Why can it be difficult for Activists to get Access to the Boardroom?
Shareholder Activism Series: A Primer on the Swiss Legal Framework
This blog series puts the spotlight on legal issues relevant to activist shareholders and event-driven institutional investors in Swiss target companies and introduces market participants from abroad to the pillars of Switzerland's legal framework.
Swiss law limits the selective flow of information to shareholders Swiss listed companies publish regular financial reporting, share information at the general meeting and distribute ad hoc information and other press releases. In addition, the boards of many listed companies (at least most of the blue chips) promise to be in a constant constructive dialogue with all interested shareholders. Indeed, a board will often listen to the thoughts and demands of significant shareholders (whether activist or not), repeat publicly available information, and even discuss general strategic concepts at a high level.
However, activist shareholders and event-driven institutional investors often want access to more detailed or more current information from the target's board, be it on strategy, potential investments or divestitures, or untapped potential for shareholder return. However, shareholders not represented on the board may find it difficult to get information directly from the boardroom. While there might be a number of reasons for this, in most cases the Swiss legal framework is likely to be a significant factor.
Leaving aside the statutory or contractual protection of the target company's or third parties' business or trade secrets as well as antitrust considerations (e.g. if the activist is a competitor), Swiss corporate law and capital markets regulations limit the flow of information to individual shareholders (or at least the permissible use of such information by the shareholder).
Board duties include relative equal treatment of shareholders The duties of the board of directors of a Swiss company include, among other things, a duty of relative equal treatment: the board must, in the same circumstances, treat shareholders equally. When it comes to information, the size of a shareholder's stake in the company is, as a rule, not sufficient to grant a shareholder preferential treatment. Rather, a specific reason in the company's interest is required for the board to share information selectively with a major shareholder.
Whether such a reason exists must be determined by the board on a case by case basis. Possible justifications for preferential access to information may include that a major shareholder provides additional benefits to the company (e.g. through a committed long-term engagement), that a due diligence exercise or another major transaction requires the involvement of a particular shareholder (e.g. by exercising or waiving certain shareholder rights), or that the board has other reasons to believe that a major shareholder will create additional long-term value which could otherwise not be achieved.
In essence, therefore, the properly protected disclosure of specific information at a reasonable level (but no 'flat rate') by the board to an anchor shareholder will more often than not be justifiable as being in the interests of the company. This is particularly so when the company has a legitimate interest in learning how its anchor shareholders will exercise their shareholder rights (e.g. voting rights), which presupposes a certain information flow. That said, activist shareholders might find it more difficult to convince the board that they should be given preferential access (even if a substantial stake is acquired), particularly if their investment is (in fact or appearance) short-term. In any event, the target's board acting diligently will be reluctant to permit any sort of routinized or excessive information flow.
Board representation does not lead to unrestricted access Apart from gaining a say on the management of the company's affairs, activist shareholders sometimes seek one or more seats on the target's board in order to get more direct access to information from the boardroom.
However, even an activist shareholder represented on the board does not have unrestricted access to information. Rather, the duties of confidentiality and of relative equal treatment also apply to board members elected at the request or initiative of a specific shareholder. Such persons are, figuratively speaking, wearing two hats: they are not only bound by statutory duties towards the target company, but also under contractual and possibly even statutory obligations towards the shareholder they represent. From a Swiss corporate law perspective, even though it is generally legitimate for the activist shareholder to follow its own agenda, its board representative(s) must first and foremost act in the interests of the target company.
Corporate law is only one of the relevant aspects to consider, though. The self-regulation of the stock exchange and Swiss capital markets regulation impose additional restrictions in relation to price-relevant information with a view to creating a level playing field.
Capital markets' level playing field – Ad hoc-disclosure and insider trading rules Pursuant to the listing rules of the SIX Swiss Exchange, a SIX-listed company must inform the market of any price-relevant facts which arise in its sphere of activity without delay (so-called ad hoc-disclosure). These facts must be published in a manner that ensures the equal treatment of market participants. In other words, the selective information of individual shareholders (or other market participants) of facts that fall within this category is not permissible.
Under certain circumstances, the target company may postpone the publication of price-relevant facts to the wider public. A postponement requires, among other things, that the confidentiality of the relevant information is ensured for the entire duration. In particular, the target company must limit the number of informed individuals to the smallest possible number, obtain written confidentiality undertakings from all these individuals (within and outside of the target's organisation) and keep a list of insiders. Therefore, if the publication of a price-relevant fact is postponed, it will generally not be permissible for a board representative to share the information with others, including within the activist shareholders' organisation.
Restrictions also apply to insider information, i.e. confidential information which, if published, would have the potential to significantly influence the price of a listed security. Among other things, insider information may not be disclosed to a third party or used to trade in listed securities (including the use of respective derivatives), unless a safe-harbour applies.
The disclosure of insider information to a third party is safe-harboured if (a) the recipient needs the information in order to fulfil its statutory or contractual obligations, or (b) the disclosure is indispensable with regard to the conclusion of a contract and the board (i) notifies the recipient that the information must not be exploited, and (ii) documents both the disclosure and the notification. The disclosure of insider information by a board representative to other persons within the activist shareholders' organization may well fall within this safe-harbour, e.g. if the activist has reporting obligations in its home jurisdiction or a corporate or capital market transaction involving the activist shareholder is contemplated. That said, the safe-harbour, if applicable, only protects disclosure. It would therefore not be possible for the activist shareholder to use the information for trading, unless some other exception applied.
The most relevant trading-related safe-harbour for activist shareholders is that securities transactions to implement one's own decision to carry out such securities transactions are permissible, provided that the decision was not made on the basis of insider information. However, this safe-harbour is unlikely to apply to insider information from the target's boardroom. Rather, an activist shareholder who has a representative on the target's board should take precautions to avoid its trading activities, if any, being tainted by knowledge of insider information.
Market standard regulations and processes are key In practice, it should be standard procedure for any major Swiss listed company as well as activist shareholders and institutional investors to ensure that the ad hoc-disclosure and insider trading rules are complied with. Target companies will generally implement blackout periods during and somewhat beyond critical phases (such as financial reporting) as well as market standard precautionary measures to protect insider information (need-to-know basis, confidentiality agreement with trading restrictions, continuously updated insider list, IT security, leakage plans). However, the flow of information from the target's board to selected shareholders (whether activist or not) raises crucial questions under the Swiss legal framework and is highly delicate in practice for everybody involved. If a shareholder is represented on the target's board, this should be addressed in the relevant regulations and processes of both the target and the shareholder.