Activist Shareholders: Definition, Tactics & Impact

An activist shareholder is a shareholder of a corporationCorporationA corporation is a legal entity created by individuals, stockholders, or shareholders, with the purpose of operating for profit. Corporations are allowed to enter into contracts, sue and be sued, own assets, remit federal and state taxes, and borrow money from financial institutions. who attempts to use his or her equity stake in a company to achieve certain goals. The main goal of activist shareholders is bringing change within or for the company. They intend to affect the behavior of a company by exercising their voting power or influencing other shareholders.

An activist shareholder does not necessarily need to own a large equity stakeStockholders EquityStockholders Equity (also known as Shareholders Equity) is an account on a company's balance sheet that consists of share capital plus in a company. A large equity stake provides the opportunity to exert a stronger influence on the company’s operations. However, obtaining the required shareholding can be problematic due to the high costs associated with the move or resistance of other shareholders.

The reasons for the shareholders’ activism may be financial or non-financial. Financial goals include cost-cutting, changes in the corporate or financial structureCapital StructureCapital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm's capital structure, or a spin-off or merger. Non-financial goals may be the abandonment of operations in certain markets or the adoption of socially or environmentally friendly policies.

Forms of Shareholder Activism

Activist shareholders can avail themselves of different methods to push the desired changes within or for the company. The most common forms of shareholder activism include:

1. Shareholder resolution

This is a proposal that can be submitted by the shareholders for a vote at the company’s annual meeting. Although the management of companies generally opposes the submission of shareholder resolutions, this activism method is reasonably effective at engaging the public’s attention.

2. Proxy Fights

When a group of shareholders is not content with the company’s management or its actions/decisions, it may persuade other shareholders to use their proxy votes to effect changes in the management. A proxy vote is a form of voting where a shareholder is not willing or is not able to attend the shareholders’ meeting and delegates their voting power to a representative.

3. Publicity campaigns

An activist shareholder may use mass media to draw the public’s attention to a problem or issue in a corporation. Sometimes, publicity campaigns can be used to put pressure on the company’s management.

4. Negotiations with management

Sometimes, activist shareholders can reach their goals through a simple negotiationNegotiation TacticsNegotiation is a dialogue between two or more people with the aim of reaching a consensus over an issue or issues where conflict exists. Good negotiation tactics are important for negotiating parties to know in order for their side to win or to create a win-win situation for both parties. with corporate management.

5. Litigation

Activist shareholders can also initiate legal action against the company’s management to reach their goals. However, this option is the least desirable for both parties. The litigation processes are extremely expensive and can create negative sentiments around the company.

Related Readings

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