Activist shareholders help make changes in a public trading company to change how it is run. Their goals can be modest, such as advising corporation management, or ambitious in forcing the sale of the company, restructuring or even replacing the board of directors. 

Unlike private equity firms that can buy or restructure companies to profit when they are sold, activist investors do not need majority stakes. They use public communications to win over other shareholders. 

But before we try to understand the use of activism, let us take a look at what is an activist shareholder and how it works.

Activist Shareholder - Table of Contents

What is an Activist Shareholder?

An activist shareholder is an individual who uses their stakes in a publicly-trading company to pressure management to get them to take a specific approach. Since obtaining a controlling interest through a takeover is costly, activist shareholders leverage a minimal stake of less than 10% of other outstanding shares to initiate a campaign.

An activist shareholder's main goal can range from financial reasons, such as unlocking shareholder values, to non-financial reasons, like adopting environmentally friendly policies.

Understanding a Shareholder Activist

A company can become the target of a shareholder activist when it reports high costs, incurs mismanagement, or if the other shareholders believe that it can become more profitable if it is run as a private company. To launch a successful campaign, a shareholder does not need to hold a major stake in the targeted corporation. Instead, it can acquire less than or equal to 1o% of the outstanding shares to be heard on the board. 

Investors that typically choose to act as shareholder activists include high net-worth individuals, hedge funds, and private equity firms. Such individuals can buy shares of mismanaged corporations from the open market to help increase their stakes to a level where they gain a seat on the board.

In most cases, the market gets tipped off by these strategic plays, especially when the investors make public disclosures.

What is the Use of Shareholder Activism?

Shareholder activism helps increase the total capital deployed and the number of campaigns mounted. As per the Harvard Law School Forum on Corporate Governance, 2018 was a record year for shareholder activism. Approximately $65 billion in capital was used throughout the year to increase initiated campaigns to 250 and see an increase in the total number of investors from 110 in 2017 to 130 in 2018. 

These numbers represent the increase in figures. Shareholder activism is also reaching out across borders to conduct their campaigns. The same report found that 60% of campaigns were aimed at companies based in the USA, 25% at European companies, and 10% at Asia Pacific.

Example of Shareholder Activism

One of the most notable activist shareholders is Carl Icahn. He developed a reputation as a ‘corporate raider’ in the 1980s. This occurred in his hostile takeover of TWA airlines in 1985. At the time, TWA, Texaco and American Airlines were the nation’s largest airlines. Mr Icahn’s successful takeover of the company steered it from bankruptcy. 

Another good example is Bill Ackman. One of his prolific positions was issuing a public relations campaign against Herbalife in 2012. 

In contrast, multiple hedge funds have pushed for change in their partners’ environmental, social and governance issues. Some of the top funds concerned with ESG are Trian Partners, Red Mountain Capital Partners, Blue Harbour Group, and ValueAct Capital. Some funds are pushed by their investors who want to showcase their company’s commitment to CSR or Corporate Social Responsibility.

[ Check out the Rights and Duties of a Shareholder ]

Importance of Shareholder Activism

The main goal of shareholder activism is to use their equity shares to achieve specific goals. They intend to bring change to the company from within by exercising their influence over other shareholders and voting power. 

While an activist shareholder does not need a large equity stake, having it gives them the power to influence the corporation’s operations. This can again be problematic due to the large costs associated with the resistance of the other shareholders.

How Shareholder Activism Works?

When trying to understand what is an activist shareholder, you need to understand how it works. Shareholder activists target companies with excess cash reserves that might be distributed as dividends. If the investors think that the company does not require that excess cash and there is a change of distribution, he then starts growing their ownership stake in the company to get a seat on the board of directors. In such situations, investors hope to persuade the other shareholders to agree to a larger dividend distribution. 

So, when the target corporation incurs high operating costs, the activist shareholder may suggest cutting management salaries or scrapping non-performing business units and other measures that return the company to profitability. The activist shareholder employs multiple strategies that range from contentious to collaborations like public campaigns, litigations, proxy contests, and negotiating with management.

Types of Shareholder Activism

Shareholder activism can avail multiple methods to push their desired change within the company. The most common options for shareholder activism include the following: 

1. Individual Activists

These are individuals who are wealthy and influential. They leverage their capital to purchase enough company shares to gain enough voting rights on the board of directors. They aim to influence the strategic direction of the targeted company. The individual is well-known in the financial industry and uses their influence to make a structural change in the company strategy.

2. Private Equity Firms

Activist investors in private equity firms can employ multiple options but will take control of a public company to make it private. The structure of a private equity firm includes limited partners who own significant amounts of funds and enjoy limited liability. Private equity firms help use capital from multiple investors who want to invest large capital for an extended time. 

3. Hedge Funding

Activist investors in the form of hedge funding take control of a public company in multiple ways. Hedge funds take the approach of individual activist investors or act like private equity firms. The underlying goal of the hedge fund is to generate returns for investors no matter what, and the funding is not subject to constraints in the strategies employed. 

Multiple activist investors act through hedge funds and are established with investments from multiple limited partners and a general partner. These investments are illiquid as they are locked for one year to provide hedge fund managers with the best flexibility.

[ Related Blog: Equity Share vs Preference Share ]

List of Activist Shareholders

Some best examples of activist shareholders are:

• Bill Ackman 
• Carl Icahn
• Dan Loeb 
• David Einhorn.

Conclusion

When planning to understand what is an activist shareholder, then you need to check the present market scenario. While these individuals use their small minority stakes to push for a change at publicly listed companies, they exercise their rights as shareholders to the fullest to persuade other shareholders to make changes in the company. The discipline they impose helps promote shareholder-friendly policies in other corporations as well.