What is an Activist Shareholder?
An activist shareholder is a shareholder of a corporation 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 stake 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 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 negotiation with corporate management.
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.
Thank you for reading CFI’s explanation of an activist shareholder. CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: