Historically, shareholder activism has not been an important force in South Africa. It is more common to see activism in the South African context from interested parties such as trade unions, rather than shareholders. More recently, following global trends attributable to an increasingly internationalised shareholder base, for instance, shareholder activism has been on the rise and the market has started to take note of the influence shareholders can wield. The regulatory framework in South Africa, which creates platforms for shareholder engagement and the enforcement of shareholder rights, has created a somewhat enabling environment for shareholder activism that is being embraced with increasing levels of participation. While much of the publicised shareholder activism in South Africa has focused on aspects of corporate governance and executive remuneration, there has also been shareholder activism influence, although to a lesser extent, on mergers and acquisitions. While in most deals there is no legal obligation to consult with trade unions and other potential activists in advance of a transaction, it is often in the best interests of the parties to do so, since these activists often use the media and regulatory approval processes as hurdles to getting a deal through.
II LEGAL AND REGULATORY FRAMEWORK
The South African Companies Act 71 of 2008 (the SA Companies Act) is the main source of company law in South Africa and contains the majority of the provisions that relate to shareholder rights, activism and engagement. The main regulatory authorities under the SA Companies Act include the Companies and Intellectual Property Commission (CIPC), tasked broadly with powers of enforcement under the SA Companies Act (including receiving, initiating and investigating complaints concerning alleged contraventions) and the Companies Tribunal.
Chapter 5 of the SA Companies Act, read together with Chapter 5 of the Companies Regulations, 2011 promulgated thereunder (the Takeover Regulations), regulates takeovers and other affected transactions (i.e., mergers, schemes, asset disposals, etc.). These Takeover Regulations are applicable in respect of public companies and state-owned companies. They also have limited application to private companies (i.e., where there has been a transfer of 10 per cent or more of the private company's shares within the past 24 months). The primary regulatory authority tasked with enforcing the Takeover Regulations is the Takeover Regulation Panel (TRP). The TRP ensures, among other things, that shareholders have the same information from an offeror during the course of an affected transaction and are afforded enough time to consider the information in order to make an informed decision. The TRP also investigates complaints, where necessary, in relation to affected transactions.
The Listings Requirements (the Listings Requirements) of the Johannesburg Stock Exchange Limited (JSE), enforced by the JSE, apply to entities whose shares are listed on the JSE. These Listings Requirements, among other things, provide for the fair and equal treatment of shareholders, access to information, certain voting thresholds and pre-emptive rights.
The King Report on Governance for South Africa 2016, issued by the Institute of Directors in Southern Africa (the King Code) contains various principles of corporate governance, many of which deal with shareholder rights and engagement. For instance, the King Code recommends that the board of directors must encourage shareholders to attend general meetings and that the board of directors should engage with the shareholders through various means such as websites, advertising and press releases. Certain parts of the King Code have been incorporated into legislation by reference and it has been recently updated to introduce greater disclosure recommendations, including in respect of board committees (which would include a remuneration committee) and CEOs (for example, in respect of notice periods, contractual conditions relating to termination and succession planning). Importantly, recent updates to the King Code specifically introduce recommendations relating to executive remuneration and particular disclosures in this regard. This includes the recommendation that companies should produce and disclose, in respect of a reporting period, a remuneration policy and implementation report (which deals with the implementation of the remuneration policy). This remuneration policy and implementation report must be tabled annually for a separate non-binding advisory vote by shareholders at the company's annual general meeting. In the event that 25 per cent or more voting rights are exercised against any part of this remuneration policy, the board must engage with shareholders in good faith and with best reasonable effort, in order to understand shareholder dissatisfaction and the reasons for dissenting votes. The board is required to appropriately address reasonable and legitimate concerns raised in the evaluation of performance. Although the advisory vote given to shareholders is non-binding, this vote coupled with increased disclosure enables greater shareholder activism in that it encourages the board to engage with shareholders, promotes transparency and provides shareholders with a platform to express their dissatisfaction.
Although not intended as a regulatory means for shareholder activism, certain other regulatory avenues indirectly create platforms for shareholder engagement and the enforcement of shareholder rights and related agendas. As an example, shareholders may use the 'public interest' considerations factored in by the Competition Commission and the Competition Tribunal in determining whether or not to approve a merger from a competition perspective as a means to trip up a transaction.
We have set out below some of the regulatory avenues for shareholder activism.
i Dissenting shareholders
Section 164 of the SA Companies Act provides for appraisal rights that allow dissenting minority shareholders, in the context of a scheme of arrangement, a merger or a sale of all or a greater part of the assets or undertaking of the target, to require the target company to purchase the dissenting shareholders' shares at fair value. These appraisal rights are available to dissenting shareholders that have objected to a resolution to approve such a transaction in advance of it being voted on, and that have voted against the resolution.
Also, in accordance with the provisions of Section 115 of the SA Companies Act, if 15 per cent or more of the shareholders vote against a resolution proposed for implementing a scheme of arrangement, a merger or a sale of all or a greater part of the assets or undertaking of a target company, any dissenting shareholder may within five days of the resolution being passed require the company, at its expense, to obtain court approval before implementing the resolution. Even if less than 15 per cent of the shareholders vote against such resolution, a shareholder who can satisfy a court that there is a prima facie case for review, may within 10 days apply to court for a review of the resolution. The shareholder should first have indicated prior to the meeting that it intended voting against the resolution and subsequently indeed voted against the resolution. A court may only set aside the resolution if it is satisfied that there is manifest unfairness to shareholders or a material procedural irregularity.
ii Actions and remedies
Pursuant to Section 161 of the SA Companies Act, a shareholder may apply to court for an order necessary to protect any right or rectify any harm done to the securities holder by the company (as a consequence of an act or omission that contravened the SA Companies Act or the constitutive documents of the company) or the directors of the company (to the extent that they are liable for a breach of their fiduciary duties).
Similarly, pursuant to Section 163 of the SA Companies Act, a shareholder may apply to court for relief from oppressive and unfairly prejudicial conduct of the company or a related person. The court has a wide range of remedies, including restraining the conduct, declaring a person delinquent or under probation or setting aside transactions.
In accordance with the provisions of Section 165 of the SA Companies Act, a shareholder (and other stakeholders such as trade unions and directors) may bring proceedings in the name of and on behalf of a company to protect the legal interests of the company.
iii Shareholder approvals
Certain corporate actions require shareholder approval prior to adoption. This may be by way of an ordinary resolution (supported by more than 50 per cent of the voting rights exercised on the resolution) or a special resolution (supported by at least 75 per cent of the voting rights exercised on the resolution). These thresholds may be adjusted in the constitutive documents of the company (upwards for an ordinary resolution and up or down for a special resolution), provided that there is always a 10 per cent margin between the lowest threshold for passing a special resolution and the highest threshold for passing an ordinary resolution.
In certain instances, the SA Companies Act also imposes additional approval requirements or restrictions. For example, in respect of any resolutions to be passed approving a disposal of all or a greater part of the assets or undertakings of a company, a merger or amalgamation or a scheme of arrangement and certain buy-backs, not only must the resolution be approved at a meeting (affording minorities an opportunity to attend and ask questions) but only the votes of disinterested shareholders will be taken into consideration (i.e., any voting rights controlled by an acquiring party, a person related to an acquiring party, or a person acting in concert with either of them, must not be included in the calculation). Similarly, in respect of companies listed on the JSE, for example, votes of related parties and their associates will not be taken into account in relation to any resolution in connection with the related party transaction.
A shareholders' meeting must be called if 10 per cent of all voting rights entitled to vote on a matter submit a demand for a shareholders' meeting (or a lower threshold as stipulated in the constitutive documents of the company), unless a court finds the demand frivolous or vexatious. Any two shareholders may propose that a resolution be submitted to shareholders for consideration.
A resolution may not be taken at a shareholders' meeting on a matter unless persons are present to exercise in aggregate at least 25 per cent of all voting rights entitled to be exercised in respect of that matter (subject to a lower or higher threshold stipulated in the constitutive documents of the company); and if the company has more than two shareholders, at least three shareholders must be present. At an adjourned meeting, adjourned for lack of quorum, the shareholders present will constitute a quorum.
iv Protection for making disclosures
Section 159 creates protection for shareholders who disclose information to the relevant regulators where the shareholder reasonably believed at the time that the company or a director had contravened the SA Companies Act; failed to comply with a statutory obligation; engaged in conduct that endangered or harmed an individual or the environment; unfairly discriminated against a person; or contravened other legislation that could potentially place the company at risk. These shareholders are immune from any civil, criminal or administrative liability and the relevant shareholder has qualified privilege in relation to the disclosure made, which would encourage shareholder activists seeking to hold the board accountable for their conduct.
v Defences available to companies and director's duties
There are several defences available to companies when faced with instances of shareholder activism, for example, by planning ahead for various scenarios from a legal and commercial perspective, evaluating a company's shareholding profile and anticipating the concerns or needs of each group of shareholders. Strategic private engagements with various stakeholders, tactics such as 'bear hugs' and accounting for potential shareholder activist activity in the course of creating transaction timelines will also play an important role in preventing or resolving shareholder activist issues in a transactional context. The SA Companies Act generally excludes some of the aforementioned platforms for activism in the event that they are exercised in a manner that is vexatious, frivolous or without merit.
Directors need to take care not to engage in any conduct that is directed at frustrating an offer made in good faith. Directors have a duty to act in the best interests of the company and shareholders at all times.
III KEY TRENDS IN SHAREHOLDER ACTIVISM
i Profile of activist investors
In broad terms, a distinction can be drawn between shareholder activists who are economic activists and governance activists.
Economic activists in South Africa primarily comprise institutional investors and fund managers who have been active in seeking out greater shareholder value. Some examples of economic activists in South Africa include the Public Investment Corporation (SOC) Limited (PIC), an investment management company that is wholly owned by the South African government and is focused on managing government employees' pension funds; and other institutional and pension funds that hold sizeable stakes in companies listed on the JSE.
Governance activists in South Africa are mainly shareholders seeking to influence policy and improve corporate governance principles, such as transparency and increased shareholder involvement on issues such as executive remuneration. Although there is some overlap in the distinction between economic activists and governance activists, some examples of shareholders who have engaged in governance activist activity in South Africa include: the PIC; Allan Gray; Sygnia Asset Management; Value Capital Partners; Foord Asset Management; and certain key individuals who have queried a number of companies on aspects such as good corporate governance, ethics and executive compensation.
Although not yet commonplace in South Africa, shareholder activist activity has been on the rise in companies engaged in a variety of sectors, as shareholders with diversified portfolios seek to enhance shareholder value and activists with various public interest drivers seek to achieve their goals.
A number of recent shareholder activism campaigns have focused on management and executive compensation and remuneration policies. Some JSE-listed companies have indeed been forced to reconsider their remuneration policies following shareholder resistance. Others have had to change the make-up of their board, including Group Five Limited (Group Five) and Adcorp Holdings Limited. Shareholders normally give their views on such matters by voting against resolutions at annual general meetings. However, some shareholders follow the strategy of proactively engaging with the board and executives of companies in which the fund has invested, with the aim of shaping the relevant companies into better and more sustainable long-term financial prospects, which they believe is likely to unlock shareholder value. An example is Allan Gray's involvement in the executive remuneration scheme proposed by Sasol Limited (Sasol), the largest energy and chemical company listed on the JSE.
Allan Gray acquired shares in Sasol over the course of 2010 and 2011. After scrutinising Sasol's executive remuneration scheme, Allan Gray was of the view that the executive remuneration scheme was sub-optimum and recommended that its clients vote their shares in Sasol against the scheme at the 2011 annual general meeting. Allan Gray's concerns with the scheme included the minimal level of disclosure, low performance targets and the fact that the majority of the long-term incentives were not subject to performance conditions and simply vested over time.
Allan Gray engaged with Sasol's Remuneration Committee (Remco) with a view to improving the scheme. This included analysis and benchmarking of the remuneration scheme, meeting with the Remco and further formal correspondence with Sasol's board, culminating in Allan Gray's recommendation to its clients that they vote their shares in favour of Sasol's remuneration scheme in 2012, 2013 and 2014 on the basis that disclosure had been enhanced, performance targets required for incentives to vest had been made more challenging, all the long-term incentives were subject to stringent performance conditions and executives were formally required to build substantial shareholdings in the company. Allan Gray believes that these changes went a long way towards ensuring that executives act in the long-term best interests of shareholders.
Another example of shareholder activism, but in the context of public interest considerations, is the case of Woolworths Holdings Limited, where consumer activists acquired a minority shareholding in the company for the purposes of attending shareholders' meetings and raising governance, transparency, political and ethical issues.
A relatively novel shareholder activism tactic that was recently used by a shareholder is a request for information under the South African Promotion of Access to Information Act 2 of 2000 (PAIA). In broad terms, PAIA allows persons to access any information held by the state, and information held by private bodies where such information is required for the exercise or protection of any rights.
An individual shareholder, who held one share in Coronation Fund Managers (Coronation) at the relevant time, requested further details on Coronation's remuneration policy on the basis that the information set out in Coronation's annual report was not sufficiently detailed. He was not satisfied with the level of detail provided by Coronation and subsequently used PAIA to launch an information request at Coronation's annual general meeting in January 2016. Coronation refused that PAIA request on the basis that it believed it had complied fully with JSE and SA Companies Act requirements to disclose information related to remuneration to its shareholders. The refusal has not been contested in court, but this tactic, coupled with other forms of pressure applied on Coronation, ultimately led to Coronation agreeing to disclose details of its remuneration policy.
In the context of mergers and acquisitions, activists have also been seen to use the rights and remedies afforded to them under the SA Companies Act (as discussed above) or other regulatory procedures (such as the public interest considerations that regulators take into consideration for merger approvals from a competition/anti-trust perspective or other regulatory approval processes) to delay or thwart the implementation of a transaction. Trade unions and other shareholders focused on guarding employee interests, for example, have appealed to the competition authorities to address public interest concerns such as the effect that a merger will have on a particular industrial sector or region, employment, the ability of small businesses, or firms controlled by historically disadvantaged persons, to become competitive and the ability of national industries to compete in international markets. Public interest concerns are generally resolved by the imposition of conditions rather than the prohibition of a merger.
ii Outcomes and the path to resolution
Recent shareholder activist examples indicate that shareholder activists have had an impact on the manner in which South African companies engage with their shareholders. As shareholders become increasingly concerned with executive remuneration policies, transparency and other corporate governance issues, companies will need to pay closer attention to adherence with principles of good governance and engagement in the context of mergers and acquisitions. This is especially so in the context of changes introduced by the King Code.
IV RECENT SHAREHOLDER ACTIVISM CAMPAIGNS
Examples of other recent shareholder activism campaigns in South Africa are set out below.
i Group Five
Allan Gray, an activist shareholder in JSE-listed construction company Group Five, expressed doubt that the construction company's board was still able to act in the firm's best interests after a number of executive and non-executive directors, including the CEO, resigned from the company's board between February and June 2017. Allan Gray, which owns a significant minority stake in the company, requested an extraordinary general meeting in May to reconstitute the board. Allan Gray proposed new board members but faced opposition from the existing board. In late July 2017, all of the non-executive directors resigned from the board and were replaced by eight new non-executive directors at an extraordinary general meeting.2
Pressure from shareholder activist Allan Gray, with an approximate 16 per cent stake in Net1 UEPS Technologies (Net1), played a big role in the resignation of Net1's long-standing CEO at the end of May 2017.3 Net1 is the ultimate parent company of social grant payment provider Cash Paymaster Services, whose social grant contract with the South African Social Security Agency came under scrutiny in the South African Constitutional Court in March 2017. As the problem surrounding payments of social grants grew to crisis levels, and with strong public sentiment against the conduct of Net1, Allan Gray publicly placed pressure on Net1.4 Allan Gray welcomed the announcement of the CEO's resignation, but just as quickly expressed its discontent when it discovered the payout he was to receive. It was reported that the then CEO would receive a substantial payout in order to vacate his position and would also continue to earn a monthly salary from Net1 as a consultant. Allan Gray stated that it had previously put forward proposals that shareholder approval should be required for golden handshakes and large payouts. Renewed shareholder pressure, particularly from Allan Gray, resulted in Net1 terminating the consulting agreement.5
South Africa's largest cement company, PPC Limited (PPC), has already been the subject of one of the most prominent examples of shareholder activism in South Africa. During 2014, a group of shareholders requisitioned a special shareholders' meeting to consider the removal of the entire board of PPC and to replace it with the nominees of the requisitioning shareholders. The measures successfully forced the board to engage with the requisitioning shareholders' concerns. In 2018, PPC once again received the attention of activist shareholders, particularly asset managers such as Prudential Investment Managers and Value Capital Partners. The cement company was the subject of a merger attempt by a consortium comprising its smaller rival AfriSam and a Canadian investment house, Fairfax Financial Holdings. This failed as a result of shareholder resistance to a perceived undervaluation of PPC. Increasing shareholder pressure ultimately led to the chairman of PPC stepping down in March 2018. Value Capital Partners ensured that two of its own directors were appointed to the reshuffled PPC board. Further changes to the board may follow at PPC's annual general meeting in August 2018.6
A showdown occurred between the chairman of Naspers Limited (Naspers) and a prominent shareholder activist at Naspers' annual general meeting in August 2016. Naspers is the largest listed company on the JSE by market capitalisation. The cause of the tension was the activist shareholder's request for specific documentation that detailed certain management and specialist incentives, and that had been available to shareholders previously. Naspers had consistently taken the view that the time period in which shareholders were entitled to view these documents had closed, and refused to make an exception in this case. The activist shareholder, however, contended that shareholders were entitled to view the documents in terms of Naspers' constitutional documents. The conflict resulted in the activist shareholder being threatened with ejection from the meeting. The relevant shareholder subsequently engaged a lawyer in order to pursue the matter further, and Naspers ultimately confirmed through its legal representatives that the shareholder would be given access to the requested documentation.
In 2018, Naspers was the target of corporate governance-focused shareholder activism driven by Allan Gray. Allan Gray made it clear that it would be voting against the proposed remuneration policy at the Naspers annual general meeting on the basis that, leaving aside Naspers' underlying investment in Tencent, the remuneration policy did not align with the performance of the company.7
Steinhoff International Holdings NV (Steinhoff) has been the subject of a highly publicised matter stemming from accounting irregularities that sent the share price of the company spiralling in December 2017. Some stakeholders have cited the multinational owner of Poundland and Pepkor as evidence of the need for increased shareholder activism. Among those calling for greater shareholder activism is Coronation, a substantial shareholder of Steinhoff, which reportedly lost up to 14 billion rand as a result of the accounting irregularities fallout. Coronation indicated that it would be applying a 'higher level of scepticism' to its investment approach, and it is reported to have recently sold its remaining position in Steinhoff.8 Furthermore, in a move that appears to be linked to recent events, a number of Steinhoff's shareholders voted against the reinstatement of incumbent directors Steve Booysen (the head of Steinhoff's audit and risk committee) and Angela Kruger-Steinhoff (the daughter of Steinhoff's founder), such that the two directors were reappointed with only 56 per cent and 59 per cent support, respectively.9 This will be a precedent-setting example in the ongoing debate around the appropriate levels of shareholder involvement in matters concerning the management of a company, a function that was previously left in the hands of the board.
V REGULATORY DEVELOPMENTS
The introduction of updates to the King Code (which came into effect in respect of financial years commencing on or after 1 April 2017) built on previous versions of the King Code and encourages shareholder activism while further developing principles such as shareholder engagement through some of its recommendations. The King Code provides an opportunity for a framework for the responsibilities of shareholders to be incorporated in the corporate governance system of checks and balances. Some of the more recent shareholder activism campaigns mentioned above have emphasised issues relating to what is regarded as excessive executive remuneration, and it is possible, given the more stringent standards for disclosure and engagement, that the most recent King Code iteration had an impact on shareholder activists and their modes of engagement with companies.
In the course of preparing for increased shareholder activism in South Africa, companies need to monitor their shareholder portfolio and anticipate the kinds of activists that are likely to emerge, as well as the type of demands that these shareholders are likely to make, on a case-by-case basis. However, as discussed above, shareholder activists who hold insignificant stakes in companies are also afforded certain rights and protections, and companies will need to ensure that they practise good corporate governance and proactively participate in the appropriate level of shareholder engagement with particular focus on unlocking shareholder value. This includes disclosure and engagement as recommended by the King Code, particularly in the context of listed companies. Recent events have resulted in shareholder bases that are less apathetic in their approach to management accountability and the pursuit of shareholder value, and demand greater levels of accountability, transparency and return on their investment. Failure to engage with modern sophisticated, informed and activist shareholders and provide them with the levels of transparency demanded may leave the board exposed to shareholder disapproval sparked by shareholder activists who are armed with an increased amount of information and a variety of regulatory rights and protections.
1 Ezra Davids is the chairman of the corporate/M&A practice and Xolani Ntamane is a senior associate at Bowmans.
2 Eyewitness News: 'Activist shareholder says loses faith in SA's Group Five after resignations', 27 June 2017 (internet source, accessed 10 July 2017); ENSafrica: Chevan Daniels, George van Niekerk and Koos Pretorius, 'Group Five board shake-up: the legal framework for shareholder activism in South Africa', 28 July 2017, https://www.ensafrica.com/news/Group-Five-board-shake-up-the-legal-framework-for-
shareholder-activism-in-South?Id=2715&STitle=ENSafrica%20newsflash (internet source, accessed 14 May 2018).
3 Daily Maverick 'Net1: Lipstick on a pig or fundamental shift?', 25 May 2017, www.dailymaverick.co.za/
opinionista/2017-05-25-net1-lipstick-on-a-pig-or-a-fundamental-shift/#.WWPG3mcUncv (internet source, accessed 10 July 2017).
4 Eyewitness News 'Shareholder Allan Gray would welcome stricter grant controls', 22 March 2017,
http://ewn.co.za/2017/03/12/net1-shareholder-allan-gray-would-welcome-stricter-grant-controls (internet source, accessed 10 July 2017).
5 Mail & Guardian. 'How Serge beat Net1's shareholders', 2 June 2017, https://mg.co.za/article/2017-06-02-
00-how-serge-beat-net1s-shareholders (internet source, accessed 10 July 2017); Daily Maverick 'Net1: Lipstick on a pig or fundamental shift?', 25 May 2017, www.dailymaverick.co.za/opinionista/2017-05-25-
net1-lipstick-on-a-pig-or-a-fundamental-shift/#.WWPG3mcUncv (internet source, accessed 10 July 2017); Eyewitness News 'Shareholder Allan Gray would welcome stricter grant controls', 22 March 2017,
http://ewn.co.za/2017/03/12/net1-shareholder-allan-gray-would-welcome-stricter-grant-controls (internet source, accessed 10 July 2017).
6 Financial Mail: Nick Hedley, 'PPC Shareholder vote: How the chips may fall', 6 November 2014; Rand Daily Mail: Sikonathi Mantshantsha, 'The odds are stacked against Ketso Gordhan's PPC comeback', 16 October 2014; Times Live: Ann Crotty, 'PPC fallout cements need for oversight', 6 December 2014 (interest source, accessed 18 August 2016); Moneyweb: Ray Mahlaka, 'PPC's watershed moment of shareholder activism'. 5 March 2018. (internet source, accessed 11 May 2018); Moneyweb: Ray Mahlaka, 'Why the PPC, AfriSam tie-up is facing shareholder rebellion', 9 October 2017, https://www.moneyweb.co.za/news/companies-and-deals/why-ppc-afrisam-tie-up-is-facing-shareholder-rebellion/ (internet source, accessed 29 May 2018).
7 Moneyweb: Patrick Cairns 'The significance of Allan Gray speaking out on Naspers', 24 August 2017, https://www.moneyweb.co.za/moneyweb-opinion/the-significance-of-allan-gray-speaking-out-on-naspers/ (internet source, accessed 14 May 2018).
8 Business Day: Ann Crotty, 'Steinhoff investors will not recoup billions lost In accounting scandal'
not-recoup-billions-lost-in-accounting-scandal/ (internet source, accessed 15 June 2018).
9 Huffington Post, 'Steinhoff Under Fire: Coronation Fund Plans To Sue', 14 May 2018, https://www.huffingtonpost.co.za/2018/05/14/steinhoff-under-fire-coronation-fund-plans-to-sue_a_23433844/ (internet source, accessed 22 May 2018); Business Day: Hanna Ziady, 'Once bitten, twice shy for Coronation after Steinhoff bloodbath', 23 May 2018, https://www.businesslive.co.za/bd/companies/financial-services/2018-05-23-coronation-promises-to-exercise-more-scepticism/ (internet source, accessed 23 May 2018); Bloomberg: Janice Kew, 'Biggest Steinhoff shareholder is said to oppose two directors', 24 April 2018, https://www.fin24.com/Companies/Retail/biggest-steinhoff-shareholder-is-said-to-oppose-two-directors-20180424-2 (internet source, accessed 23 May 2018).