Collective investor action — when does positive engagement become inappropriate control?
Governance Institute recognises the importance of constructive investor engagement in maintaining good corporate governance. When effective engagement takes place between parties who want the entity to perform well over the long term and within a sound governance framework, everyone stands to benefit.
ASIC has attempted to facilitate collective investor engagement to promote good governance through its draft update to Regulatory Guide 128 (draft RG 128). At the same time, the draft guide draws the line at the types of investor actions that go too far because they are aimed at gaining control of the company through ‘back door’ means that are not permitted by the Corporations Act.
Striking the right balance
Distinguishing between collective action by investors that’s acceptable because it’s in pursuit of better governance outcomes from collective action that is not — because it’s aimed at seeking control of an entity inappropriately — is inevitably a challenging task.
The danger is that by ‘over-regulating’ legitimate forms of engagement, RG 128 may deter investors from coming together to push for better governance in the entities in which they have an interest.
Curtailing shareholder rights
One of our concerns in draft RG 128 arises from ASIC’s position that investors seeking to control the composition of the board or to influence the conduct of the company’s affairs may be seeking control of the company. In our view, it’s entirely proper and consistent with good governance for investors to seek to influence and improve the composition of a company’s board, management decision-making and governance processes when there is no objective of gaining control.
The Corporations Act provides shareholders with several avenues to air concerns about the company. For instance, 100 shareholders can collectively put an issue on the AGM’s agenda. In addition, shareholders with five per cent of voting stock are able to require the directors to call a general meeting to put forward certain resolutions to members. Shareholders typically exercise these rights to call for constitutional changes or to propose the removal of underperforming directors. These are fair and legitimate concerns. However, draft RG 128 indicates that such actions may amount to inappropriate attempts to control the company, which raises concerns that important shareholder rights to express governance concerns at general meetings, might be stifled.
What about the ‘two-strikes’ rule?
Another concern is that draft RG128 makes no reference at all to the two-strikes rule, even though the rule can be used to seek control of an entity inappropriately. To illustrate, the two-strikes rule can be used to spill a board of directors by companies intent on a hostile takeover. Investors that acquire 20 per cent of a relevant interest in voting shares (subject to the exceptions that are available) — the trigger point for compulsory acquisition — could spearhead moves against the company’s board on the pretext of its remuneration report. This issue needs to be explicitly addressed in the new guide.
Is a new class order in order?
As part of the update of RG 128, ASIC is also proposing to discontinue existing class order relief that is available to facilitate agreements between institutional investors about voting.
In its place, we believe that ASIC should introduce a new class order to support the objectives of RG 128 to facilitate investor engagement directed at improving governance. That is, the proposed class order would provide relief for those investors acting collectively for the purposes of promoting good corporate governance.
And we would like to see standing relief available in those circumstances, with investors acting collectively required to inform and explain to ASIC their basis for relying on the relief. This provides ASIC with the opportunity to consider whether the relief is being used appropriately.
What do you think? Are shareholder rights to express governance concerns to other members affected by draft RG 128? Have you had concerns that they are being used inappropriately to seek control of the company?