A recent ruling
A recent Federal Court ruling has supported the "NRMA Principle" that shareholders cannot instruct directors on how to run the company, but recent developments at AGL Energy make it clear that activists are still hunting for a way to make an impact.
The Federal Court recently ruled that the Commonwealth Bank was correct in rejecting an ordinary resolution submitted by a shareholder group for putting to its 2014 AGM, on the basis that shareholders cannot require an AGM to consider a resolution "expressing their opinion on matters as to how a power vested in the board ought to be exercised".
The resolution, requisitioned by shareholders (more than the minimum 100) associated with the Australasian Centre for Corporate Responsibility (ACCR), expressed concern that the Bank's annual report did not contain certain disclosures around emissions and fossil fuel risks associated with projects and companies the Bank had financed, and strategies to reduce those risks.
The basis for the Bank's position was that the subject of the ordinary resolution was "within the purview of the Board and management of the bank", not the shareholders. The Bank did, however, put to the AGM a special resolution requisitioned by the same group that sought to amend its constitution to require an annual report on greenhouse gas emissions financed by the Bank.
The Federal Court ruling was entirely to be expected, based on what is known as "the NRMA principle"1. But the activists in NRMA had another argument – that the requisitioned general meeting should still be held to consider a resolution for members to express their opinion about the manner in which the NRMA board election should be conducted.
The Court rejected this argument too:
The Court, however, gave the shareholder activism movement a lesson on how to proceed in the future:
That shareholder activists have learned this lesson has been evident in the recent activism in relation to AGL Energy.
An energetic campaign
On 29 July 2015, approximately 120 AGL shareholders, reportedly linked to a number of organisations including ACCR, GetUp! and the Asset Owners' Disclosure Project, requisitioned a resolution to be put on the agenda for the next AGM of AGL to be held on 30 September 2015:
"Special Resolution to amend the constitution:
That, at the end of Clause 31 'Notice' the following new sub-clause 31.5 is inserted: 'That, (a) the board must prepare a business model that demonstrates sufficient diversification of the power generation and supply activities of the company to ensure continued profitability under pathways that limit the world to 2°C warming; and (b) include in future annual reporting to shareholders, at reasonable cost and omitting any proprietary information, information about ongoing power generation and supply chain emissions management benchmarked against that model.'"
This resolution is valid because it seeks to amend AGL's constitution. Of course, a change to a company's constitution requires a 75% vote in favour and is therefore much less likely to be passed than an ordinary resolution. But the chance of passing even an ordinary resolution (50% vote) on issues put up by the minimum 100 shareholders is usually slim.
So the real question is whether the law should allow the AGM of listed companies to be used for the purpose of this type of shareholder activism on the say-so of 100 members.
A step in the right direction
The Corporations Act allows shareholders to force a company to put a resolution to the next AGM if it is supported by 100 shareholders or by shareholders holding at least 5% of the issued shares. The Act separately allows shareholders to force a company to call a general meeting outside of the AGM process if that is supported by shareholders holding at least 5% of the issued shares. 100 shareholders used to be able to force the holding of an additional general meeting but that right was removed by Parliament early in 2015.
Parliament did not go far enough - it should also have removed the right of 100 members to force a resolution onto the notice paper for the next AGM. Why? Because if a shareholder activist cannot find support of 5% of the shareholding base to requisition the resolution in the first place, there is little or no prospect that the resolution will be passed at the AGM and the AGM's business should not be hijacked by such matters. Resolutions of that sort tend to be related more to "social issues" than the true business of the company itself, which is essentially to achieve satisfactory returns for its shareholders.
An example of this was the 2012 proposal by GetUp!, backed by about 200 shareholders, to amend Woolworths' constitution to restrict the operation of poker machines in Woolworths' business. This proposal received the backing of only 2.5% of the votes cast on the resolution, and so was just a 'toothless tiger' that wasted the time and energy taken to address it.
This tiger has learned new tricks
The sensible course of action if a shareholder activist wants to achieve change in the board's strategy or a company's activities is to do it through the board itself. The activist could do this either through discussions with the board or, if that fails, by seeking shareholder support at a general meeting to change the board.
While this approach is now commonly used in Australia by "value" shareholder activists, who are seeking better performance and financial returns from the company, it is typically not the focus of the "social" shareholder activist, whose main objective has been to try to force the company to change its behaviour, usually as a result of a threat of damage to brand reputation (and the resulting negative impact on company revenue and even market capitalisation).
But the social shareholder activists' tactics have expanded in recent years – where in the past companies had to contend with protests and picket-lines, they now also face crowd-funded litigation driven through the sophisticated social media campaigns that are a core component of modern pressure campaigns. For example, donations of more than $300,000 through GetUp! funded litigation in the Federal Court by the Mackay Conservation Group in relation to offshore dredging at Abbot Point in Queensland, which led to a change in the dredge spoil disposal method. More recently, Federal Court action by the same organisation led to the federal environmental approval for Adani's Carmichael coal mine being held to be invalid. Earlier this month, the Environmental Defenders' Offices in Queensland and New South Wales launched a Climate Litigation Fund to support innovative climate change litigation. Whether or not the litigation is successful, the time and effort spent fighting these matters through the courts of law and public opinion are better spent in other ways.
Companies need to be prepared for the tiger walking into the AGM. The temptation might be for the board to think it might be a 'toothless tiger' because the resolution it proposes is unlikely to be passed, but it can roar very loudly via social and other media campaigns, and may even bring its own lawyer as proxy to argue its point, so it can be a very serious addition to the agenda.
What can a company do to prepare for a shareholder activism campaign?
- Monitor the share register for early signs of activist investors, including multiple small parcels of shares that could indicate that 100 shareholders might soon be banding together.
- Review and improve operational performance and maximise the efficiency of the balance sheet and thereby limit the likelihood of the "value" shareholder activist turning up in the first place.
- The "social" shareholder activist may be harder to placate, so companies should analyse their weaknesses on social issues, fix problems that can be fixed, and rehearse their arguments for the inevitable media and social media pressure campaigns. Much of the focus in this respect is likely to be around environmental issues if history is any guide.
1The "NRMA Principle"
The NRMA principle is that shareholders cannot instruct the directors how to run the company unless the company's constitution specifically allows that to happen.
The principle originated from an early example of Australian shareholder activism. Prior to the 1986 AGM of the National Roads and Motorists Association, a number of members requisitioned a general meeting to consider a resolution to direct the board to appoint a returning officer for the board election and another resolution to direct that returning officer to use a particular ballot procedure.
However, the Association's constitution put "the control and management of the business and affairs of the Association" in the hands of the directors. The Supreme Court held that shareholders could not direct the board on how elections should be conducted. Because of this, the proposed resolutions could not have any effect, and therefore the Association did not have to convene a general meeting.