A tentative perspective on shareholder activism in South Africa

Broad introduction to shareholder activism
1. Shareholder activism is an acknowledged investment asset class in the US. It has been around since the mid-1980s (though some reckon it is earlier than that). Its star is in the ascendancy globally. It is relatively new in South Africa. It is anticipated that it will also become rote in our jurisdiction over time. Shareholder activism of whatever description is massively complex from a host of perspectives, including, a legal perspective. There are many moving parts.
2. Broadly speaking, shareholder activism falls into two categories, namely:
2.1 shareholder activism as promoted by investors other than institutional investors (“shareholder activists”);
2.2 shareholder activism as promoted by institutional investors (“institutional shareholders”).
3. Shareholder activism of both description is arguably mostly a discrete and thoughtful response in relation to perceived corporate underperformance, whether generally or specifically of whatever description, with reference to particular circumstances. Shareholder activism, particularly of the kind promoted by institutional shareholders, mostly do not attract public attention. This is apparently also the case in South Africa.
4. In order to avoid doubt, shareholder activism of either description takes place in the listed company space.
Can a distinction be drawn between the target companies pursued respectively by shareholder activists and institutional shareholders?
5. Apart from drawing a distinction between the two types of shareholder activism in South Africa, it is also profitable for purposes of academic enquiry to create a distinction between so-called blue chip companies and those companies which are not thought of as such.
6. With reference to the previous passage, speaking most broadly, in the case of:
6.1 the former, these are more likely to be the subject of shareholder activism typical of institutional shareholders; whereas
6.2 the latter, these are more likely to be the subject of shareholder activism typical of shareholder activists.
7. The previous proposition is likely correlated between:
7.1 the ability and capacity of a shareholder activist to raise a fund of adequate proportion to initiate shareholder activism in relation to a so-called blue chip company (though there are nuances if this statement is properly explored). Doing so is possible in the US where shareholder activism has been an established asset class for a considerable period; whereas the same cannot be said of a jurisdiction such as South Africa where shareholder activism has not established the same prominence;
7.2 the eminence and reputation of institutional shareholders and the self-worth of management of blue chip companies. In the face of demonstrable shortfalls in the applicable performance metrics of what may be expected of management of a blue-chip company, these managers are alive to their reputations and the prospects of career endurance. They may be more willing to move along or change places than their peers in companies’ other than blue chip companies. Rather unkindly (and at the risk of generalizing), management of the latter are less concerned about career endurance (possibly (or not) as a result of having less star power/career mobility than their blue-chip management peers).
8. What is stated so far under this heading should not be looked upon as a proposition that institutional shareholders only invest in so-called blue chip companies. The large institutional shareholders in our jurisdiction are faced with many hundreds of millions of rand of investment inflows monthly. Institutional shareholders can only buy so much shares in Woolworths, SAB Miller and the like (which are SA blue chip stocks). By reason of the volume of inflows, institutional shareholders obviously also buy shares in companies other than blue-chip companies.
9. As an aside with reference to paragraph 5, the previous paragraph is probably of greater application in jurisdictions where shareholder activism is generally nascent. So, for example, it is probably more apposite in our jurisdiction in contradistinction to the US. In a jurisdiction such as the US, shareholder activists of repute (whether positive or negative, if the latter, not quite infamous as those bruised by encounters with them may likely contend) such as Carl Icahn, Bill Ackman and the like, arguably pack the same sway or power (if not greater) as/than institutional shareholders.
What is the objective of shareholder activists and institutional shareholders respectively?
10. Shareholder activism as conducted by shareholder activists are almost exclusively performance driven. An activist fund will take an interest in a company:
10.1 where there is an arbitrage between the price at which the counter is trading and the intrinsic value of the company in question. To avoid uncertainty, the former will be less than the latter; and
10.2 the activist fund has a strategy or a plan to address the management or other shortcomings in the company over a defined period (at least co-extensive with the mandate period (or the remainder thereof) of the activist fund to its investors) so that following the intervention in question, the arbitrage is less or eliminated (though valuation experts will no doubt take issue with the elimination assertion).
11. Shareholder activism as piloted by institutional shareholders is arguably more thoughtful (or the approach towards the subject is intellectually richer). Institutional shareholders apart from performance issues are also driven or concerned by the ESG issues found within investee companies. Where institutional shareholders perceive shortfalls of this nature, they typically get out bed in the morning on the issue of shareholder activism.
12. In short, the issues taken into account by institutional shareholders include accountability to ultimate beneficiaries, responsible investment guidelines in the jurisdiction in question (in our case, the Code for Responsible Investing in South Africa more commonly known as CRISA), generally increased scrutiny by regulators and the appetite for hard-coated regulation by regulators at a global level.
13. In the US, shareholder activists frequently solicit and obtain the support of institutional shareholders. In the absence of doing so, the shareholder activism in question may come to naught. It is likely that shareholder activists will adopt the same approach in our jurisdiction.
Shareholder activism in contra-distinction to M&A corporate action
14. Shareholder activism is not uniform. It occupies a wide-ranging investment strategy spectrum. It provides a broad church to those who deal in or wish to engage with corporate underperformance of whatever description.

15. Corporate action by shareholders or third parties in the case of underperforming companies arguably fall into the categories contemplated below. The analysis is useful inasmuch as it places shareholder activism in contradistinction to other forms of corporate action aimed at corporate underperformance.
16. The first of the categories encompasses corporate action which is externally focused, the chief currency whereof is transaction-centric. This is a mergers and acquisitions strategy. The corporate action may as such be bilateral in nature.
17. The value driver of the increase in value is one or a related series of transactions. These strategies are driven by corporate finance professionals or investment bankers in conjunction with management and/or shareholders (in the case of the latter, at least with the support of key shareholders).
18. A mergers and acquisitions strategy is arguably aimed or targeted at the income-earning structure of the target company. Typically, the body of shareholders is the decision-making organ in relation to changes to or around the income-earning structure of a company. These strategies, for example, may involve company A merging with/taking over/absorbing Company Y or vice versa, as the case may be.
19. In these cases, the execution strategy may typically require antecedent general shareholder approvals (and the required circulars to shareholders and fair and reasonable reports) or a general offer where the merger and acquisition is to be executed through the blunt instrument of a takeover. This may happen where management is not alongside the offeror. In other words, management does not initially (and possibly throughout the entire process (in which case, the offer will be referred to as a hostile offer)) support the merger and acquisition in question.
20. The second of the categories encompasses corporate action which is internally focused, the chief currency whereof is to engage with the board and management of the company in question in order to increase the value of the company over a defined period taking account of a clear strategy to do so. This is a shareholder activist strategy. The corporate action in question may as such be unilateral in nature (for the reason that the company itself may not be transacting with a counterparty in order to execute the shareholder activist strategy or intervention in question).
21. The value driver of the increase in value is an interventionist strategy (of some description) by the activist shareholder/s in question. These strategies are driven by shareholder activists who either do so on their own or seek the support of likeminded shareholders (frequently this would include the support of institutional shareholders).
22. A shareholder activist strategy is arguably aimed or targeted at the income-earning operations of the target company. Typically, the board is the decision-making organ in relation to changes to or around the income-earning structure of a company. Such a strategy, for example, may involve shareholder activist A engaging with management to address some or other perceived operational or structural shortcoming within the group of companies of which the target company is the ultimate holding company. The tools to address the perceived shortcoming/s may thereafter or conjointly include merger/s and acquisitions/s.
23. In these cases, the execution strategy simply requires the board to comply with the fiduciary duties generally applicable to directors. The application of these duties may be filtered through the business judgement rule. Thus, a thoughtful shareholder activist will present the intervention as being in the best interests of the company in question. This squarely falls within the decision-making compliance framework of a board.
24. There may be other categories of intervention. One of these is a recovery strategy generated from within the company by the board/management of the company in question, whether in conjunction with or without the assistance of a management consultancy firm. In a case such as this, the internally generated recovery strategy may of course have been preceded by one or a combination of the first two categories.
25. In all of these cases, the cooperation or alliance subsisting between those advocating for some or other change in the direction of the company may be construed as or in fact amount to a change of control of the company in question. This may at least have the following two consequences: a change of control of the target company from a takeover regulation perspective and/or a competition law perspective. Either or of course both of these outcomes presents a substantial impediment to the shareholder activist (of both types identified in this post).