 74 Corporations Act, ss 250U, 250V. A company’s managing director is exempted from this requirement. 75 See ch 5, section 5.1.5 for details regarding the points made in this paragraph.

Shareholders’ Annual Say on Pay  145 Proponents of declaratory resolutions point to the remuneration vote as an example of how declaratory resolutions can play a significant role in corporate governance.76 Certainly, Australia’s experience with the remuneration vote and two-strikes rule underscores a number of the arguments made above. In particular, the impact of these laws calls into question claims that declaratory resolutions are otiose given shareholders’ existing rights to replace directors and amend the corporate constitution. Shareholders’ use of the remuneration vote indicates that shareholders do see benefit in an additional, intermediate governance tool; that is, a governance right which is less interventionist and impractical than shareholders’ core governance rights to replace directors and change the corporate constitution, but which allows for a more explicit and public display of dissent than behind-the-scenes engagement and voting against other items of business at AGMs. However, there are some unique features of the remuneration vote and twostrikes rule and the context in which they operate that are significant. These factors need to be borne in mind when considering the implications of the remuneration vote and two-strikes rule for the law reform debate regarding declaratory resolutions in general. First, the remuneration vote relates to a particular, salient, and significantly regulated issue: executive remuneration. The issue attracts scrutiny from across the political spectrum77 and from the financial press.78 It is a point of focus for large institutional investors, their representative bodies and proxy advisers which publish policies outlining their expectations regarding executive remuneration.79 This context is significant. The salience of executive remuneration heightens the reputational risk for directors and executives of an adverse remuneration vote. Chapter six highlighted Australian professional directors’ sensitivity to reputational harm and argued that this sensitivity makes them receptive to large shareholder influence-wielding, notwithstanding Australian shareholders’ evident reluctance to remove directors from office. Professional directors will be aware that executive remuneration is an area of particular focus for large investors. The strike mechanism under the two strikes rule and the attentive reporting of strikes by the financial press create the very real risk for directors

76 See, eg, ACSI and Sheehan (n 1) 9. 77 See, eg, the controversy in 2017 regarding the remuneration package of the CEO of Australia Post, which attracted attention from across the political spectrum: T McIlroy, ‘Malcolm Turnbull Says $5.6 Million Salary of Australia Post Boss Ahmed Fahour Is Too High’ The Sydney Morning Herald (online) (8 February 2017) www.smh.com.au/politics/federal/malcolm-turnbull-says56-million-salary-of-australia-post-boss-ahmed-fahour-is-too-high-20170208-gu7t06.html (noting viewpoints of Liberal, Labor and One Nation politicians). 78 Each year, the financial press keenly reports on companies that receive adverse remuneration votes at their AGM: see, eg, A White, ‘Second Strikes on Remuneration Show Boards Still Don’t Get It’ The Australian (3 December 2016) 32; J Duke, ‘TPG Cops First Strike Over Pay’ The Sydney Morning Herald (Sydney, 7 December 2017) 22; J Frost, ‘Investors Beat Up NAB’ The Australian Financial Review (20 December 2018) 1. 79 Ch 5, section 5.3.1.

146  Revisiting the Regulatory Debate (I) that shareholder concerns will attract broader market scrutiny. In a relatively small market in which companies conservatively recruit directors from a small ‘cadre’ of well-regarded candidates, the remuneration vote exposes a director to material reputational downside risk. Several other contextual features are also relevant to the governance impact of the remuneration vote. For example, executive remuneration is subject to extensive regulation, including detailed disclosure rules.80 If companies were not subject to mandatory disclosure requirements, shareholders may not have sufficient information to inform their voting decision;81 or companies might not disclose similar information, making it difficult for shareholders to inform their assessment of one company’s remuneration arrangements by comparing them with other companies’ arrangements.82 Various governance intermediaries provide data and analysis of executive remuneration practices and proxy advisers provide analysis and recommendations to assist investors to decide how to vote.83 In the absence of this data, analysis and advice, investors may be unable or unwilling to undertake the work necessary to inform their voting decision on the remuneration vote. The policies published by shareholders’ representative bodies and proxy advisers also evidence a level of consensus amongst the investor community regarding executive remuneration practices.84 In the absence of such consensus, the remuneration vote might produce greater variation in voting outcomes. Finally, the remuneration vote offers shareholders an economical means of engaging in activism.85 Instead of activists having to prepare, propose and solicit support for a resolution, the legislation requires a public company to propose a resolution seeking approval of its remuneration report. The subject matter of the resolution is a report prepared by the company and the decision of shareholders is simply whether to approve, disapprove or abstain from voting on that report. Shareholders can inform their voting decision by taking into account mandatory disclosures made by the company and (in the case of institutional

80 See, generally, K Sheehan, ‘The Regulatory Framework for Executive Remuneration in Australia’ (2009) 31 Sydney Law Review 273; K Sheehan, ‘Say On Pay and the Outrage Constraint’ in RS Thomas and JG Hill (eds), Research Handbook on Executive Pay (Cheltenham, Edward Elgar, 2012) 259–62. 81 L Byrnes and L Chapple, ‘How Should Regulators Deal with Entrenched Company Executives?’ (2015) 33 Company and Securities Law Journal 266, 280. Byrnes and Chapple also argue that the disclosure requirements send a clear message to company managers about the importance of remuneration as a governance issue. 82 Sheehan, ‘Say On Pay and the Outrage Constraint’ (2012) 258. 83 Ch 5, section 5.3. 84 ibid. 85 M Bugeja et al, ‘Life After a Shareholder Pay “Strike”: Consequences for ASX-listed Firms’ (Working Paper No 130, Centre for International Finance and Regulation, November 2016); P Durkin, ‘Shareholders Use Two-strikes Rule Judiciously’ The Australian Financial Review (23 November 2011) 4 (quoting Australian proxy adviser, Dean Paatsch, who notes that the twostrikes rule has ‘succeeded in lowering the outrage constraint’).

Why Don’t Shareholders Give Themselves a Right?  147 investors) the voting recommendations of proxy advisers. Lastly, the two-strikes rule augments the remuneration vote in two important respects: it excludes the votes of company managers and their closely related parties which might otherwise distort voting outcomes; and, through the ‘strike’ mechanism, it gives shareholder dissent on the remuneration vote significance even in circumstances where it is not sufficient to defeat the resolution. These insights enable us to refine further our assessment of the likely utility of a general statutory right to propose declaratory resolutions. Specifically, they suggest that such a right would most likely only play a meaningful governance role in relation to issues that (i) are salient, particularly for the institutional investors which are significant shareholders and active voters in the Australian market; (ii) are subject to adequate disclosures by public companies; and (iii) attract the focus of the various intermediary organisations that assist investors in their corporate governance activities. This underscores the point made earlier that declaratory resolutions are likely to be utilised most often in relation to issues with broader market relevance, such as the ESG issues which are currently a point of focus for both public companies and their major investors. 7.5.  WHY DON’T SHAREHOLDERS GIVE THEMSELVES A RIGHT TO PASS DECLARATORY RESOLUTIONS THROUGH CONSTITUTIONAL CHANGE?

7.5.1.  Shareholders’ Apparent Reluctance to Engage in Constitutional Change Under Australian law, shareholders already have an ability to give themselves a right to pass declaratory resolutions; namely, by using their power to amend the corporate constitution to include such a right.86 In recent years, shareholder activists have attempted to do this on a number of occasions. These proposals involve the two-resolution tactic noted in chapter four. Under this approach, a social activist organisation proposes two, interrelated resolutions. The first resolution seeks to amend the target company’s constitution to include a general power for the shareholder meeting to pass declaratory resolutions. The second resolution, which is conditional on the passage of the first resolution, is a declaratory resolution to be passed under this new power. The declaratory resolution typically relates to an ESG issue.87 This two-resolution approach has become increasingly common. In a study of shareholder-proposed resolutions between 2002 and 2019, Freeburn and Ramsay identified 25 two-resolution proposals and noted that they are a relatively recent innovation.88 They report that the constitutional amendment



86 For

background on shareholders’ constitutional amendment power, see ch 3, section 3.4. 4, section 4.1.3(i). 88 Freeburn and Ramsay (n 10) 1157–58. 87 Ch

148  Revisiting the Regulatory Debate (I) resolutions in these proposals received an average ‘for’ vote of 6.10 per cent,89 which meant that the related declaratory resolutions were not put to a vote. However, Freeburn and Ramsay point out that the targeted companies tended to disclose publicly the proxy votes received in respect of the declaratory resolutions.90 These disclosures show that the declaratory resolutions attracted, on average, approximately double the amount of ‘for’ votes than the related constitutional amendment resolutions.91 This voting data indicates that shareholders are unwilling to give themselves a right to propose and vote on declaratory resolutions through constitutional amendment. Moreover, the data highlights that shareholders are in fact more supportive of the second, ESG-related declaratory resolution than they are of the constitutional amendment resolution. As chapter four explained, the reason why activist organisations use the two-resolution tactic is because they recognise shareholders’ clear reluctance to engage in constitutional change.92 By using the two-resolution approach, which separates the constitutional amendment resolution from the ESG declaratory resolution, activist organisations are seeking to minimise the prospect of a target company’s shareholders conflating their concerns about constitutional change with the merits of the ESG-related declaratory resolution. Although the ESG-related declaratory resolution is generally not voted on because the constitutional amendment resolution is not approved, public companies tend to disclose proxy votes received prior to the shareholder meeting in relation to the ESG resolution. This disclosure provides a meaningful insight into shareholders’ views regarding the subject matter of the ESG-related declaratory resolution. In effect, therefore, the two-resolution tactic creates a de facto separate shareholder vote on the ESG-related declaratory resolution. 7.5.2.  Support for a ‘Say on Climate’ Another notable market development relating to declaratory resolutions has been shareholders’ attempts to secure a ‘say on climate’; that is, a periodic, nonbinding vote pursuant to which shareholders express their views regarding a company’s progress towards adapting to the implications of climate change. Activist shareholders have recently secured commitments from several major companies to provide them with a ‘say on climate’.93 These commitments do not, however, involve constitutional change. Instead, companies have responded to shareholder pressure by volunteering to table a ‘say on climate’ resolution at



89 ibid

1162. 1149. 91 ibid 1164–65. 92 Ch 4, section 4.1.3(i). 93 Ch 4, section 4.2. 90 ibid

Why Don’t Shareholders Give Themselves a Right?  149 their next AGM and to provide shareholders with relevant disclosures regarding their strategy for reducing emissions and their progress towards achieving those reductions.94 7.5.3.  Implications of these Developments for the Law Reform Debate These recent developments indicate that shareholders have little appetite for using constitutional change to give themselves a right to pass declaratory resolutions. In particular, shareholders appear to be concerned about the consequences of bringing about change by undertaking constitutional innovation on a companyby-company basis. ACSI has described constitutional change as inappropriate because ‘a bespoke constitution that does not align with market practice could be a disadvantage for the company and its shareholders’.95 Nonetheless, shareholders have still made some progress based on their own initiatives. The two-resolution tactic separates ESG-related declaratory resolutions from constitutional amendment resolutions and thereby provides shareholders with an ability to demonstrate their support for the former free from concerns about the latter. In the face of mounting shareholder pressure, some major energy and power companies have also volunteered to provide shareholders with a periodic declaratory vote on companies’ progress towards addressing the implications of climate change. Do these developments make declaratory resolution law reform otiose? In this author’s opinion, the answer is ‘no’. The two-resolution mechanism and ‘say on climate’ are subject to shortcomings. Companies’ ‘say on climate’ initiatives, for example, do not involve constitutional change and instead leave the structuring and implementation of ‘say on pay’ in the hands of companies and their boards.96 Some of these companies have declined (to date) to make a commitment to provide a vote beyond the following year’s AGM.97 Another company has chosen to offer a vote on a multi-year basis rather than an annual basis.98 The two-resolution tactic is unnecessarily complex. The first, constitutional amendment resolution attracts minimal shareholder support and only serves the purpose of providing a formal legal basis for activists to table the second,

94 ACCR, ‘Say on Climate’ www.accr.org.au/topics/say-on-climate/. 95 ACSI and Sheehan (n 1) 13. 96 See, eg, the following proposals by major energy companies: Santos Ltd, ‘Santos Adopts Shareholder Advisory Vote on Climate Change Report’ (ASX Announcement, 16 March 2021); Woodside Petroleum Ltd, ‘Climate Reporting and Non-binding Shareholder Vote’ (ASX Announcement, 19 March 2021); Origin Energy Ltd, ‘Origin to Adopt Shareholder Advisory Vote on Climate Change’ (ASX Announcement, 6 August 2021). 97 Woodside Petroleum Ltd, ‘Climate Reporting and Non-binding Shareholder Vote’ (2021). 98 Santos Ltd, ‘Notice of Annual General Meeting’ (ASX Release, 1 April 2022) 10 (noting that the vote will occur every three years).

150  Revisiting the Regulatory Debate (I) ESG-related declaratory resolution. Even though activists use this approach in the hope that it maximises shareholder support for the ESG resolution, ACSI reportedly believes that shareholders continue to conflate their concerns regarding the constitutional amendment resolution with the merits of the ESG-related declaratory resolution.99 Furthermore, shareholders’ voting preferences regarding the ESG resolution are only revealed if the target company discloses proxy votes received in relation to the resolution. Technically, such disclosure is not legally required; the Corporations Act merely requires companies to disclose proxy voting data for resolutions actually passed.100 As the ESG-related declaratory resolutions are generally not put to a vote because the related constitutional amendment resolutions are not approved, companies would be entitled to not disclose proxy data in relation to the ESG resolutions. This, in fact, is what occurred in the one case involving a two-resolution proposal identified by this author’s own empirical research101 as well as in one other prominent example in 2018.102 The non-disclosure of proxy data prevents a two-resolution proposal from revealing shareholders’ voting preferences on material ESG issues and therefore frustrates its ability to close the ‘utility gap’ described earlier. Furthermore, these shareholder-led innovations appear to be leading to uncoordinated and overlapping activist initiatives. It is not unusual now for major energy and power companies to receive multiple declaratory resolution proposals addressing broadly similar climate change issues each year.103 Even companies which have offered shareholders a ‘say on climate’ are still receiving multiple additional declaratory resolution proposals addressing climate change or related issues.104 The tabling of multiple declaratory resolutions on a yearly basis covering broadly similar issues runs the risk of generating confusion, frustration or indifference amongst a company’s shareholders as a whole.

99 R Williams, ‘Shareholders want Power to “Escalate” Issues’ The Sydney Morning Herald (online) (26 October 2017) www.smh.com.au/business/shareholders-want-power-to-escalate-issues-20171026gz8nnl.htm (quoting the chief executive of ACSI who argues that two-resolution proposals make ‘it very difficult to consider a resolution on its merits, because you have to think about whether you want to change the constitution … to accommodate it’). 100 Corporations Act, s 251AA(2), requires a public company to notify the ASX of, among other things, voting and proxy data for resolutions passed at a meeting. 101 Ch 4, section 4.1.3(i). 102 In 2018, QBE Insurance did not disclose proxy votes in relation to a declaratory resolution on the basis that it was not put to the meeting because the constitutional amendment resolution was not passed: QBE Insurance Group Ltd, ‘2018 Annual General Meeting of Shareholders – Results of Meeting’ (ASX Announcement, 3 May 2018) 2. 103 Freeburn and Ramsay (n 10) 1152 (noting various companies which have been subjected to multi-year campaigns, including Origin Energy Ltd which received 15 resolutions over four years). 104 The 2022 AGMs of Santos Ltd and Woodside Energy Group Ltd each involved four declaratory resolutions: a ‘say on climate’ resolution proposed by the company and three shareholder-proposed declaratory resolutions addressing climate change issues: Santos Ltd, ‘Notice of Annual General Meeting’ (2022) 3–5; Woodside Energy Group Ltd, ‘Notice of Annual General Meeting 2022’ (ASX Announcement, 8 April 2022) 5–6.

The Design of a Statutory Right to Propose Declaratory Resolutions  151 This would undermine declaratory resolutions’ potential to promote and highlight shareholder consensus on material ESG issues and would lend support to critics’ claims that such resolutions jeopardise efficient corporate governance. It appears unlikely, based on developments to date, that investors will use their constitutional amendment power to regulate the tabling of declaratory resolutions. Some investors have in fact specifically indicated that it is their preference that appropriate safeguards are put in place through law reform.105 Shareholders’ evident reluctance to establish a robust legal foundation for declaratory resolutions through constitutional change is rational when one considers it in light of the potential governance utility of declaratory resolutions for shareholders. This chapter’s ‘utility gap’ analysis highlights that what shareholders seek is, fundamentally, a relatively generic right; namely, a right to table and pass declaratory resolutions in order to highlight or escalate their governance concerns. It is not a right that requires tailoring to a company’s particular circumstances. From a shareholders’ perspective, law reform is a more efficient solution in these circumstances than seeking to create change through private ordering on a company-by-company basis. Relevantly, ACSI has indicated that the issue should be addressed through law reform in order to achieve a uniform approach across the market.106 The cultural and political factors noted in chapter six might also be relevant here.107 It is possible that those factors may constrain Australian shareholders’ willingness to drive significant governance innovation through their own attempts to change company constitutions. For these reasons, law reform represents a more appropriate method for providing shareholders in Australian public companies with a right to pass declaratory resolutions. 7.6.  THE DESIGN OF A STATUTORY RIGHT TO PROPOSE DECLARATORY RESOLUTIONS

The details of laws permitting declaratory resolutions vary across the globe. In some countries, shareholders enjoy a mandatory statutory right to propose declaratory resolutions.108 English law, on the other hand, provides a default

105 The Australian institutional shareholder, AMP Capital, has stated that it would prefer to ‘see the introduction of safeguards via a regulated solution’: AMP Capital, 2017 Review: Proxy Voting & ESG Investment Research (March 2018) 5. BlackRock has expressed similar sentiments: R Williams, ‘Fund Giant’s Warning for Local Boards’ The Sydney Morning Herald (Sydney, 6 November 2017) 20. See also ACSI and Sheehan (n 1) 31–35. 106 ACSI and Sheehan (n 1) 3. See also Computershare, Intelligence Report: Insights from Annual General Meetings Held in 2017 (March 2018) 7 (citing the CEO of the Australian Shareholders Association to the effect that she believes the issue should be addressed through ‘public policy change’). 107 Ch 6, section 6.1.4(ii)–(iii). 108 Eg, s 109(2) of New Zealand’s Companies Act 1993 and Rule 14a-8 in the United States.

152  Revisiting the Regulatory Debate (I) constitutional rule which permits shareholders to give directions to the board of a company by passing a special resolution;109 a company can elect to adopt the default rule or a different arrangement in its constitution.110 Laws will often limit the use of declaratory resolutions by requiring proposing shareholders to satisfy share ownership preconditions.111 Laws may also limit the subject matter of declaratory resolutions in order to prevent spurious or vexatious proposals,112 or to reduce the risk of shareholders micro-managing a company’s ordinary business operations or to avoid conflict with a similar resolution tabled by corporate management.113 In the Australian context, such design issues need to be considered carefully in order to ensure that a right to pass declaratory resolutions is effective to address the ‘utility gap’ revealed by this chapter’s analysis. The design of the right is also relevant to the second major theme in the Australian law reform debate about declaratory resolutions; that is, the risk that declaratory resolutions may compromise the effectiveness and efficiency of corporate decision-making. In its 2000 report, CAMAC concluded that giving shareholders a right to pass declaratory resolutions could lead to inefficiency as a result of shareholders attempting to run a company ‘through shareholder plebiscite’, put pressure on directors to accede to suboptimal shareholder preferences, and diminish the accountability of directors.114 However, CAMAC did not explore how variations in the design of a right to pass declaratory resolutions might mitigate these risks. For example, the law could preserve the authority and accountability of directors by expressly providing that a declaratory resolution is non-binding and without prejudice to the authority and duties of a company’s directors. The Governance Institute issued a discussion paper in 2018 which reported that its members and institutional investors were concerned that a right would be ‘used by special interest groups to “hijack” the AGM to pursue societal issues’.115 However, whether a ‘hijacking’ by special interest groups occurs would depend, among other things, on the thresholds for filing a declaratory resolution proposal, any applicable subject matter exclusions, and how often shareholders could file such proposals. This chapter’s analysis provides guidance regarding the following important design issues.

109 Clause 4 of the model articles for public companies and private companies limited by shares prescribed under Companies Act 2006, s19. 110 Companies Act 2006, s 19(3). 111 Eg, under Rule 14a-8, filing shareholders must have continuously held at least US$2000 of voting shares for at least three years; or $15,000 of voting shares for at least two years; or $25,000 of voting shares for a at least one year: Code of Federal Regulations § 240.14a-8(b)(i). 112 Eg, Companies Act 2006, s 338(2). 113 Eg, Code of Federal Regulations § 240.14a-8(i)(7) and (9). 114 CAMAC (n 28) 37. 115 Governance Institute (n 34) 11.

The Design of a Statutory Right to Propose Declaratory Resolutions  153 7.6.1.  Mandatory or Default? A threshold design issue is whether a statutory right to pass declaratory resolutions should in fact be guaranteed (ie, mandatory for all companies). The Corporations Act regulates both private and public companies limited by shares as well as certain other forms of company such as companies limited by guarantee.116 It is far from evident whether a mandatory right to pass declaratory resolutions is required in all such companies. Private companies, for example, are closely-held and are not subject to the same separation of ownership and control as occurs in public companies.117 It is questionable whether a mechanism for shareholders to formally express their governance concerns to managers is necessary in such companies.118 The Australian law reform debate has focused on public companies. The empirical evidence presented in chapter four highlights that, to date, declaratory resolutions have largely targeted large capitalisation public companies.119 The two shareholder types which this chapter’s analysis indicates are likely to find such a right beneficial – institutional investors and social activist organisations and their supporters – tend not to focus on smaller capitalisation companies. Institutional investors instead concentrate their investments in large capitalisation companies120 and activist organisations target their activism at larger capitalisation companies.121 These considerations might suggest that a statutory right to pass declaratory resolutions should only be available to larger capitalisation companies; for example, by confining the availability to companies in one of the large capitalisation market indices. However, it is not possible to rule out the possibility that a declaratory resolution right may have utility in smaller capitalisation public companies. This is because the other principal declaratory resolution right under Australian law, the remuneration vote, is utilised by shareholders in smaller capitalisation companies. Computershare, for example, reports that the average ‘no vote’ on the remuneration vote for companies outside of the S&P/ASX 300 is in line with the average ‘no vote’ for companies included in the S&P/ASX 300.122 It is conceivable, therefore, that shareholders in smaller public companies might utilise such a right should it become available as a mandatory statutory rule.

116 Corporations Act 2001, s 112. 117 A proprietary company must have no more than 50 non-employee shareholders: Corporations Act 2001, s 113(1). 118 To similar effect, see Bottomley (n 24) 131. 119 Ch 4, sections 4.1.4 and 4.2. 120 Ch 3, section 3.3. 121 Ch 4, sections 4.1.4 and 4.2. This may be because such companies are high-profile and interventions involving them are likely to generate publicity for the activist and/or because prompting change in such substantial organisations may have a greater impact than prompting change in smaller organisations. 122 Computershare, 2021 AGM Intelligence Report (2021) 20.

154  Revisiting the Regulatory Debate (I) An alternative approach would be to make a statutory declaratory resolution right available on an ‘opt in’ basis. If shareholders in a particular public company consider that such a right would be useful, they could choose to adopt the right by ‘opting in’; for example, by passing an ‘opt in’ resolution at a company’s AGM. However, the evidence presented in this chapter reveals significant shareholder inertia when it comes to tailoring the governance arrangements of their companies through private-ordering. Although shareholders already effectively have an ability to ‘opt in’ to a declaratory resolution right by approving a constitutional change which incorporates such a right, the available evidence indicates that they have never done so. It might be argued that a formal statutory ‘opt in’ right may alleviate some of this inertia as it would set out, ex ante, the full terms of the right, leaving shareholders with the relatively straightforward decision of whether to adopt the legislatively-prescribed right or not. On balance, this is unlikely to be the case. Constitutional change proposals tabled to date are already relatively standard in nature by virtue of the fact that they are predominantly tabled by just one of two organisations.123 Shareholders have still refused to provide material support for such proposals. In Australia, shareholders appear to be particularly unwilling to take the lead in private-ordering initiatives, suggesting that law reform establishing a mandatory declaratory resolution right is the most appropriate course of action.124 For the reasons explained above, this right should be made available to shareholders in all public companies. 7.6.2.  Binding or Non-binding Declaratory Resolutions Binding declaratory resolutions are possible in other jurisdictions; for example, the United Kingdom125 and New Zealand.126 In the Australian context, there are varying perspectives on whether declaratory resolutions should be binding on a company and its managers. CAMAC envisaged that declaratory resolutions would be non-binding and ACSI has expressed reservations regarding binding resolutions.127 However, survey research published by the Governance Institute has found similar levels of support among respondents for both binding and non-binding declaratory resolutions.128 123 Ch 4, section 4.2. 124 Another reason in favour of mandatory law reform, noted in section 7.6.4 below, is that it would provide an opportunity to put in place some appropriate safeguards to ensure that declaratory resolutions do not create inefficiencies in public company governance. 125 Clause 4 of the model articles for public companies and private companies limited by shares prescribed under Companies Act 2006 permits shareholders to give directions to a company’s board by passing a special resolution. 126 Companies Act 1993, s 109(3) (stating that a declaratory resolution can be binding if this is permitted by the company’s constitution). 127 CAMAC (n 28) 35–36; ACSI and Sheehan (n 1) 34–35. 128 Governance Institute (n 34) 8.

The Design of a Statutory Right to Propose Declaratory Resolutions  155 Giving shareholders a right to pass binding declaratory resolutions would involve both legal and practical complexity. For example, how should company managers respond if, over a relatively short period of time, shareholders passed contradictory directives, or if managers believe a directive is not in the interests of shareholders as a whole? The courts have indicated that shareholders cannot relieve directors of their statutory duties of care and good faith under the Corporations Act.129 A binding declaratory resolution could therefore place a company’s directors and officers in an impossible situation if it requires them to act inconsistently with their duties. Law-makers could attempt to resolve this issue by altering the way in which the law imposes accountability in such a situation, although this too would give rise to difficult issues. Should directors be relieved of their duties entirely? Or should duties be shifted from a company’s directors to its shareholders when a declaratory resolution is passed? There would be obvious difficulties associated with determining which shareholders should be subject to duties in companies in which no particular shareholder can control the outcome of voting on resolutions. Moreover, exposing shareholders to the possibility of legal duties may reduce the incentives of shareholders to utilise a right to table declaratory resolutions. Or, shareholders might attempt to minimise their risk of liability by confining their resolutions to broad, aspirational directives, which leave the details of implementation in the hands of a company’s managers. In such a case, the practical impact of a binding declaratory resolution may differ little from a non-binding declaratory resolution. The likely governance role of a right to pass declaratory resolutions, as revealed by this chapter’s analysis, suggests it is unnecessary for law-makers to address these challenging issues. In particular, it is debatable whether institutional investors would regard a right to pass binding declaratory resolutions as a practical means of escalating their governance concerns. As a binding resolution would directly affect the management of a company, shareholders would need to be satisfied that the resolution would not lead to unexpected consequences. This book has highlighted how institutional investors have expressed reservations concerning board-related activism owing to the difficulty, cost and risks of exercising that tactic. It is therefore questionable whether institutional investors would have any incentives to undertake the similarly difficult task of satisfying themselves that a binding declaratory resolution would be effective to achieve its objective without giving rise to adverse consequences for their company. Relevantly, ACSI’s discussion paper reports that investors consulted by ACSI preferred non-binding resolutions over binding resolutions.130 ACSI noted that investors considered that this would be a ‘better fit with Australia’s strong engagement culture’.131 Investors indicated that they considered that 129 Capricornia Credit Union Ltd v Australian Securities and Investments Commission (2007) 62 ACSR 671, 691, 693. See also Ford, Austin and Ramsay’s Principles of Corporations Law [9.640.12]. 130 ACSI and Sheehan (n 1) 7. 131 ibid.

156  Revisiting the Regulatory Debate (I) giving shareholders a right to pass binding resolutions could negatively affect shareholder-company engagement practices; for example, by making engagement more combative in nature as company managers seek to head off the prospect of direct shareholder interference in their company’s management.132 It is also questionable whether a right to pass binding declaratory resolutions would be important for issue group activists. Attempts by such activists to pass declaratory resolutions in recent years have avoided detailed and prescriptive interference in companies’ affairs. Instead, the common two-resolution proposal favoured by these activists comprises a constitutional amendment resolution permitting advisory resolutions together with an advisory resolution relating to a specific ESG issue. 7.6.3.  A Right to Propose Declaratory Resolutions at Large or a ‘Say On …’ Model? Australian shareholders have embraced their annual ‘say on pay’ and in recent years have begun to call for an annual ‘say on climate’. In its discussion paper on declaratory resolution law reform, ACSI noted the possibility of giving a shareholder meeting a ‘say on ESG’; that is, a right to approve a company-prepared ESG report.133 A key advantage of a ‘say on’ model was noted earlier in the context of discussing shareholders’ remuneration vote; namely, it is an economical form of activism for shareholders. Activist shareholders do not need to formulate and solicit support for their own proposal. Instead, they vote on an annual resolution tabled by a company concerning company-prepared disclosures and are typically aided in their decision-making by the recommendations of proxy advisers. However, a significant limitation of this approach is that it confines the subject matter of the resolution to the company-generated disclosure that it is the subject of the resolution. It would not directly assist shareholders who have concerns about another matter. Shareholders could attempt to highlight concerns about such other matters by voting against the resolution. However, this could send an ambiguous message. For example, if shareholders voted against an annual ‘ESG report’ prepared by a company it would not be obvious what particular aspect of the report concerned them. This may frustrate the potential for declaratory resolutions to be used to highlight issues of concern, build investor consensus, and apply pressure to company managers. Furthermore, shareholder concerns may evolve over time. BlackRock, for example, updates its

132 ibid 35. The Productivity Commission concluded that giving shareholders a binding vote on remuneration would be counterproductive. It considered that investors may not utilise a binding vote out of concern about the downside of letting shareholders make binding decisions regarding remuneration: Productivity Commission, Executive Remuneration in Australia (2009) 287. 133 ACSI and Sheehan (n 1) 33.

The Design of a Statutory Right to Propose Declaratory Resolutions  157 ESG focus areas annually, highlighting the potential for the content of the ‘E’, ‘S’ and ‘G’ categories to fluctuate over time as new issues emerge.134 A statutorilyprescribed report prepared for the purpose of a ‘say on’ declaratory vote may therefore, over time, fail to encompass matters of real concern to shareholders. Institutional investors and issue activists indicate that the governance potential of declaratory resolutions lies in the fact that such resolutions can be initiated by shareholders and are public and targeted in nature, providing a means for shareholders to highlight their particular concerns, build shareholder consensus and escalate pressure on companies.135 This suggests that a right to pass declaratory resolutions should provide shareholders with the discretion to choose which particular issues they wish to highlight, rather than being structured as a ‘say’ on a legislatively-prescribed company disclosure. 7.6.4.  Restrictions on the Right As noted earlier, a number of commentators have raised concerns regarding the potential for shareholder-proposed declaratory resolutions to create inefficiency in public company governance. Current practices indicate that such concerns are not unfounded. Section 7.5.3 above noted how some larger Australian companies are receiving multiple declaratory resolution proposals each year, often relating to similar issues. This chapter’s analysis indicates that it would be possible to impose conditions on a right to pass declaratory resolutions to guard against such inefficiencies, without materially compromising the corporate governance utility of such resolutions. For example, it is not evident that a right to pass declaratory resolutions should be capable of exercise at any shareholder meeting. The type of ESG issues which this chapter’s analysis suggests are likely constitute the subject matter of most declaratory resolutions are unlikely, in general, to have a commercial or operational immediacy that requires a company’s shareholders to consider them more frequently than annually. Similarly, the ‘escalatory’ function that a right to pass declaratory resolutions would serve for institutional investors is unlikely to necessitate that the right be capable of exercise more frequently than annually. Company managers should have an appropriate opportunity to engage with shareholders, understand their viewpoints and respond to their concerns before a shareholder meeting is required to consider

134 S Boss and M Edkins, ‘BlackRock’s 2021 Engagement Priorities’ (Harvard Law School Forum on Corporate Governance, 22 March 2021) www.corpgov-law.harvard.edu/2021/03/22/blackrocks2021-engagement-priorities/ (noting that ‘[s]ome issues have long been core [considerations] … Other issues have become priorities more recently, driven by our observations of emerging risks and opportunities for companies, market developments, and changing client and societal expectations’). 135 See above, section 7.3.3.

158  Revisiting the Regulatory Debate (I) a resolution relating to those concerns. It would be appropriate, therefore, to confine the right to table and pass declaratory resolutions to a company’s AGM. When a resolution is brought before a shareholder meeting such as an AGM, it is pursuant to a formal process that involves disclosure of relevant information by a company, the giving of a minimum period of notice to shareholders, and an opportunity for voting shareholders to cast a vote in person or by proxy. If pursuant to this process a declaratory resolution does not receive a significant level of shareholder voting support, it would be reasonable to treat that outcome as a considered view of shareholders on the materiality of the subject matter of that resolution. In these circumstances, it is questionable whether activists should be able to table a resolution dealing with the same subject matter at the company’s next AGM. The likely subject matter of declaratory resolutions provides support for this argument. In effect, ESG matters tend to concern policy-like issues. Thus, ACSI envisages declaratory resolutions addressing ‘climate-related, labour and human rights or disclosure risks’.136 If, for example, a company’s shareholders provide little support for a resolution addressing climate change disclosure, it is open to question whether good corporate governance would require that activists be allowed to table a substantially similar resolution at the company’s very next AGM. Requiring an interval of, say, two years before a resolution addressing substantially similar subject matter could be tabled would seem to be appropriate.137 It would be unnecessary to apply any additional subject matter exclusions, such as the exclusion under the United States’ Rule 14a relating to proposals regarding a company’s ordinary business operations.138 The utility analysis presented in this chapter suggests it is unlikely that shareholders would use a declaratory resolution power to address detailed issues of management which might otherwise be regarded as the province of corporate managers. Further, if, as argued above, a declaratory resolution right only permits non-binding declaratory resolutions, the need to ring-fence certain topics from shareholders is questionable. A final design issue is whether filing shareholder(s) should be required to hold a material shareholding. Thresholds presuppose that there is a minimum shareholding interest that is likely to ensure that proponents of declaratory resolutions will use the power to propose resolutions constructively. ACSI has proposed the same thresholds that currently apply to shareholders’ statutory

136 ACSI and Sheehan (n 1) 3. 137 ACSI points out that declaratory resolutions may only prompt change in companies’ affairs over an extended period of time. It notes how, in the United States, it often takes multiple resolutions, involving numerous companies, to create meaningful change in companies’ affairs: ACSI and Sheehan (n 1) 29. However, a re-filing restriction would not necessarily impede such a process. If shareholders in Company A reject a declaratory resolution in Year 1, activists can shift their attention in Year 2 to Company B, and return to Company A when the re-filing restriction lifts in Year 3. 138 Code of Federal Regulations § 240.14a-8(i)(7).

Conclusion  159 right to requisition other forms of permissible shareholder resolutions, namely, that the resolution must be tabled by at least 100 shareholders or by shareholder(s) with at least 5 per cent voting power.139 The Governance Institute suggests that the threshold may need to be more onerous in order to deter spurious or vexatious declaratory resolutions. It raises the possibility of setting the threshold solely by reference to voting power (ie, omitting the alternative 100-shareholder threshold).140 This chapter’s analysis indicates that this issue should be approached with caution. First, whether a high threshold is required to address spurious proposals is open to debate based on existing empirical evidence. Under the current approach – which sets a threshold of at least 100 shareholders as an alternative to a shareholding of 5 per cent – the numbers of filed proposals have not been significant in recent years and none were evidently ‘spurious’ in nature.141 Second, confining the threshold to a percentage of share capital may negate the influence of the organisations that are responsible for coordinating declaratory resolutions in Australia. As chapter four noted, these activists tend to be social or environmental activist organisations that do not maintain significant investments in companies and generally rely on the 100-member threshold.142 A threshold set by reference to a percentage of share capital is unlikely to be achievable for these organisations. Although institutional investors have been supportive of declaratory resolutions and have called for law reform to facilitate declaratory resolutions, the evidence indicates they have not been active filers to date.143 Accordingly, imposing a percentage shareholding threshold would likely significantly impact the number of filed proposals and therefore significantly compromise the potential of declaratory resolutions to address the ‘utility gap’ identified by this chapter’s analysis. 7.7. CONCLUSION

This chapter has demonstrated how a nuanced analytical approach which pays close regard to the nature and objectives of activist shareholders, and the context in which they operate, can significantly advance the analysis of a governance right which in Australia has previously been considered otiose or subject to considerable risk. More generally, this chapter’s analysis yields some important insights into the relative utility of different governance tools for shareholders. In particular, it highlights the possibility that shareholders may

139 ACSI and Sheehan (n 1) 3. These are the thresholds applicable under Corporations Act, s 249N, discussed in ch 3, section 3.4.4. 140 Governance Institute (n 34) 13. 141 Ch 4, section 4.2. 142 ibid. 143 ibid.

160  Revisiting the Regulatory Debate (I) see considerable benefit in an intermediate form of governance tool, such as a right to pass declaratory resolutions. Overseas researchers have suggested that declaratory resolutions play a material governance role in circumstances where shareholders lack more potent alternatives. The prevalence of declaratory resolutions under the United States’ Rule 14a-8 is explained on this basis.144 Conversely, it has been suggested that declaratory resolutions are less likely to be used by shareholders in jurisdictions which provide shareholders with more generous governance alternatives.145 However, the Australian experience indicates that declaratory resolutions can have considerable utility in a market in which shareholders also enjoy potent governance rights. Several features of the Australian market, highlighted by the previous chapters, would appear to explain this situation. First, Australia has high levels of share ownership by institutional investors which generally have constrained incentives to engage in aggressive, complex and ‘hands-on’ activist interventions. Certain cultural and political factors may also constrain investors’ willingness to engage in aggressive forms of shareholder activism. Australia’s institutional investors are not, however, apathetic when it comes to corporate governance. They are active participants in public company governance, albeit in a way that seeks to wield influence over corporate managers rather than to replace or direct those managers. One of investors’ preferred strategies is to wield influence by voting on resolutions at shareholder meetings; evidence indicates that Australian company directors are sensitive to this influence-wielding.146 In this context, the potential utility of declaratory resolutions is clear. They involve one of investors’ preferred governance tactics (ie, voting). Because of their non-binding and generally non-prescriptive nature, they do not result in sudden and potentially disruptive and risky corporate change associated with more aggressive forms of activism. Yet, because of their public nature and Australian directors’ apparent sensitivity to major shareholders’ influence-wielding, they have the potential to prompt meaningful corporate change. The Australian experience may shed light on the increasing prevalence of ESG-related declaratory resolutions in overseas markets. Even though shareholders in some of these markets enjoy a range of alternative governance rights,147 it may be the case that declaratory resolutions are better suited to addressing investors’ ESG concerns for the type of reasons which explain their utility in the Australian market.

144 Kastiel and Nili (n 6) 574 (noting that shareholder proposals are the ‘primary avenue for shareholder involvement in corporate America’ and have been used together with private ordering to provide shareholders with more generous corporate governance rights); Cools, ‘Shareholder Proposals Shaking Up Shareholder Say’ (2021) 302. 145 Cools (n 15) (noting that declaratory resolutions are less common in Europe than in the United States and arguing that this can be explained in part by the fact that European shareholders tend to have more generous governance rights available to them). 146 On the points in this paragraph, see generally ch 6, section 6.1. 147 Cools (n 15).

Conclusion  161 This chapter’s analysis also provides important insights into the design of statutory rights permitting and regulating declaratory resolutions. Although declaratory resolutions laws in some countries are relatively mature, design issues may nonetheless come to fore in coming years, particularly if ESG-related declaratory resolutions continue to increase in prominence. In the United States, for example, the SEC adopted changes in 2020 to the ownership qualifications under the long-standing Rule 14a-8 in light of concerns raised by the corporate sector about alleged misuse of the rule by activists.148 Design issues will also be relevant for companies facing requests to implement an annual ‘say on climate’. This chapter’s analysis highlights the importance of law makers and regulators (in relation to law reform) and corporate boards (in relation to ‘say on climate’ proposals) paying close attention to the utility of declaratory resolutions for the principal shareholder types in their public companies. This analysis can then be used, in a manner similar to that set out above, to evaluate the appropriateness of the conditions or limitations applicable to a declaratory resolution right. Finally, the Australian experience provides an interesting example of the limits of private ordering in corporate governance. Private ordering refers to attempts by shareholders to drive changes in company’s corporate governance rules. In the United States, private ordering is regarded by some commentators as a superior method of developing corporate governance rules than mandatory law reform on the basis that it enables companies and their shareholders to tailor governance arrangements to a company’s specific circumstances.149 In theory, shareholder-led private ordering should be entirely feasible in the Australian market because of shareholders’ ability to initiate changes to a company’s constitution and because the extensive holdings of institutional shareholders across the Australian market mean they are well placed to drive market-wide change. Although institutional investors may have limited incentives to expend resources on leading private-ordering campaigns, there are social activist organisations in Australia that have been active proponents of constitutional change to permit declaratory resolutions. Australian shareholders, however, have demonstrated a notable reluctance to give themselves a right to pass declaratory resolutions through private ordering, even though this chapter’s analysis and investors’ own public pronouncements suggest that such a right would be of considerable utility. They point out that they regard statutory change as a more efficient method of obtaining a relatively generic governance right such as a right to pass declaratory resolutions. One suspects that the social and political considerations noted in chapter six may also make Australian shareholders reluctant to lead significant corporate governance change through private-ordering.

148 Kastiel and Nili (n 6) 619–21. 149 For a concise summary of the claimed benefits of private ordering, see LA Bebchuk, ‘Letting Shareholders Set the Rules’ (2006) 119 Harvard Law Review 1784, 1787.

8 Revisiting the Regulatory Debate (II) Regulating Collective Shareholder Activism

T

he second regulatory issue which will be reconsidered in light of the insights from the evidence and analysis in the earlier chapters is the regulation of collective shareholder activism. 8.1. INTRODUCTION

Activism can become more feasible when it is undertaken by multiple shareholders (hereafter, ‘collective action’). By acting collectively, activist shareholders can pool their resources, share the costs of their intervention, and leverage their influence. As a result, their intervention may become significantly less speculative and more cost effective than if it were undertaken by an individual shareholder. Collective action has the potential, therefore, to facilitate activism. Collective action occurs in a variety of forms across the globe. US commentators have described how ‘wolf packs’ of hedge funds support a lead hedge fund’s intervention against a target company, exerting considerable collective pressure on the target company to accede to the demands of the lead hedge fund.1 Commentators have noted how investor associations and networks in markets such as Australia, Italy, Japan and the United Kingdom coordinate and focus the influence of institutional investors with respect to their investee companies.2 Institutional investors also seek to exert collective influence on 1 JC Coffee and D Palia, ‘The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance’ (2016) 41 Journal of Corporation Law 545. 2 See, eg, G Balp and G Strampelli, ‘Institutional Investor Collective Engagements: Non-Activist Cooperation vs Activist Wolf Packs’ (2020) 14 Ohio State Business Law Journal 135 (discussing the role of Assogestioni in Italy, the UK Investor Forum, the Netherland’s Eumedion and the US Council of Institutional Investors); M Becht et al, ‘Outsourcing Active Ownership in Japan’ (ECGI Finance Working Paper No 766/2021, 2021) (discussing the role of Governance for Owners Japan); T Bowley and JG Hill, ‘Stewardship and Collective Action: The Australian Experience’ in D Katelouzou and DW Puchniak (eds), Global Shareholder Stewardship (Cambridge, Cambridge University Press, 2022) (discussing the role of investor associations in Australia).

Introduction  163 investee companies in relation to ESG issues through investor networks formed specifically for the purpose of addressing investors’ concerns about ESG issues, such as the UN-supported Principles of Responsible Investment.3 Collective action, in its different forms, is a significant corporate governance phenomenon. Some commentators argue that it has the potential to compensate for the otherwise constrained incentives of individual investors to participate in corporate governance.4 A number of institutional investor stewardship codes specifically envisage that investors will use collective action as one of the mechanisms by which they exercise stewardship over their investee companies.5 However, collective action can also give rise to a potentially serious regulatory challenge. By acting collectively, two or more shareholders may leverage their influence to the point where they acquire a measure of control over their company. To take a simple example, if three shareholders who each hold 20 per cent of a company’s shares act collectively, their aggregate voting power would enable them to determine the outcome of most resolutions at a shareholder meeting, including resolutions removing and appointing directors. This has the potential to give those shareholders a measure of control over the management of their company’s affairs. Owing to its potential to cause a shift in the control of a company, collective action is often subjected to national takeover laws. These laws seek to ensure that changes in control of public companies occur in a transparent, fair and efficient manner by tightly regulating significant accumulations of voting power in public companies. In order to minimise the scope for control-seekers to acquire control indirectly or covertly, these laws are generally framed in broad terms. As a consequence, they will often capture and constrain collective action,6 thereby significantly limiting the ease with which shareholders can use collective action to facilitate their activism. International regulators have explored strategies for striking a more appropriate balance between takeover laws and collective action.7 The Australian regulator, ASIC, confronted this issue in 2015. The outcome of ASIC’s review,

3 See, eg, E Dimson, O Karakas and X Li, ‘Coordinated Engagements’ (ECGI Finance Working Paper No 721/2021, 2021). See also ch 5, section 5.3.5. 4 Balp and Strampelli, ‘Institutional Investor Collective Engagements’ (2020); Bowley and Hill, ‘Stewardship and Collective Action’ (2022). 5 Bowley and Hill (n 2). 6 See, eg, A Taleska, ‘Shareholder Proponents as Control Acquirers: A British, German and Italian Perspective on the Regulation of Collective Shareholder Activism Via Takeover Rules’ (2018) 19 European Business Organization Law Review 797 (discussing application of European takeover regulation to collective action); Balp and Strampelli (n 2) (discussing the application of US federal laws designed to regulate accumulation of share ownership in public companies to collective action); Bowley and Hill (n 2) (discussing application of Australian takeover law to collective action). 7 Discussed below in section 8.7.

164  Revisiting the Regulatory Debate (II) as set out in Regulatory Guide 128 (RG 128),8 was highly cautious in nature. ASIC concluded that it would not exercise its statutory modification powers to relax the application of takeover laws to collective action and, instead, published conservative interpretative and enforcement guidance outlining a limited range of collective action that ASIC considers is already permitted under takeover laws. This chapter draws on this book’s research and insights to reappraise the cautious approach of ASIC in RG 128. It concludes that ASIC’s stance is unsatisfactory. When viewed in light of the evidence and analysis in the previous chapters, it becomes apparent that ASIC’s cautious guidance facilitates types of collective action that are already facilitated to a significant extent by market-based developments that do not attract the application of takeover laws, such as proxy advisers, investor associations and engagement firms. ASIC’s guidance provides very little latitude for other, ‘higher-intensity’ forms of collective action, such as voting coordination by investors, coordinated attempts to replace directors and joint filings of declaratory resolutions. These forms of collective action may be necessary where shareholders need to escalate their governance efforts. ASIC considered, however, that there is a material risk of such ‘higher intensity’ forms of collective action being used for control-seeking purposes and leading to unregulated changes in control in public companies. The nuanced image of shareholder activism which emerges from this book’s research calls this risk assessment into question. This chapter critiques RG 128, considers the approaches of overseas regulators, and proposes an alternative approach. Its analysis provides important insights for law makers, regulators and researchers in Australia and overseas who are interested in the increasing governance significance of collective action and its intersection with takeover regulation. 8.2.  THE CORPORATE CONTROL IMPLICATIONS OF COLLECTIVE ACTION

Although public company shareholders do not in general have the power to manage their company, a shareholder with a large enough shareholding may have the capacity to exert a significant measure of control over their company. In particular, a shareholder with a large enough shareholding will be in a position to determine the outcome of resolutions considered at a shareholder meeting. The subject matter of some resolutions may have such significance for a company’s affairs that a shareholder whose votes can determine the outcome of such a resolution may acquire considerable leverage vis-à-vis the company’s 8 Australian Securities and Investments Commission (ASIC), Collective Action by Investors (Regulatory Guide 128, June 2015) (RG 128).

The Corporate Control Implications of Collective Action  165 managers. Resolutions to appoint or remove directors are a prime example of such a resolution. Control over the appointment and removal of a company’s directors is generally regarded as giving shareholders significant leverage over how a company is managed.9 In practice, a shareholding which represents materially less than a majority of a company’s issued shares can deliver shareholders considerable voting influence over resolutions. This is because the approval thresholds for resolutions are in general based on shares voted.10 On average, approximately 40–60 per cent of a public company’s shares are voted at shareholder meetings.11 As a result, a shareholding in the vicinity of approximately 20–30 per cent is potentially large enough to determine the outcome of ordinary resolutions.12 In Australia, resolutions appointing and removing public company directors are ordinary resolutions.13 Activists who act collectively may come to hold, in aggregate, voting power of this magnitude. This may enable them to acquire a significant measure of control over a company’s affairs. Admittedly, this may not be an especially ‘clean’ way to achieve control of a company. In particular, the activists’ ability to control their company will depend on the continuation of their alliance and their ability to agree among themselves on how they will exercise control. If the activists have a disagreement and part ways, they will lose their collective leverage. Despite these challenges, collective action can provide a less costly and financially risky way to acquire control of a company. An investor who wishes to obtain voting control by purchasing a large parcel of shares will need to make a significant financial outlay which will materially increase its financial exposure to the relevant company. In contrast, shareholders engaged in collective action obtain control by coordinating their governance activities rather than by purchasing shares. As such, their individual financial exposure to the company remains unchanged.14 In theory, therefore, it is entirely conceivable that shareholders may use collective action as a strategy for obtaining control of a company.

9 This is reflected by the fact that Anglo-Australian company law has traditionally taken the view that, if shareholders do not agree with how their company is managed, they can ensure that it is managed in accordance with their expectations by replacing the company’s directors: see, eg, The Gramophone and Typewriter, Ltd v Stanley [1908] 2 KB 89; John Shaw and Sons (Salford), Ltd v Shaw [1935] 2 KB 113. 10 One important exception in the Australian context is the approval requirement for schemes of arrangement (which are used to effect mergers or restructurings), which requires approval by a majority in number of shareholders and at least 75% of all votes cast on the resolution: Corporations Act, s 411(4). 11 Ch 5, section 5.1.3. 12 That is, a resolution passed by a simple majority of votes cast on it. 13 Corporations Act, ss 201G, 203D. 14 Australian takeover law constrains the scope for acquirers to take control of companies through private transactions and incorporates a strict benefit-sharing rule which, in practice, requires that all target company shareholders receive a general offer to acquire their shares at the same price per share. These rules have the potential to make takeovers in Australia difficult and expensive. One commentator has argued that this can make shareholder activism an attractive alternative for persons wishing to acquire control of a company: J Mannolini, ‘Convergence or Divergence: Is

166  Revisiting the Regulatory Debate (II) 8.3.  COLLECTIVE ACTION AND TAKEOVER LAWS: THE AUSTRALIAN REGULATORY SETTING

The principal source of takeover regulation in Australia is the Corporations Act. The legislation prescribes when and how changes in corporate control are regulated, provides for the resolution of disputes regarding changes in corporate control, and addresses important ancillary matters such as the disclosure of significant accumulations of shares by shareholders.15 The law seeks to promote four broad objectives relating to fairness, efficiency and due process. These objectives, which are set out in the Corporations Act,16 are as follows: • The acquisition of control over voting shares in a listed company should take place in an efficient, competitive and informed market. • A company’s directors and the holders of its voting shares should know the identity of any person who proposes to acquire a substantial interest in the company and have reasonable time and sufficient information to consider the acquisition proposal. • The holders of a company’s voting shares should have a reasonable and equal opportunity to participate in any benefits accruing to shareholders through any proposal under which a person would acquire a substantial interest in the company. • An appropriate procedure should be followed prior to an acquirer becoming entitled to exercise its statutory right to compulsorily acquire a company’s outstanding securities. The first of these objectives (an efficient, competitive and informed takeover market) recognises the potentially beneficial role change of control transactions can play in an economy.17 It seeks to assist change of control transactions to play this role by ensuring that the market for corporate control in Australia is efficient, competitive and informed. The second objective (shareholders and directors should have sufficient information, time and opportunity to consider a control proposal) aims to ensure

There a Role for the Eggleston Principles in a Global M&A Environment?’ (2002) 24 Sydney Law Review 336, 349–50. 15 Corporations Act, chs 6, 6A–6C. 16 Corporations Act, s 602. 17 In short, change of control transactions can act as a source of market-imposed discipline by creating the possibility that underperforming companies will be taken over and their incumbent managers removed. They can also promote efficient resource allocation within an economy by enabling the management of underperforming companies to be transferred to new owners who may be more effective managers: Commonwealth Treasury, Takeovers – Corporate Control: A Better Environment for Productive Investment (Corporate Law Economic Reform Program Proposals for Reform: Paper No 4, 1997) 7–8.

Collective Action and Takeover Laws: The Australian Regulatory Setting  167 that changes in control occur in a transparent, orderly and informed manner. It seeks to ensure the integrity of the market for corporate control and to promote investor confidence in that market.18 The third objective (the equal opportunity principle) promotes a form of distributional fairness among shareholders of a company which is subject to a change of control.19 In effect, it treats voting control over a company as a valuable asset belonging to a company’s shareholders as a whole. Where a transaction will result in voting control passing to a party, the equal opportunity principle requires that all of the relevant company’s shareholders have an opportunity to participate in any benefits which flow to shareholders from the transaction (for example, to be offered the same price per share by an acquirer). The fourth objective (the need for an appropriate procedure to be followed before an acquirer becomes entitled to acquire compulsorily any outstanding shares) relates to the Corporations Act’s compulsory acquisition powers. It is not relevant in the context of collective action which generally does not involve shareholders attempting to purchase complete ownership of a company.20 An additional important feature of Australian takeover law is that the law significantly curtails the ability of a company’s directors to prevent or frustrate changes of control (eg, by implementing a poison pill).21 Given these features of Australian takeover law, there is logic in the legislation regulating collective action which has the capacity to cause a change of control. The previous section explained how collective action can enable activist shareholders to acquire a measure of control over companies. This could occur promptly and with little warning; for example, shareholders who were previously unassociated could meet in private and agree to act collectively in future. This may leave little opportunity for other prospective controllers to compete for control of the relevant company. The company and its other shareholders would also have little opportunity to evaluate and respond to the change of control before it occurs. As just noted, Australian public company boards are constrained from taking action to slow down or frustrate the control-seekers’ attempts to acquire control of the company. Lastly, in these circumstances, the company’s other shareholders would receive no consideration in connection with the passing of control to the activist shareholders. Such an outcome would sit uneasily with the first three objectives of Australian takeover law described above. It is therefore appropriate that takeover

18 ASIC, Takeovers: False and Misleading Statements (Regulatory Guide 25, 22 August 2002) [25.11]. 19 J Mannolini, ‘CLERP and Takeover Law Reform – Politics Trumping Principle’ (1999) 10 Australian Journal of Corporate Law 193, 201. 20 See above, section 8.2. 21 Friedlander, D, Fischer, M and Ting, M ‘Economic Activism: Re-thinking Directors’ Duties and Governance Structures in the Activist Context’ (Paper presented at Supreme Court of New South Wales Annual Corporate Law Conference, Sydney, 23 July 2014); Takeovers Panel, Frustrating Action (Guidance Note 12, 1 December 2016).

168  Revisiting the Regulatory Debate (II) law regulates collective action which affects the control of a company. However, as the next section demonstrates, the detailed provisions of Australian takeover law go much further than this and curtail a very broad range of collective action. 8.3.1.  The Over-reaching Nature of Australian Takeover Laws The focus of Australian takeover law is on regulating the acquisition of voting control in a company, that is, control over a company’s voting shares. The legislation is not confined, however, to accumulations of voting power that occur pursuant to an acquisition of a proprietary interest in voting shares. Instead, the legislation employs two expansive concepts which seek to capture a range of other transactions and relationships in relation to voting shares – namely, the concepts of ‘acquiring a relevant interest’ and ‘association’. As a result of these expansive concepts, takeover laws regulate both collective action which has the capacity to bring about a change in control and collective action which does not. (i)  Acquiring a Relevant Interest in Voting Shares Section 608(1) of the Corporations Act provides that a person acquires a ‘relevant interest’ in voting shares if they: • are the registered holder of those securities; • control the exercise of a right to vote attached to those securities; or • control the exercise of a power to dispose of the securities. As a result of these rules, a person who is not the registered holder of voting shares can still have a ‘relevant interest’ in those shares if they have control over the voting or disposal of those shares. For this purpose, ‘control’ means a ‘measure’ of control as opposed to absolute or substantial control.22 It does not matter if this measure of control is indirect, subject to restraint or restriction, or exercisable alone or jointly with someone else.23 Accordingly, a person with contractual rights over the voting or disposal of shares held by another person can acquire a ‘relevant interest’ in those shares.24 However, the legislation also makes it clear that a person can acquire the requisite measure of control pursuant to the terms of an unenforceable arrangement or understanding.25 Whether a measure of control exists in such a case is

22 Re Kornblums Furnishings Ltd (1981) 6 ACLR 25, 36. 23 Corporations Act, s 608(2). However, the control must be more than minor, peripheral, hypothetical, theoretical or notional: Edensor Nominees Pty Ltd v ASIC (2002) 41 ACSR 325, [33]. 24 Re Kornblums (n 22) (holding that pre-emptive rights over shares contained in a shareholders agreement conferred the requisite measure of control over the disposal of those shares). 25 Corporations Act, s 608(2).

Collective Action and Takeover Laws: The Australian Regulatory Setting  169 determined on the assumption that the parties to the arrangement or understanding will consider themselves obliged to act in accordance with its terms.26 Thus, if a term of an unenforceable arrangement contemplates that shares will be disposed of or voted in a particular way, the law will presume that the parties to the arrangement will comply with that term. As a result of these rules, a shareholder involved in collective action could easily find that it has acquired a ‘relevant interest’ in shares held by the other activists.27 Consider the case where Shareholders A and B agree with each other that they will vote their respective shares in favour of removing the directors of Company X. If their understanding is reflected in an enforceable agreement, they will each be regarded as having obtained a measure of control over the voting of each other’s shares, owing to their binding commitments to vote in favour of the board spill. However, the same result arises even if their understanding is unenforceable since the law will presume that A and B consider themselves obliged to act in accordance with their understanding. The legislation makes clear that the existence of the requisite measure of control can be implied from the circumstances of shareholders’ collective action.28 So, even if it is not possible to point to an express agreement or understanding between activists, it will be sufficient if the overall circumstances of their interaction make it evident that they have impliedly agreed to vote their shares in a particular way.29 Take the above-mentioned example of Shareholders A and B. Their attempt to spill the entire board of Company X has the potential to be a difficult and hard-fought contest. It would be unusual for Shareholders A and B to embark on this exercise without there being at least an implicit understanding between them that they will advance their common objective by voting their respective shares in favour of the board spill. Such an understanding would be sufficient to give them a relevant interest in each other’s shares.30 (ii)  The Concept of ‘Association’ Australian takeover law also addresses another form of voting power accumulation – the concept of ‘association’. This is another expansive legislative concept.

26 Edensor Nominees (n 23) [33]. 27 A point acknowledged by ASIC: see RG 128 (n 8) [128.25] (noting how ‘collective action by investors can result in the investors acquiring a relevant interest in each other’s securities’). 28 Corporations Act, s 608(2). 29 See, eg, Flinders Diamonds Ltd v Tiger International Resources Inc (2004) 49 ACSR 199 (finding that a relevant interest had been acquired having regard to the overall course of dealing between activists). 30 ibid [37]. It might also be argued that in these circumstances there is also likely to be an implicit understanding between the activists that they will not sell down their shareholdings (and thereby reduce their leverage) until their collective action has run its course. This too would result in the activists acquiring a ‘relevant interest’ in each other’s shares: RG 128 (n 8) [128.25].

170  Revisiting the Regulatory Debate (II) Section 12(2) of the Corporations Act provides that a person is an ‘associate’ of another person if:31 • they are parties to a relevant agreement for the purpose of controlling or influencing the composition of the target company’s board or the conduct of the target company’s affairs (‘relevant agreement category’); or • they are acting, or propose to act, in concert in relation to the target company’s affairs (‘acting-in-concert category’). There is significant overlap between these two categories.32 The courts have held that, in both cases, it must be shown that the relevant parties have reached an agreement or understanding regarding a common purpose – variously described as a consensual understanding, a ‘meeting of minds’ or ‘an element of reciprocal commitment’.33 As a result, parties will not be associates if, coincidentally, they share the same views34 or engage in the same actions,35 or if one of the parties has nothing more than an expectation that the other party will act in a certain way.36 However, the requisite agreement or understanding need not be formal in nature. The concept of ‘acting in concert’ involves ‘at least an understanding between the parties’.37 It is not essential, however, that the parties are bound by their understanding.38 Although the relevant agreement category refers to a ‘relevant agreement’, the concept of a ‘relevant agreement’ is not confined to enforceable agreements. Section 9 of the Corporations Act defines a ‘relevant agreement’ as an agreement, arrangement or understanding whether formal or informal, written or oral, enforceable or not. The courts have made it clear that it does not matter if parties are free to withdraw from, or to act inconsistently with, their agreement, arrangement or understanding.39 As a result, the concept of association can capture arrangements which range from informal, unwritten understandings between shareholders through to enforceable written agreements between shareholders.

31 There is a third limb of the definition which aggregates shareholding interests of bodies corporate in a control relationship with each other (eg, members of corporate groups). It is not directly relevant to this chapter’s analysis, since it aggregates shareholding interests based on a ‘structural’ connection as opposed to the situation where shareholders voluntarily choose to come together to leverage their governance influence. 32 It has been said that this overlap is due to the iterative development of this area of the law: Bentley Capital Ltd 01R [2011] ATP 13, [34]. 33 Perpetual Custodians Ltd v IOOF Investment Management Ltd (2013) 304 ALR 436, 454 (surveying the case law on this point). 34 Winepros Ltd [2002] ATP 18 at [33]. 35 Adsteam Building Industries Pty Ltd v Queensland Cement and Lime Co Ltd (1985) 14 ACLR 456, 459. 36 Perpetual Custodians (n 33) 454. 37 Bank of Western Australia Ltd v Ocean Trawlers Pty Ltd (1995) 16 ACSR 501, 524. 38 ibid. 39 ibid.

Collective Action and Takeover Laws: The Australian Regulatory Setting  171 In order to give rise to an association, the relevant agreement, arrangement or understanding must have some nexus with the governance of a company.40 Even so, the legislation defines this nexus in very general terms. The ‘relevant agreement’ category applies where there is a relevant agreement ‘for the purpose of controlling or influencing the composition of [a company’s] board or the conduct of [a company’s] affairs’. Although the legislation refers to ‘controlling’, it also refers to ‘influencing’, which contemplates something less than control. The acting-in-concert category simply refers to concerted action ‘in relation to’ a company’s ‘affairs’. Section 53 of the Corporations Act41 sets out an expansive definition of the affairs of a company which includes, among other things, ‘the internal management and proceedings of the body’ and the membership, control and business of a body. The concept of association is therefore capable of applying to an informal understanding between parties, which is not control-seeking in nature, and which is directed at ‘influencing’, or is ‘in relation to’, a company’s affairs. (iii)  Why these Concepts are Over-reaching The expansive nature of the concepts of ‘acquiring a relevant interest’ and ‘association’ means that they fail to discriminate adequately between collective action which is control-seeking in nature and collective action which is not. As the empirical research presented in this book has revealed, Australian shareholder activism takes varying forms: • some activists have bounded incentives to engage in their company’s governance; they are therefore unlikely to use corporate governance activities in order to acquire and exercise control over their company; • much activism simply seeks to make a point to company managers, rather than to make binding decisions or change a company’s managers; and • some forms of activism seek to address quite specific or one-off matters (eg, executive remuneration) which will have little or no bearing on the control of a company. However, the concepts of ‘acquiring a relevant interest’ and ‘association’ do not make allowance for such variations. They apply to any person, regardless of their nature, who acquires a measure of control over the voting or disposal of voting shares or who acts in concert with another party. They are not confined to circumstances where a shareholder is acting with the intention of acquiring control. Instead, the ‘relevant interest’ concept simply looks at the nature of a shareholder’s relationship to voting shares; and the ‘associate’ concept extends 40 Thus, it has been held that routine commercial arrangements which have an incidental impact on how a company is governed do not create an association between the persons that are parties to them: National Foods Ltd [2005] ATP 8, [58]. 41 Applied to the associate provisions by Corporations Regulations 2001 (Cth), reg 1.0.18.

172  Revisiting the Regulatory Debate (II) to situations where a person merely seeks to ‘influence’ the composition of a company’s board or the conduct of its affairs or where they are acting in concert ‘in relation to’ a company’s affairs. Because the legislative concepts do not make allowance for such nuances, they will apply equally to: • two shareholders who are well-known corporate raiders who collectively requisition a shareholder meeting to vote on resolutions to replace all of a company’s directors with nominees who are loyal associates of the corporate raiders; and • two shareholders who agree to nominate and vote in favour of a single board candidate whom they wish to join a board which already has seven directors, because they believe the candidate is an independent director with valuable commercial experience. The conduct in the first example (completely replacing a company’s directors with persons who will do the bidding of corporate raiders) is likely to deliver the corporate raiders a substantial measure of control over the relevant company’s affairs. The conduct in the second example (appointing a single, independent director to add valuable experience to a large board) is unlikely of itself to give the activists control of the relevant company. Yet both cases would result in the shareholders involved becoming associates42 and acquiring a ‘relevant interest’43 in each other’s shares. 8.3.2.  The ‘Sting in the Tail’ of Australian Takeover Law The overreach of takeover laws subjects shareholder activists to the risk of significant commercial and legal consequences. (i)  Breach of the 20 per cent Takeovers Threshold Australian takeover law prohibits a person from acquiring a relevant interest in a voting share if, as a result of that acquisition, that person or someone else’s 42 The shareholders in the first example will be ‘associates’ because, inter alia, they have an agreement for the purpose of controlling the composition of a company’s board. The shareholders in the second example will be ‘associates’ because there is an agreement between them for the purpose of influencing the composition of a company’s board. 43 In relation to the first example, seeking to spill an entire company’s board is a significant and potentially quite difficult exercise. It would be unusual for the two corporate raiders to embark on the exercise without there being some agreement between them that they would vote their shares in favour of the nominated candidates and, potentially also, that they would not sell-down their shareholdings until the board spill had run its course. They would therefore acquire a relevant interest in each other’s shares. The shareholders in the second example would acquire a ‘relevant interest’ in each other’s shares because they have agreed with one another to vote their shares in favour of the director candidate.

Collective Action and Takeover Laws: The Australian Regulatory Setting  173 voting power in the company increases to a point that is above 20 per cent.44 There are exceptions which permit acquisitions pursuant to regulated transactions such as a takeover bid.45 A person’s ‘voting power’ is defined by reference to the number of voting shares in which the person or its associates have a relevant interest.46 If a shareholder acquires a relevant interest in a voting share as a result of collective action, its voting power will increase. If its voting power increases to a point above 20 per cent, the shareholder will be in breach of the 20 per cent ‘takeovers threshold’. (ii)  Reduced Capacity to Trade Shares or Engage in Collective Action If, as a result of collective action, a shareholder acquires a relevant interest in shares but this does not increase its voting power to a point above 20 per cent, there will not be a breach of the 20 per cent threshold. However, the person’s voting power will have moved closer to the 20 per cent threshold. This will reduce their capacity to purchase additional shares in the company. This may prove problematic for investors who wish to retain the flexibility to engage in share trading activities.47 It will also constrain activists’ ability to involve additional shareholders in their collective action, or to pressure company managers by increasing the size of their shareholding during the course of their intervention.48 A similar issue arises where shareholders become ‘associates’ as a result of collective action. The existence of an association does not of itself result in the associates acquiring a ‘relevant interest’ in each other’s shares; accordingly, the existence of an association cannot of itself result in a shareholder breaching the 20 per cent threshold. However, if shareholders become associates of one another, their voting power will be deemed to include the voting shares in which their associate(s) have relevant interests. This will move each shareholder’s voting power towards the 20 per cent threshold. This will reduce their capacity to acquire additional shares in the company, unless they are prepared to do so pursuant to a regulated transaction such as a takeover. 44 Corporations Act, s 606(1). 45 The 20% threshold is a ‘hard’ threshold. That is, unlike in certain other jurisdictions, an acquirer cannot acquire voting power in excess of 20% pursuant to a private transaction on the condition that it subsequently makes a general offer to the company’s remaining shareholders. Instead, an acquirer can only acquire voting power in excess of 20% by one of a handful of legislatively prescribed methods; for example, a takeover bid or an acquisition approved by a majority of disinterested shareholders: Corporations Act, s 611. Thus, the law ensures that voting power in excess of the 20% threshold is acquired only through regulated transactions. 46 Specifically, Corporations Act, s 610 provides that a person’s voting power is the percentage calculated by dividing the votes attached to voting shares in which the person or any of its associates has a relevant interest by the total number of votes attached to all issued shares in the relevant company. 47 GP Stapledon, ‘Disincentives to Activism by Institutional Investors in Listed Australian Companies’ (1996) 18 Sydney Law Review 152, 164. 48 Taleska, ‘Shareholder Proponents as Control Acquirers’ (2018) 813.

174  Revisiting the Regulatory Debate (II) (iii)  Mandatory Disclosure Obligations If collective action results in a shareholder’s voting power increasing to 5 per cent or more, or increasing from a level that is above 5 per cent by an increment of 1 per cent or more, the shareholder will be required to file a substantial shareholding notice with both the company and the ASX within two business days.49 The requirement to file substantial holder notices is intended to complement the core provisions of takeover laws by ensuring the market is informed promptly of significant accumulations of voting power.50 A substantial holding notice must disclose, among other details, the identity of the shareholder and its associates, the nature of their association, and details of the voting shares in which the shareholder and its associates have a relevant interest.51 Substantial holder notices are made available publicly by the ASX. Given the detailed information that is required to be disclosed in a substantial holder notice, the filing of such a notice will reveal to the market the existence of shareholders’ collective action. (iv)  Significant Legal Sanctions for Non-compliance The law imposes significant sanctions for non-compliance. A failure to comply with s 606 (the 20 per cent threshold) or s 671B (the substantial shareholding notification obligation) is a criminal offence.52 In neither case is it necessary for the prosecution to prove any mental element on the part of the offender (eg, intention or recklessness).53 The law also provides for various civil remedies. ASIC or any person whose interests are affected54 may make an application to the Takeovers Panel (‘Panel’).55 The Panel is a non-judicial body which hears disputes concerning takeover laws. The Corporations Act empowers the Panel to make a declaration and orders if it is satisfied that a dispute reveals ‘unacceptable circumstances,’ an expansive statutory concept which is not limited to breaches of law.56 If the 49 Corporations Act, s 671B(1). 50 ASIC, Relevant Interests and Substantial Holding Notices (Regulatory Guide 5, November 2013) [5.284]–[5.285]. 51 Corporations Act, s 671B(3). 52 Corporations Act, ss 606(4A), 671B(8). 53 A contravention of s 606 is an offence of absolute liability and a contravention of s 671B is an offence of strict liability, which ss 6.1 and 6.2 of the Criminal Code set forth in the Criminal Code Act 1995 (Cth) provide do not require proof of any fault element. 54 This is not an onerous requirement. The courts have held that the ‘interests’ that must be affected in order to have standing must be interests which go beyond the mere interests of an ordinary member of the public, but do not need to be of a proprietary nature: BHP Ltd v Bell Resources Ltd (1984) 8 ACLR 609. The Panel indicated in Qantas Airways Ltd 01 [2007] ATP 1 that it would be prepared to accept an application made by a pilots’ union in relation to a takeover of an airline. 55 Corporations Act, s 657C. 56 The Panel may find circumstances are unacceptable: (i) where they involve a past, present, future or likely contravention of takeover law; or (ii) because of the effect those circumstances have had, are having, will have or are likely to have on the control or potential control of a company

Collective Action and Takeover Laws: The Australian Regulatory Setting  175 Panel makes a declaration of unacceptable circumstances, it is empowered to make any order that it thinks appropriate to remedy the situation,57 including orders restraining the voting of shares or requiring the disposal of shares.58 ASIC or any person whose interests are affected can apply to the court59 for an injunction under s 1324 restraining a contravention of the legislation or an order under s 1325A. In addition, a person who contravenes s 671C (the obligation to file a substantial holder notice) is liable to compensate anyone who has suffered loss or damage because of the contravention.60 8.3.3.  The Impediment to Collective Action Created by these Laws For shareholders who wish to engage in collective action, these laws are a significant complication. There is no legislative ‘safe-harbour’ for collective action. Instead, shareholders need to determine whether or not their collective action is likely to enliven the complex and expansive statutory provisions discussed above.61 This would generally require the input of lawyers with specialised knowledge of this area of the law. Significant consequences can arise where takeover law applies to collective action. Shareholders may breach the 20 per cent takeovers threshold. Or they may find that their ‘voting power’ is now much closer to the threshold than it was, reducing their capacity to acquire any further relevant interests in shares – unless, that is, they are prepared to acquire such relevant interests pursuant to a regulated transaction such as a takeover bid. Shareholders involved in collective action may also find that they are required to disclose their relationship publicly in a substantial holding notice. If a shareholder fails to comply with the law, they face the possibility of material criminal and civil liability. In short, this area of the law is complex and creates material legal and commercial risk.

or the acquisition or proposed acquisition of a substantial interest in a company; or (iii) where they are inconsistent with the objectives which underpin Australian takeover law: Corporations Act, ss 657A(1)–(2). 57 Corporations Act, s 657D(2). 58 Corporations Act, ss 9 (definition of ‘remedial order’), 657D(2). 59 The restriction on parties commencing court proceedings in relation to takeover laws (in Corporations Act, s 659B) only applies, by the express terms of that provision, in cases where there is an actual or proposed takeover bid. 60 Corporations Act, s 671C. 61 The courts have acknowledged the breadth of the statutory concepts, including the possibility that they can apply to uncontroversial forms of shareholder behaviour. However, they have accepted that parliament intended that the legislation operate in an expansive way in order to minimise the scope for control-seekers to engage in avoidance techniques, noting that any anomaly resulting from this can be addressed by ASIC exercising its statutory modification powers (discussed below) or by the courts when deciding remedies for breach of the legislation: Australian Securities and Investments Commission v Yandal Gold Pty Ltd (1999) 32 ACSR 317, [90]; Flinders Diamonds (n 29) [71].

176  Revisiting the Regulatory Debate (II) Over the years, official inquiries62 and academic research63 have noted the difficulties these laws cause shareholders. When ASIC undertook market consultation in 2015 prior to issuing RG 128, market feedback expressed concern that takeover laws constrain what the market generally considers to be routine and desirable corporate governance practices.64 Respondents also claimed that the prospect of material criminal and civil liability for non-compliance has a ‘chilling effect’ on collective action.65 ASIC itself has conceded that takeover laws ‘can serve to deter activity that does not have an illegitimate control purpose’.66 8.4.  ASIC’S EFFORTS TO STRIKE A BALANCE BETWEEN CORPORATE GOVERNANCE AND TAKEOVER REGULATION

8.4.1.  Modifying the Operation of Takeover Laws The Corporations Act gives ASIC significant powers to modify the operation of takeover laws. They enable ASIC to exempt any person from a provision of the legislation or modify how the legislation applies to any person.67 These powers recognise the complexity of takeover regulation and provide a means for it to be modified to avoid unintended or inappropriate consequences.68 In 1998, ASIC used these powers to address the problematic application of Australian takeover law to collective action. The modification was set out in Collective Action by Institutional Investors (CO 00/455, 4 October 2013) (hereafter, Class Order 00/455).69 The class order was subject to two important 62 Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Better Shareholders – Better Company: Shareholder Engagement and Participation in Australia (2008) [3.39]–[3.44]. 63 Stapledon, ‘Disincentives to Activism by Institutional Investors in Listed Australian Companies’ (1996); I Ramsay, GP Stapledon and K Fong, ‘Corporate Governance: The Perspective of Australian Institutional Shareholders’ (2000) 18 Companies and Securities Law Journal 110. 64 See, eg, Australian Council of Superannuation Investors, Submission to ASIC, Update to RG 128 (20 April 2015) (questioning the application of takeover laws to investors jointly engaging with companies on strategic issues such as resilience of business models to climate change and to shareholders exercising their rights to requisition a shareholder meeting); Governance Institute of Australia, Submission to ASIC, Update to RG 128 (20 April 2015) (expressing concern at how the law constrains collective action directed at promoting good corporate governance). 65 See, eg, Gadens, Submission to ASIC, Update to RG 128 (15 April 2015) (noting the scope provided by takeover laws for companies to use tactical litigation to frustrate attempts by shareholders to ‘rejuvenate and reinvigorate’ boards); Australian Institute of Company Directors, Submission to ASIC, Update to RG 128 (20 April 2015) (noting that the risk of prosecution for breach of the law may dissuade investors from acting collectively). 66 RG 128 (n 8) [128.9]. 67 Corporations Act, ss 655A, 673. 68 See above n 61. 69 More precisely, the modification was originally contained in Australian Securities and Investments Commission, Collective Action by Institutional Investors (CO 98/649) which was reissued in 2000 and subsequently revised as Collective Action by Institutional Investors (CO 00/455, 4 October 2013) (Class Order 00/455).

ASIC’s Efforts to Strike a Balance  177 limitations. It only applied to a specifically defined type of institutional investor;70 and it only applied where two or more such investors entered into an agreement concerning how they would vote at a particular shareholder meeting.71 In cases where it applied, Class Order 00/455 provided that the voting agreement would not result in the investors acquiring a relevant interest in one another’s shares or becoming associates of one another.72 Class Order 00/455 required investors who relied on it to announce publicly, not less than seven days before the relevant shareholder meeting, the existence of their voting agreement as well as details such as their identities, the identity of the target company, and the subject matter of the voting agreement.73 Class Order 00/455 was not well-received by the market. ASIC revealed in 2015 that it was aware of only one instance of investors relying on Class Order 00/455.74 Based on feedback it received, ASIC understood that institutional investors did not rely on the class order for two reasons. First, the class order applied to an overly narrow range of behaviour. ASIC noted that the way in which institutional investors engaged with companies had evolved and was no longer solely focused on voting at shareholder meetings.75 Second, ASIC noted that institutional investors found the requirement to disclose details of their voting agreement ‘unpalatable’.76 Another possible explanation, not explored by ASIC, is whether the emergence of proxy advisers may have contributed to a degree of standardisation in institutions’ voting practices, negating the need for institutions to coordinate their voting directly.77 8.4.2.  Regulatory Guide 128 – ASIC’s Revised Approach to the Issue of Collective Action and Takeover Law Class Order 00/455 was scheduled to expire on 1 October 2016.78 Partly in anticipation of this expiry date and partly in response to developments in this area of regulation in overseas jurisdictions,79 ASIC revisited its approach towards the issue of takeover law and collective action in 2015.

70 That is, an institution that pools the funds of persons to whom it owes a fiduciary duty, or contractual duty under a life insurance policy, and manages the funds in a registered scheme (mutual fund), superannuation fund or statutory fund of a life insurance company: Class Order 00/455 s 609(18A). 71 Class Order 00/455 ss 609(18A)–(18C). 72 ibid. 73 ibid s 671B(10) and Sch B para [6]. 74 ASIC, Collective Action by Investors: Update to RG 128 (Consultation Paper 228, February 2015) 7 (CP 228). 75 ibid 10. 76 CP 228 (n 74) 10. 77 Bowley and Hill (n 2) 428. On the role and impact of proxy advisers, see ch 5, section 5.3.4. 78 CP 228 (n 74) 7. 79 ibid 6–7. These overseas developments are discussed below in section 8.7.

178  Revisiting the Regulatory Debate (II) ASIC outlined its proposed new approach in Consultation Paper 228 (CP 228). In CP 228, ASIC indicated that it was not planning to replace Class Order 00/455.80 Given the feedback ASIC had received,81 it was apparent that any new class order would need to extend to a broader range of collective action and be subject to less prescriptive conditions. ASIC concluded that this would involve significant regulatory risk. Although ASIC acknowledged that not all forms of collective action will impact the control of a company,82 it considered that it was not possible to reliably distinguish control-seeking collective action from other forms of collective action.83 In the eyes of ASIC, this decision would not materially impact shareholders because ASIC concluded, following its review, that the law as it stands already provides scope for meaningful forms of collective action.84 It also considered that it could provide investors with additional comfort by giving guidance on its approach to determining whether to take enforcement action in relation to collective action.85 Accordingly, rather than exercising its modification powers to create a safe-harbour for collective action, ASIC decided it was sufficient to provide interpretative and enforcement guidance. ASIC set out its guidance in RG 128. (i)  RG 128: ASIC’s Views Regarding Permissible Collective Action According to RG 128, collective action of the following nature is unlikely to be caught by takeover laws: • shareholders sharing information or views with one another; • shareholders encouraging one another to vote in a particular way; and • shareholders jointly raising ‘general issues’ of concern with a company’s board.86 In relation to the third category, ASIC notes that ‘general issues’ include corporate governance issues such as executive remuneration as well as issues regarding long-term strategic or commercial risks facing a company.87 What if shareholders wish to escalate the nature of their governance intervention? In cases where there are serious issues with a company’s

80 ibid 12. 81 As noted in the previous section. 82 CP 228 (n 74) para 128.13(a) of the proposed regulatory guide attached thereto. 83 ASIC, Response to Submissions on CP 228 Collective Action by Investors: Update to RG 128 (Report 438, June 2015) 7. 84 ibid. 85 ibid. 86 RG 128 (n 8) Table 1. 87 ibid.

ASIC’s Efforts to Strike a Balance  179 performance or where incumbent managers are refusing to acknowledge shareholders’ concerns, tactics such as sharing information, exhorting one another to take action and jointly raising ‘general issues’ may not be sufficient.88 RG 128 offers little comfort, however, for shareholders who wish to use collective action to escalate their governance interventions. RG 128 cautions that ‘if … conduct extends to the formulation of joint proposals to be pursued together or there is an understanding that the investors will act or vote in a particular way, then concerns may arise’.89 RG 128 is particularly unaccommodating of confrontational forms of collective action. It states that if shareholders indicate to a company that ‘joint proposals will be pursued if the company does not give a satisfactory response’, such conduct may make the shareholders ‘associates’.90 If activists threaten to pursue their objectives by coordinating their voting, such conduct may result in the shareholders acquiring a relevant interest in each other’s shares.91 Moreover, RG 128 states that if shareholders jointly sign a notice to requisition a shareholder meeting or jointly table a resolution for consideration at a shareholder meeting, such action would ‘in most instances’ make the signatories associates and give them a relevant interest in each other’s shares.92 RG 128 makes it especially clear that ASIC will view collective action aimed at changing the composition of a company’s board with particular suspicion.93 ASIC’s clear reluctance in RG 128 to accommodate ‘higher intensity’ forms of collective action, including collective action directed at changing the composition of a company’s board, sits uneasily with ASIC’s acknowledgement at the beginning of RG 128 that ‘[a] fundamental principle of corporate governance is that investors should be able to hold the board … to account for the entity’s performance’.94 (ii)  RG 128: ASIC’s Approach to Enforcing Takeover Laws RG 128 also contains guidance about when ASIC is likely to take enforcement action in relation to non-complying collective action.

88 This point is acknowledged, for example, by stewardship codes which note that, when faced with difficult governance issues, institutional investors will need to consider escalating the nature of their interventions, including by voting against management proposals, tabling declaratory resolutions or nominating candidates for election to the board: see, eg, Australian Council of Superannuation Investors, Australian Asset Owner Stewardship Code (May 2018) 10–11. 89 RG 128 (n 8) Table 1. 90 ibid. 91 ibid. 92 ibid, Table 2. 93 ibid, Tables 2 and 3. 94 ibid, [128.1].

180  Revisiting the Regulatory Debate (II) According to ASIC, it is less likely to take enforcement action against collective action which: • relates solely to ‘the improvement of a company’s corporate governance’ or ‘issues that can properly be determined at a [shareholder] meeting’;95 • is temporary and purely related to the resolution of any such issue; and • is not concerned with the exercise of control and does not involve any undisclosed association.96 According to RG 128, examples of matters that relate solely to ‘the improvement of a company’s corporate governance’ include ‘encouraging’ better disclosure practices, more comprehensive board evaluation processes, and more sophisticated risk management systems.97 In other words, RG 128 makes it clear that ASIC is less likely to take enforcement action in relation to temporary, non-control seeking collective action which ‘encourages’ companies to take action in relation to mainstream issues of corporate governance practice. 8.5.  THE QUESTIONABLE CORPORATE GOVERNANCE UTILITY OF RG 128

The cautious guidance in RG 128 favours a very particular form of collective action which is characterised by two key attributes. First, it is what might be described as ‘lower intensity’ collective action; that is, collective action which involves a loose association of shareholders and does not propose to adopt a particularly interventionist stance. This includes shareholders exchanging information with each other, encouraging each other to participate in mainstream corporate governance activities, or holding non-confrontational meetings with companies. Second, RG 128 expresses a clear regulatory preference for collective action of this nature which is directed at mainstream or systemic issues of corporate governance practice. Examples given of such issues in RG 128 include executive remuneration, risk management, corporate disclosure practices, and board evaluation processes.98 95 ASIC’s reference to ‘issues that can properly be determined at a [shareholder] meeting’ is curious. On one view, an issue that can properly be determined at a general meeting includes any resolution that shareholders can validly requisition using their requisition powers in the Corporations Act, including resolutions appointing and removing directors. However, it seems unlikely that, having already underscored its concerns regarding requisitioned meetings and other aggressive forms of intervention in RG 128, ASIC is here suggesting that it would be unlikely to take enforcement action in relation to such activism. The more plausible interpretation of this phrase, taking into account ASIC’s other comments in RG 128, is that it is merely referring to shareholders engaging with companies regarding routine items of business at shareholder meetings (eg, approvals for incentive awards to the managing director). 96 RG 128 (n 8) [128.49]. 97 ibid [128.50]. 98 ibid Table 1, [128.50].

The Questionable Corporate Governance Utility of RG 128  181 ASIC considered that RG 128’s support for this type of collective action would make a meaningful contribution to Australian corporate governance. RG 128 refers to the potential for activism of this nature to ‘promote corporate governance improvements for the long-term benefit of an entity and its investors’.99 However, when ASIC’s guidance is considered in light of the research and analysis presented in the previous chapters, its utility appears questionable. 8.5.1.  Lower-intensity Activism Directed at Mainstream Issues is Already Supported by Other Market Developments The preceding chapters reveal Australian shareholder activism as a collection of different strategies. The more prevalent forms of activism involve less overtly aggressive forms of intervention such as periodic behind-the-scenes engagement and voting on management-sponsored proposals at routine shareholder meetings. Another (or ‘intermediate’) category of activist behaviour involves strategies which permit shareholders to voice their concerns more conspicuously, albeit in a way that does not displace, or alter the powers of, a company’s managers. Examples include issuing a ‘strike’ pursuant to the two-strikes rule or tabling and voting on a declaratory resolution. A further, and less common, category of activist behaviour involves shareholders exercising their core legal rights to intervene in the management of their company; namely, their power to remove and replace directors and their power to amend their company’s constitution. When considered against this background, it is apparent that RG 128 only facilitates a particular subset of activist behaviour. That is, the types of lowerintensity forms of collective action which RG 128 accommodates predominantly involve the more common activist strategies, such as shareholder-company engagement meetings and voting on routine items of business at shareholder meetings. On one view, RG 128’s focus on these forms of activism is not a short-coming. By seeking to encourage more prevalent forms of activism, RG 128 could be seen as a worthwhile attempt to promote a foundational level of shareholder participation in the governance of Australian public companies. However, the evidence presented earlier in this book indicates that the type of routine forms of company-shareholder engagement and mainstream corporate governance concerns emphasised by RG 128 are already facilitated by a notable market development which is generally not constrained by takeover laws; that is, by the industry of governance intermediaries which supports investors’ corporate governance activities. The role and significance of these intermediaries were explored in chapter five.100

99 ibid

100 Ch

[128.13(a)]. 5, section 5.3.

182  Revisiting the Regulatory Debate (II) The activities of these intermediaries are not constrained by takeover laws for several reasons. First, engagement firms and proxy advisers are commercial service providers which speak for and advise investors. As such, they are exempted from the ‘associate’ rules by s 16(1)(a) of the Corporations Act, which provides that a person is not an associate of another merely because it gives advice to the other, or acts on the other’s behalf, pursuant to a professional or business relationship. Also, in developing governance guidelines or advocating for the broader interests of the investors they represent, intermediaries have a market focus rather than a company-specific focus. Such activities do not implicate takeover laws which, as noted earlier, are directed at accumulations of voting power in a particular company. On occasion, these intermediaries may focus their attention on the performance of particular companies. However, such company-specific activities generally will not trigger takeover laws. So long as any decision by an intermediary to target an individual company is made at the initiative of the intermediary, based on its own assessment of where its members’ or clients’ interests lie, there will not exist the requisite arrangement or understanding between the intermediary and its members who are shareholders in the relevant company so as to give rise to a ‘relevant interest’ or an ‘association’. As this book has shown, the principal impact of these intermediaries has been to facilitate share voting and routine shareholder-company engagement practices, particularly in relation to mainstream issues of corporate governance practice. These intermediaries therefore already facilitate the type of shareholder behaviour which ASIC seeks to encourage in RG 128. In other words, RG 128’s focus on lower-intensity forms of collective action is, in these circumstances, otiose. 8.5.2.  More Typically, Collective Action is Used by Shareholders for Higher-Intensity Forms of Activism Market commentary indicates that, insofar as shareholders undertake collective action which might be caught by takeover laws, they do so when they wish to address other, more difficult concerns about the governance or performance of their company. These forms of ‘escalatory’ activism are less likely to be directly facilitated by governance intermediaries such as proxy advisers, engagement firms and representative organisations whose activities primarily facilitate shareholders’ routine governance activities such as engagement, share voting and policy formulation. In the context of more difficult interventions, direct collective action can enable activists to share the costs of activism and has the potential to enhance activists’ leverage and improve the prospects for success of their interventions. In a submission made to ASIC during the formulation of RG 128, the industry superannuation fund, AustralianSuper, posed an example involving two

The Questionable Corporate Governance Utility of RG 128  183 institutional investors which have ‘significant reservations’ about ‘a particular project’ proposed by a company.101 AustralianSuper pointed out that it would make considerable sense for these institutions to press their concerns by acting collectively. This is because acting together would highlight to the company ‘their level of concern’ and make it more likely that the company would ‘engage seriously with them’.102 In its submission, the law firm Gadens argued that it made sense for as many shareholders as possible to sign a notice requisitioning a shareholder meeting in order to ‘show the incumbent board the level of security holder support for a change in the board’.103 Other sources make similar points. In Caravel Resources Ltd,104 the Takeover Panel noted the tactical logic of collective action in relation to a board spill. In that case, the protagonist shareholder had a shareholding that was large enough for the shareholder to requisition a shareholder meeting in its own right. However, the Panel noted that the shareholder undertook the requisition collectively with other shareholders in order to demonstrate to company managers the substantial level of shareholder dissatisfaction that existed and thereby dissuade the managers from opposing the activists.105 Stewardship codes also highlight the potential of collective action as an escalation strategy. ACSI’s stewardship code refers to collective action as an ‘escalation activity’ and notes how it can help an investor ‘leverag[e] its voice and exer[t] influence’.106 A stewardship report published by a large Australian institutional investor notes that collective action is an option available to it for escalating a governance concern when behind-the-scenes interactions have been unsuccessful.107 In addition to these practical and tactical considerations, shareholders may also find it legally necessary to act collectively when seeking to exercise their most interventionist governance rights.108 The Corporations Act empowers shareholders to require a company to convene a shareholder meeting provided the requisition is made by shareholder(s) holding at least 5 per cent of voting shares;109 the legislation also permits shareholders holding at least 5 per cent of

101 AustralianSuper, Submission to ASIC, Update to RG 128 (20 April 2015) 3. 102 ibid. For older empirical research which makes a similar point, see GP Stapledon, ‘The Structure of Share Ownership and Control: The Potential for Institutional Investor Activism’ (1995) 18 UNSW Law Journal 250 (noting, based on interview evidence, that institutional investors considered that, in order for an intervention to change a company’s managers to be feasible, it would need to involve institutional investors which collectively hold 20–30% of the relevant company’s shares). 103 Gadens (n 65) 2. 104 Caravel Resources Ltd [2018] ATP 8. 105 ibid [43]. The law firm, Dentons, has made a similar point in a critique of RG 128: Dentons, Board Spills: ASIC Proposals to Make It Harder for Shareholder Activism (26 February 2015). 106 ACSI (n 88) 11. 107 Colonial First State Ltd, Responsible Investment and Stewardship Annual Report 2016 (2016) 7. 108 A similar point is made in Stapledon (n 47) 167. 109 Corporations Act, s 249D.

184  Revisiting the Regulatory Debate (II) a company’s voting shares to convene a shareholder meeting themselves.110 In addition, the Corporations Act allows shareholders to propose a resolution for consideration at a shareholder meeting, provided that the proposal is made by at least 100 shareholders or by shareholder(s) holding at least 5 per cent of voting shares.111 Shareholders will necessarily need to act collectively to satisfy the 100 shareholder requirement. It may also be necessary for shareholders to act collectively in order to satisfy the alternative, 5 per cent requirement under these rules, particularly in large capitalisation companies in which a 5 per cent shareholding would represent a very significant investment. In summary, the preceding analysis suggests that the guidance in RG 128 is directed to where it may be least required. Governance intermediaries such as proxy advisers, engagement firms and investor associations already facilitate the types of governance activities, and leverage shareholder influence in relation to the types of corporate governance issues, emphasised in RG 128. Market evidence indicates that collective action instead plays an important role in assisting shareholders to escalate their governance concerns. However, this is precisely the kind of collective action which RG 128 does not encourage. 8.6.  THE CONTESTABLE NATURE OF ASIC’S VIEWS REGARDING THE RISKS, AND DIFFICULTY, OF PROVIDING GREATER LATITUDE FOR COLLECTIVE ACTION

ASIC’s reluctance to adopt a more accommodating stance towards higherintensity, direct forms of collective action was due to concerns about share­holders exploiting regulatory relief in order to engage in control-seeking behaviour. When ASIC was pressed during the consultation process which preceded RG 128 to provide more expansive relief, it responded by referring to the ‘difficulty in setting appropriate parameters to such relief’ and noted that none of the submissions it received during the consultation process proposed approaches which ‘could practicably be converted into [relief] that would give sufficient comfort to investors without undermining the principles of [takeover laws]’.112 The evidence presented in this book challenges ASIC’s cautious approach. It highlights characteristics of Australian activism which indicate that the risk of shareholders exploiting collective action for control-related purposes is not as pervasive as ASIC’s stance in RG 128 assumes. These characteristics are examined below.



110 Corporations

Act, s 249F. Act, s 249N. 112 ASIC, Response to Submissions on CP 228 Collective Action by Investors (2015) 7. 111 Corporations

The Contestable Nature of ASIC’s Views Regarding the Risks  185 8.6.1.  Activism as Influence-Wielding not Control-Seeking Behaviour Shareholders who seek to intervene in their company’s governance will not necessarily do so in order to acquire control of their company. As this book has shown, much Australian activism seeks to wield influence over corporate managers, rather than to replace those managers or to direct the exercise of management power. Issue activists are focused on drawing attention to environmental, social or political causes. Institutional investors have limited incentives to expend on routine corporate governance activities,113 even less so on acquiring and exercising control of a company.114 To the extent institutional investors engage in corporate governance, their focus is more likely to be on prompting companies to address particular issues relating to performance and management accountability115 or, increasingly, material ESG issues.116 These engagement activities are focused on managing investment risk and performance and eliciting information to inform capital allocation decisions rather than on acquiring and exercising control over corporate management. Scholars have also pointed out that much institutional investor activism is defensive in nature.117 That is, it occurs in response to, and as an attempt to resolve, a particular issue and does not seek pro-actively to intervene in a company’s governance: Defensive shareholder activism occurs when an investor with a pre-existing stake in a company becomes dissatisfied with corporate performance … and reacts by lobbying for changes … A shareholder acting in this sort of ex post fashion will not own enough shares to guarantee victory in a contest for boardroom control or to dictate corporate policy but potentially can use their stake as a departure point in garnering support for the changes they advocate.118

Even Australian hedge fund activism, although limited to date, would appear to present a low risk of control-seeking behaviour. The instances of hedge fund activism noted in chapter four appear to conform to the nature of hedge fund activism observed overseas, which scholars have described as an attempt to prevail in a ‘market for corporate influence’.119 That is, hedge funds in general do not seek to acquire and exercise control of a company. Instead, they acquire 113 Ch 2, section 2.2. 114 This is why ASIC was prepared, in CO 00/455, to provide a limited exemption to institutional investors from takeover laws: ASIC, Collective Action by Institutional Investors (Regulatory Guide 128 (superseded), July 1998) [128.16] (‘[T]he objective of these types of institutions is to manage funds on behalf of persons to whom they owe a fiduciary duty. In doing so, they normally do not seek control of companies in which they invest’). 115 A point emphasised, for example, in Australian investors’ stewardship codes: Bowley and Hill (n 2) 422–24. 116 Ch 6, section 6.1.6. 117 M Kahan and EB Rock, ‘Hedge Funds in Corporate Governance and Corporate Control’ (2007) 155 University of Pennsylvania Law Review 1021, 1069. 118 BR Cheffins and J Armour, ‘The Past, Present, and Future of Shareholder Activism by Hedge Funds’ (2011) 37 Journal of Corporate Law 51, 56. 119 ibid 56.

186  Revisiting the Regulatory Debate (II) a non-controlling shareholding in a company and then seek to exert influence over the company’s managers and other shareholders, with a view to prompting the company to make value accretive changes which will enable the hedge fund to subsequently sell their minority shareholding profitably. 8.6.2.  The Relevance of Capital Market Structure The earlier chapters highlighted how capital market structure can influence the nature of collective activism in a market. A market with high levels of institutional investor ownership, for example, is likely to have a different experience of activism than a market with high levels of controlling blockholders.120 Variations in capital market structure within a single market may also produced different patterns of activism. This book has noted, for example, how larger capitalisation Australian companies appear to have a materially different experience of shareholder activism than smaller capitalisation companies.121 Another potentially relevant aspect of capital market structure is ownership dispersion. In a market where ownership is dispersed, an alliance of shareholders which collectively represents a significant proportion of a company’s issued shares (eg, 30 per cent) may have significant voting influence, and potentially voting control. This is because, in such a market, the balance of a company’s shareholding base is likely to consist of numerous smaller shareholders who will experience coordination difficulties that impede their ability to form a cohesive ‘bloc’ to counteract the alliance’s influence. Listed company share ownership data highlights that share ownership in Australia is relatively concentrated in nature. This concentration takes the form of handfuls of shareholders holding a considerable majority of a company’s shares122 In these circumstances, an alliance of shareholders which collectively holds, for example, 30 per cent of a company’s voting shares, will not necessarily be in a position to exercise voting control. This is because there may be a counteracting bloc of other major shareholders which collectively holds a similar level of voting power.123 Relevantly, market commentary in Australia has noted 120 DW Puchniak, ‘The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense Out of the Global Transplant of a Legal Misfit’ (2022) American Journal of Comparative Law (forthcoming). 121 Ch 6, section 6.1.3. 122 Ch 3, section 3.3. 123 Two commentators have argued that ownership concentration is a factor that justifies an overall relaxation of takeover laws by increasing the takeovers threshold from 20% to 30%: M Bugeja and R de Silva Rosa, ‘Raising the Takeover Threshold in Australia: Issues and Evidence’ (2006) 1 Journal of the Securities Institute of Australia 33. Although raising the threshold would assist collective action, in that it would permit greater accumulations of voting power to occur, this would represent a fundamental change to Australian takeover regulation. Such fundamental change is not necessary to facilitate collective action. As will be discussed shortly, ASIC can already (and, arguably, more feasibly) provide an appropriate safe-harbour for collective action by exercising its delegated powers to modify the operation of takeover laws.

The Contestable Nature of ASIC’s Views Regarding the Risks  187 how a company’s large shareholders, especially institutional investors, can play an instrumental role in determining the outcome of an activist intervention.124 ASIC’s concerns about the risk of control-seeking activism were expressed as a generalisation. However, the nature of major shareholder types in the Australian market, their dispersion across the market, and the levels of share ownership concentration raise questions about the materiality of such risk and, at the very least, suggest that it is highly unlikely to be uniform across the Australian market. 8.6.3.  Different Activist Tactics have Different Control Implications Shareholders who wish to influence their company’s affairs do not invariably resort to the stereotypical activist board spill. As this book has shown, Australian activists draw on a variety of tactics. The potential for these different tactics to affect the control of a company varies considerably. For example, many tactics are employed in order to make a point to company managers, rather than to ‘seize the reins’ of a company’s management; that is, shareholders use them to highlight their concerns and persuade a company’s managers to make changes in their company’s affairs. Examples of such tactics include attempts to pass non-binding declaratory resolutions, issuing a strike under the two-strikes rule, and behind-the-scenes engagement. This form of activism does not involve shareholders attempting to replace their company’s managers or make a decision that is binding on their company. However, even activism which seeks to make a binding corporate decision will not inevitably affect the control of a company. As explained in chapter three, shareholders have a number of quite specific decision-making powers under Australian law; for example, their rights to approve material corporate transactions or the issue of equity to directors.125 The ability of activists to exploit such decision-making for control-related purposes will be limited by several factors. First, this form of shareholder decision-making is in most cases initiated by company managers, not shareholders.126 Second, the subject matter of this decision-making is quite specific and therefore less likely to affect the overall control and direction of a company.127 Finally, this form of decision-making does not of itself result in any change to a company’s managers or their powers.

124 Chapter 6, section 6.1.7. 125 Ch 3, section 3.4. 126 ibid. Two important exceptions are shareholders’ powers to replace directors or amend their company’s constitutions, the exercise of which can be initiated by shareholders. These powers are considered shortly. 127 Stapledon makes a similar point, giving an example of collective action aimed at defeating a resolution to implement an equity incentive scheme for a company’s executives: Stapledon (n 47) 166.

188  Revisiting the Regulatory Debate (II) In theory, shareholders’ power to amend their company’s constitution affords shareholders greater scope to intervene in corporate management. Unlike the powers referred to in the previous paragraph, shareholders’ power to amend their company’s constitution can be exercised at the initiative of shareholders and can be used to alter the powers of a company’s managers.128 In practice, however, using the constitutional amendment power to obtain control of a company without complying with takeover laws would be challenging. In particular, an activist would need to draft a constitutional amendment resolution setting out the terms of the amendment; the company’s shareholders would need to be given at least 28 days’ written notice of the amendment resolution; and the company’s directors would have the opportunity to communicate their views concerning the resolution to shareholders.129 In these circumstances, an attempt by an activist to amend a company’s constitution in a way that would deliver control to the activist without it making a formal takeover would be difficult to disguise. Moreover, a resolution seeking to amend a company’s constitution will only be passed if it is approved by at least 75 per cent of shares voted on it.130 In order to obtain this level of approval, control-seeking activists would in general need to secure the support of a material number of unassociated shareholders, which is likely to be challenging if the purpose of the amendment is to enable activists to obtain control without making a formal takeover.131 Activism which involves shareholders’ rights to replace directors is potentially more problematic from a control perspective. Shareholders who can determine the outcome of resolutions appointing or replacing directors may acquire a significant measure of control over their companies’ affairs.132 Yet even board-related activism will not inevitably lead to a change in control. This is because the control implications of board change will be highly fact-dependent. In particular, factors such as the number of directors being replaced and the relationship between directors and activists will, in practice, affect whether board-related activism gives activists control over a company’s affairs. For example, replacing one director on a nine-director board would, in general, be less likely to deliver activists a measure of control than if they replaced a majority of the company’s directors. Of course, it is possible to envisage circumstances in

128 Ch 3, section 3.4. 129 See Corporations Act, ss 136(2), 249HA and 249L(1) (addressing the notice requirements for special resolutions). 130 Ch 3, section 3.4. 131 As explained earlier, it is a key principle of Australian takeover law that, where there is a change in control of a company, all shareholders in the company should have an equal opportunity to participate in the benefits flowing from the change of control; for example, by receiving an offer from the acquirer to acquire their shares. Given this, a shareholder, when faced with an activist seeking their support in order to acquire control without offering to acquire shareholders’ shares, is likely to be wary of such a proposal. 132 See above, section 8.2.

Overseas Initiatives  189 which a single change to a board might have control implications.133 However, the point being made here is simply that there is nothing inevitable about boardrelated activism impacting the control of a company. 8.7.  ADOPTING A MORE ACCOMMODATING REGULATORY STANCE TOWARDS COLLECTIVE ACTION: OVERSEAS INITIATIVES

Having regard to factors such as those outlined in the previous section, British and European regulators have been prepared to recognise greater scope for shareholders to undertake collective action free from takeover laws.134 8.7.1.  The European Securities and Markets Authority Public Statement on Collective Action In 2013, the European Securities and Markets Authority (‘ESMA’) and the Takeover Bids Network, a network of European regulators with responsibility for takeover regulation, issued a public statement outlining the extent to which collective action is permitted under the takeover laws of member states.135 ESMA’s approach recognises that not all forms of collective action will enable activists to acquire a measure of control over their company. ESMA’s public statement sets out a ‘white list’ of forms of collective action that, according to ESMA, are unlikely to facilitate control-seeking behaviour. The permissible forms of collective action fall into the following four categories: • shareholders entering into discussions with each other about possible matters to be raised with a company’s board; • shareholders making representations to the company’s board about company policies, practices or particular actions that the company might consider taking;

133 Eg, an activist seeks the appointment of a loyal associate to a board of eight directors on which four of the activist’s other loyal associates already serve as directors. This appointment would result in the activist’s nominees representing a majority of the board and therefore able to control board decision-making. 134 This section describes two significant European approaches to balancing takeover law regulation and collective action. Additional approaches are discussed in Taleska (n 6), including German law’s exemption for one-off collective interventions and Italian law’s exemption for collective action aimed at appointing less than a majority of board seats. 135 European Securities and Markets Authority, Information on Shareholder Cooperation and Acting in Concert under the Takeover Bids Directive (Public Statement, ESMA/2013/1642, 12 November 2013) which has since been updated and is now contained in Information on Shareholder Cooperation and Acting in Concert under the Takeover Bids Directive (Public Statement, ESMA31-65-682, 8 February 2019) (ESMA Statement).

190  Revisiting the Regulatory Debate (II) • shareholders exercising statutory rights to add items to the agenda of a shareholder meeting or to call a shareholder meeting; and • shareholders agreeing to vote the same way on a resolution.136 ESMA excludes from the last two categories collective action which seeks to appoint directors to a company’s board. That is to say, attempts by shareholders to call shareholder meetings, table resolutions, or agree how they will vote do not constitute a ‘white list’ activity if they are done in connection with seeking the appointment of a director.137 According to ESMA, board-related collective action can be ‘particularly sensitive … because, if shareholders cooperate in the appointment of board members, they may be in a position to control the operational management of the company’.138 ESMA points out that member states adopt different views on the takeover law implications of collective action relating to the appointment of directors, in part because of ‘differences [in] national company law and … prevailing shareholder structures’.139 As a result, ESMA concluded that it was not possible to include collective action directed at board appointments in its ‘white list’. Notably, however, ESMA’s concern does not include removal of directors, presumably on the basis that removing a director has less potential to deliver a measure of control to an activist than the appointment of an activist-aligned director. ESMA’s public statement contains no other express restrictions on the objectives which shareholders might seek to achieve by pursuing ‘white list’ activities. In fact, ESMA acknowledges that ‘white list’ activities could be used in connection with activism directed at commercial issues (such as dividend policy or financial structuring), management issues (such as remuneration) or corporate social responsibility.140 However, ESMA notes that there may arise cases in which collective action in the ‘white list’ forms part of an attempt to acquire control of a company: [T]here might, for example, be facts about the relationship between the shareholders, their objectives, their actions or the results of their actions which suggest that their cooperation is … one element of a broader agreement or understanding to acquire or exercise control over the company.141

As a result, ESMA’s white list is subject to an important caveat: a ‘white list’ action will not, in and of itself, give rise to implications under takeover laws.142 The reference to ‘in and of itself’ is intended to make it clear that regulators can consider the overall context in which a ‘white list’ activity occurs in order to determine whether it gives rise to implications under takeover law.

136 ibid

[4.1].

138 ibid

[5.1].

137 ibid. 139 ibid. 140 ibid

[3.1]. [3.3]. 142 ibid [1.5]. 141 ibid

Overseas Initiatives  191 In 2021, ESMA noted the increasing significance of ESG-related activism and observed that investors regard collective engagement as the most cost-effective method of engaging with companies on ESG issues.143 It indicated that in may be appropriate for it to consider amending the white list to include express acknowledgement of the permissibility of collective action directed at ESG issues.144 8.7.2.  The UK Takeover Panel’s Practice Statement No. 26 In 2002, the United Kingdom’s City Code on Takeovers and Mergers (UK Code)145 was amended in order to provide greater latitude for shareholders to undertake collective action without attracting the operation of the UK Code.146 The 2002 amendments provided that collective action will generally only result in shareholders becoming concert parties under the UK Code if it involves a ‘board control-seeking proposal’. A ‘board control-seeking proposal’ refers to an actual or threatened attempt by shareholders to change the composition of their company’s board.147 The amendments did not, however, specifically define what constitutes a ‘board control-seeking proposal’. Instead, they set out a list of factors which the UK Panel on Takeovers and Mergers (UK Panel) would take into account in determining whether a proposal is ‘board control-seeking’. These factors include: • the relationship between any proposed directors and the activists and their supporters; • the number of directors to be appointed or replaced relative to the total size of the board; • the nature of the roles performed by directors being replaced and to be performed by proposed directors if appointed; • the nature of the mandate, if any, of the proposed directors; • whether the activists will benefit from the implementation of the proposal, other than simply through their holding of shares in the company; and • the relationship between the proposed directors and the existing directors and/or the relationship between the existing directors and the activists.148

143 European Securities and Markets Authority, Undue Short-Term Pressure on Corporations (Report, ESMA 30-22-762, 18 December 2019) 68–69. 144 ibid. 145 The Panel on Takeovers and Mergers, City Code on Takeovers and Mergers (5 July 2021) (UK Code). 146 The Panel on Takeovers and Mergers, Shareholder Activism and Acting in Concert (Consultation Paper PCP 10, 14 March 2002) [1.6] (UK Consultation Paper). 147 UK Code (n 145) r 9.1, Note 2. 148 ibid.

192  Revisiting the Regulatory Debate (II) It subsequently became apparent that investors were unclear on the scope for collective action provided by these amendments.149 As a result, in 2009 the UK Panel issued a Practice Statement in order to clarify the effect of the amendments.150 Practice Statement 26 clarifies how the Panel will determine what constitutes a ‘board control-seeking’ proposal, including the weight it will attach to the factors set out above. It emphasises that the first factor set out above is the most important factor.151 That is, a ‘board control-seeking’ proposal will only attract the scrutiny of the UK Panel if there is a significant relationship between the activists and the persons they are seeking to appoint as directors.152 If there is a significant relationship, the Panel will then proceed to consider the other factors listed above, before making a final determination. If there is a not a significant relationship between proposed directors and the activists, the Practice Statement makes it clear that the UK Panel will not inquire into the matter further.153 And so, according to the UK Panel, even if activists requisition a general meeting to replace the entirety of a company’s board, this will not constitute a ‘board control-seeking’ proposal so long as the relationship between the activists and their board nominees is insignificant.154 According to the UK Panel, this is because in such a case it can be assumed that the nominees will, if elected, exercise their own independent judgement rather than act under the influence of the activists.155 A fortiori, any form of collective action which does not involve an attempt or threat to make changes to a company’s board will not trigger the application of the concert party provisions of the UK Code. Thus, the UK Panel notes that voting agreements between shareholders or proposals to change how a company is managed not involving a board change will not be caught.156 This is a significantly more permissive approach than both RG 128 and ESMA’s public statement. As ESMA noted in its statement, certain countries adopt different positions on the issue of collective action based on their understanding of shareholding patterns in their country. The consultation paper issued by the UK Panel in preparing the 2002 amendments indicates that the UK Panel was guided in its approach by the nature of investors in UK listed

149 The Panel on Takeovers and Mergers, Shareholder Activism (Practice Statement No 26, 9 September 2009, as amended at 5 July 2021) [1.1] (Practice Statement 26). 150 ibid. 151 ibid [3.1]. 152 ibid [3.1]–[3.3]. According to the UK Panel, relevant factors to consider in determining whether there is such a relationship include whether the proposed directors have been employees of any of the activists, whether they will be remunerated in any way by the activists, or whether there are any agreements or understandings between the activists and the proposed directors with regard to their proposed appointment. 153 ibid [3.2]. 154 ibid. 155 ibid. 156 ibid [1.4]–[1.5].

Potential for More Expansive Regulatory Relief for Collective Action  193 companies. The UK Panel noted how institutional investors had proposed that collective action by institutional investors should be wholly exempted from acting in concert rules on the basis that institutional investors engage in activism in order to address concerns regarding investment performance rather than to acquire control of companies.157 The UK Panel was not prepared to provide a blanket exception because it was concerned that there could arise exceptional cases in which institutional investors might use collective action to seek control of a company.158 However, the UK Panel indicated that, in formulating its approach towards ‘board control-seeking proposals’, it had taken into account the fact that institutional investors are generally unlikely to seek control of companies.159 8.8.  THE POTENTIAL FOR MORE EXPANSIVE REGULATORY RELIEF FOR COLLECTIVE ACTION IN AUSTRALIA

The Corporations Act provides normative support for ASIC adopting a more accommodating approach towards collective action. The first of the four core principles which underpin Australian takeover law, as reflected in s 602 of the Corporations Act,160 refers to the importance of promoting an ‘efficient, competitive and informed market’. This principle highlights the significance of economic considerations in shaping Australian takeover regulation. As another commentator has pointed out, such considerations are capable of justifying liberal regulatory settings which contribute to the efficiency and competitiveness of the Australian market.161 This would arguably include the provision of greater latitude under Australian takeover laws for activist shareholders to engage in collective activism which helps to improve the governance, and thereby the competitiveness and efficiency, of Australian public companies. Feedback received by ASIC during the consultation process that preceded RG 128 requested that ASIC provide more expansive relief than what it proposed to include in RG 128. However, ASIC determined that it was not feasible to provide greater latitude for collective action without creating an undue risk of shareholders exploiting such latitude for control-seeking purposes.162 The preceding analysis calls this view into question. It has 157 UK Consultation Paper (n 146) [2.6], [3.7]. 158 ibid [3.7]. 159 ibid [3.5]–[3.6]. Winner suggests that the UK Panel’s more permissive approach may reflect the dispersed nature of share ownership in the UK and the fact that the UK has had less experience of powerful shareholders coming together to control companies without making takeovers: M Winner, ‘Active Shareholders and European Takeover Regulation’ (2014) 11 European Company and Financial Law Review 364, 389–90. 160 See above, section 8.3. 161 See also, Mannolini, ‘Convergence or Divergence’ (2002) 337–40 (recognising that the efficiency principle may support behaviour which sits uneasily with the other four Eggleston principles). 162 ASIC, Response to Submissions (n 83) 7.

194  Revisiting the Regulatory Debate (II) highlighted a number of reasons why collective activism will not necessarily impact the control of a company. It has also shown how, taking into account such considerations, British and European regulators have been prepared to accommodate a broader range of collective action than accommodated by RG 128. ASIC could adopt a similar approach. The Corporations Act gives ASIC powers to modify the operation of takeover laws.163 The legislation provides that ASIC may subject any such modification to conditions.164 It is therefore within ASIC’s power to conditionally exempt a broader range of collective action from takeover laws. The conditions of such an exemption could be linked to the type of contextual factors, outlined above, which make it less likely that collective action will affect the control of a company. For example: • Ownership concentration: the exemption could be limited to collective action involving companies with high-levels of ownership concentration. Ownership concentration, however, will only mitigate the risk of controlseeking collective action if there is a sufficient, countervailing ‘bloc’ of substantial shareholders who are not associated with the relevant activists. This could be ensured by subjecting the exemption to a condition that the company’s top 20 shareholders who are not associated with the activist shareholders have voting power that is at least equal to the voting power of the activists. • Collective action that is not board-related: owing to the potential control implications of board-related activism, the exemption could be confined to collective action that does not involve an attempt to change the composition of a company’s board. Or, somewhat less restrictively, it could permit boardrelated activism so long as it would not result in persons affiliated with the activists constituting a majority of a company’s board.165 • One-off interventions: in order to minimise the risk of collective action being used as part of a concerted campaign to affect the management of a company, the exemption could be limited to the type of ‘defensive’ activism described earlier. For example, the exemption could provide that it only applies where the activists have not engaged in collective action in relation to the company in the previous 12 months and require that their collective action not exceed a prescribed time period (eg, four months).

163 See above n 67 and accompanying text. 164 Corporations Act, ss 655A(4), 673(4). 165 In this regard, whether a director candidate is affiliated with an activist could be determined by reference to the principles in ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, which define director independence. Relevantly, these principles require, inter alia, that an independent director be independent of substantial shareholders: ASX Corporate Governance Council, Corporate Governance Principles and Recommendations, 4th edn (February 2019) Recommendation 2.3.

Potential for More Expansive Regulatory Relief for Collective Action  195 • Low-risk activists: the exemption could also be confined to types of shareholder whose incentives to participate in corporate governance make it unlikely that they will use collective action as a means of acquiring control of companies; for example, institutional investors. An alternative way of confining the safe-harbour to activists who are unlikely to seek control is to limit the safe-harbour to those activists whose aggregate voting power does not exceed a maximum figure (eg, 30 per cent). This would also complement the ownership concentration condition noted above by ensuring that the safe harbour is not available to activists whose influence is so significant that a company’s other major shareholders may be discouraged from resisting them. • Notification requirement: shareholders who wish to rely on the exemption could be required to disclose their collective action to the market. Such a requirement would complement the ownership concentration condition noted above, since it would ensure that a company’s other shareholders are alerted to the activists’ attempt to leverage their influence through collective action. As ESMA acknowledged with its ‘in and of itself’ caveat, there is a risk that cases of seemingly benign collective action might nevertheless give rise to control implications owing to the overall context in which they take place. For example, in certain circumstances, an activist proposal unrelated to a company’s board composition may still enable activists to achieve a substantial measure of control over a company. One such scenario is where activists collectively pressure a company to undertake a capital-raising under which the activists would stand to increase their percentage shareholdings materially.166 This risk could be mitigated by subjecting the exemption to multiple conditions drawn from the list set out above. Arguably, the scenario just noted would be less likely to give rise to control implications if, for example, the exemption was only available in relation to companies with a sufficient countervailing ‘bloc’ of unassociated substantial shareholders and was subject to a condition that the activists must promptly and publicly disclose their association. In such a case, the company and its other shareholders – in particular, its other major shareholders – would be alerted to the activists’ likely motives in promoting the capital raising. Further, it is important to appreciate that Australian takeover law provides another important safeguard against any exceptional cases that are not caught by the exemption’s conditions; namely, ASIC or any other party whose interests are affected by collective action can apply to the Panel for a declaration of unacceptable circumstances. There does not need to be a contravention of takeover 166 This could occur where the activists are prepared to subscribe fully for their entitlement pursuant to the capital raising but the company’s other shareholders are not: Winner, ‘Active Shareholders and European Takeover Regulation’ (2014) 383.

196  Revisiting the Regulatory Debate (II) law in order for the Panel to make a declaration of unacceptable circumstances and consequential orders.167 Instead, the Corporations Act also empowers the Panel to make a declaration and orders where the Panel is satisfied that circumstances are unacceptable having regard to the principles that underpin Australian takeover law.168 Control-seeking collective action that seeks to avoid takeover laws by exploiting a regulatory exemption intended to promote shareholder participation in corporate governance would be inconsistent with the ‘efficient, competitive and informed’ principle, the ‘equal opportunity principle’, and the principle that shareholders and directors of a company should know the identity of control-seekers and have reasonable time to consider any control proposal. The potential implications of some of the conditions set out above would however require further consideration. For example, it is arguable that confining regulatory relief to institutional investors would be inappropriately restrictive in the Australian context. The evidence presented in this dissertation indicates that institutional investors tend not to engage extensively in the higher-intensity forms of activism which, as pointed out earlier, might be most facilitated by collective action. Further, the investments of institutional investors tend to be focused in large capitalisation companies.169 If regulatory relief for collective action is confined to institutional investors, it may, as a practical matter, confine the relief to activism involving large capitalisation companies. It is open to question whether this would be an appropriate outcome.170 The implications of any requirement for activists to disclose their collective action to the market would also need to be considered. As ASIC noted during the consultation which preceded RG 128, institutional investors had informed them that they were reluctant to rely on Class Order 00/455 in part because of its requirement that they publicly disclose the existence and nature of their collective action.171 The precise nature of their concerns would need to be better understood. 8.9. CONCLUSION

By acting collectively, shareholders can make activism a more feasible and less speculative exercise. Across the globe, shareholders participate in different forms of collective action, including ad hoc coalitions with other shareholders, representative organisations, and investor networks. Collective action, however, can come into conflict with takeover laws, which are designed to regulate 167 See above nn 54–58 and accompanying text. 168 ibid. These are the purposes described above in section 8.3. 169 Ch 3, section 3.3. 170 On one view, small capitalisation company shareholders may in fact be in greater need of collective action relief. This is because the less liquid market in such companies’ shares may make it harder for their shareholders to do the ‘Wall Street walk’ in response to governance concerns, thereby compelling shareholders to address their concerns through activism. 171 See above n 76 and accompanying text.

Conclusion  197 changes in corporate control. Such laws are generally drafted broadly in order to capture indirect or clandestine attempts to obtain control of companies and are therefore capable of encompassing forms of collective action that are not control-seeking in nature. Law makers and regulators are then faced with a challenging balancing exercise: to what extent should takeover laws be modified to permit potentially beneficial shareholder governance activities to be undertaken collectively? Using the Australian regulator’s attempt at striking a balance in RG 128 as a case study, this chapter has illustrated the difficulties and pitfalls associated with this regulatory balancing act. Although well-intentioned, ASIC’s attempt in RG 128 to strike an appropriate balance is unlikely to make a material difference in practice because it facilitates collective action that is already facilitated to a significant extent by other market mechanisms, such as investor networks and representative organisations. For overseas regulators and law makers, this aspect of the Australian experience highlights the importance of taking into account the overall context in which shareholder activism occurs. An approach which narrowly focuses on shareholder activists themselves may fail to appreciate important market features and developments, such as these intermediary organisations, which assist activist shareholders. In the Australian context, these intermediaries are less likely to facilitate ‘higher-intensity’ forms of collective action. ASIC harboured significant concerns about the potential control effects of ‘higher-intensity’ forms of collective action and resisted facilitating it in RG 128. As a consequence, when shareholders are faced with the need to escalate their governance concerns in the face of reluctant or recalcitrant corporate managers, the use of collective action to facilitate escalatory tactics remains subject to the significant constraints that arise under Australian takeover law. This chapter has demonstrated the merits of an alternative approach to this important issue. This approach draws on an analysis which pays close regard to the nuances of shareholder activism and the context in which it occurs. In particular, it takes account of important characteristics of activism which suggest that the risk of control-seeking collective action in the Australian context is not as pervasive as ASIC assumed. As this chapter has demonstrated, these characteristics can be used to inform the parameters of more expansive regulatory relief which will not provide undue latitude for control-seeking behaviour. Although this chapter demonstrates that there is certainly considerable scope for ASIC to provide more expansive relief for collective action, its analysis indicates that the design of such relief involves some complexity. The approach advocated by this chapter – as well as the approaches of British and European regulators – reveal that collective action ‘safe harbours’ must be able to take account of a variety of potentially significant contextual factors that can affect the takeover law risks of collective action. This includes the nature of activists, their objectives, and the circumstances of the companies they target. A deft regulatory touch is therefore required.

198  Revisiting the Regulatory Debate (II) This particular regulatory challenge underscores the more general point made by some commentators regarding the challenge of attempting to distinguish ‘desirable’ shareholder behaviour from ‘undesirable’ shareholder behaviour.172 As this book has demonstrated, contemporary shareholder activism is a complex phenomenon. As a result, regulatory approaches which presuppose that it is possible to draw ‘brightline’ boundaries may prove ineffectual or counterproductive.

172 JG Hill, ‘Good Activist/Bad Activist: The Rise of International Stewardship Codes’ (2018) 41 Seattle University Law Review 497, 523 (describing this as a ‘difficult task’ and noting how a former chair of the US Securities and Exchange Commission proposed that regulators should instead adopt an ‘agnostic’ stance on the merits of particular activists).

9 Conclusion

A

1991 Australian parliamentary inquiry into corporate governance practices was underwhelmed by the evidence it heard about shareholder involvement in the governance of Australian public companies. It pointed out that: A number of witnesses commented on the dominant position of institutional investors in the shareholding of major companies and the failure of those institutions to adopt other than a passive role in the affairs of companies.1

Two decades later, a very different perception of shareholders’ role in corporate governance had emerged. Commentators considered that public company shareholders were increasingly adopting an activist stance which was re-shaping the nature of Australian corporate governance. Writing in 2014, a journalist described this development as a ‘quiet revolution’ and commented that, although ‘[i]t’s been a while coming … sophisticated shareholder activism is gathering pace in Australia and it’s ready to pack a punch.’2 Other commentators resorted to more extreme metaphors. In light of some high-profile examples of shareholder activism in the early 2010s, one Australian investment banker cautioned corporate Australia that ‘[y]ou are more likely to get run over’.3 9.1.  THE NATURE OF AUSTRALIAN ACTIVISM: INSIGHTS FOR AUSTRALIA

This book does not dispute the fact that shareholders now play a significant role in the governance of Australian public companies. The previous chapters have presented considerable evidence of shareholders engaging actively and influentially with their companies. However, this book takes issue with commentary which suggests that overtly aggressive and interventionist activism is the paradigmatic form of shareholder–company engagement in Australia. Although it is possible to point to examples of such activism in recent years, they are not

1 House of Representatives Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, Corporate Practices and the Rights of Shareholders (1991) 174. 2 P Gilder, ‘The Board Bruisers’ Herald Sun (Melbourne, 8 March 2014) 63. 3 Quoted in J Moullakis, ‘Australia Readies for Activism Jump’ The Australian Financial Review (29 May 2014) 28.

200  Conclusion representative of the overall nature of public company-shareholder relations. As this book has highlighted, aggressive activist campaigns are not prevalent and, to the extent they occur, they are largely confined to smaller capitalisation companies. An accurate understanding of activism is critical from a regulatory perspective. Regulation based on an incomplete understanding of the activity it seeks to regulate may otherwise be ineffective, inefficient or unnecessary. Chapter one highlighted how concerns in the 2010s about aggressive activism prompted calls for law reform which, if enacted, would have constituted novel and significant changes to Australian law. This included calls for the introduction of laws to compel activist investors to disgorge profits derived from activism and for a reappraisal of how directors’ core duty to act in the best interests of their company applies in the context of a proxy contest.4 In light of the low levels of aggressive activism revealed by this book, the need for such novel reforms was, at the very least, questionable. Public companies play a significant role in the Australian economy and their governance warrants careful attention. However, this important exercise should not be guided by simplistic perceptions of the nature of Australian shareholder power. As this book has shown, Australian activism is an intricate phenomenon. It is undertaken by different types of activist shareholders, for varying reasons; it more typically involves voting dissent on management-sponsored resolutions at an AGM or private interactions between a shareholder and a company than a proxy contest; and it is more likely to be undertaken in order to exert a degree of influence over a company’s decision-makers than to replace those decisionmakers or seize control of corporate decision-making. Australian activism is shaped by a mix of factors. Australia’s capital market conditions and regulatory settings are significant – for example, there is an absence of controlling blockholders which might otherwise thwart activism, and Australian law provides shareholders with a range of relatively straightforward governance rights. However, the intricate and nuanced nature of Australian activism points to the impact of other factors, including social and political factors, institutional features and transnational influences. Some of these contributing factors are uniquely domestic in nature; for example, the industry superannuation funds and the local institutions (such as ACSI and the FSC) that make up Australia’s evolved corporate governance ‘industry’. In view of Australian activism’s intricate nature, its regulatory implications need to be analysed in a granular and contextualised manner. In particular, regulatory discussions need to acknowledge the mix of factors that shape activism and recognise the different types (and characteristics) of activist shareholders and their respective benefits, risks and limitations from a corporate governance perspective. Regulatory discussions also need to acknowledge that much



4 Ch

1, section 1.2.

The Comparative Relevance of Australia  201 shareholder activism seeks only to wield influence in corporate governance rather than take control of companies or direct the exercise of management power. In view of the distinctively domestic influences that contribute to the nature of Australian activism, commentators, law makers and regulators also need to be careful when considering the implications for Australia of overseas developments and analytical insights. This book has highlighted the difference that a more granular and contextualised analysis can make by applying it to two important and topical regulatory issues in the Australian context. Chapter seven revisited the debate about whether there is a case for law reform to give shareholders a mandatory statutory right to pass declaratory resolutions. Chapter eight explored the appropriateness of relaxing Australian takeover laws in order to permit shareholders to leverage their governance influence by engaging in collective activism. Chapters seven and eight demonstrated how an analytical approach which pays close regard to the details of Australian activism can lead to materially different conclusions about the appropriate regulatory response to these two issues. Additional regulatory issues undoubtedly lie on the horizon. Federal parliament’s 2021 inquiry into the ownership of Australian public companies indicated that politicians of both major political parties are aware of the increasing significance of institutional investors in the Australian market and are interested in its implications.5 The increasing prominence of ESG activism, particularly in relation to climate change-related issues, is likely to make shareholder activism a politically salient topic as this country seeks to grapple with the economic and social challenges of transitioning to a lower-carbon economy. Other more technical, but no less important, issues are also likely to require attention. For example, does it make sense that Australia, unlike many other jurisdictions, has two separate institutional investor stewardship codes?6 Should ACSI’s call in 2019 for a single, more prescriptive code be heeded?7 In all these matters, law makers and the regulator must look beyond stereotypical or one-dimensional conceptions of activism and recognise shareholder activism for the complex corporate governance phenomenon that it is. 9.2.  THE COMPARATIVE RELEVANCE OF AUSTRALIA

Australia is often grouped with markets such as the United Kingdom and the United States as an example of a jurisdiction with relatively dispersed, predominantly institutional, share ownership.8 Comparative corporate governance analysis has also categorised Australia as a ‘shareholder centric’ market

5 Ch

6, section 6.1.4(iii). ch 5, section 5.3.2. 7 ibid. 8 See, eg, OECD, OECD Corporate Governance Factbook 2021 (2021) 25–26. 6 See

202  Conclusion characterised by a substantial public equities market and the type of normative emphasis on shareholder interests reflected in UK and US corporate and securities law.9 Against this background, overseas readers might have presumed that the Australian experience of shareholder activism would be similar to the UK or US experience. Certainly, there are some parallels. For example, Australia has adopted stewardship codes, is experiencing increasing share ownership by index investors and is witnessing a heightened focus by institutional investors on ESG issues. Yet, in overall terms, Australian activism is not a mere analogue of overseas varieties of activism. This book has highlighted various points of difference and distinctive local characteristics. Among other things, hedge fund activism and high-profile proxy contests are not common, particularly in relation to larger capitalisation companies. Despite having access to generous governance rights by international standards, Australian shareholders tend to eschew overtly aggressive activist interventions, providing an interesting counterpoint to shareholder empowerment commentary in the United States which argues that potent shareholder governance rights can play an instrumental role in fostering shareholder oversight of public companies.10 Institutional investor activism is shaped to a significant extent by Australia’s home-grown industry superannuation funds and a substantial local industry of governance intermediaries. Australia has also charted its own approach to investor stewardship codes and is one of only a handful of jurisdictions with multiple codes.11 These codes bear some unique characteristics which reflect the respective preferences of Australia’s domestic funds management and superannuation sectors.12 US and UK perspectives feature significantly in the international debate on shareholder activism.13 The Australian experience of activism provides an important alternative perspective. Australia’s distinctive experience of shareholder activism highlights that trends and developments described in the international literature are not necessarily universal in nature, or at least will unfold in varying ways in different markets. In short, the Australian experience underscores the point that local details and context matters. Chapters seven and eight highlighted the analytical significance of taking into account local details and context, in the context of a reappraisal of the regulatory debate about declaratory resolutions and collective activism. In accordance with the note of caution sounded above, overseas readers should

9 See B Cheffins, ‘Corporate Governance Convergence Lessons from Australia’ (2002) 16 Transnational Lawyer 13, 19–20; R Mitchell et al, ‘Shareholder Protection in Australia: Institutional Configurations and Regulatory Evolution’ (2014) 38 Melbourne University Law Review 68. 10 For an overview of the shareholder empowerment debate, see ch 2, section 2.1. 11 Ch 5, section 5.3.2. 12 ibid. 13 As noted in ch 2, section 2.2.

The Intricacy of Shareholder Power  203 not simply assume that the analysis in those chapters applies equally in their own jurisdiction. Nonetheless, declaratory resolutions and collective activism are notable practices in other countries. The analytical approach adopted in chapters seven and eight provides important guidance to overseas readers about the type of granular inquiry that needs to be undertaken when exploring these two significant regulatory issues in their own jurisdictions. 9.3.  THE INTRICACY OF SHAREHOLDER POWER

Shareholder power is a central theme in contemporary corporate governance scholarship.14 As this book has highlighted, commentators, law makers and regulators are increasingly focused on the risks and opportunities posed by shareholder power. Two opposing narratives underpin much of the scholarship and commentary.15 The first adopts a positive view of shareholder power. It considers that empowered shareholders have the potential to play a constructive role in corporate governance, contributing to improved corporate performance and accountability. The second narrative expresses significant concerns about shareholder power, including whether it will be used to promote shareholders’ narrow self-interest or undermine corporate managers’ authority. Both narratives sometimes give rise to broad generalisations regarding shareholder power and its potential. For some commentators, empowered shareholders are ‘locusts’,16 ‘packs of wolves’17 and ‘fleas’.18 A starkly different assessment of shareholder power was put forward in the 2012 version of the United Kingdom’s stewardship code, which declared that shareholders have the potential to ‘promote the long term success of companies’ and thereby ‘benefit […] companies, investors, and the economy as a whole’.19 The Australian experience offers a more complex account of contemporary shareholder power. It is not monolithic in nature and it is shaped by an intricate mix of factors. In some respects, it is notably contingent. Chapter 4 noted, for example, how just two social activist organisations have been responsible for filing 84 per cent of all ESG-related declaratory resolutions since 2002.20 A small number of influential governance intermediaries – four proxy advisory

14 JG Hill, ‘Good Activist/Bad Activist: The Rise of International Stewardship Codes’ (2018) 41 Seattle University Law Review 497. 15 ibid. 16 M Landler and H Timmons, ‘Poison Ink Aimed at “Locusts”’ The New York Times (New York, 31 March 2006) C0008. 17 JC Coffee and D Palia, ‘The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance’ (2016) 41 Journal of Corporation Law 545. 18 ‘Flea on a Bike Loses Squillions’ Crikey (online) (8 March 2005) www.crikey.com.au/2005/03/08/ flea-on-a-bike-loses-squillions. 19 Financial Reporting Council, The UK Stewardship Code (September 2012) 1. 20 Ch 4, section 4.2.

204  Conclusion firms, three representative bodies and two engagement firms – provide a significant range of governance-related services to institutional investors.21 In these circumstances, it is conceivable that even small changes to Australian corporate governance law and practice could produce significant changes in Australian shareholder power. What would happen, for example, if burdensome regulatory change was to be directed at social activist organisations or governance intermediaries? The Australian federal government’s attempt in 2021 to neutralise the influence of ACSI through its (ultimately unsuccessful) reforms to proxy adviser regulation highlighted the potential for even targeted regulatory change to bring about material changes in the Australian governance landscape.22 Contemporary shareholder power is not inevitable or immutable. Broad generalisations about the significance (or risks) of shareholder power need to be approached with caution. As the Australian experience highlights, shareholder power is the product of an interplay of various legal, economic, institutional and other factors. It is essential that analysis of shareholder power (and, in particular, shareholder activism) is based on a complete and accurate understanding of their intricate nature.

21 See ch 5, section 5.3. As the discussion in ch 5 highlighted, ACSI provides both proxy and engagement services, so technically speaking should be counted as one organisation. However, it has been counted twice in the claim in the text above to highlight the two distinct roles it performs. 22 Ch 6, section 6.1.4(iii).

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Bibliography  209 Kahan, M and Rock, EB, ‘Hedge Funds in Corporate Governance and Corporate Control’ (2007) 155 University of Pennsylvania Law Review 1021. Kastiel, K, ‘Against All Odds: Hedge Fund Activism in Controlled Companies’ (2016) Columbia Business Law Review 60. Kastiel, K and Nili, Y, ‘In Search of the Absent Shareholders: A New Solution to Retail Investors’ Apathy’ (2016) 41 Delaware Journal of Corporate Law 55. —— ‘The Giant Shadow of Corporate Gadflies’ (2021) 94 Southern California Law Review 569. Katelouzou, D ‘Worldwide Hedge Fund Activism: Dimensions and Legal Determinants’ (2015) 17 University of Pennsylvania Journal of Business Law 789. —— ‘Reflections on the Nature of the Public Corporation in an Era of Shareholder Activism and Stewardship’ in B Choudhury and M Petrin (eds), Understanding the Company: Corporate Governance and Theory (Cambridge, Cambridge University Press, 2017) 117–44. Katelouzou, D and Puchniak, DW (eds), Global Shareholder Stewardship (Cambridge, Cambridge University Press, 2022). Katelouzou, D and Siems, M, ‘The Global Diffusion of Stewardship Codes’ in D Katelouzou and DW Puchniak (eds), Global Shareholder Stewardship (Cambridge, Cambridge University Press, 2022) 631–62. Klettner, A, ‘The Impact of Stewardship Codes on Corporate Governance and Sustainability’ (2017) 23 New Zealand Business Law Quarterly 259. Kraakman, R et al, The Anatomy of Corporate Law: A Comparative and Functional Approach, 3rd edn (Oxford, Oxford University Press, 2017). Lamba, AS, and Stapledon, G, ‘The Determinants of Corporate Ownership Structure: Australian Evidence’ (Research Paper, 1999). La Porta, R, Lopez-de-Silanes, F and Shleifer, A ‘Corporate Ownership Around the World’ (1999) 54 The Journal of Finance 471. Leigh, A and Triggs, A, ‘Common Ownership of Competing Firms: Evidence from Australia’ (2021) 97 Economic Record 333. Levy, R, Takeovers Law & Strategy, 4th edn (Sydney, Lawbook Co, 2012). —— ‘Aspects of the Law Relating to Contested Elections of Directors’ (2015) 33 Company and Securities Law Journal 404. Lipton, M and Savitt, W, ‘The Many Myths of Lucian Bebchuk’ (2013) 93 Virginia Law Review 733. Locke, N, ‘Australian Investor Stewardship and Global Themes in Stewardship Regulation’ (2020) 38 Companies and Securities Law Journal 28. Lund, DS and Pollman, E, ‘The Corporate Governance Machine’ (2021) 121 Columbia Law Review 2563. Macneil, I and Esser, I, ‘The Emergence of “Comply or Explain” as a Global Model for Corporate Governance Codes’ (2022) 33 European Business Law Review 1. Mallow, MJ and Sethi, J, ‘Engagement: The Missing Middle Approach in the Bebchuk-Strine Debate’ (2016) 12 NYU Journal of Law and Business 385. Mannolini, J, ‘CLERP and Takeover Law Reform – Politics Trumping Principle?’ (1999) 10 Australian Journal of Corporate Law 193. —— ‘Convergence or Divergence: Is there a Role for the Eggleston Principles in a Global M&A Environment?’ (2002) 24 Sydney Law Review 336. Marshall, SD, Andersen, K and Ramsay, I, ‘Are Superannuation Funds and Other Institutional Investors in Australia Acting Like “Universal Investors”?’ (2009) 51 Journal of Industrial Relations 439. McCahery, JA, Sautner, Z and Starks, LT, ‘Behind the Scenes: The Corporate Governance Preferences of Institutional Investors’ (2016) 71 The Journal of Finance 2905. Mees, B and Brigden, C, Workers’ Capital: Industry Funds and the Fight for Universal Superannuation in Australia (Sydney, Allen & Unwin, 2017). Mees, B and Smith, SA, ‘Corporate Governance Reform in Australia: A New Institutional Approach’ (2019) 30 British Journal of Management 75.

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2.  GOVERNMENT/PARLIAMENTARY/REGULATORY DOCUMENTS ASX Corporate Governance Council, Corporate Governance Principles and Recommendations, 4th edn (February 2019). ASX Ltd, ASX Market Announcements Platform (Guidance Note 14, 6 August 2018). —— Continuous Disclosure: Listing Rules 3.1-3.1B (Guidance Note 8, 5 June 2021). —— Listing Rules of the Australian Securities Exchange (as at May 2022). Association of Superannuation Funds of Australia, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (13 September 2021). Australasian Centre for Corporate Responsibility, The AGM and Shareholder Engagement (Submission to CAMAC, December 2012). Australasian Investor Relations Association, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (13 September 2021). Australia and New Zealand Banking Group, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (Answer to Question on Notice ANZ06QW and Answer to Question on Notice ANZ01QON, 2021). Australian Competition and Consumer Commission, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (8 September 2021). Australian Council of Superannuation Investors, Update to RG 128 (Submission to ASIC, 20 April 2015).

212  Bibliography —— Submission, House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (13 September 2021). Australian Institute of Company Directors, Update to RG 128 (Submission to ASIC, 20 April 2015). Australian Prudential Regulation Authority, Quarterly Superannuation Performance Statistics Highlights (June 2021) (August 2021). Australian Securities and Investments Commission, Collective Action by Institutional Investors (Regulatory Guide 128 (superseded), July 1998). —— Collective Action by Institutional Investors (CO 98/649, 2000). —— Takeovers: False and Misleading Statements (Regulatory Guide 25, August 2002). —— Collective Action by Institutional Investors (Class Order 00/455, 4 October 2013). —— Relevant Interests and Substantial Holding Notices (Regulatory Guide 5, November 2013). —— Collective Action by Investors: Update to RG 128 (Consultation Paper 228, February 2015). —— Response to Submissions on CP 228 Collective Action by Investors: Update to RG 128 (Report 438, June 2015). —— Collective Action by Investors (Regulatory Guide 128, June 2015). —— Annual General Meeting Season 2017 (Report No 564, January 2018). —— Annual General Meeting Season 2018 (Report No 609, January 2019). Australian Shareholders’ Association, The AGM and Shareholder Engagement (Submission to CAMAC, 21 December 2012). Australian Takeovers Panel, Frustrating Action (Guidance Note 12, 1 December 2016). AustralianSuper, Update to RG 128 (Submission to ASIC, 20 April 2015). Black, S and Kirkwood, J, Ownership of Australian Equities and Corporate Bonds (RBA Bulletin, Reserve Bank of Australia, September 2010). BlackRock, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (17 September 2021). Chartered Secretaries Australia, The AGM and Shareholder Engagement (Submission to CAMAC, 2012). Commonwealth Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report (Vol 1, 2019). Commonwealth Treasury, Takeovers – Corporate Control: A Better Environment for Productive Investment (Corporate Law Economic Reform Program Proposals for Reform: Paper No 4, 1997). —— Takeovers Issues – Treasury Scoping Paper (5 October 2012). Companies and Securities Advisory Committee, Shareholder Participation in the Modern Listed Public Company (Final Report, June 2000). Corporations and Markets Advisory Committee, The AGM and Shareholder Engagement (Discussion Paper, 2012). European Securities and Markets Authority, Undue Short-Term Pressure on Corporations (Report, ESMA 30-22-762, 18 December 2019). —— Information on Shareholder Cooperation and Acting in Concert under the Takeover Bids Directive (Public Statement, ESMA31-65-682, 8 February 2019). —— Information on Shareholder Cooperation and Acting in Concert under the Takeover Bids Directive (Public Statement, ESMA/2013/1642, 12 November 2013). Evidence to House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (9, 20, 22, 23 September 2021 and 11 October 2021). Evidence to House of Representatives Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, Corporate Practices and the Rights of Shareholders (1991). Financial Reporting Council, The UK Stewardship Code (2012). —— The UK Stewardship Code 2020 (2020). Frydenberg MP, J and Hume Senator, J, Reforms to Bring Greater Transparency and Accountability to Proxy Advice (Media Release, 17 December 2021). Gadens, Update to RG 128 (Submission to ASIC, 15 April 2015).

Bibliography  213 Governance for Owners, The AGM and Shareholder Engagement (Submission to CAMAC, 2012). Governance Institute of Australia, Update to RG 128 (Submission to ASIC, 20 April 2015). House of Representatives Standing Committee on Economics, Parliament of Australia, Report on the Implications of Common Ownership and Capital Concentration in Australia (March 2022). House of Representatives Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, Corporate Practices and the Rights of Shareholders (1991). McNally, S, Chambers, M and Thompson, C, ‘Financial Stability Review: The Australian Hedge Fund Industry’ (Reserve Bank of Australia Publications, Sept 2004). National Australia Bank, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (Answer to Question on Notice CO-NAB04QW and Answer to Question on Notice CO-NAB02QON, 2021). Panel on Takeovers and Mergers, Shareholder Activism and Acting in Concert (Consultation Paper PCP 10, 14 March 2002). —— Shareholder Activism and Acting in Concert (Statement by the Code Committee of the Panel following the External Consultation Process on PCP 10, RS10, 4 July 2002). —— Shareholder Activism (Panel Executive Practice Statement No 26, 2009/18, 5 July 2021). —— City Code on Takeovers and Mergers (5 July 2021). Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Better Shareholders – Better Company: Shareholder Engagement and Participation in Australia (July 2008). Price, J, ‘Holding the Board to Account – General Meetings Requested by Shareholders’ (Australian securities and Investments Commission, December 2016) www.asic.gov.au/regulatory-resources/ corporate-governance/corporate-governance-articles/holding-the-board-to-account-generalmeetings-requested-by-shareholders/. Principles for Responsible Investment, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (2021). Productivity Commission, Executive Remuneration in Australia (Report No 49, 19 December 2009). Vanguard, Submission to House of Representatives Standing Committee on Economics, Parliament of Australia, Inquiry into the Implications of Common Ownership and Capital Concentration in Australia (13 September 2021).

3.  INDUSTRY PUBLICATIONS Activist Insight, Activist Investing: An Annual Review of Trends in Activist Investing (2017). —— The Activist Investing Annual Review 2018 (2018). —— The Activist Investing Annual Review 2019 (2019). —— The Activist Investing Annual Review (2020). —— The Activist Investing Annual Review (2021). Activist Insight and Arnold Bloch Leibler, Shareholder Activism in Australia: A Review of Trends in Activist Investing (2016). Allens, ‘Shareholder Activism on the Rise as Allens Defends Antares Against US Hedge Fund’ (Media Release, 22 July 2014). AMP Capital, 2017 Review: Proxy Voting & ESG Investment Research (March 2018). Australasian Investor Relations Association, ESG Engagement Guidelines Recommended Practices for Australasian Listed Entities: Navigating the New Landscape of Heightened Investor Scrutiny (2017). —— New Guidelines Getting Set for Companies to Better Handle Environmental, Social and Governance Challenges (Media Release, 10 April 2017). Australian Council of Superannuation Investors, Board Composition and Non-executive Director Pay in ASX200 Companies (November 2016).

214  Bibliography —— ACSI Governance Guidelines (November 2017). —— Australian Asset Owner Stewardship Code (May 2018). Australian Council of Superannuation Investors and Sheehan, K, Shareholder Resolutions in Australia: Is There a Better Way? (October 2017). Australian Institute of Company Directors, Institutional Share Voting and Engagement: Exploring the Links between Directors, Institutional Shareholders and Proxy Advisers (September 2011). Australian Shareholders’ Association, Voting and Engagement Guidelines for ASX 200 Companies (June 2020). Australian Super, Stewardship Statement: 1 July 2018 to 30 June 2019 (November 2019). —— ESG and Stewardship Policy (January 2022). Boston Consulting Group, Shareholder Value Creation Through Persistent Uncertainty: Analysis of ASX 200 Company Performance (9 March 2017). Clayton Utz, Corporate Head Office Advisory Update (February 2015). Colonial First State Ltd, Responsible Investment and Stewardship Annual Report 2016 (2016). Comerton-Forde, C, An Analysis of S&P/ASX 300 and NZX 50 Share Ownership (Australasian Investor Relations Association, 2021). Computershare Intelligence Report: Insights from Annual General Meetings held in 2016 (2017). —— Intelligence Report: Insights from Annual General Meetings Held in 2017 (2018). —— Intelligence Report: Insights from Annual General Meetings 2018 (2018). —— 2020 AGM Intelligence (2020). —— 2021 AGM Intelligence Report (2021). Corrs Chambers Westgarth, Executive Remuneration: Results of Spill Meetings Put Effectiveness of Two Strikes in Question (7 March 2013). Credit Suisse, Activist Alpha (Research Note, 13 June 2017). Deloitte Access Economics, Competition in Funds Management (September 2021). Dentons, Board Spills: ASIC Proposals to Make It Harder for Shareholder Activism (26 February 2015). Financial Services Council, Superannuation Governance Policy (Standard No 20, March 2013) (repealed). —— ESG Reporting Guide for Australian Companies (Guidance Note 30, February 2016). —— Principles of Internal Governance and Asset Stewardship (FSC Standard 23, July 2017). —— Voting Policy, Voting Record and Disclosure (FSC Standard 13, 27 May 2020). Gilbert & Tobin, Shareholder Activism – More Than One Way to Skin a Cat (16 December 2016). —— Shareholder Activism Report (3 September 2018). Glass Lewis, 2021 Policy Guidelines: Australia (2021). Governance Institute of Australia and Sandy Easterbrook, Improving Engagement between ASX-listed Companies and Their Institutional Investors: Background Paper (February 2014). —— Improving Engagement between ASX-listed Companies and Their Institutional Investors: Principles and Guidelines (July 2014). Governance Institute of Australia, Shareholder Resolutions: Is there a Case for Change? (July 2018). International Corporate Governance Network, ICGN Guidance on Institutional Investor Responsibilities (2013). Institutional Shareholder Services, Australia Proxy Voting Guidelines (September 2018) 5. —— Australia: Proxy Voting Guidelines: Benchmark Policy Considerations (13 December 2021). JP Morgan, Shareholder Activism in Australia: Navigating the Evolving Landscape (November 2016). Minter Ellison, A Sign of Shifting Shareholder Expectations On Executive Remuneration (22 October 2018). Morrow Sodali, ‘Corpgov: Shareholder Activism in Australia Requires a Softer Touch’ (7 October 2019). —— 2020 AGM Season Review – Australia (February 2021). Ownership Matters, Many Are Called, Few Are Chosen: An Analysis of the Composition of ASX 300 Boards from 2005–2020 (25 October 2020). —— Ownership Matters Voting Guidelines (February 2022).

Bibliography  215 Perpetual Investments, Corporate Governance and Proxy Voting Policy (September 2017). —— Responsible Investment Policy (August 2020). Regnan – Governance Research & Engagement Pty Ltd, Annual Report 2016/2017. —— Engagement Impact Report FY2019 (August 2019). —— Governance Research & Engagement Pty Ltd, Engagement Impact Report FY2020 (August 2020). —— Engagement Impact Report 2021 (August 2021). Responsible Investment Association Australasia, Responsible Investment Benchmark Report: Australia 2021 (2021).

4.  NEWSPAPER ARTICLES Binsted, T, ‘Advisers Warn of Surge in Activism’ The Australian Financial Review (2 June 2014) 28. —— ‘Board Hopeful Fires Salvo at Brickworks’ The Australian Financial Review (23 November 2015) 13. Boyd, T, ‘Activists Have All the Tools to Act’ The Australian Financial Review (24 June 2015) 44. Chambers, M, ‘Elliott Envoys Arrive to Push BHP Changes’ The Australian (2 May 2017) 20. Colvin, J ‘Striking the Wrong Shareholder Chord’ The Australian Financial Review (10 December 2012) 47. Crikey, ‘Flea on a Bike Loses Squillions’ on Crikey (8 March 2005). Desloires, V, ‘Blackrock, Vanguard, State Street Are Not Passive on Corporate Governance’, The Sydney Morning Herald (online, 1 November 2016). —— ‘Passive Funds Are No Longer the Silent Giants’ The Australian Financial Review (2 November 2016) 17. Duke, J, ‘TPG Cops First Strike Over Pay: TELECOMS | Almost 30% “no” vote’ The Sydney Morning Herald (Sydney, 7 December 2017) 22. Durie, J, ‘Pioneer Earmarked for a New Chief’ The Australian (12 February 2014) 19. —— ‘Shrinking Director Gene Pool a Worry’ The Australian (29 March 2019) 17. Durkin, P, ‘Shareholders Use Two-strikes Rule Judiciously’ The Australian Financial Review (23 November 2011) 4. —— ‘Quiet Achievers Who Felled a Bank Boss’ The Australian Financial Review (28 November 2019) 36. Featherstone, T, ‘Getting Active with ETFs’ The Australian Financial Review (18 August 2018) 28. Fickling, D and Purvis, B, ‘Lack of Shareholder Activism Gives CEOs Free Pass, Mark Carnegie Says’ The Sydney Morning Herald (online, 13 August 2014). Frith, B, ‘Echo Should take Crown’s Stake Bid to Takeovers Panel’ The Australian (2 March 2012) 22. Frost, J, ‘Investors Beat Up NAB’ The Australian Financial Review (20 December 2018) 1. Garvey, P, ‘Short-selling Attack Intensifies’ The Australian (24 March 2017) 23. Gilder, P, ‘The Board Bruisers’ Herald Sun (Melbourne, 8 March 2014) 63. Gluyas, R, ‘Brace for Shareholder Activists, Goldman Warns Clients’ The Australian (8 May 2013) 17. Gottliebsen, R, ‘Big Australian Back in Bed with Shareholders’ The Australian (16 May 2017) 28. Henderson, R, ‘Passive Funds Pushing Aside Active Managers’ The Australian Financial Review (16 June 2021) 33. Kaye, T, ‘Activist Shareholders Playing a Greater Role’ The Australian (19 February 2019) 23. Kehoe, J, ‘High Stakes in Ownership Investigation’ The Australian Financial Review (5 August 2021) 36. Khadem, N, ‘Proxy Advice Law Which Sparked Fears It Would Reduce Investor Activism Defeated in the Senate’ ABC News (online) (10 February 2022). Knight, E, ‘Rinehart Might Influence People but She’s Winning Few Friends in Doing So’ The Sydney Morning Herald (Sydney, 23 June 2012) 6.

216  Bibliography —— ‘Shareholders Ignored Bluff and Raised the Stakes’ The Sydney Morning Herald (Sydney, 27 November 2019) 22. Korporaal, G, ‘ASIC May Push Out Creep Rule to 30pc’ The Australian (12 July 2012) 19. —— ‘ESG Drives M&A, Fundraising’ The Australian (9 April 2021) 20. Landler, M and Timmons, H, ‘Poison Ink Aimed at “Locusts”’ The New York Times (New York, 31 March 2006) C0008. Lewis, L, ‘How an AGM Defeat on Climate Signals the Rise of ESG in Japan’ Financial Times (online, 23 July 2020). Maiden, M, ‘Shareholder Activism in its Infancy’ The Sydney Morning Herald (online) (28 November 2012). McCrann, T, ‘Big End of Town Loses Its Nerve Under Pressure’ The Weekend Australian (26 August 2017) 37. McIlroy, T, ‘Malcolm Turnbull Says $5.6 Million Salary of Australia Post Boss Ahmed Fahour Is Too High’ The Sydney Morning Herald (online) (8 February 2017). Moullakis, J, ‘Australia Readies for Activism Jump’ The Australian Financial Review (29 May 2014) 28. Robin, M, ‘Share activism “not part of Australian investors mentality”’ The Canberra Times (Canberra, 12 May 2017) 35. Roddan, M, ‘Funds Lash Directors, Auditors’ The Australian (20 March 2018) 20. —— ‘Retail Army Wants to Block Catherine Brenner’s Scentre Seat’ The Australian Financial Review (online) (27 March 2022). Rogers, D, ‘ASX Ripe for Activist Investors: Credit Suisse’ The Australian (15 June 2017) 27. Shapiro, J, ‘Expect More Shareholder Activism Down Under, Warns Credit Suisse’ The Australian Financial Review (23 May 2017) 19. Smith, M, ‘Boards Prepare to Keep Activists at Bay’ The Australian Financial Review (7 March 2014) 40. —— ‘Power to the People’ The Australian Financial Review (26 September 2014) 64. Toscano, N and Knight, E, ‘Colonial Rabble Rousers: How a Group of Australian Funds Toppled Rio’s Chief’ The Sydney Morning Herald (Sydney, 19 September 2020) 4. West, M, ‘Boards Under Attack from Activist Funds’ The Sydney Morning Herald (Sydney, 25 November 2013) 21. White, A, ‘Second Strikes on Remuneration Show Boards Still Don’t Get It’ The Australian (Canberra, 3 December 2016) 32. Whyte, J, ‘Agitators Get to Grip with Boards’ The Australian Financial Review (23 July 2012) 21. Whyte, J and Gardner, J, ‘Jack Tilburn, Corporate Terminator, Has Asked Last Question’ The Australian Financial Review (10 October 2018) 2. Williams, R, ‘Standing up at AGMs – Saving the World or a Waste of Time?’ The Sydney Morning Herald (Sydney, 14 October 2017) 6. —— ‘Shareholders want Power to “Escalate” Issues’ The Sydney Morning Herald (online) (26 October 2017). —— ‘Fund Giant’s Warning for Local Boards’ The Sydney Morning Herald (Sydney, 6 November 2017) 20. Wilmot, B, ‘Brenner Faces Shareholder Opposition to Westfield Place’ The Australian (28 March 2022) 15.

5. OTHER BHP Billiton Ltd, ‘Notice of Meeting 2013’ (ASX Announcement, 12 September 2013). —— ‘Notice of Meeting 2017 Addendum’ (ASX Announcement, 20 September 2017). Friedlander, D, Fischer, M and Ting, M ‘Economic Activism: Re-thinking Directors’ Duties and Governance Structures in the Activist Context’ (Paper presented at Supreme Court of New South Wales Annual Corporate Law Conference, Sydney, 23 July 2014).

Bibliography  217 National Australia Bank Ltd, ‘2013 Notice of Annual General Meeting’ (ASX Announcement, 18 November 2013). Organisation for Economic Co-operation and Development, Common Ownership by Institutional Investors and its Impact on Competition (OECD Secretariat Background Note, 5 December 2017). —— Owners of the World’s Listed Companies (OECD Capital Market Series, Paris, 2019). —— OECD Corporate Governance Factbook (2021). Origin Energy Ltd, ‘Origin to Adopt Shareholder Advisory Vote on Climate Change’ (ASX Announce­ ment, 6 August 2021). QBE Insurance Group Ltd, ‘2018 Annual General Meeting of Shareholders – Results of Meeting’ (ASX Announcement, 3 May 2018). Santos Ltd, ‘Notice of Annual General Meeting’ (ASX Announcement, 12 March 2021). —— ‘Santos Adopts Shareholder Advisory Vote on Climate Change Report’ (ASX Announcement, 16 March 2021). —— ‘Notice of Annual General Meeting’ (ASX Announcement, 1 April 2022). Sanyal, K, ‘Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014’ (Bills Digest No 58, Parliamentary Library, Parliament of Australia, 2014). Woodside Petroleum Ltd, ‘Climate Reporting and Non-binding Shareholder Vote’ (ASX Announce­ ment, 19 March 2021). —— ‘Notice of Annual General Meeting 2022’ (ASX Announcement, 8 April 2022).

218

Index ABL see Arnold Bloch Leibler abstentions  80–81 ACCR see Australasian Centre for Corporate Responsibility ACSI see Australian Council of Superannuation Investors Activist Insight  60, 66, 67, 68, 69 activist stewardship  4 ‘agency capitalism’  18, 125 agency costs  12–13 aggressive activism  6, 7 low levels of  104–5, 200 cultural and social considerations  108–9 difficulties associated with replacing directors and constitutional amendments  105–8 nature of public company shareholders  110 political factors  109–10 structure of public company boards  111–13, 123 AGMs  71–2 ‘AGM season’  94 see also shareholder meetings AMP Capital  81 Armour, J.  3 Arnold Bloch Leibler (ABL)  66, 67, 68, 69 ASA see Australian Shareholders Association ASIC see Australian Securities and Investments Commission ASX Corporate Governance Council  89, 90, 111 ASX Listing Rules  37 ASX Market Announcements Platform  43, 50 Australasian Centre for Corporate Responsibility (ACCR)  52–4, 106, 143 Australasian Investor Relations Association  33–4, 85, 115 Australian Council of Superannuation Investors (ACSI)  80, 88, 89–91, 112, 119, 135, 139, 141, 142, 149, 151, 154, 155, 156, 158 engagement assignments  93, 94

proxy advice  94, 95, 110 stewardship code  84, 91–2, 115, 119, 122 Australian Institute of Company Directors  75, 83, 84, 93–4 Australian Securities and Investments Commission (ASIC)  76, 77–8, 81, 82, 95, 130, 163–4, 176 modifying the operation of takeover laws  176–7 potential for a more accommodating approach  193–6, 197–8 Regulatory Guide 128 (RG 128)  178–84, 197 reluctance to adopt a more accommodating stance  184 role of  37–8 Australian Securities Exchange  28 Australian Shareholders Association (ASA)  88 AustralianSuper  85, 87, 93, 182–3 Balp, G  3 Barrow, D  55, 56 behind-the-scenes engagement  82, 83–7 ESG issues  85 index investors  86–7 institutional investors  84, 103 collaboration  87 limitations of  139 specialist activist investors  84 superannuation funds  85–6 Berle, A  12, 16 BHP  36, 48, 55, 65–6, 108 Billabong International Ltd  58 BlackRock  86–7, 95, 156–7 board-related activism  194 Bottomley, S  135 Bugeja, M  78–9 CAMAC see Corporations and Markets Advisory Committee capital market features of  8–9 market structure  186–7

220  Index Cheffins, B  3 Chia, H  62 Climate Action 100+ project  96–7 Coastal Capital  58 collective action  162–4, 196 ASIC modifying the operation of takeover laws  176–7 potential for a more accommodating approach  193–6, 197–8 Regulatory Guide 128 (RG 128)  178–84, 197 reluctance to adopt a more accommodating stance  184 board-related activism  194 corporate control implications  164–5 ‘defensive’ activism  194 ESMA public statement on collective action  189–91 higher-intensity collective action  182–4, 197 low-risk activists  195 lower-intensity collective action  181–2 notification requirement  195 one-off interventions  194 ownership concentration  194 takeover laws  167–8, 196–7 20 per cent ‘takeovers threshold’  172–3 ‘acquiring a relevant interest’ in voting shares  168–9, 171–2 ‘association’  169–72 disclosure obligations  174 impediment to collective action  175–6 reduced capacity to trade shares or engage in collective action  173 sanctions for non-compliance  174–5 UK Takeover Panel collective action  191–3 commercial activists  56–60 changing the composition of a board  59–60 constitutional amendments  58–9 institutional / professional investors  56 strategic / trade investors  56 voting power  57 Computershare  35, 72, 73–4, 77, 79, 153 constitutional amendments  40, 51–2, 53, 54, 58–9, 106–8, 137, 188 declaratory resolutions, and  134, 147–8, 149, 150, 151

corporate governance role of shareholders  11–14, 26 cost / benefit analysis  11 Corporate Governance Principles and Recommendations  38, 39, 55, 72, 111 corporate performance and accountability mechanisms for promoting  25–6 Corporations and Markets Advisory Committee (CAMAC)  135, 136, 139, 152, 154 Cox, J  26 ‘deal activism’  5 declaratory resolutions  131–2 benefits of  159–60 constitutional amendments, and  134, 147–8, 149, 150, 151 current law  134 efficiency of corporate decision-making  135–6, 152, 157 law reform  132–3, 134–6 multiple declaratory resolutions  150–51 overseas jurisdictions  133–4 ‘say on climate’  148, 149, 150 ‘say on pay’  144–7 statutory right to propose declaratory resolutions  151–2, 161 binding / non-binding resolutions  154–6 mandatory right  153, 154 ‘opting in’  154 restrictions on the right  157–9 ‘say on’ model  156–7 ‘utility gap’  135, 136, 151 institutional investors  140–42 issue group activists  142–3 limitations of shareholders’ other governance tools  138–40 non-institutional blockholders  143–4 precise nature of the ‘utility gap’  140–44 questionable utility of shareholders’ core governance rights  136–7 defensive activism  185, 194 directive resolutions see declaratory resolutions directors interventionist activism appointment and/or removal of directors  40, 51, 59–60, 105–6, 136–7, 188–9 election to the board of directors  55–6 reputational concerns  111–13, 123–4, 128–9, 145–6

Index  221 disclosure requirements public companies  16, 43–4, 49–50 shareholders  44 diversity of shareholder activists and their objectives  100–101 Doidge, C  129 Dunlop, I  55, 56 Elliott Management  36, 48, 65–6, 108 engagement  3 engagement firms  92–4 environmental, social and governance (ESG) issues  52, 53, 54 behind-the-scenes engagement  85 ESG-focused activism  114–16, 119 ESG-related declaratory resolutions  131–2, 147–8, 149–50 ESG stewardship  4, 7 institutional investors  142 investor networks  96–7 shareholder-proposed ESG resolutions  64–5, 70, 79–80, 115, 119 equity capital market  28–9 principal indices  29 European Securities and Markets Authority (ESMA) public statement on collective action  189–91 Financial Services Council (FSC)  88–9 stewardship code  84, 89, 91–2, 119, 122 firm-level ownership  31 absence of controlling blockholders  31–2 ownership concentrated in small groups of significant shareholders  32–5 retail shareholders  36 Freeburn, L.  63, 64, 79–80, 147–8 Gadens  183 ‘gadflies’  47 Gilbert & Tobin  63 Gilson, R  18, 19, 23, 113, 125 Gordon, J  18, 19, 23, 113, 125 governance framework of public companies  38–9 Governance Institute of Australia  94, 136, 152, 154 governance intermediaries  88, 97, 98, 117–18, 123, 125, 126, 129, 146, 181–2 engagement firms  92–4 investor networks  96–7

proxy advisers  94–6 representative bodies  88–91 stewardship codes  91–2 Gray, A  58–9 hedge fund activism  5–6, 7, 15, 18–19, 23, 113–14, 125, 185–6 higher-intensity collective action   182–4, 197 Hill, J  25 Horizon Oil Limited  58–9 Hostplus  58–9 household share ownership  29 IGCC see Investor Group on Climate Change index investors  30–31, 110, 126, 140 behind-the-scenes engagement  86–7 individual activists  54–6, 101–2 industry superannuation funds  30 influence-wielding activism  116–17, 128–30, 185–6 institutional investors  15, 18, 23, 29–31, 33–4, 102, 109–10, 124–7 behind-the-scenes engagement  84, 103 collaboration  87 ‘common ownership’  22, 24, 124 declaratory resolutions, and  140–42 ESG issues  24, 142 stewardship codes  20, 23, 24, 38 institutional / professional investors commercial activists  56 international influences  119, 122–3, 127 interventionist activism  46–8, 49, 61–2, 69–70, 104, 105 ‘extra-legal’ tactics  65–6 incidence of interventions  50–51, 62, 63, 64, 67, 70 types of intervention  50 nature of activists involved  52, 60–61, 64, 68–9 commercial activists  56–60 individual activists  54–6 issue group activists  52–4 ‘occasional dissidents’  69 nature of interventions  60–61, 62, 69–70 amendment of company’s constitution  51–2, 53, 54, 58–9 appointment and/or removal of directors  51, 59–60 election to the board of directors  55–6 proactive rights  49 public companies’ disclosure obligations  49–50

222  Index ‘public demands’ by shareholders  66 ‘shareholder campaigns’  66 shareholder-proposed ESG resolutions  64–5, 70 targeted companies  61, 62, 64, 67, 68, 70 trade unions  46–7 see also aggressive activism Investor Group on Climate Change (IGCC)  96–7 investor networks   96–7 investor relations professionals  83 Investors Against Slavery and Trafficking APAC  96 issue group activists  52–4 declaratory resolutions  142–3 JP Morgan  66, 67, 68, 69 Lamba, A  34–5 Lipton, M  25–6 literature on shareholder activism  11–12, 14–15, 21 lower-intensity collective action   181–2 Lund, D  123, 129 management-sponsored resolutions  138 Marra Shareholders Action Group  46 Mayne, S  47, 54, 55, 56 Means, G  12, 16 Mees, B  90 ‘mega funds’  8 Morrow Sodali  108 multiple declaratory resolutions  150–51 National Australia Bank Ltd  36 National Roads and Motorists Association Ltd  46, 47 nature of shareholders  17–19 Nili, Y  20 nominee shareholders  32–3 non-institutional blockholders  31, 34–5, 69, 101, 102 declaratory resolutions, and  143–4 ‘occasional dissidents’   69 ‘organic principle’ of corporate power  134 Organisation for Economic Cooperation and Development (OECD)  31, 34 ownership concentration / dispersion  16–17, 186–7, 194

Packer, J  5 Pollman, E  123, 129 precatory resolutions see declaratory resolutions Principles of Responsible Investment (PRI) (UN)  97, 115, 119 private ordering  161 proxy advisers  75, 76, 82, 94–6, 110, 112 proxy voting  72 ‘public demands’ by shareholders  66 Puchniak, D  20 Ramsay, I  62, 63, 64, 79–80, 147–8 Regnan declaratory resolutions  141–2 engagement assignments  93 regulation  37, 44 Australian Securities and Investments Commission role of  37–8 central place of shareholders in corporate law  39–41 disclosure requirements public companies  43–4 shareholders  44 governance framework of public companies  38–9 initiating shareholder decision-making  42–3 regulatory implications of activism  120 sources of corporate law  37–8 ASX Listing Rules  37 soft law  38 remuneration vote see ‘say on pay’ representative bodies  88–91 Responsible Investment Association Australasia  116 retail shareholders   36 Rinehart, G  5 Ringe, W  20 Rio Tinto Ltd  48, 86 Roc Oil Limited   58–9 Sandon Capital  2 ‘say on climate’  64–5, 80, 119, 132, 148, 149, 150 ‘say on pay’  41, 76–9, 113, 144–7 selling shareholdings (exit)  140 share ownership  44 household ownership  29 index investors  30–31 institutional investors  29–31

Index  223 non-institutional blockholders  31 see also firm-level ownership shareholder activism  199 characteristics of  1, 2, 3, 14, 199–200 distinguishing feature of  1–2 factors shaping the nature and extent of  15, 19–21, 120–24, 200–201 business culture  19 equity capital market characteristics  16–19 political factors  19, 121–2 regulatory settings  15–16 transnational factors  19–20 merits of  21–5 ‘shareholder campaigns’  66 ‘shareholder empowerment’  14 shareholder meetings  71–2 AGMs  71–2 attendance at  72–3 exercising voting influence  73, 74–5 expressing dissent through voting  75–6, 82, 104–5 abstentions  80–81 ‘say on pay’  76–9 shareholder-proposed ESG resolutions  79–80 proxy advisers  75, 76, 82 proxy voting  72 two-strikes rule  77, 78, 79, 82–3 voting coordination  81–2 voting rates  73–4 shareholders’ powers  39–41, 203–4 amendment of company’s constitution  40 annual ‘say on pay’  41 approval rights  41 right to remove directors  40 takeovers shareholders as gate-keepers  40 shareholders’ resolutions see declaratory resolutions Smith, S  90 social activist organisations  102 soft law  38 specialist activist investors behind-the-scenes engagement  84 Stapledon, G  34, 35 stewardship  3

stewardship codes  20, 23, 24, 38, 84, 89, 91–2, 115, 119, 122 collective action  183 Strampelli, G  3 strategic / trade investors commercial activists  56 substantial shareholding notices  44, 57, 174 superannuation sector  29–30, 44–5, 100–101, 109, 125–6 behind-the-scenes engagement  85–6 systematic stewardship  4 tactical variation and specialisation  101–3 control implications  187–9 Takeover Bids Network  189 Takeovers Panel (Australia)  174–5, 183, 195–6 takeover regulation  166, 167 ESMA public statement on collective action  189–91 objectives relating to fairness, efficiency and due process  166–7 Regulatory Guide 128 (RG 128) (ASIC)  178–80 see also collective action takeovers shareholders as gate-keepers  40 targeted companies nature of activism, variations in  103–4 Thomas, R  26 Tilburn, J  47 trade unions interventionist activism  46–7 two-resolution approach  147–8, 149, 150 two-strikes rule  4–5, 41, 77, 78, 79, 82–3, 113, 144–5, 147 United Kingdom Takeover Panel collective action  191–3 United States significance of US perspectives  26, 127 Vanguard  86, 87, 126 Varzaly, J  32, 33 voting see shareholder meetings ‘wolf packs’  162

224