Directors urged to prepare for disruption

The number of hostile takeover bids confronting Australian companies may be relatively low, but disruption from sources such as activist groups and shareholder class actions is a growing challenge for directors.

Minter Ellison partner Alberto Colla said there was very little clear air for listed companies in the current market.

“Most companies will face some form of disruptive corporate action,” Mr Colla told Business News.

“We’re worried there is a perfect storm brewing in Western Australia.”

This was a result of market volatility, which made earnings forecasts very difficult, and increasing shareholder and regulatory scrutiny.

Mr Colla said the growing number of activist groups ranged from institutional shareholders to specialist activist funds such as Sandon Capital Investments.

“Shareholder activism is now mainstream,” he said.

“These funds are certainly making their mark.”

Mr Colla said activist shareholders targeted 57 ASX-listed companies last year, including Antares Energy, Coventry Group, Tatts Group and BlueScope Steel.

The activist funds typically acquire a small shareholding and then agitate for change in company strategy and/or board structure.

WA managing partner Adam Handley said activist shareholders had changed the way investors engaged with boards.

“It used to be behind closed doors,” Mr Handley said.

“The gentlemen’s club doesn’t operate like it used to.”

Mr Colla said company directors could not afford to ignore approaches from activists.

“Sometimes boards can take it personally, they take it as an affront,” he said.

“They need to engage with activists on their merits, and do so in a neutral and open-minded way.”

Mr Handley said the increasing prevalence of shareholder class actions was another challenge for company directors.

There are 17 litigation funders active in the Australian market, including IMF Bentham, Hillcrest Litigation Services and Harbour Litigation Funding.

“That risk is creating a lot of nervousness at board level,” Mr Handley said.

Mr Colla noted that none of the cases settled in Australia had gone to a court judgment; instead they had been settled out of court.

“A plausible case is all that is needed to force companies into negotiations,” he said.

To minimise the risk of a class action, Mr Colla said listed companies should ensure any earnings guidance was appropriately qualified and, where issues did arise, the company should provide updates as best it could.

“You can’t sit on potentially bad news and wait for perfect clarity before making an announcement,” Mr Colla said.

Mr Handley said takeover bids remained an ever-present issue for company directors.

He has worked with many Chinese groups seeking to invest in the Australian market and observed an increasing willingness by Chinese bidders to go hostile.

He believes Baosteel’s takeover of Aquila Resources was a watershed.

“That was run quite aggressively, it heralded a new era in thinking,” Mr Handley said.

Mr Colla said the best way to avoid disruptive corporate actions was to deliver consistently good financial results.

He suggested boards should critically review and stress test their strategies, looking at the company through the eyes of a potential activist.

It was also important to stay aware of the shareholder base, if necessary issuing tracing notices to identify who sits behind beneficial owners.

Mr Colla said companies also needed to engage frequently and effectively with shareholders and proxy advisers, which were becoming more influential.