As part of its program to cut red tape and bureaucracy, the Australian government is set to repeal the 100-member rule.
The rule contained in the Corporations Act forces a company to hold a general meeting on the request of shareholders with (a) at least 5% of the votes that may be cast at the general meeting; or (b) at least 100 members who are entitled to vote at the general meeting. Only part (b) of the rule will be scrapped under the proposed bill, so shareholders with 5% or more of the votes are still able to requisition a general meeting.
Business groups have long maintained that the 100-member rule is excessively costly for corporations, which may be forced to an extraordinary general meeting on the basis of 100 shareholders holding a minuscule portion of total shares.
On the other hand, shareholder advocate groups like the Australian Shareholders Association warn about closing one of the few avenues available for retail shareholders to raise their concerns with the board.
So is the repeal an attack on shareholder democracy or will it, as some claim, actually enhance shareholder participation?
There’s no doubt that activists have used the 100-member rule to push specific political issues. In 2012 the activist group GetUp! used the rule to try to force Woolworths, the largest owner of poker machines in Australia, to hold an EGM on a resolution limiting the maximum poker machine bet to A$1.
The matter went to Federal Court, with Woolworths arguing it should be able to hear the resolution at its normal annual general meeting (AGM) in November. It argued the cost of an EGM was significant (in the range of $500,000) and an unnecessary expense for the company. The Federal Court agreed, and Woolworths held an EGM to vote on the resolution just before the AGM in November 2012. The resolution was overwhelmingly voted down.
In 2003 the Wilderness Society collected the necessary 100 shareholders to force logging company Gunns to an EGM on a resolution to ban old-growth logging. The resolution was voted down by a wide margin.
The problem with allowing very small shareholders to requisition a general meeting is the deadweight loss to the firm of the significant costs of holding an EGM, given that historically the resolutions have usually been defeated. The resolutions pushed by groups such as GetUp! deal with political or corporate social responsibility issues and are often motivated by the desire to garner public attention for a specific cause, rather than the maximisation of shareholder returns. Not surprisingly such 100-member meeting requisitions are not value-enhancing for the affected firms nor their shareholders.
But shareholder activism and the use of the 100-member rule is not confined to retail investors and lobby groups. Shareholder activism is on the increase in Australia, with a record eight board spills announced in January alone this year.
The profit motive
In a move many see as the start of a new era of shareholder activism in Australia, earlier this year US-based hedge fund Lone Star Value Investors LP used a range of legal tools, including the requisition of an EGM, in an attempt to reconstitute the board of Antares Energy Limited, an ASX-listed oil and gas firm. Though unsuccessful, Lone Star’s proposal to remove two directors from the Antares board and nominate five of its own candidates for election would have given it effective control of Antares with a shareholding of around 6%.
Clearly, then, there is also ample scope for shareholder activists to use the 100-member rule as a means to exploit opportunities for economic gain. In this context, the move to repeal the rule closes an avenue whereby the board could be challenged on the basis of a very small proportion of shareholder votes and with a relatively small investment by the activist shareholders. That is, the arbitrary “100-members” rule is a low hurdle that does not reflect ownership stake.
To illustrate, the Australian Shareholders Association estimates the average market capitalisation of ASX200 companies (excluding the top 20) is about A$2.6 billion. The investment required to obtain the 5% shareholding to requisition a general meeting under the remaining provisions of the Corporations Act would therefore be in the magnitude of A$130 million, well beyond the reach of a small investor or lobby group.
Obviously the abolition of the 100-member rule will have less impact on institutional activist groups, such as Lone Star, which have far greater resources at their disposal.
What about small investors?
So where does this leave the small retail investor who wants to raise concerns with the board? It’s important to understand that it’s only the 100-members power to requisition a general meeting that is being repealed under the current bill. Other shareholder rights provisions of the Corporations Act will remain intact. Small shareholders can continue to use the 100-member rule to force a discussion with the board, but must wait until the scheduled AGM to do so.
Investors also still have access to the two strikes rule, designed to hold directors accountable for executive salaries and bonuses.
The question remains to what extent small shareholder participation in the management of the company is reasonable or desirable.
Share investments carry ownership rights but not management rights. It’s an established legal principle that shareholders cannot tell directors how to run their company unless the company’s constitution explicitly gives such powers to shareholders. Shareholders have a legitimate interest in how the board exercises its powers but they have no part to play in the actual exercise of those powers.
At the same time the board is accountable to members, including small shareholders, who unlike institutional investors may not have an opportunity to speak to the board outside of the AGM.
But we should remember that like all shareholders stuck with an underperforming board, retail investors also have the option of simply selling their shares - the ultimate form of shareholder activism.