The upward trend of shareholder activism is a matter of concern in many of Australia’s boardrooms.
Following the decision of the Federal Court of Australia in RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited1 (Brickworks case), activist shareholders are likely to search out corporate conduct which, viewed objectively from the perspective of reasonable directors, is unfair to the minority shareholders. Company directors should be alive to the risk that their business decisions will be scrutinised by activist shareholders through this lens and should draw on the lessons for boards which emerge from the Brickworks case.
In the Brickworks case handed down by the Federal Court on 10 July 2017, a large institutional investor sought to dismantle a cross shareholding arrangement between two publicly listed Australian companies on the basis that the cross shareholding was oppressive to minority shareholders. It was alleged that the cross shareholding entrenched the incumbent boards, depressed both companies’ share prices and disenfranchised minority shareholders.
The court emphatically dismissed the claim, holding that reasonable directors would not, in this situation, consider maintenance of the cross shareholding to date to be unfair or oppressive. On the contrary, the court held that directors of both boards had diligently discharged their obligations to act in the best interests of the company; and the cross shareholding had facilitated long-term strategic decision-making and commercial stability. The claimant failed to establish that the founding family of one of the companies (the Millner family) exercised the alleged level of control or influence over the companies’ boards; that the cross shareholding had negatively impacted the companies’ share price; or that the unwinding of the cross shareholding would necessarily deliver value for shareholders.
The cross shareholding arrangement was entered into by Brickworks Limited (Brickworks) and Washington H Soul Pattinson and Company Limited (Soul Pattinson) in 1969. At the time of the court’s decision, each of Brickworks and Soul Pattinson were the largest shareholders in each other, with Brickworks owning approximately 43 per cent of the shares in Soul Pattinson; which, in turn, had an interest of about 44 per cent in Brickworks.
In the 1980s, one of Australia’s largest fund managers, Perpetual Limited, through its custodian’s nominee, RBC Investor services Australia Nominees Pty Limited (Perpetual), acquired shares in both Brickworks and Soul Pattinson. When the proceeding was commenced in 2014, Perpetual owned approximately nine per cent of the shares in Brickworks and 6.5 per cent of the shares in Soul Pattinson.