As corporations get larger, shareholders are often less and less involved, especially when they only own a small portion of the enterprise. A new trend is the rise of activist shareholders, owners with a small portion of equity who are still exercising their rights as owners to effect corporate change. No company with minority shareholders is immune from this trend.
In general, shareholder activism tends to be good for other shareholders. They often step in to reverse downward trajectories on performance and increase returns. They also help improve strategy, streamline operations, and strengthen the board of directors. In some cases, they step in to save the organization from outright fraud and failure.
As good as this can be in many cases, it’s also something that causes concern for majority shareholders and executives. After all, activists are coming in saying that they need to change something significantly in company operations. Instead of getting upset and feel like this is a personal attack, a good executive should understand that the shareholders are concerned about the company’s overall health and believe they can do something to improve it.
The first step executives should take when confronted with an activist minority shareholder is to listen to the thoughts and concerns they have. Often, executives can then provide insight into operations or other factors that the activists were unaware of. In other cases, listening to the activists can suggest alternate directions for solving some of the company’s issues.
Before resorting to hostile takeovers, executives and shareholders should try to sit down, talk, and reach a compromise response to the concerns on issues going forward. A collaborative response to activist shareholder concerns is the most likely avenue to long term success.
Bring in auditors and other consultants as necessary to identify facts. As hard as it may be for executives, understand that these shareholder activists are owners as well with a vested interest in the company’s success. Do what you can to work with them to prevent hostile actions.
For smaller companies, when looking for individuals to invest, you should look for people who want to be actively involved in your enterprise. For a growing company, an investor can bring contacts and much needed oversight and guidance along with adding to the company’s capital. Many times, those initial investors make up your first board of directors and bringing on an investor means you’re basically hiring your boss. Though they might still be minority shareholders, they likely have tremendous influence over company direction and success.
If you’re a business owner concerned about the possibility or reality of shareholder activists, reach out to Virtus Law Firm. Our experienced team of attorneys can help you set up your business and understand the laws relating to shareholder rights. We can also help you negotiate solutions when things get tense. Give us a call today at 612.888.1000 or email us at info@virtuslaw.com.