This article has been written by Spriha Smith pursuing a course on Training Program on How to Use AI to Grow Your Legal Practice from LawSikho.

Introduction

In India, shareholder activism is becoming more of a phenomenon, and the growing importance of shareholders in shaping corporate strategy, governance, and decision-making inside businesses is captured by shareholder activism in corporate law. A more active role in the operation and administration of the business in which they have invested alludes to a notion of corporate governance whereby a company’s shareholders take. Shareholder activism arises when these passive participants choose to alter the company’s governance, although most shareholders are passive owners of the companies in which they have invested. Anything a shareholder does to advocate for changes to a company’s policies or management is known as shareholder activism. Shareholders are acting this way based on their ownership rights. To rectify a company’s error or bring about a significant change in business policy, it is mostly employed. An important factor in corporate governance in India that had grown to be the dynamic between companies and shareholders has been altered by shareholder activism. Seeking to impact business strategies, governance procedures, and overall decision-making processes, investors are taking a proactive approach to this developing trend. The regulatory framework that regulates corporate governance and shareholder rights is a key factor in identifying the characteristics of shareholder activism in India. Clauses concerning the makeup of the board, voting rights, transparency duties, and shareholder meetings have a significant influence on the effectiveness of shareholder activism strategies. Shareholder activism in India affects more than just particular companies. It affects investor views, market dynamics, and the advancement of business best practices. As shareholders become increasingly active and assertive, organisations are forced to reevaluate their governance structures and stakeholder engagement strategies in an effort to strike a harmonious balance between shareholder interests and bigger corporate objectives.

A shareholder who uses their ownership position in a publicly listed firm to pressure management to adopt a certain strategy is known as a shareholder activist. Usually, those who advocate for or initiate change within a corporation are known as shareholder activists. Including internal firm culture and business models, governance, profit sharing, and environmental issues, these modifications cover a wide range of topics. Shareholder activists, typically, acquire a minority investment in a business and then use a range of strategies, such as threats of litigation and public attention, to force a discussion and effect change. To launch a campaign, instead of using a pricey takeover to gain a controlling interest, shareholder activists use a small stake—less than 10% of the outstanding shares. Financial objectives like increasing shareholder value may be the focus of shareholder activism, as well as non-financial ones like enacting eco-friendly laws and pulling out of politically volatile nations, and demonstrating a stronger commitment to workers’ rights. To be eligible for a director position, activist shareholders must purchase a substantial portion of the target company. Through increasing their power within the corporation, shareholder activists can push for initiatives that will lower operating expenses, boost activity, remove investments from particular nations, and increase profits.

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Shareholder activism types

Companies and promoting shareholder engagement can lead to better corporate governance practices, increasing value addition. Shareholders might engage in activist investment in several ways and with a range of tactics, to influence the company’s decisions. Section 100: Calling the extraordinary general meeting. Section 109: Demand for poll. The following are the primary forms of shareholder activism:

Contests through proxy: When an activist shareholder nominates candidates to replace departing board members, a proxy fight primarily aims to either seize control of the company or exert pressure on the board and management to change their objectives or policies, this type of contest is called a proxy contest.

Resolution by shareholders: Recommendations made by shareholders during a shareholder meeting are called shareholder resolutions. A variety of subjects, such as the appointment of independent directors, executive remuneration, social and environmental concerns, and other business-related matters, may be covered by these resolutions.

Litigation: Shareholders have the right to sue the firm or its management if there is a violation of securities laws or a breach of fiduciary obligations.

Engagement with management: the company’s management via letters, meetings, or other channels to express their concerns or suggestions can be corresponded with the Shareholders.

Media campaigns activist: Activist shareholders can use to highlight their issues and worries and to put pressure on the board and management to take action using activism as a tool. These diverse kinds of shareholder activism require a range of instruments, strategies, and methods. While some forms of activism are more aggressive, others are more cooperative and seek to build a relationship with the company’s management. Furthermore, activist shareholders can achieve their objectives by using multiple techniques at once. Apart from conferring several benefits to enterprises and investors, shareholder activism has the potential to substantially enhance corporate governance protocols. But there are also some limitations that need to be considered.

Key players in shareholder activism: Section 151[1]: Appointment of directors elected by small shareholders.

Importance of shareholder activism

Directors are principally in charge of managing the business’s operations and making decisions within Indian law. The fact that no third party is permitted to have any ability to hold the board and management responsible for their actions gives shareholders the power to influence or meddle in a company’s internal affairs. Because they were unhappy with the company’s current sale process, two large shareholders of Fortis Healthcare Limited, who held 12% of the company’s shares, successfully removed a director from the board and appointed three new independent directors in their place in May 2018.

The goal of the venture’s stockholders will determine whether shareholder activism is a good or bad concept. Should they force administrative modifications purely for their advancement, the company will suffer. Unprecedented progress will be ensured, though, if the decisions are informed and mentor the leadership. Corporate Social Responsibility Under Section 135 of Companies.

For SEBI, the idea that a publicly traded company must respond to its shareholders for every action it takes has always been a priority. Because they own a portion of the business, shareholders may lose the value of their investments as a result of any bad decision made by the management of the company. In India, particularly in light of the nation’s long history of corporate fraud, shareholder activism is becoming increasingly important to corporate governance. This keeps management accountable and prevents their dictatorship. The rise of activism is facilitated by governance intermediaries, while transparency and information for shareholders are improved by reforms and SEBI regulations. The company might keep making poor managerial and operational choices if shareholders do not get involved, which would cause its share price to plummet. Shareholder activism makes sure the business is headed towards success by monitoring the company’s profitability and preventing actions that can cause shareholders to lose their investment value. Furthermore, the corporation strives for maximum transparency since it understands that shareholder activists can start shareholder activism at any time, which could potentially harm the goodwill. It also has a favourable effect on the company’s market performance. Impact on Corporate Governance: Section 178. Nomination and Remuneration Committee – CAIRR

Shareholder Activism gives them a platform to express their grievances and highlights the management team’s incompetence. This is dependent on the goals that the venture’s stockholders have in mind. If they impose administrative changes purely for their own personal development, the company will suffer. On the other hand, tremendous progress will be ensured by making wise decisions and serving as a mentor to the leadership. Activism by shareholders guarantees management accountability and instills a sense of ownership in the company. They have the option to voice their disapproval of environmental, social, and governance (ESG) issues in addition to financial ones. This, needlessly, releases more wealth and increases the return on their investment.

Due to different legal systems, customs, and cultural considerations, India approaches shareholder activism and corporate governance differently than the US, UK, Japan, and Germany. India’s strategy is still more reactive, changing as a result of new regulations and greater participation from shareholders.

Benefits of shareholder activism 

  • By pushing for transparency, responsibility, and moral conduct from the board of directors and management, shareholder activism promotes sound corporate governance principles.
  • By drawing attention to matters that are important to shareholders and advocating for better results and increased representation from shareholders, shareholder activism holds management responsible for their actions.
  • Activism has the potential to improve the alignment of management’s and shareholders’ interests, which will ultimately improve financial performance and inspire more trust in investors.
  • By voicing concerns about the management’s immoral or financially risky actions, shareholder activism can aid in the prevention of corporate scandals.

Rise of shareholder activism in India

The most significant shareholder activism is that institutional investors have increased, proxy advisory firms (PAFs) have proliferated across the country, and shareholders are now more informed about their investments and rights. PAFs are governed under theSEBI(Research Analysts) Regulations, 2014. A proxy advisor is somebody who counsels an institutional investor or shareholder of a corporation on how to maximise their rights in the firm (such as recommendations for a proposal public offering or voting recommendations on agenda items). PAF suggestions have been observed to impact the voting patterns of shareholders, which has resulted in a rise in shareholder activism.

The country’s expanding legal remedies, powers, and rights for shareholders are among the primary causes of the rise in shareholder activism. When discussing shareholder activism in India, the primary material of legislation to be mentioned is the Companies Act of 2013. It gives shareholders particular privileges and authority that let them participate in the company’s management. A resolution requiring the approval of shareholders by a simple majority or special majority would be an example of this. An additional illustration would be the shareholders’ authority to designate or dismiss directors.

Rise of social media in modern activism

For example, globally, The activist revolution – J.P. Morgan. it is also generally known that academics studying corporate governance continue to dispute how shareholder activism affects the industry. Supporters of the idea contend that shareholder oversight and involvement are essential to holding managers accountable and enhancing business success. Opponents argue that a powerful shareholder voice interferes with the board’s primary responsibility of developing and carrying out a long-term company business plan. Activist shareholders communicate with the management and other shareholders through a range of means and platforms. They are using online forums, blogs, YouTube, LinkedIn, Twitter, and other electronic platforms more and more. These platform’s real-time impact is what makes them particularly appealing. They make it possible for activists to quickly get involved in debates or start new causes.

Twitter has emerged as a prominent social media platform for issuers and activist investors seeking to engage in corporate communications. Among the many active users, Carl Icahn, a renowned Wall Street titan, stands out as the most well-known activist user. With his savvy approach to social media, Icahn has amassed over 1,60,000 new followers in less than a year, solidifying his position as a social media virtuoso.

Icahn’s success on Twitter can be attributed to several key factors. Firstly, he has a knack for crafting concise and engaging tweets that capture the attention of his audience. His ability to convey complex financial concepts and investment strategies in a simple and understandable manner has resonated with both retail investors and industry professionals.

Secondly, Icahn’s tweets often carry a sense of urgency and authenticity. He frequently uses Twitter to share his thoughts and opinions on current events, corporate governance issues, and market trends. This transparency and willingness to engage directly with his followers have built trust and credibility, making his tweets highly influential.

Thirdly, Icahn leverages Twitter as a platform for advocacy and activism. He actively uses his account to advocate for shareholders’ rights, challenge corporate management teams, and promote transparency and accountability in the business world. His tweets often serve as a catalyst for change, sparking discussions and debates on important topics within the investment community.

Icahn’s mastery of Twitter has not gone unnoticed. He has been recognised by publications such as The Wall Street Journal and Forbes for his innovative use of social media as an investment tool. His success has inspired other issuers and activist investors to embrace Twitter as a means of communicating with their stakeholders and shaping public opinion.

In conclusion, Carl Icahn’s remarkable success on Twitter serves as a testament to the power of social media in corporate communications. His ability to captivate his audience, convey complex ideas effectively, and drive meaningful conversations has set a new standard for activist investors. As Twitter continues to evolve, it is likely that Icahn and other savvy users will continue to push the boundaries of what is possible in the realm of digital activism.

Legal and Regulatory Framework: Section 245 – Class Action. Section 230-240 – Compromises, Arrangements, and Amalgamations. Securities and Exchange Board of India (SEBI) Regulations: Particularly relevant for listed companies, including:

  • SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR)
  • SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

The role of technology and social media: Section 120: Maintenance and inspection of documents in electronic form.

Shareholder activist examples

In Tata Sons versus Cyrus Mistry, a court struggle ensued after Cyrus was dismissed from his position as chairman of Tata Sons in 2016, causing controversy. This litigation, which accused the Tata Group of managerial irregularities in the corporation, was among the most well-known examples of shareholder activism in India. The court found that the respondent had not engaged in any oppressive or poorly controlled behavior. Many choices were made sincerely, not intending to hurt or deplete the company’s resources. Consequently, it was determined that the acts did not violate Section 241 of the Companies Act of 2013 and were neither oppressive nor poorly managed.

2019 saw L&T make a strong acquisition offer for Mindtree, a well-known provider of software services. The founders and management of Mindtree opposed this, which resulted in a high-stakes conflict that saw L&T take over the company.

Carl Ichan is a well-known activist shareholder in the financial industry, in addition to his accomplishments as a philanthropist, a successful businessman, and a traditional investor. Mr. Ichan became well-known in the 1980s as a “corporate raider” as a result of his hostile acquisition of TWA Airlines in 1985, among other noteworthy events.

Environmental Social Governance (ESG) is not the same as Mr. Ichan and Mr. Achman. ValueAct Capital, Red Mountain Capital Partners, Blue Harbour Group, and Train Partners are among the main funds that have prioritised environmental, social, and governmental (ESG) concerns.

Corporate Responses to Activism: Section 102: Statement to be annexed to notice. Section 134: Financial statement, board’s report, etc.

Conclusion

In the beginning, with few listed companies and little impact from retail investors, the Indian equities market was underdeveloped. Recent developments, which have sparked control transactions and an increase in shareholder agitation, however, include the significant stakes held by institutional and private equity funds. Activist shareholders are voicing their concerns and holding the company’s management accountable for their incompetence. In addition to keeping managers accountable, this prevents their dictatorship. It has a favourable effect on the firm’s market performance, value, and decision-making ability.

A number of initiatives have been put in place to support sound corporate governance and guarantee the preservation of shareholder rights, including the Companies Act of 2013 and SEBI regulations. With these rules in place, Indian businesses are moving towards more accountable and transparent operations, which enhance stakeholder participation and decision-making. India’s corporate governance environment is still changing, and further changes are probably on the horizon. With strengthened shareholder rights, and an emphasis on sustainability, potential development areas include more regulation. There is a chance that the role of institutional investors—in particular, mutual funds, pension funds, and insurance companies—will change and result in increased investor engagement.

Companies that disregard shareholder rights and corporate governance in this dynamic environment run the danger of losing the trust of investors and development prospects. By creating a strong corporate governance framework, implementing best practices, and taking shareholder concerns into consideration, businesses may guarantee their long-term viability and competitiveness. Enhanced oversight, better decision-making, and increased shareholder participation generally result from encouraging corporate governance standards. By encouraging accountability and transparency as well as a culture of responsible investing, effective shareholder activism can aid in the accomplishment of these goals. Indian businesses can contribute to the development of a more robust economy and improve the nation’s standing as a business destination by adopting these values. Regulators have not given up on their attempts, however. Changes in shareholder activism have been noted by several studies, and these reforms yield favourable results. The corporate sector as well as the country’s general efficiency may gain from increasing encouragement of shareholder activism.

References

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