Shareholder Activism: New Year, New Challenges
The new Swiss corporation law, effective January 1, 2023 (see Homburger Bulletin of June 22, 2020), provides additional tools for activist shareholders to exert pressure on corporate boards. At the same time, boards have more reason to refer activists to their formal rights as shareholders under corporation law. This Bulletin explains what is new and what this means for boards.
In recent years, various Swiss corporates were facing activist initiatives by shareholders. While some never surface, those that hit the press included Temenos (2022), Richemont (2021), Aryzta (2020), Meyer Burger (2019), Sunrise (2019), Panalpina (2019), Nestlé (2017), GAM (2017), Credit Suisse (2017), and Clariant (2017). In 2020 and 2021, Swiss shareholder activism declined relative to prior years because of the COVID-19 pandemic, but volatility in stock prices in 2022 encouraged hedge funds and other activists. Campaigns have largely focused on board representation, share buybacks, distributions, and company strategy, but activists have also brought ESG matters to the table. Irrespective of the communicated motives, activists often aim to push a company into play for a takeover or spin-off transaction or to create volatility for arbitrage opportunities.
What Can Boards Do
Whether they know it or not, many Swiss companies are being observed by activists who might not yet be (outed as) shareholders and who wait for their moment. Listed companies nowadays have their defense manuals in view of potential takeover approaches. However, as public takeovers are increasingly triggered, one way or another, by an active shareholder, boards should also monitor the profile their company offers to potential activists, address weaknesses and remain conscious of the ways and means of activism. Maintaining an open dialogue with key investors is always helpful, but insufficient to prevent activist campaigns. The continuous communication and determined pursuit of a clear and understandable company strategy also makes attacks less likely and undermines their chances of success. Investors aiming to cash out may still seek ways to realize profits, and companies must be prepared to be proactive if needed.
A New Toolbox for Activists
The new Swiss corporation law, which took effect on January 1, 2023, gives activists new tools and lowers the hurdles for using existing instruments. As a result, would-be activists need to make smaller investments to pursue their initiatives through legal means.
1. Right to Call a Shareholder Meeting
Previously, a shareholder had to represent 10% of a company’s share capital to compel the board to convene an extraordinary shareholders’ meeting, but under the new law, for listed companies, the threshold has been reduced to 5% of the share capital or voting rights. Activists at small- to medium-sized companies will therefore find it easier to reach this lower threshold.
However, a board might be able to use the lower threshold to its advantage by suggesting to an activist that it is in the activist’s control to request a shareholder meeting if the activist truly believes this to be necessary. In other words, why should a board listen to a campaigner who prefers just sending letters. Thus, a board may be able to play the ball back into the shareholder’s court.
Also, while it is easy to publicly call upon a board to convene a shareholder meeting if this has no direct consequences, things are different if the activist must anticipate that the board has to act on such request.
2. Agenda and Proxy Access
Now, shareholders representing 0.5% of the share capital of a listed company—not 10% of the share capital or shares with a nominal value of CHF 1 million as before—have the right to have an item included on the agenda of a shareholder meeting. Shareholders with 0.5% can also compel the board to include their motions on specific agenda items and a short explanation in the invitation to the shareholder meeting. By reducing the shareholding requirements, the new law makes it easier for activist shareholders to, among other things, nominate alternative director candidates or make other proposals.
3. Information and Inspection Rights
In addition to shareholders’ existing right to ask questions at shareholder meetings (information right), under the new law shareholders representing at least 5% of the share capital or voting rights have a right to inspect certain company documents. Previously, this right was subject to the authorization of the shareholders or the board.
Shareholders’ information and inspection rights are still subject to confidentiality and other legitimate company interests. Such requests need only be granted to the extent that the requested information is needed for the exercise of shareholder rights. If the board refuses to answer questions or grant an inspection, shareholders may challenge the decision in court. Although this was already possible under the old law, by making these rights and obligations explicit the new law may make it easier for boards to decline requests in non-obvious cases and force shareholders to explain in court why their request should be allowed.
4. Right to Request a Special Investigation
Shareholders representing 5% of the share capital or voting rights of a listed company (rather than the previous 10% of the share capital or shares with a nominal value of CHF 2 million) now have the right to demand a special investigation from a court if the shareholder meeting has previously rejected such demand.
The new law also lowers evidentiary hurdles for a special investigation. Previously, a claimant had to show that it was more likely than not that a legal violation or a breach of a company’s articles of association had caused loss to the company or its shareholders. Under the new law, this standard has been lowered to such violation being suitable (geeignet) to have caused such a loss.
Despite these changes, commencing and conducting a special investigation remains a complex and lengthy process. It is therefore unlikely that the number of special investigations will increase materially under the new law.
Under the new law, shareholders may appoint litigation counsel to initiate, on behalf of the company and by simple majority, directors’ & officers’ liability lawsuits or actions to seek repayment of unjustified benefits against directors, officers, or shareholders, among others. Although this makes it easier for shareholders to appoint litigation counsel and force the company to bring a lawsuit, it is unlikely that shareholders will approve such lawsuits. If at all, it seems more effective to replace the board by the same voting majority and have the new board pursue such claims. However, the (threat of a) request for inclusion of such an action on the agenda of a shareholder meeting may be used to put pressure on the incumbent board and management.
Companies’ existing articles of association may not comply with the new rights and requirements set out above, particularly the new thresholds. As per the new law’s transitional rules, we believe that such conflicting provisions remain in force until January 1, 2025, at the latest, but must be amended by then. If, however, a company’s articles are silent regarding the matters that the new law affects, then the terms of the new law apply immediately.
The new law makes it easier for would-be activists to initiate campaigns, but it does not follow that they will be successful. Activist campaigns are often “low-cost and low-engagement”. Such campaigns may be limited to some e-mails and a public letter or two in which an activist raises its demands to the board. Rather than giving in to these (soft) demands, a board may refer an activist to its available corporate rights, such as the right to request a shareholder meeting, more often and leave the task, hassle and accountability for such actions to the activist. In any case, it will be more difficult for an activist shareholder to blame the board if the activist refrains from making use of available shareholder rights.
In sum, while the new rules do need to be considered in designing the defensive set-up of companies and may have certain effects, we do not expect them to become game changers for shareholder activism in Switzerland.
This Bulletin expresses general views of the authors as of the date of this Bulletin, without considering any particular fact pattern or circumstances. It does not constitute legal advice. Any liability for the accuracy, correctness, completeness or fairness of the contents of this Bulletin is explicitly excluded.