Introduction to Shareholder Rights and Securities Litigation

Shareholder rights and securities litigation go hand-in-hand when it comes to seekeing corporate reform. Securities class actions have become an increasingly important mechanism for enforcing shareholder rights and improving corporate governance. These lawsuits allow shareholders to collectively pursue claims against a corporation, its executives, or its board of directors for misconduct that has negatively impacted the value of their investments. Institutional investors, such as pension funds, mutual funds, and insurance companies, play a critical role in securities class actions due to their significant ownership stakes and resources. Their involvement can enhance the effectiveness of these actions by providing the necessary financial backing and expertise to pursue complex litigation.

The role of institutional investors in securities litigation has grown substantially over the years. As major stakeholders, they have a vested interest in ensuring that corporate governance standards are upheld and that any breaches are addressed promptly. By participating in securities class actions, institutional investors not only seek to recover financial losses but also aim to deter future misconduct by holding corporations accountable. Their participation can lead to more rigorous oversight and improved governance practices, benefiting all shareholders.

Moreover, the active engagement of institutional investors in securities class actions can influence the outcomes of these cases. Their substantial financial resources and access to expert legal counsel enable them to mount robust legal challenges against corporate wrongdoers. This increased pressure can result in more favorable settlements or verdicts for the plaintiffs, thereby enhancing the overall effectiveness of securities litigation as a tool for protecting shareholder rights.

In addition to pursuing legal remedies, institutional investors often advocate for stronger regulatory frameworks and corporate governance reforms. They collaborate with policymakers, regulators, and other stakeholders to promote changes that enhance transparency, accountability, and ethical conduct within corporations. By leveraging their influence, institutional investors can drive systemic improvements that reduce the likelihood of future securities fraud and misconduct.

In conclusion, institutional investors play a pivotal role in securities class actions and the broader landscape of corporate governance. Their involvement not only strengthens the enforcement of shareholder rights but also contributes to the promotion of higher standards of corporate behavior. As we look towards 2025, the continued engagement of institutional investors in securities litigation is likely to remain a key factor in shaping the future of corporate accountability and governance.

What are Shareholder Rights?

1. Voting power

• Elect directors: Shareholders vote to elect the company’s board of directors, who are responsible for guiding the company and overseeing management.
• Influence major decisions: They also vote on fundamental corporate issues such as mergers, acquisitions, and amendments to corporate bylaws.
• Propose resolutions: Shareholders can propose topics for discussion and voting at annual or special meetings.

2. Ownership and transferability

• Ownership stake: As owners, shareholders have a proportional interest in the company’s equity.
• Sell shares: Shareholders have the right to freely sell or transfer their ownership interest, providing liquidity to their investment.
• Preemptive rights: In some cases, shareholders have the right to purchase newly issued shares before outsiders. This protects against dilution of their ownership percentage. 

3. Financial rights

• Dividends: Shareholders are entitled to receive a portion of the company’s profits in the form of dividends if the board of directors decides to pay them.
• Residual claim on assets: If a company liquidates, shareholders have a claim on any remaining assets after all creditors and bondholders have been paid. This makes common stock a riskier investment than debt.

4. Right to information and transparency

• Access company records: Shareholders have the right to inspect basic corporate documents, such as financial statements, bylaws, and records of shareholder meetings.
• Attend meetings: They are entitled to attend annual general meetings (AGMs) or special meetings to hear from management and discuss company performance.
• Access SEC filings: For public companies, investors can access a range of information, including annual reports (Form 10-K) and quarterly reports (Form 10-Q), through the SEC. 

5. Legal protections

• Right to sue: Shareholders can sue the company, its directors, or officers for wrongdoing, such as fraud or breach of fiduciary duty. This can take the form of an individual lawsuit or a class action lawsuit.
• Minority shareholder protections: Specific rights protect minority shareholders from being unfairly prejudiced or oppressed by controlling shareholders.

• Common shareholders generally have voting rights on corporate decisions but are last in line for asset claims during liquidation.
• Preferred shareholders often do not have voting rights but receive priority for dividend distributions and have a higher claim on company assets during liquidation

Shareholder Rights and Corporate Governance

How shareholder rights strengthen corporate governance

• Electing and removing directors: As owners of the company, shareholders have the fundamental right to elect the board of directors. This ability to choose and remove the ultimate overseers of the company ensures that the board remains accountable for its actions and strategic decisions. Many companies now use a majority voting standard for uncontested director elections, which gives shareholders greater power to influence the board’s composition.
• Approval of major decisions: Shareholders have the right to approve or reject major corporate actions, including mergers, acquisitions, and the sale of significant assets. This right prevents management from making fundamental changes to the company’s direction without the consent of its owners.
• Influencing corporate strategy: Through shareholder proposals, investors can raise issues of concern with management and the board of directors. While often advisory, these proposals can push companies to adopt new policies on a wide range of issues, from environmental and social practices to executive compensation.
• Enhancing accountability and oversight: Shareholder rights help to enforce accountability on the board and management. By exercising rights to access corporate records, attend general meetings, and sue for wrongful acts, shareholders can monitor company performance and ensure ethical conduct.
• Protecting minority interests: Corporate governance frameworks include specific protections for minority shareholders, who lack the voting power to control the company. These safeguards, such as anti-oppression laws and pre-emptive rights, ensure that majority shareholders do not abuse their power or act in a manner that unfairly harms minority investors. 

Shareholder engagement and corporate governance

• Active participation: Through annual meetings, private dialogue, and proxy voting, shareholders engage with company leadership to discuss strategy and express concerns. This provides management and the board with valuable feedback and helps align corporate objectives with shareholder interests.
• Transparency and trust: Shareholders expect transparency in corporate financial reporting and disclosure. A strong corporate governance framework ensures that shareholders have timely access to information, which builds trust and enables more informed investment decisions.
• Stewardship: Shareholders, particularly large institutional investors, increasingly see themselves as long-term stewards of the companies in which they invest. They engage with management not just for short-term gain but to promote sustainable, long-term value creation. 

Institutional Investors Protect Shareholder Rights

How institutional investors protect shareholder rights

Influencing corporate governance

• Board independence: They push for a higher percentage of independent directors on the board to provide objective oversight and challenge management decisions.
• Executive compensation: Institutional investors scrutinize and vote on executive compensation packages, often pushing for pay to be more closely tied to company performance and long-term value creation.
• Shareholder proposals: They submit and support shareholder proposals on a wide range of issues, such as environmental, social, and governance (ESG) standards, which promote greater corporate accountability. 

Enhancing transparency and disclosure

• Improved financial reporting: Their influence can lead to enhanced financial reporting, better internal controls, and the use of high-quality auditors, especially in markets with weak regulations.
• ESG disclosure: Some institutional investors actively push for companies to disclose more information on ESG-related risks, such as climate change, which can affect long-term shareholder value. 

Providing market discipline

• Exit strategy: Institutional investors can use their substantial trading volume as leverage. The “Wall Street walk” or threat of exiting a position can signal dissatisfaction with management, putting downward pressure on the share price and incentivizing managers to make corrective changes.
• Mitigating agency costs: Institutional investor monitoring can help reduce agency costs, which arise from conflicts of interest between management and shareholders. This is particularly valuable in firms with concentrated ownership, where minority shareholders are at greater risk of having their rights ignored. 

The Private Securities Litigation Reform Act’s impact

Challenges and considerations

• Conflicts of interest: Certain “pressure-sensitive” institutional investors, such as banks or insurance companies, might have business relationships with their investee companies, which can limit their willingness to challenge management.
• Differing investment horizons: Some institutional investors, like short-term hedge funds, may focus on quick returns, leading them to prioritize short-term gains over sustainable, long-term strategies that benefit all shareholders.
• Cost-benefit analysis: Shareholder activism can be costly. For any activist campaign, institutional investors must determine if the expected benefits (e.g., increased stock price) outweigh the costs, which can include the expenses of a proxy fight.
• Limited engagement: Despite their potential, most institutional investors are not activists. They may only become active when a company’s stock price is at risk or when they face a particularly egregious governance issue.

Successful Examples of Institutional Investor Activism

The Engine No. 1 and ExxonMobil case (2021)

• The context: Engine No. 1, which owned only a 0.02% stake in the company, argued that ExxonMobil was underperforming its peers and mismanaging the transition to a lower-carbon economy.
• The strategy: Rather than focusing solely on ESG principles, Engine No. 1 appealed to the company’s large institutional investors, like BlackRock, Vanguard, and State Street, by framing the transition as a long-term profitability issue.
• The outcome: With the backing of these major shareholders, Engine No. 1 won a historic proxy fight, successfully electing three independent directors to ExxonMobil’s board. These directors had experience in the energy sector and were committed to a more sustainable energy strategy. Following the campaign, ExxonMobil’s shares significantly outperformed its peers.

Trian Partners and The Walt Disney Company (2023)

• The context: The campaign focused on improving operational efficiency, addressing a perceived lack of board oversight, and boosting shareholder returns.
• The outcome: After Trian Partners began its push, Disney reinstated its dividend and announced other business initiatives. This prompted Trian to drop its campaign, illustrating how the pressure from activist investors can lead to management changes and a renewed focus on shareholder value. 

Politan Capital and Masimo Corporation (2023)

• The context: The campaign followed a significant drop in Masimo’s market value after it acquired an audio company, prompting concerns about capital allocation and a loss of strategic focus.
• The outcome: After a heated proxy battle, Masimo’s shareholders voted to elect Politan’s nominees to the board. The activist investor then began working from within to push for change and unlock value. 

CalPERS and corporate governance reforms

• Historical context: Since the late 1980s, CalPERS has targeted underperforming companies with poor governance practices, pushing for changes like the elimination of “poison pills” and staggered boards that protect management from hostile takeovers.
• Recent example: In 2024, CalPERS voted against all of ExxonMobil’s directors, specifically citing the company’s lawsuit against activist shareholders as a threat to investor rights. This demonstrated its continued commitment to using its significant vote to signal disapproval and demand action. 

The Impact on Shareholder Rights by Institutional Investors

Advantages

• Enhanced Monitoring and Accountability: Institutional investors, with their substantial holdings, have a strong incentive and the resources to monitor management more effectively than individual shareholders. This increased oversight leads to better corporate governance and reduced instances of managerial misconduct. They ensure that managers are accountable for their actions and prioritize shareholder value.
• Improved Transparency and Disclosure: Institutional investors demand high levels of transparency and disclosure, which benefits all shareholders by providing more accurate and timely information for investment decisions.
• Protection of Minority Shareholder Rights: In contexts where minority shareholders might be vulnerable, institutional investors, especially foreign institutional investors (FIIs), can act as a crucial check on controlling shareholders, advocating for the protection of all shareholders’ interests. This is particularly beneficial in countries with weak investor protection laws, where FIIs can push for higher governance standards.
• Activism for Corporate Change: Institutional investors are often at the forefront of shareholder activism, advocating for changes in corporate strategy, executive compensation, and even environmental and social responsibility policies. This activism can lead to significant improvements in corporate performance and long-term value creation.
  • • Lower Litigation Costs through Class Actions: Institutional investors’ ability to serve as lead plaintiffs in securities class actions, as facilitated by the PSLRA, allows for more efficient and effective legal recourse against fraudulent practices.

Disadvantages

• Focus on Short-Term Gains: Concerns exist that some institutional investors, particularly hedge funds, may prioritize short-term gains over long-term growth and sustainability. This focus can pressure companies to make decisions that boost short-term profits but may ultimately harm the company’s long-term prospects.
• Potential for Conflicts of Interest: Certain types of institutional investors may have business relationships with their investee companies, potentially creating conflicts of interest that could influence their voting behavior and engagement with management.
• Challenges of Collective Action: While institutional investors can coordinate to achieve shared goals, coordinating action across a diverse group of investors with potentially different objectives can be challenging.
• Limited Scrutiny of Smaller Companies: Due to resource constraints, institutional investors often focus their monitoring efforts on larger, more established companies, leaving smaller firms with less oversight and potentially more vulnerability to mismanagement.

Other Strategies that Activist Institutional Investors Employ

Collaborative strategies

• Negotiated settlements: Many campaigns end in a negotiated settlement rather than a full proxy fight. The company may agree to some of the activist’s demands, such as changes to the board’s composition or a strategic review, to avoid the public scrutiny and cost of a proxy battle.
• Collaborative proposals: Institutional investors may collaborate with other investors, companies, and advocates to develop and present shareholder proposals on environmental, social, and governance (ESG) issues. This strategy can be more effective than individual proposals, as it demonstrates broader support for a given initiative.

Public pressure tactics

• Public advocacy and media campaigns: Activists may publicly advocate for strategic changes through open letters, presentations, and media campaigns. This public pressure can make it difficult for management to ignore the activist’s demands and helps to sway retail and other institutional shareholders.
• “Just vote no” campaigns: A more confrontational approach involves running “vote ‘no'” campaigns, urging shareholders to reject specific board members or proposals at annual meetings. This tactic is used to signal strong dissatisfaction with current leadership or strategy.
• Diligence and reports: Activists often conduct significant diligence and invest in third-party consulting to analyze a target’s business strategy, finances, and ESG impact. They then use these findings in public reports to build their case for change.
• Litigation: Activists may initiate or threaten lawsuits, including demands for books and records, to bring management to the negotiating table. 

Financial and structural maneuvers

• Portfolio changes: A large institutional investor can signal its dissatisfaction by selling its shares, a tactic known as the “Wall Street walk.” This can put downward pressure on the stock price and motivate management to act.
• Capital structure restructuring: Activists may push for changes to a company’s capital structure, such as increasing leverage, implementing share buybacks, or initiating special dividends. This can be a way to address a perceived inefficient use of capital.
• Divestitures and spin-offs: If a company has multiple divisions, an activist may push for the sale of non-core divisions or for a spin-off of a particular unit to unlock value.
• Wolf pack activism: Activist investors may team up with other funds to coordinate their campaigns and increase their leverage. This “wolf pack” approach amplifies their influence by combining their voting power and resources.

Examples Of Negotiated Settlements Between Companies and Activist Investors

• Activist demands: While not publicly stated at the time, Elliott’s demands likely included significant changes, given the outcome.
• Resolution: Charles River agreed to appoint a senior Elliott executive and three other new independent directors to its board. The company also committed to a strategic review of its business.

Carl Icahn and jetBlue (2024)

• Activist demands: Icahn’s public filing signaled his intention to push for changes, likely related to the airline’s strategy and recent performance issues.
• Resolution: Within days of Icahn’s disclosure, jetBlue settled by appointing two Icahn-backed nominees to its board of directors. 

Elliott Management and Crown Castle  (2024)

• Activist demands: Elliott had publicly agitated for change at Crown Castle, which had faced pressure for underperformance and governance issues.
• Resolution: The settlement involved new directors being appointed to the board and an agreement to conduct a strategic review of the company’s fiber and small-cell business. However, the quick settlement also drew criticism from some who felt it limited the board’s authority.

Lifecore Biomedical and multiple activists (2024)

• Activist demands: The details of each activist’s demands were private, but the resolutions suggest issues with governance and strategic direction.
• Resolution: The settlements included the appointment of new directors, expense reimbursements for each activist, and agreements on shareholding levels and standstill periods.

Carl Icahn and Southwest Gas Holdings (2023)

• Activist demands: Icahn was pushing for significant governance changes, including the removal of the current CEO and a review of the company’s business strategy.
• Resolution: The settlement included replacing the CEO, placing Icahn-backed nominees on the board, and reviewing strategic alternatives for the company. 

Key provisions of settlement agreements

• Board seats: Activist investors often gain seats on the company’s board, sometimes including “replacement rights” that allow them to appoint a new director if their initial nominee leaves.
• Strategic reviews: A company may agree to form a special committee to conduct a strategic review of its business, which can result in divestitures, spin-offs, or a modified business strategy.
• Executive changes: In some cases, activists successfully negotiate for the departure of key executives, including the CEO.
• Standstill provisions: Companies typically require activists to agree to a “standstill” period, which prevents the activist from launching another public campaign for a set time frame.
• Expense reimbursement: Settlement agreements can also require the company to reimburse the activist for a portion of its expenses incurred during the campaign.

ExxonMobil (Climate Strategy and Board Composition)

• Activist investor: Engine No. 1.
• Engagement strategy: Framed climate change as a core business and profitability issue, appealing to large institutional investors like BlackRock and Vanguard.
• Governance improvements:
  • Board seats: Elected three independent directors to the board, all with extensive energy transition expertise.
  • Strategic review: The new board has been tasked with overseeing a long-term strategic review, focusing on a more sustainable energy strategy.
• Outcome: The successful proxy fight, supported by major institutional shareholders, marked a significant shift in corporate governance by prioritizing long-term environmental and business strategy. 

The Walt Disney Company (Strategic Oversight and Board Changes)

• Activist investor: Trian Partners, led by Nelson Peltz.
• Engagement strategy: Publicly challenged management on operational inefficiencies and a lack of board oversight.
• Governance improvements:
  • Strategic review: While the proxy fight was eventually dropped, the pressure from Trian led Disney to address concerns about its operational strategy and shareholder value.
  • Board changes: The engagement prompted Disney to add new independent board members, although Peltz himself was not elected.
• Outcome: The activism resulted in a renewed focus on shareholder returns and business initiatives, demonstrating how activist pressure can influence management’s strategic priorities. 

Southwest Airlines (Leadership and Board Composition)

• Activist investor: Elliott Investment Management.
• Engagement strategy: Criticized Southwest’s operational failures and called for leadership changes and a strategic review.
• Governance improvements:
  • CEO change: In response to pressure, the CEO resigned.
  • Board seats: Elliott secured seats on the board, including appointing new independent directors to oversee a strategic overhaul.
• Outcome: This case highlights how institutional investor activism can successfully force significant leadership changes and prompt a re-evaluation of business strategy at underperforming companies.

Charles River Laboratories (Board and Strategic Review)

• Activist investor: Elliott Management.
• Engagement strategy: An undisclosed, yet forceful, engagement resulted in a rapid settlement before a public proxy fight.
• Governance improvements:
  • Board seats: The company agreed to appoint a senior Elliott executive and three new independent directors to its board.
  • Strategic review: A strategic review of the business was also initiated.
• Outcome: The quick resolution demonstrates how the credible threat of a proxy fight from a known activist can achieve swift governance changes without public spectacle.

Masimo Corporation (Governance and Strategic Focus)

• Activist investor: Politan Capital, led by Quentin Koffey.
• Engagement strategy: Public proxy contest focused on poor capital allocation and a flawed strategic direction.
• Governance improvements:
  • Board seats: Shareholders elected Politan’s nominees to the board, enabling the activist to directly influence corporate strategy.
• Outcome: This successful campaign demonstrated how an activist can leverage a public proxy fight to gain inside influence and implement their desired changes. 

Common Sticking Points in Negotiations Between Activist Investors and Company Management

Disagreements over board composition

• Number of seats: Activists often push for multiple board seats, arguing it’s necessary to implement their agenda. Management might resist, offering fewer seats to limit the activist’s influence.
• Director independence: Management and the activist may disagree on the independence of proposed new directors. Activists want nominees who will represent their interests, while companies seek truly independent directors who are not beholden to a specific investor.
• Candidate qualifications: The activist might propose nominees with specific operational or financial expertise, while the company may argue those candidates lack other necessary skills or experience with the company’s specific industry. 

Conflicts over capital allocation

• Dividends vs. buybacks: Activists often advocate for special dividends or aggressive share buyback programs to return capital to shareholders. Management might prefer to use that capital for organic growth, strategic acquisitions, or to weather future uncertainty.
• Investment in R&D: An activist may argue that a company is overspending on research and development (R&D) or other long-term projects, which can suppress short-term profits. Management often defends these investments as crucial for future growth and innovation.
• Divestitures vs. acquisitions: Activists may push for the sale of underperforming or non-core business segments to unlock value. Management may resist these divestitures, seeing them as integral to a long-term, diversified strategy.

Differences in strategic vision

• Market focus: An activist may argue for a more focused business model, while management may believe that a diversified portfolio of businesses is a better long-term strategy. This often leads to disagreements over major mergers, acquisitions, or spin-offs.
• ESG and social issues: While many institutional investors now value ESG initiatives, some activists may view them as a distraction that reduces shareholder returns. This can create tension over a company’s commitment to social and environmental goals. 

Short-term versus long-term perspectives

• Valuation discrepancies: The activist’s investment thesis is often based on the potential for a quick stock price increase, whereas management may be focused on building sustainable value over many years. Disagreements can arise from differing views on a company’s valuation and the best way to realize its full potential.
• Settlement terms and standstill agreements: Activist settlements typically include “standstill” provisions that prevent the activist from launching another public campaign for a specified time. The length of this period can be a major sticking point, with management seeking a long period of peace and the activist wanting to retain leverage. 

How Differing Risk Tolerance Affects Negotiations

Activist investors: High risk, high reward

• Willingness to endure conflict: Activists are prepared to enter into costly and public proxy fights, which creates leverage during negotiations. Management’s desire to avoid a long, distracting, and expensive public battle often pressures them to settle.
• Focus on quick value unlock: They push for actions that may carry significant risk but offer the potential for a rapid stock price increase, such as aggressive cost-cutting, asset sales, or leveraged share buybacks.
• Acceptance of volatility: Activists are more comfortable with the market volatility their campaigns create, as it can generate trading opportunities. This contrasts with management’s concern for stable share performance and reputation. 

Company management: Risk aversion for stability

• Desire for stability: Management’s aversion to risk often stems from its responsibility to a broader range of stakeholders, including employees, customers, and other long-term shareholders.
• Protection of legacy: Decisions that significantly alter a company’s business model can threaten its long-term survival, which management and the board, as long-term stewards, are motivated to prevent.
• Reputational cost: Public proxy fights carry a significant risk of reputational damage, which can harm the company’s relationships with customers, vendors, and other stakeholders. 

How differing risk tolerance impacts negotiations

• Valuation disagreements: Management and activists often have different views on a company’s valuation. Management’s conservative approach may undervalue the potential for growth, while the activist’s high-risk-high-reward mentality can lead to an inflated valuation of a potential deal.
• “Carve-out” solutions: When negotiating strategic changes like divestitures or acquisitions, the party with the higher risk tolerance may offer concessions to the risk-averse party. For example, a company willing to take on more debt to fund a project may agree to compensate the other side with higher potential returns to secure a deal.
• Incentive alignment: Parties may need to create complex compensation structures to bridge the gap. For instance, a deal might include earn-outs or performance-based clauses to align the rewards for high-risk actions.
• Information asymmetry: Activists may exploit management’s risk aversion by threatening actions that management views as highly risky. Management, with its deeper knowledge of the company’s operations, can counter this by providing detailed data to demonstrate that the activist’s proposed changes are riskier than they appear. 

Negotiating with differing risk tolerances

• Understand the other party’s perspective: Successful negotiation requires understanding the motivations behind each party’s risk tolerance. Open discussions can uncover concerns about financial, operational, and reputational risks.
• Frame the risks and benefits clearly: Use data and evidence to support your position and explain the rationale behind your risk analysis.
• Explore creative alternatives: Brainstorm different options and scenarios that can satisfy both parties, such as phased approaches or contingency plans.
• Maintain flexibility: Be prepared to adjust your strategy as new information and concerns emerge during the negotiation. 

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