Federal Court decision deals setback to rising Shareholder Activism in Australia
Shareholder activism has been growing in popularity in Australia. It is a means by which minority shareholders can band together to pressure boards to act in certain ways (usually to the benefit of the minority shareholders with social goals, sometimes not). Advocates contend that shareholder activism is an important way of ensuring that company management remain accountable to their shareholders. Many directors and boards, on the other hand, view the actions of shareholder activists as myopic for focusing on short term earnings for shareholders or misguided for promoting goals that are extraneous to the company’s business, instead of long term growth and value creation.
Shareholder activism is made possible by the permissive regulatory framework which governs the rights of shareholders, including the Corporations Act which:
- allows shareholders with only 5% of issued share capital have the right to call a General Meeting; and
- gives shareholders the right to seek relief against ‘oppressive conduct’ against them.
The Federal Court in RBC Investor Services Australia Nominees Pty Ltd v Brickworks Ltd  FCA 756 dealt an apparent blow to shareholder activism, instead preferencing board autonomy. The Court’s decision demonstrates that where directors have a basis to believe they are acting with the best interests of the Company in mind, the Court will be reluctant to intervene.
Brickworks Ltd (Brickworks) and Washington H. Soul Pattinson & Company Ltd (Soul Pattinson) are two companies that operate under a cross-shareholding structure implemented in the 1960s, meaning that each company owned approximately 40% in the other (such arrangements cannot be implemented today due to a prohibition in the Corporations Act). Perpetual Investment Management Ltd (Perpetual) is a minority shareholder of both Brickworks and Soul Pattinson.
Perpetual had engaged in shareholder activism against Brickworks and Soul Pattinson for many years, putting multiple proposals to the Board to have the cross-shareholding dismantled. In this case, Perpetual claimed it had been ‘oppressed’ (as a minority shareholder) due to the maintenance of the cross shareholding structure, which Perpetual argued entrenched the incumbent boards, thereby depressing the share price in each company.
Justice Jagot dismissed Perpetual’s claim for oppressive conduct stating there was no evidence that the dismantling would yield material longer term financial benefits to the shareholders of either company. In respect of Perpetual’s many failed attempts to dismantle the cross-shareholding structure, her Honour reaffirmed the principle that it is the responsibility of the directors (not the Court) to determine what is in the best interests of the company as a whole. Her Honour found that the Board had considered the range of potential effects of the each of Perpetual’s proposals (both positive and negative) and acknowledged the Board’s decisions to preserve the structure were duly informed and considered.
This outcome is in line with the Court’s traditional reluctance to intervene in or to punish directors for the result of ‘commercial business decisions’, lest it is unequivocally clear that irrationality, illegality, unfairness or oppression has occurred as a result.
Despite the loss by Perpetual in this case and the Court’s tendency to favour board autonomy, the rise in shareholder activism is a warning against corporate complicity and complacency. Boards should ensure that they at all times act in the best interests of the company, communicate proactively and clearly with shareholders, think strategically about all external communication and be ready to engage in dialogue if and when activists come knocking; even if only to save the costs of expensive litigation..