Clifford Chance
Businesses that ignore shareholder risk face business interruption, reputational damage and potential legal liability for the business and its directors.
Public companies cannot thrive without shareholder support. Yet companies also face a wide spectrum of risks from their shareholders – from activist shareholders looking to drive an array of (at times conflicting) agendas within the business, to shareholders seeking to recover losses following a fall in share price.
Investors (both institutional and individual) are increasingly turning to activism to promote changes to corporate governance practices, to address social or political issues, or challenge executive compensation. Across the globe there has been growth in shareholder engagement, shareholder proposals and 'vote no' campaigns, which – depending on the issue, the form of engagement, or the outcome – have the potential to disrupt the business and damage your company's reputation.
Litigation by shareholders against companies are on the rise. Long a staple of the US market, other jurisdictions around the world have made it easier to bring securities litigation claims against companies and their directors. The significant growth of the global litigation funding market, twinned with the availability of "after the event" insurance, allows shareholders to bring class or group litigation without bearing the costs (or risks) of claims. Where shareholders are funds that owe duties to their own stakeholders, the case for participating in these claims is even harder to resist.
Clifford Chance can help your business develop a strategy to identify and address shareholder risk.
Be clear on shareholder risk
5 questions to ask yourself
What does shareholder activism look like for our business?
Do you know which activists are likely to be interested in your business? What are they trying to achieve? What are their tactics? When are they likely to approach the business? You need to understand the face of shareholder activism in order to be in a position to respond to approaches to your business.
Are we listening to our shareholders?
Do you actively monitor your shareholder register? Do you have an understanding of the concerns and priorities of your shareholders? You need to foster stronger connections with shareholders in order to effectively respond to and engage with activist shareholders. Technology offers the opportunity for clear, consistent communication of your investor-relations strategy to your entire shareholder base.
Are we adequately protecting our directors?
In fraud-based "stock-drop" claims, liability will likely turn on the extent of directors' knowledge of untrue or misleading statements made by the business. Do you have robust and comprehensive internal procedures for the preparation of public disclosures? Do you seek the advice of external experts, and maintain detailed records of the steps taken, to verify statements made in the company's disclosures? You need to make sure you satisfy yourself of the adequacy of the disclosures you are approving in order to avoid liability for yourself and your business.
To what extent are we reviewing our existing disclosures?
Has your business' circumstances materially changed? Is your existing market disclosure now untrue, misleading or incomplete? You will need to have a process in place to ensure that your existing disclosures are kept under review and consideration is given to whether you need to publish an ad hoc disclosure or supplementary prospectus in order to avoid potential liability.
Should we be revisiting our crisis response strategy?
When challenges arise, internally or in the press, pressure can mount for senior management to communicate calm to the markets. Doing so can present serious risks. How are you managing your response to crises? Who is involved? Are you abiding by all applicable duties of disclosure?
