The traditional strategy among activists in the Swedish market has been private approaches and until recently there have been few examples of investors having taken public and adversarial approaches. There are, however, clear signs of a growing trend of activism with recent examples of both public and adversarial strategies. This has resulted in a heightened awareness among listed companies.
II LEGAL AND REGULATORY FRAMEWORK
i The Swedish corporate governance regime
To understand the legislative and regulatory landscape for shareholder engagement and shareholder activism, the Swedish corporate governance regime should be considered. Corporate governance of Swedish listed companies is regulated by a combination of legislation, self-regulation and codes of practice, statements by self-regulatory bodies and generally accepted practices. The main source of corporate legislation is the Swedish Companies Act (the Companies Act). Other regulatory sources include the Swedish Corporate Governance Code (the Code), the rules of regulated markets and multilateral trading facilities, such as Nasdaq Stockholm's rule book for issuers, as well as statements and rulings by the Swedish Securities Council on what constitutes good practice on the Swedish securities market. Other legislation also forms a part of the regulatory framework, including the Annual Accounts Act, the Swedish Securities Market Act and the EU Market Abuse Regulation.
The Swedish Corporate Governance model recognises the benefit of long-term engaged controlling shareholders, but is at the same time neutral in respect of ownership structures. The right of a majority shareholder to exercise control over a company is counterbalanced by certain minority protection.
The Swedish corporate governance model is based on a hierarchical governance structure where each body can issue directives to a subordinated body and to a certain extent take over the subordinated body's decision-making authority. The different bodies are the shareholders' meeting, the board of directors appointed annually by the shareholders and the managing director appointed by the board of directors. The shareholders' meeting is the highest decision-making body of the company, which also reflects the shareholders' strong position in Swedish corporate governance.
ii The Swedish market for publicly traded companies
There are more than 300 companies whose shares are traded on a Swedish regulated market. The ownership structure of Swedish publicly traded companies has undergone significant changes over the past half-century during which the direct share ownership by private households has decreased. Instead, domestic institutional investors, such as pension funds, life insurance companies and mutual funds, have picked up households' savings in listed shares. This has led to an increasing institutional ownership that plays a significant role on the Swedish stock market. More recently there has been a significant increase in foreign ownership stakes of mainly UK and US-based institutional investors. Despite the institutionalisation of ownership, several listed companies have one or limited number of majority shareholders and, with respect to ownership concentration, approximately two-thirds of the listed companies have at least one shareholder in control of more than 20 per cent of the voting rights. The Swedish Companies Act permits different classes of shares with differentiated voting rights. Several of the listed companies have two classes of shares, where one of the classes may have up to 10 times the voting power of the other class.
Majority owners in Swedish listed companies often take an active ownership approach and engage in the governance of the relevant company, in particular by being represented on the board. Also domestic institutional investors are engaged in the governance of companies, normally through representation on nomination committees and participation at shareholders' meetings.
iii The corporate bodies
The Companies Act provides the statutory background against which shareholders' engagement and activism will be framed. The Companies Act sets out fundamental provisions regarding the governance of a company, including the responsibilities and authority of each corporate body.
iv The board of directors
The board structure in Sweden has one tier. Swedish law does not include provisions for a separate controlling body or supervisory board. The board of directors is responsible for the company's organisation and the management of the company's affairs. A limited number of issues are, according to the Companies Act, reserved exclusively for the board, but other than those the shareholders' meeting can pass resolutions on any company matter, including issuing instructions to the board. Swedish boards are invariably non-executive. Instead, the executive power rests with the managing director, who is appointed by the board.
Election of board members
A particular characteristic of Swedish corporate governance is the engagement of shareholders in the nomination processes to appoint the boards of directors and the auditors through the participation in companies' nomination committees. Nomination committees are not regulated by the Companies Act, but by the Code. Under the Code, which is based on the comply-or-explain principle, all Swedish companies listed on a regulated market must put in place a nomination committee pursuant to a shareholder resolution that either appoints the committee members or sets out the principles on the basis of which the committee members are to be appointed.
The nomination committee is typically composed of representatives of the three to five largest shareholders. Under the Code the majority of the nomination committee members must be independent from the company and management and at least one of its members should be independent, both in relation to the company's largest shareholders but also from a cooperating group of shareholders. The Code sets out certain independent requirements in respect of composition of the board. There are also requirements aimed at encouraging gender balance on boards.
Even though director nomination is typically made through the nomination committee, any shareholder can nominate directors for election to the board and have the nomination included in the notice to the general meeting. Furthermore, any shareholder has the right to propose a candidate as late as at the meeting itself (provided board election is on the meeting agenda).
Responsibilities of the board
The board of directors has wide discretion to regulate its own work, typically through the rules of procedure that the board is required to adopt each year. The board members hold fiduciary positions in relation to the company and must therefore exercise due care and act in the best interests of the company. They are required to comply with the Companies Act and other applicable rules and regulations and with the company's articles of association.
The Companies Act sets out certain general principles, primarily the general clause and the principle of equal treatment, the purpose of which are to protect minority shareholders. The general clause provides that the board of directors or any other representatives of a company may not adopt resolutions that are liable to unduly benefit a shareholder or another party to the disadvantage of the company or another shareholder. Resolutions by the shareholders' meeting are also subject to the general clause. Under the principle of equal treatment all shares have equal rights in the company, if not provided otherwise by the articles of association.
If a board member intentionally or negligently causes the company harm, he or she may be liable for damages. Board members may also in certain circumstances be liable to third parties, including individual shareholders, creditors and employees, if the relevant board member intentionally or negligently breaches the Companies Act, the Annual Accounts Act or the articles of association.
v The shareholders
Under the Companies Act, the shareholders' meeting is the highest decision-making body of the company. At the shareholders' meeting the shareholders participate in the supervision and control of the company. There are a number of matters where a resolution must be passed by the shareholders' meeting such as, alterations of the company's articles of association and changes to the company's share capital, mergers and demergers of the company.
To balance the power of major shareholders, the Companies Act provides for certain protection of minority shareholders. Some rights under the Swedish Companies Act may be exercised by each shareholder (i.e., regardless of the number of shares owned or the number of votes they represent) whereas some rights may only be exercised by a shareholder whose shareholdings represent 10 per cent or more of the share capital. There are also certain rights that can be exercised by various majorities of shareholders.
Shareholders with a single share may attend, express views and vote at general meetings; introduce matters to the agenda and present proposals for resolutions at general meetings; and take court actions against the company to set aside or amend a resolution on the grounds that it has not been duly passed or that the correct procedure for its adoption was not followed. Also, as is described further below, anyone (i.e., not only shareholders) can request a copy of a company's share register, which shows all holdings of 500 shares or more.
Shareholders with 10 per cent of the shares, or more, may:
a requisition an extraordinary shareholders' meeting;
b block a decision to discharge board members or the managing director from liability for damages;
c bring derivative claims against any board member, managing director, auditor or shareholder;
d block the squeeze-out of minority shareholders following a takeover offer;
e block certain mergers or demergers;
f request the appointment of one or more special examiners to investigate the company's management, accounts or certain measures taken by the company or a minority shareholders' auditor; and
g request that the general meeting resolves on a dividend of at least a portion of the distributable profit.
Shareholders with more than one-third of the shares may block certain shareholder resolutions (including resolutions to alter the articles of association, issue shares, warrants or convertible instruments on a non-pre-emptive basis, buy back shares or reduce the share capital).
Under Swedish law, a shareholder can be subject to claims in relation to damage caused to the company, a shareholder or a third party as a consequence of participating, intentionally or though gross negligence, in any breach of the Swedish Companies Act, the Annual Accounts Act or the company's articles of association. A shareholder may not vote in respect of legal proceedings against him or her, or his or her discharge from liability for damages or other obligations towards the company. Claims against shareholders based on the liability rules in the Companies Act are very uncommon. Other than as set out above shareholders do not have any statutory fiduciary duties under Swedish law and, therefore, have no general obligation to act in the best interest of the company. Nor is there any code of best practice for shareholders. Even if there are no particular duties resting with controlling shareholders or institutional investors from a corporate governance perspective, controlling shareholders nevertheless often engage in the corporate governance of the company.
III KEY TRENDS IN SHAREHOLDER ACTIVISM
There are clear signs of a growing trend of shareholder activism in Sweden. Recent examples of activist campaigns have also heightened the awareness among Swedish companies. These examples are not limited to attempts to influence corporate events, such as the outcome of a takeover, but include for instance open letters about the alleged lack of transparency and attempts to influence the contents of the agenda of annual general meetings. Furthermore, recent shareholder engagement has moved into the area of sustainability, aiming for instance to improve the company's environmental or social policies. On this basis, many companies actively monitor their share registers and put in place response manuals that address not only the receipt of a takeover offer but also approaches by activists.
i Shareholder engagement and activism
With one or a few majority owners in many Swedish listed companies, there are few examples where shareholders other than the majority owners have tried to influence the companies in which they own shares. This has, to a certain extent changed during the past decade, arguably following the increase in shareholder activism in the US and generally as a result of the globalisation of the financial markets.
Where shareholders do engage in activist strategies, they may include the following:
a purchasing shares in a company to build a stake that can be voted to influence decisions at shareholders' meeting. This could be combined with stock borrowing, which enables a borrower of shares to exercise voting and shareholder rights;
b purchasing shares or other long positions using CFDs or other derivatives to influence decisions at shareholders' meetings;
c requesting a copy of the company's share register with a view to contacting and cooperating with other shareholders to voice concerns and obtain support for actions that a company should take;
d making a private approach to a company's board to convey concerns and potentially bring about changes to the strategy or management;
e purchasing shares in a company to qualify for a seat on the company's nomination committee and, as a result, to influence the composition of the board;
f using public announcements, press articles, open letters or social media to voice concerns and propose actions that a company should take;
g exercising minority rights, such as requisitioning an extraordinary shareholders' meeting to consider resolutions to effect changes, such as changes to the composition of the board and the return of funds to the shareholders;
h threatening or taking legal action, such as a derivative action, for breach of directors' duties or a claim for unfair treatment of minority shareholders;
i seeking to have the company taken over to realise a premium to the share price; and
j seeking to have a company undertake a specific transaction.
The preferred response to an activist initiative is fact-specific and dependent on the particular strategy (or combination of strategies) used by the activist. The way the company deals with the situation can affect the reputation of the company and the board of directors and it may impact the general view of the company's engagement with its shareholders.
iii Preparing for activist approaches
There are a number of steps that a company could take prior to being targeted by a shareholder activist. Such steps may include the following:
a maintaining a good relationship with its major shareholders and communicating its strategy clearly and how it is maximising long-term shareholder value;
b monitoring press, research reports and social media in respect of both the company and its industry;
c conducting regular strategic reviews to identity areas of interest to activists;
d monitoring the company's shareholder base to identify beneficial ownership, increased levels of stock borrowing and the use of derivatives;
e maintaining good corporate governance standards, including complying with legal and regulatory requirements and best practice, including ensuring that proper procedures, systems and controls are in place; and
f generally identifying and anticipating areas of vulnerability.
iv Rules and processes impacting activism
Stakebuilding and disclosure requirements
Monitoring the shareholder base of the company could form part of an activist's strategy and stakebuilding scheme. Information about the shareholder base, individual shareholders' investment horizon and investment strategies could be used by an activist to plan acquisitions and sales to fit stakebuilding processes. Information about the shareholder base could also be a useful tool in initiatives that involve cooperation with other shareholders.
Monitoring trades, shareholders and shareholdings is also useful for a company to determine whether relevant disclosure or mandatory bid thresholds are reached or exceeded. The company could monitor the activist shareholder's behaviour and the shareholdings closely to see whether relevant thresholds are crossed and the consequences this may bring, such as making a disclosure or having to make a mandatory bid. Furthermore, two or more activists or other shareholders pursuing a common strategy may be acting in concert. If this is the case, their shares may be aggregated for the purposes of these requirements.
The ownership structure of Swedish listed companies is in theory transparent. Pursuant to the Swedish Companies Act, all companies must, through their appointed central securities depositories, maintain a public share register, comprising shareholders with a shareholding of more than 500 shares in the company. However, in practice, the use of nominee or custody accounts will often reduce the transparency of the share register. The share register may not, therefore, reveal the true identity of beneficial holders.
The Swedish regime on shareholding disclosure implements the EU Transparency Obligations Directive (as amended). The regime requires the purchase and sale of shares to be notified to the Financial Supervisory Authority as well as to the target within three trading days where any of the following thresholds is reached, exceeded or fallen below: every 5 per cent up to and including 30 per cent; 50 per cent; two-thirds; and 90 per cent of the total number of shares or voting rights (including any shares held in treasury). The Financial Supervisory Authority will make the relevant information public by no later than at noon on the next trading day following receipt by the Financial Supervisory Authority of the notification. These disclosure rules do not only apply to shares. They also apply to financial instruments that entitle the holder to acquire shares that have been issued as well as long cash-settled derivatives (holdings through cash settled-derivatives are calculated on a delta-adjusted basis). However, warrants and convertible debt instruments that entitle the holder to subscribe for newly issued shares are not caught by the shareholding disclosure rules. Also stock-lending could be used, allowing a borrower of shares to exercise voting and shareholder rights without incurring a long-term economic exposure to the value of the shares. Disclosure requirements apply when the holdings of borrowed stock reach, exceed or fall below the relevant thresholds according to the above.
Market Abuse Regulation
The EU Market Abuse Regulation requires listed companies to announce any price-sensitive information as soon as possible unless they are able to delay such disclosure requiring that there is a legitimate interest to delay the disclosure, that the public is not being misled and that confidentiality can be ensured. On the one hand, an activist could use the argument of diligent application of the rules as a tool to force disclosure. On the other hand, since the Market Abuse Regulation restricts disclosure of inside information selectively, these rules could be used to resist information requests from an activist. Furthermore, an obvious concern in relation to dealings on the basis of confidential information is where the activist or shareholder has been in discussions with the board and, as a result, has received inside information. While individual dealings by an activist on the basis of its own intentions and knowledge of its own strategy would not typically be abusive, certain other activities could constitute market abuse. If the activist has received inside information from the company, dealings in shares or other financial instruments may constitute an insider dealing offence. In addition, where false rumours and expectations are generated to take advantage of short-term price movements, this could constitute a market abuse offence.
A shareholder activist who cooperates with other shareholders will need to consider the implications of acting in concert for the purposes of the shareholding disclosure requirements and the mandatory bid requirement.
In particular, where the parties have entered into an agreement that 'obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards . . . management', such an agreement would generally qualify as relevant concertedness for the purposes of both the shareholding disclosure requirements and the mandatory bid requirement.
In this context it may be worth noting that the European Securities and Markets Authority (ESMA) has published a statement that addresses the extent to which shareholders may cooperate on governance issues without being regarded as 'acting in concert' under the EU Takeovers Directive. The statement includes a 'White List' of activities that are deemed not to be acting in concert. However, ESMA stresses the importance of early consultation with the relevant national authority where there is any uncertainty. If there are additional facts that indicate that the shareholders should be regarded as acting in concert, then the national authority should take those facts into account for the purposes of determining whether or not the parties are acting in concert, even if the relevant activity is on the White List. As a result, each case will be determined on its own facts.
The activities on the White List include:
a entering into discussions with each other about possible matters to be raised with the company's board;
b making representations to the company's board about company policies, practices or particular actions;
c other than in relation to board appointments, exercising shareholders' statutory rights in relation to general meetings (e.g., the right to call a general meeting, adding items to the agenda and tabling draft resolutions); and
d other than in relation to board appointments, and insofar as such a resolution is provided for under national company law, agreeing to vote the same way on a resolution put to a general meeting (e.g., to approve or reject a proposal relating to directors' remuneration or rejecting a related-party transaction).
Duties of the board of directors and management
Since the Swedish corporate governance landscape is strongly based on the principle of equal treatment of all shareholders, the board has a duty to act in the best interests of the company. A board member owes his or her duties to the company as a whole (i.e., to all shareholders, and not to a particular shareholder). On this basis it may, therefore, be legitimate to resist any activist pressure to accept initiatives, propose dividends, give a recommendation in favour of a bid or proposal or allow access for due diligence in such a process. Further, the legal duties only require that the interests of the shareholders are taken into account and not those holding derivatives. Activists may, however, challenge the exercise of directors' duties by bringing derivative claims for damages but such claims will in practice often prove to be unpredictable and will rarely result in any immediate effect. The use of litigation is, therefore, typically not regarded as a key tool for activists in Sweden.
With few exceptions, the general meeting of shareholders may decide on any issue that does not expressly fall within the exclusive authority of another corporate body. The strategy of an activist shareholder could, therefore, involve engaging in the shareholders' resolution process, including with the aim of being represented in the company's nomination committee. Typically, the nomination committee members are appointed by the three to five largest shareholders in the company. The nomination committee instructions normally include principles for the appointment of the members, who are usually appointed by the shareholders identified as the largest at a set time well before the annual general meeting. This implies that an activist may stakebuild in order to be among the largest shareholders at the specified time.
A shareholder could also take activist initiatives by requisitioning resolutions at the shareholders' meeting. A shareholder may also request information at the shareholders' meeting.
Each shareholder has the right to attend the shareholders' meeting, and shareholders who are not able to attend in person could be represented by a proxy. Proxy solicitation by the company is not permitted. The Companies Act, however, provides for the proxy voting, but this is a possibility that is rarely used by Swedish companies. To introduce proxy voting, the company must alter its articles of association, by introducing a provision on proxy voting. This would enable the distribution of proxy forms where the shareholders may indicate their votes (as 'yes' or 'no') regarding the relevant proposals, which are then executed without the shareholders being present at the shareholders' meeting.
A timeline for shareholders' resolution initiatives could look as follows:
Q2 Year 1
Q1 Year 2
Q2 Year 2
Appointment of nomination committee
Propose matters to the AGM agenda in ample time before publication of the AGM notice.
Give notice to attend the AGM.
Attendance at the AGM.
Furthermore, an activist shareholder holding 10 per cent or more of the shares in the company may exercise or threaten to exercise minority rights to put pressure on the board of directors. Such minority rights include requisitioning an extraordinary shareholders' meeting, blocking decisions to discharge liability, bringing claims for damages, requesting a special examiner or requiring certain minimum dividend payments.
Generally accepted market practice
In addition to the regulatory framework described above, self-regulation has long characterised the Swedish securities market.
The self-regulating body, the Swedish Corporate Governance Board, is responsible for managing and administrating the Code and generally promoting good governance of listed companies in Sweden. The Code is a form of self-regulation and compliance with it is mandatory for all Swedish companies listed on a regulated market subject to the 'comply or explain' principle.
The Code has received general acceptance on the Swedish market, and a majority of companies report no or only minor instances of misapplication of the Code.
Another self-regulation body is the Swedish Securities Council. The role of the Swedish Securities Council is to promote good practices on the Swedish stock market by issuing statements on points of interpretation of the Takeover Rules and what constitutes good market practice. The Swedish Securities Council is consequently an important rule-maker in this context. Any action by a Swedish limited company that has issued shares listed on a regulated market in Sweden or by a shareholder of such a company may be subject to the Swedish Securities Council's assessment.
IV RECENT SHAREHOLDER ACTIVISM CAMPAIGNS
Examples in activism in Sweden include the following.
In October 2003, Amaranth Capital (now Cevian) acquired 10.4 per cent of Lindex shares, thereby becoming its second-largest shareholder.
Amaranth Capital gained board representation in 2004. Board and management changes were initiated, as well as changes to the companies and strategy.
Amaranth Capital sold its stake in 2006 and 2007.
Cevian, together with Carl Icahn, acquired 3 per cent of Skandia's shares in December 2004.
Cevian gained board representation in 2005 and used this position to support a takeover bid by Old Mutual. The bid was eventually successful (in 2005–2006).
In September 2006, Violet Partners (a JV between Parvus and Cevian) acquired shares representing 5.3 per cent of the voting rights in Volvo.
Violet Partners sought to gain a position on the board and pushed for changes to the capital structure and amendments to the composition of the board.
Violet Partners' gained a seat on the nominations committee but did not succeed in its attempt to gain board representation. Parvus eventually left the JV.
Muddy Waters/Telia Company (2015)
In 2015, the activist Muddy Waters declared a short position in an open letter questioning the extent of the Swedish phone company's transparency about its Eurasian businesses. Telia Company shares fell the most in more than three years.
Telia Company responded that it fully cooperated with ongoing investigations in Sweden, the Netherlands and the United States, that it was as open and transparent as possible with respect to listing requirements and the investigations, that it had not received any claims from US authorities and that its financial statements were in accordance with international financial reporting standards (IFRS).
Norges Bank (2015/2016)
In 2015/2016, a number of the large institutional investors (including Norges Bank Investment Management) campaigned for individual board election and transparency of voting at the shareholders' meeting. According to the investors it should be mandatory to present proposals to the board of directors as a set of individual proposal and that voting should take place individually and be announced for, for each proposed candidate, as opposed to bundled elections commonly undertaken.
Elliot Capital/Canon (2015)
In 2015, Canon made a recommended public takeover offer for the Swedish listed surveillance camera manufacturer Axis.
During the acceptance period Elliot Capital took a corner position of just over 10 per cent of the issued share capital preventing Canon from squeezing out the remaining minority shareholdings.
Axis is still listed despite Canon's stake of around 86 per cent and Elliot Capital's corner position. Elliot has exercised a number of minority rights, including requiring certain minimum dividends, the appointment of a special examiner and a minority auditor.
Elliot Capital/EQT (2016)
In 2016, EQT made a mandatory takeover offer for IFS, following the purchase of around 63 per cent of the shares in IFS.
During the acceptance period, Elliot Capital took a corner position of just over 11 per cent of the issued share capital, preventing EQT from squeezing out the remaining minority shareholdings.
Elliot has exercised a number of minority rights, including requiring certain minimum dividend, the appointment of a special examiner and a minority auditor. In 2017 EQT acquired Elliot Capital's stake and IFS was delisted.
In 2016, GE made a takeover offer for Arcam. During the acceptance period, Elliot Capital took a corner position of more than 10 per cent of the issued share capital preventing GE from squeezing out the remaining minority shareholdings. In 2017, GE acquired Elliot Capital's stake and Arcam was delisted.
V REGULATORY DEVELOPMENTS
As discussed above, the Swedish stock market has a long history of long-term engaged controlling shareholders that are typically willing to invest time and resources in the governance of companies. Corporate governance reforms, such as the introduction of the Code, have been undertaken in order to make legislation superfluous. While self-regulation has become more difficult to uphold, following the introduction of EU legislation in this area, the introduction of EU legislation is not likely to generally have any major impact on activism and its potential impact on Swedish companies.
The amended Shareholder Rights Directive, which must be transposed in the Member States on 10 June 2019 at the latest may, however, have some impact. In particular, the Directive will, among other things, increase the possibilities for a company to identify its shareholders and require institutional investors and asset managers to be transparent about how they invest and engage with the investee companies.
A consultation paper setting out proposed legislation to transpose the amended Shareholder Rights Directive into Swedish law was published in May 2018. The general approach of the consultation paper is to avoid gold plating, although there are a few limited exceptions.
In addition to proposed implementing legislation, the consultation paper sets out, among other things, a proposal to restrict the shareholders' right to require the inclusion of a matter on the agenda of a notice to convene a general meeting. Under the proposed legislation, the right to require the inclusion of a matter on the agenda of a general meeting would require an ownership of at least one 10,000th of the share capital or that the request is made by at least 25 shareholders.
While Europe is generally regarded to be significantly behind the US in terms of activism, there are clear indications of a growing trend of shareholder activism in Sweden and elsewhere in Europe. From a Swedish perspective, it is likely that this increased activism is a long-term phenomenon. From a regulatory perspective, increased transparency and accountability are likely to reinforce this trend and may potentially strengthen activists. While the traditional strategy among activists in Sweden has been private approaches, we have seen several recent examples of public campaigns to voice concerns or propose actions. This will in turn likely increase the attention of listed companies to activism as a continuing and increasing issue.
1 Eva Hägg and Patrik Marcelius are partners at Mannheimer Swartling.