Shareholder activism is a growing trend among listed companies. Sometimes, the actions of directors are contrary to the wishes of shareholders or shareholders feel that the incumbents are not performing to the level expected, and a change in board composition is necessary.
A key activist strategy is the power to require directors to call a general meeting. Under section 74 of the Companies Act 1981 shareholders may requisition a Special General Meeting, notwithstanding anything in the company's bye-laws, provided they hold at the date of deposit of the requisition, not less than 10 per cent of the paid-up voting share capital of the company (or in the case of a company not having a share capital, the members represent 10 per cent of the voting rights).
The requisition must state the purposes of the meeting (and may include the text of a resolution to be put before the SGM), be signed by the requisitionists and deposited at the registered office of the company.
If the directors don't convene the SGM within 21 days (i.e. dispatch notice) from the date of deposit of the requisition, the requisitionists, or any of them representing more than 50 per cent of the total voting rights, may convene a meeting, which must be held within 3 months of the date of deposit of the requisition.
Shareholders often requisition a meeting to consider resolutions to effect changes to the board. The Act, and typically the bye-laws of a company, provide that a director may be removed before the expiration of his period of office in an SGM called for that purpose.
The notice of intention to move a resolution for removal must:
- be received by the director concerned at least 14 days before the meeting;
- include a statement of the intention to remove that director; and
- where the removal is for cause, a statement justifying the removal.
The director may attend the meeting and make representations. The deposed director may also have a right to damages for termination of office.
The bye-laws dictate the requirements for giving valid notice and service of notice. Typically, notice must be prepared and served to: (i) all shareholders (save where the terms of their shares do not entitle them to attend/vote), (ii) all directors; and (iii) any resident representative of the company.
When shareholders attempt to remove a director, they may encounter challenges including:
- Shareholders are entitled to register their shares in the name of a nominee and shares in a publicly listed company are often recorded in a “street name” (when a brokerage holds it on behalf of a client). A requisitionist may need to engage a proxy solicitation agent and a financial adviser to determine the shareholder base.
- Legal or regulatory problems associated with the territory in which a shareholder is situated may impact the ability to send the notices to their primary address, a shareholder may be required to provide an alternative address for delivery of notices.
- It may be necessary to coordinate the activities of the requisitionists so that a notice can be served. This is sometimes done by public announcements, press articles or social media describing the matter in issue and asking shareholders to respond. Alternatively, an informal meeting can be held following public advertisement during which forms of requisition can be signed.
- Provided the board convene the SGM, the directors can respond to the requisition however they choose. For example, they can accompany the notice to shareholders with their own circular recommending rejection (subject to applicable listing rules).
- The Act does not prescribe a time limit in which the board must actually hold the SGM once convened. The board could decide to delay the timing of the meeting to frustrate the wishes of the requisitionists but this may leave the board open to attack for breach of duties and conduct which is oppressive (e.g. a claim under section 111 of the Act).
- A meeting convened on requisition cannot transact any business other than that covered by the terms of the requisition, except where the directors have put forward resolutions with due notice.
- If the board fails to convene the SGM, the requisitionists may themselves convene a meeting. The arrangements for the meeting are generally under the control of the company. However, the requisitionists may be able to insist on certain ground rules (e.g. who will serve as chair, text of the resolutions, order of debate, time allowed for speeches, appointment of scrutineers, admission of press/legal advisers etc.).
- There will be an element of cost and disruption to the company in permitting the requisitioned SGM. However, any reasonable expenses incurred by the requisitionists by reason of the failure of the directors duly to convene a meeting must generally be repaid to the requisitionists by the company or deducted from fees/remuneration due to the defaulting directors.
The ability of shareholders to requisition an SGM is a potentially powerful tool and is one that is being increasingly used to drive environmental, social and governance changes in the way businesses are managed and something directors should be mindful of.
First Published in The Royal Gazette, Legally Speaking, February 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.