Shareholder Activism in Asia and the Offshore Connection

Get ready to engage

Ian Mann, Asia Managing Partner and member of Harneys’ Litigation, Insolvency and Restructuring Group in Hong Kong
Originally published in the August | September 2020 issue

Shareholder activists acquire shares in listed companies to effect change by removing directors, lobbying for policy decisions, influencing the disposal or restructuring of assets, demanding dividend payments and more. Shareholder activism is an attractive means of launching a campaign compared to a more costly and difficult process of a full takeover. The battle is often publicly fought by proxy war at an EGM or in the media. Less commonly, but growing in popularity, the battle will take place behind closed doors via private negotiations and settlements. As a last resort the battle is taken to the courts, often the offshore courts of the British Virgin Islands and the Cayman Islands, where the majority of companies listed on the Hong Kong Stock Exchange are incorporated. 

The past few years saw remarkable growth in shareholder activism in contradistinction to the popularity of passive index tracker funds. Since the global financial crisis in 2008 activist investing has been on a sharp increase driven by increased shareholder engagement. 

It cannot be ignored that there will simply be more companies vulnerable to activism attacks due to stretched balance sheets, suspension of operations and the desperate need for cash.

Such activist campaigns have been relatively rare in the Asian market but there is no doubt 2020 is going to be an interesting year for activist campaigns. With the huge uncertainty in the global markets – the Hong Kong stock exchanges being no exception – private equity funds that specialise in making money from shareholder activism will be looking for opportunities to exploit value in what they perceive to be weak companies.

How will the Covid-19 crisis affect activism tactics?

In light of the oft-cited ‘unprecedented circumstances’ the world finds itself in right now, it is difficult to predict exactly how activism will be impacted. It may be harder to demonstrate credible ways of unlocking shareholder value during the market downturn and activists may have to reconsider their usual tactics:

  • Companies may be prevented from engaging in share buybacks or issuing dividends if they benefited from government assistance. 
  • The merger and acquisition market has retracted significantly, with logistical issues resulting from travel restrictions and social distancing measures negatively impacting the usual meetings, negotiations, valuations, fundraising and due diligence operations. 
  • Jurisdictions are responding to the issue of EGMs differently which could affect shareholder proxy battles. Some places are allowing EGMs to be postponed; others are allowing them to be held virtually, which entails greater control of the meeting by the company. While EGMs and special general meetings were specifically excluded from the social gathering regulations in Hong Kong – meaning they could still be held, the Cayman Islands expressly relaxed the need to convene board meetings on Island given the travel restrictions, in the context of economic substance requirements. 
  • Companies and other shareholders may be more reluctant to remove long-term board members with deep institutional knowledge in the midst of the crisis. 

Nonetheless, it cannot be ignored that there will simply be more companies vulnerable to activism attacks due to stretched balance sheets, suspension of operations and the desperate need for cash. Companies may be less willing to spend time and money fighting attacks when they are trying to keep their business afloat. 

One recent example is Hong Kong-based Bank of East Asia Limited, which has agreed to carry out a review of its business portfolios and assets with the “support” of activist investor Elliott Management, pausing four-year-old unfair prejudice proceedings demanding change at the lender. The bank had no choice but to yield to Elliott in the current market for banks.

The Elliot and BEA settlement reflects a recent trend of activism moving towards a more collaborative approach that focusses on engagement. We should expect to see an uptake of settlement agreements or ‘activist relationship agreements’. Such agreements provide a means of settling contests between activist investors and companies while avoiding the significant drain on resources that a protracted proxy battle or litigation may entail. They may comprise an agreed set of actions to be taken by the company, including the appointment of board representatives for the activist investor, or standstill agreements in relation to the activist’s share ownership in the company or certain corporate governance matters. 

Shareholder activism and the courts

When collaboration fails to achieve the desired results, the battle may move to the courts. With over 80 per cent of Hong Kong listed companies being incorporated outside of Hong Kong (most commonly in the BVI, Cayman Islands and Bermuda), the legal remedies available to discontented shareholders will largely be determined by the offshore statutory regimes. The Hong Kong Courts may have to determine points of offshore law in relation to applications before them. 

The courts may be asked to intervene in interlocutory matters, which tend to relate to general meetings, where the relief sought may include injunctions or declarations. The courts are typically reluctant to intervene in a properly convened general meeting unless there is a fundamental defect requiring remedy. Such a defect could be if votes are disallowed without reason as in Re China Shanshui Cement Group Limited HCMP 2915/2015 (a Cayman incorporated company listed on the Hong Kong Stock Exchange), but the court will require evidence of bad faith or Wednesbury unreasonableness before intervening (eg Re Convoy Global Holdings Limited [2018] HKCFI 2112, also a Cayman incorporated company listed on the Hong Kong Stock Exchange). 

Much rarer in respect of public companies, shareholders may bring unfair prejudice and just and equitable winding up proceedings. Issues include control of the board, voting at general meetings and implementation of decisions from general meetings, or an improper issue of shares. 

Justice Kawaley of the Grand Court of the Cayman Islands recently dealt with shareholder activism in striking out a petition seeking to wind up eHi Car Services Limited, a NASDAQ-listed, Cayman incorporated company. The petition was filed by activist shareholder Ctrip Investment Holding Ltd, a substantial minority shareholder in the company, on just and equitable grounds seeking alternative relief. In particular, Ctrip sought the court’s intervention in having a person appointed by the court to solicit the highest possible bids by which the company should be taken private, and an injunction preventing further shares from being issued prior to an EGM to sanction the completion of a take-private proposal. The Grand Court held it was not improper for the chairman to continue his role in the company while advancing his own take private proposal. The petition was struck out due to there being no visible departure by the company from the standards and conditions of fair dealings a shareholder is entitled to expect. Justice Kawaley had also found that it was an abuse of process for Ctrip to use its just and equitable winding-up petition to further its own commercial interests instead of for the benefit of the shareholders generally. 

The Cayman Islands Court of Appeal subsequently clarified the position in Tianrui (International) Holding Company Limited v China Shanshui Cement Group Limited. The Court of Appeal confirmed that a shareholder’s just and equitable winding up petition did not need to be for the purpose of advancing a class remedy for the benefit of all shareholders, disagreeing with Justice Kawaley’s finding in eHi to the contrary. The Court of Appeal held that Tianrui could legitimately take the view it preferred to wind up the listco over having to pursue piecemeal a series of actions that might address its concerns. 

The courts have shown they will protect the rights of shareholders in public companies, just as they would in private ones. Undoubtedly, the shareholder activist space will continue to grow, and activists will look to all available options to ensure they achieve the desired return on their investments.