The rise of value-driven shareholder activism in Australia: a new governance playbook

Shareholder activism is back – but with a different focus. With return-focused shareholder activism on the rise in Australia, value-based activist investing is set to grow, as it has in the United States, where it has dominated for decades.

This new wave of activism should prompt ASX-listed companies across all industries to pay greater attention to long-term value strategies and prepare to build a new best practice corporate governance playbook for positive shareholder activist engagement.

In recent times, there has been a rise in alternative asset managers that have funds dedicated to unlocking shareholder returns through activism in Australian companies. This form of activism differs from ideology-focused activism, which is primarily environmental, social and governance (ESG)-focused, such as Grok Venture’s vote against AGL’s proposed demerger and the raft of climate change activist campaigns against oil and gas companies.

Value-focused activism is also in sharp contrast to the traditional passive investing by Australian institutional investors, who liaise with the board but do not initiate value strategies or agitate for change.

The key players

The recent pivot towards transactional activism or value-focused activism has been steered by a new generation of Australian fund managers that have followed their US counterparts and established funds dedicated to ‘private equity style’ or ‘high conviction’ investments. These investments aim to generate shareholder returns by activism, effectively establishing activist investing as an asset class.

The key players offering products in this asset class are:

• Tanarra Capital Long-Term Value Fund
  
  
• HMC Capital Partners Fund 1
  
  
• L1 Capital Catalyst Fund

There are also more experienced Australian activist funds – such as Sandon Capital and Samuel Terry Asset Management – as well as other fund managers, hedge funds and even superannuation funds that will engage in activism but do not have dedicated activist funds such as Allan Gray and Aware Super. Investment banks are increasingly providing advice to activists and vulnerable companies alike about value creation opportunities and responses to activist action respectively.

Recent Australian campaigns

In recent years, activist investors have instigated public campaigns directed at improving shareholder returns from ASX-listed companies. Examples include:

• Tanarra Capital’s campaign that culminated in the resignation of the incumbent chair and the election of the Tanarra Capital nominee to the board of Healius Limited in November 2023;
  
  
• several activist investors (including HMC Capital Partners, Allan Gray, Tanarra Capital and Aware Super) advocating for board renewal and strategic change at Lendlease Group;
  
  
• L1 Capital Catalyst Fund urging Santos Ltd to split its liquefied natural gas assets;
  
  
• Sandon Capital and Samual Terry Asset Management teaming up against Karoon Energy Limited which received its first strike at its last annual general meeting (AGM);
  
  
• Allan Gray’s support of ARN and Anchorage’s proposal to acquire Southern Cross Media; and
  
  
• Washington H. Soul Pattison’s stakebuild in Perpetual to initiate a strategy to realise value in its corporate trustee and wealth management businesses.

Activist investor strategy

The strategy of the activist fund is to build a stake initially and then typically (although not always) to approach the board with opportunities. While some approaches are confidential, this is less common where activist funds are involved, as they tend to charge higher fees than passive fund managers, and the ability to publicly demonstrate active engagement with their investee base is part of their investment thesis.

An activist may then also ramp up its campaign by publishing white papers, giving interviews to media sources and engaging with other investors to put more pressure on the board to consider its proposal.

The primary focus areas for unlocking value are:

• capital management;
  
  
• strategic and operational issues (such as M&A and disposals);
  
  
• executive remuneration (compared against overall performance); and
  
  
• board renewal.

A new governance playbook

ASX-listed companies have the opportunity to learn from recent campaigns in Australia and overseas to build a new playbook for positive shareholder activist engagement – one that is focused on understanding the company’s strategy to achieve long-term value and respectful engagement (a departure from the ideology of activist defence).

In developing this playbook, the key considerations include:

1. Directors duties. Directors have a statutory obligation and fiduciary duty to act in good faith in the best interests of the corporation. While there is conjecture about the perimeter of the ‘corporation’ in applying this duty, undeniably, the shareholders are key listed company stakeholders and have a fundamental interest in the value of the shares. In fulfilling directors’ duties in the context of an activist proposal, directors should:

• acknowledge that activist funds dedicate significant time and resources to researching the relevant company, its industry and value propositions;
  
  
• consider that they have a duty to objectively and carefully evaluate an activist proposal that has the potential to create medium to long-term value;
  
  
• be cognisant of potential conflicts of interest, particularly where the stated objective of the activist is board renewal – boards should be prepared to establish an independent board committee which excludes potentially conflicted directors from considering any proposal; and
  
  
• apply the same process and perspective in assessing an activist proposal as would be the case for a control transaction.

2. Preparation and communication. Maintaining an up-to-date beneficial shareholder register, monitoring the share price, ‘war-gaming’ potential attacks by an activist, understanding different activists’ objectives and strategies and being able to articulate the company’s long-term value strategy are all key aspects of preparation for a board. We recommend the board pre-emptively engage legal, financial and communications advisors to assist in this preparation process if it considers that it is at risk of an activist campaign. A detailed communication and engagement strategy is also crucial in managing the relationship with activist investors. The communication strategy should outline:

• potential responses to a variety of different scenarios (taking into account the particular activist’s objectives); and
  
  
• the process for response, whereby the board should respond with a single voice as much as possible and nominate an individual who is best placed to be the face of the communications.

A strategy focused on positive activist engagement is far more likely to succeed in avoiding a public and potentially damaging campaign.

3. Confidentiality agreements. While a departure from current Australian market practice, we recommend that the company consider a limited confidentiality agreement with an activist before any significant engagement. The objective of the confidentiality agreement is to demonstrate that the company is willing to listen and engage with the activist, provided the interaction remains confidential. The confidentiality agreement should:

• be targeted at discussions with the activist;
  
  
• include a ‘no-contact’ provision;
  
  
• terminate after a short but reasonable period to allow for productive discussions; and
  
  
• contain injunctive relief rights.

It is common practice in the US to enter into confidentiality agreements before opening discussions with activist investors. Upfront confidentiality agreements are a fresh approach to activist engagement in Australia and the activist investor may resist, particularly if promotion of its activist activity is part of its strategy. The activist will also likely not want to receive price sensitive information and the company should not disclose price sensitive information under this agreement. In our view, however, levelling the playing field between attack and defence by creating a confidential space for the activist investor and company to interact could be a useful tool to encourage constructive engagement and may ultimately result in a resolution with the activist which does not become public and damage the company.

4. Continuous disclosure. In a listed environment, continuous disclosure obligations are a major consideration. As always, the company should be aware that:

• the threshold question is whether the information would be considered to have a material impact on the price of the company’s securities and a reasonable person would expect the information to be disclosed;
  
  
• confidential information and incomplete proposals have the benefit of the exception in Listing Rule 3.1A; and
  
  
• once an announcement in relation to the activist investor has been made, the company puts itself in a position of having to provide updates to shareholders, which can be burdensome and can also create share price volatility.

We recommend that the company’s continuous disclosure committee stay across all communications with the activist investor and thoroughly consider whether disclosure is required. If in any doubt, the company should also consult its legal advisors given the risk of class action or regulatory action for failure to comply with continuous disclosure obligations.

5. If all else fails, be prepared to litigate. If engagement with an activist does not produce a constructive outcome, companies should be prepared for the engagement to wind up into the courtroom. Activist strategies which often end up in courtroom battles include board spills, attempts to alter a company’s constitution through a general meeting and attempts to access shareholder details or information about the company. Companies should also be prepared to go on the offensive if an activist’s strategy involves false, misleading or deceptive statements about the company. A recent example of that in Australia (at least in a more traditional activist context) is Rural Fund Group’s successful challenge to statements made by a US-based activist short seller. Where a company’s interaction with an activist does turn sour, directors should also be conscious of constraints on directors’ expenditure of corporate funds to defend against the campaign of an activist investor and the need to provide a balanced disclosure to investors.

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Value-focused activism is at an all-time high in Australia and is set to increase. However, if the board is prepared and willing to engage, it is possible for the company and the activist to have a constructive relationship, which will also provide the board with additional time to prepare to defend itself if necessary.