The 100-member rule may be gone, but shareholder activism is here to stay

As part of its program to cut red tape and bureaucracy, the Australian government is set to repeal the 100-member rule.

The rule contained in the Corporations Act forces a company to hold a general meeting on the request of shareholders with (a) at least 5% of the votes that may be cast at the general meeting; or (b) at least 100 members who are entitled to vote at the general meeting. Only part (b) of the rule will be scrapped under the proposed bill, so shareholders with 5% or more of the votes are still able to requisition a general meeting.

Business groups have long maintained that the 100-member rule is excessively costly for corporations, which may be forced to an extraordinary general meeting on the basis of 100 shareholders holding a minuscule portion of total shares.

On the other hand, shareholder advocate groups like the Australian Shareholders Association warn about closing one of the few avenues available for retail shareholders to raise their concerns with the board.

So is the repeal an attack on shareholder democracy or will it, as some claim, actually enhance shareholder participation?

Political activism

There’s no doubt that activists have used the 100-member rule to push specific political issues. In 2012 the activist group GetUp! used the rule to try to force Woolworths, the largest owner of poker machines in Australia, to hold an EGM on a resolution limiting the maximum poker machine bet to A$1.

The matter went to Federal Court, with Woolworths arguing it should be able to hear the resolution at its normal annual general meeting (AGM) in November. It argued the cost of an EGM was significant (in the range of $500,000) and an unnecessary expense for the company. The Federal Court agreed, and Woolworths held an EGM to vote on the resolution just before the AGM in November 2012. The resolution was overwhelmingly voted down.

In 2003 the Wilderness Society collected the necessary 100 shareholders to force logging company Gunns to an EGM on a resolution to ban old-growth logging. The resolution was voted down by a wide margin.

The problem with allowing very small shareholders to requisition a general meeting is the deadweight loss to the firm of the significant costs of holding an EGM, given that historically the resolutions have usually been defeated. The resolutions pushed by groups such as GetUp! deal with political or corporate social responsibility issues and are often motivated by the desire to garner public attention for a specific cause, rather than the maximisation of shareholder returns. Not surprisingly such 100-member meeting requisitions are not value-enhancing for the affected firms nor their shareholders.

But shareholder activism and the use of the 100-member rule is not confined to retail investors and lobby groups. Shareholder activism is on the increase in Australia, with a record eight board spills announced in January alone this year.

The profit motive

In a move many see as the start of a new era of shareholder activism in Australia, earlier this year US-based hedge fund Lone Star Value Investors LP used a range of legal tools, including the requisition of an EGM, in an attempt to reconstitute the board of Antares Energy Limited, an ASX-listed oil and gas firm. Though unsuccessful, Lone Star’s proposal to remove two directors from the Antares board and nominate five of its own candidates for election would have given it effective control of Antares with a shareholding of around 6%.

Clearly, then, there is also ample scope for shareholder activists to use the 100-member rule as a means to exploit opportunities for economic gain. In this context, the move to repeal the rule closes an avenue whereby the board could be challenged on the basis of a very small proportion of shareholder votes and with a relatively small investment by the activist shareholders. That is, the arbitrary “100-members” rule is a low hurdle that does not reflect ownership stake.

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