{"id":867,"date":"2018-05-15T08:49:49","date_gmt":"2018-05-15T08:49:49","guid":{"rendered":"http:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/?p=867"},"modified":"2018-05-28T09:07:31","modified_gmt":"2018-05-28T09:07:31","slug":"corporate-duel-shareholder-activism-in-the-facebook-personal-data-manipulation-case","status":"publish","type":"post","link":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/2018\/05\/15\/corporate-duel-shareholder-activism-in-the-facebook-personal-data-manipulation-case\/","title":{"rendered":"Corporate Duel: Shareholder Activism in the Facebook Personal Data Manipulation Case"},"content":{"rendered":"

Wilfredo C\u00e1ceres Ghisilieri,\u00a0LL.M in International Financial Law at King\u2019s College London,\u00a0M&A Associate at Estudio Mu\u00f1iz (Peru).<\/em><\/p>\n

\u201cMark Zuckerberg\u2019s prepared testimony highlights a simple fact: He doesn\u2019t understand how a large, global and publicly-held company is run,\u201d Open MIC CEO Michael Connor said in a statement. \u201cHe currently has two jobs at Facebook \u2014 CEO and Chairman of the Board. It\u2019s time for him to give up at least one, if not both, titles. It is long past time for Facebook to separate the roles of company CEO and Chairman,\u201d Connor continued, \u201cand for Mark Zuckerberg to resign or be fired.\u201d<\/em>[i]<\/strong><\/a><\/p>\n

The recent Facebook scandal involving Cambridge Analytica manipulating Facebook\u2019s users\u2019 personal data (the \u201cFacebook Case\u201d) may have encouraged minority shareholders to propose changes to Facebook\u2019s board and management. These investor groups (the \u201cActivist Shareholders\u201d) have different reasons for requesting Zuckerberg\u2019s removal as CEO and Chairman of the tech giant: from financial motives \u2013 shares\u2019 value fell dramatically after the Facebook Case was made public \u2013 to ethical or social ones. Yet Zuckerberg holds 60% of the company\u2019s voting rights, hindering the possibility of forcing his resignation or to voting for his removal.<\/p>\n

How can Activist Shareholders instigate change in Facebook? Can shareholders pressure Zuckerberg to step down?\u00a0This post explains which mechanisms are available to shareholders for resolving dissatisfaction with the company management, and how the choice to activate them will depend on the type of shareholders involved.<\/p>\n

<\/p>\n

AVAILABLE APPROACHES TO SHAREHOLDERS WHO FACE DISSATISFACTION WITH COMPANIES\u2019 MANAGEMENT<\/em><\/strong><\/p>\n

According to Hirschman[ii]<\/a> all shareholders have three options when dissatisfied with management in a company: (i) they may directly express their dissatisfaction with management (voice<\/strong>); (ii) they may obey management\u2019s decisions (loyalty<\/strong>); or, (iii) they may sell their shares in the company (exit<\/strong>). When a shareholder \u201ctries to change the status quo (of a company) through \u2018voice\u2019, without a change in control of the firm<\/em>\u201d[iii]<\/a>, he is participating in \u201cshareholder activism\u201d.<\/p>\n

Activist Shareholders\u2019 agendas may include (a) changing corporate strategy, (b) improving business performance, including board changes, (c) addressing management issues, and (d) influencing corporate events, in particular the outcome of takeovers or other M&A situations.[iv]<\/a><\/p>\n

In the Facebook Case, voice was exercised by means of public campaigning in the media to improve Facebook\u2019s business performance. Katelouzou[v]<\/a> acknowledges other methods Activist Shareholders consider when exercising their shareholders\u2019 rights through voice and distinguishes them between \u201cinformal\u201d and \u201cformal\u201d. The former involves activities such as writing letters, behind-the-scenes intervention, one-on-one meetings with the management, as well as public campaigning. Formal<\/em> exercise of shareholder rights involves shareholders\u2019 proposals, formulating enquiries in shareholder meetings for acquiring company information and the use of corporate voting rights. Litigation is not usually seen as an appropriate tool for shareholder activism \u201cas it is considered expensive and unpredictable, and rarely leads to immediate results which activists wish to achieve.<\/em>\u201d[vi]<\/a><\/p>\n

Although all these tools are available to Activist Shareholders, in practice there are some minority shareholders \u2013 like institutional shareholders or hedge funds \u2013 with more bargaining power than others. For example, institutional investors can utilise their strong position within financial markets to perform certain actions which will gain notoriety among other market participants. Conversely, individual shareholders usually do not have the same strength, reducing their chances to achieve change in a company through \u201cvoice\u201d. As a consequence, individual shareholders often opt for loyalty or exit strategies in the case of frustration with the company.<\/p>\n

    \n
  1. Hedge Funds<\/u><\/em><\/li>\n<\/ol>\n

    A particular situation arises with hedge funds, which, according to Market Watch,[vii]<\/a> account for considerable participation share within Facebook.<\/p>\n

    Hedge funds tend to have an active participation in their investee companies. Most commonly they will apply tactics involving both informal and formal exercise of shareholders\u2019 rights to incite change in their investee companies. According to PwC, the main reasons a company may suffer an \u201cactivism attack\u201d from hedge funds are (i) excessive CEO compensation; (ii) long-tenured directors or lack of board diversity; (iii) insufficiently independent directors; (iv) lack of clear strategic plan; (v) disparate or under-performing business; and (vi) excess cash in books.[viii]<\/a><\/p>\n

    Hedge funds\u2019 active and aggressive behavior towards their investee companies is due to the fact that their investments are directly tied to their portfolio[ix]<\/a>. It may also be a result of the pressure put on them by groups or representative bodies to act in a specific way. For example, in the UK, the Hedge Fund Working Group has set governance recommendations that UK-based hedge fund managers should follow under a \u201ccomply or explain\u201d approach with their clients[x]<\/a>.<\/p>\n

      \n
    1. Institutional Investors<\/u><\/em><\/li>\n<\/ol>\n

      Institutional investors, such as pension funds or insurance companies, traditionally tend to take a more passive approach with their investee companies. This is allegedly the result of considerations such as consequences to reputation, the cost of activism or the risk of becoming an \u201cinsider\u201d by being involved in the day-to-day company business. Institutional investors concentrate upon the economic benefits to their clients rather than the efficacy of the management in investee companies. They are also reluctant to be seen as \u201cinsiders\u201d, in fear of becoming subjected to financial regulations such as insider trading and market abuse provisions, limiting their free trading on the market.[xi]<\/a><\/p>\n

      However, recent trends to boost institutional investors\u2019 activism through corporate governance tools and legal and regulatory framework may change their approach. Representative bodies like the National Association of Pension Funds (NAPF) and the Association of British Insurers (ABI) in the UK have also played an important role in influencing institutional investors\u2019 behaviour in providing guidance for the preparation of corporate governance guidelines alongside the adoption of the UK Corporate Governance Code[xii]<\/a> recommendations[xiii]<\/a>.<\/p>\n

      An important corporate governance tool for institutional investors in the UK is the Stewardship Code 2010 (revised in 2012)[xiv]<\/a> which aims to increase activism through a \u201ccomply or explain\u201d approach. Under this code, institutional investors are encouraged to report and disclose to their clients whether and how they have complied with the Stewardship Code[xv]<\/a>. These rules better protect clients as they are based on the principles that \u201cinstitutional shareholders should develop and disclose a policy on the discharging of stewardship responsibilities, should monitor the companies they invest in, should have clear polices on voting, should establish guidelines on when and how they will intervene in the affairs of companies in which they own shares and should act collectively with other investors where appropriate<\/em>\u201d[xvi]<\/a>. However, Cheffins argues that as long as the model is based on \u201cself-governance\u201d, the Stewardship Code will fail as a proper enforcement structure has not been developed. [xvii]<\/a><\/p>\n

      CONCLUSIONS: SHAREHOLDERS VERSUS POWERFUL FOUNDERS WITH SUPERMAJORITY. A MATTER OF REGULATORY FRAMEWORK<\/strong><\/p>\n

      Since Facebook became a quoted company in 2012, there has been continuous criticism and concerns to its corporate governance model. It is one which is common in U.S. tech-companies, for instance Microsoft and Amazon, where founders have supermajority decision-making powers as well as a position in the board and management.<\/p>\n

      Although, it is perfectly understandable for Zuckerberg to adopt this structure to protect Facebook from corporate raiders and activist hedge funds\u2019 attacks, but should a publicly traded company such as Facebook have the power to limit investors\u2019 participation in the company? Should Facebook\u2019s investors have more tools to deal with this situation?<\/p>\n

      Facebook\u2019s situation is really the result of the US corporate governance regulatory framework, which, through laws and regulations (i.e. corporate laws, federal laws, listing rules, the Dodd-Frank Act, etc.), as well as by rulings and opinions from the Delaware courts, forces companies to implement many corporate governance practices.[xviii]<\/a><\/p>\n

      It has been noted that U.S. law \u201cdiscourages coordination amongst shareholders in several ways<\/em>\u201d. [xix]<\/a> For example, the Securities Exchange Act \u00a7 13(d)[xx]<\/a> requires \u201cextensive disclosures from any person or group that acts together to acquire beneficial ownership of more than 5 percent of shares<\/em> [\u2026] and ultimately, controlling shareholders can be held liable for failing to protect the interest of other minority shareholders, which thereby discourages the formation of large blocks and exercise of control by institutional investors<\/em>\u201d.[xxi]<\/a> Likewise, the U.S. board-centric approach reduces shareholders\u2019 engagement as investors have limited power to \u201cdirectly nominate their own candidates to the board and have few incentives to engage in proxy contests<\/em>\u201d[xxii]<\/a>. The Board will then exercise the majority of decision-making of the company leaving US shareholders only to ratify certain narrow matters.<\/p>\n

      Despite these issues, there have been cases where U.S. tech-companies capitulated to activist shareholders\u2019 requests. One of the most influential reasons for doing so is that institutional investors often side with hedge funds because they pitch innovative ideas geared towards higher returns. Hedge funds can thus win proxy fights and apply pressure for change, especially in underperformed companies[xxiii]<\/a> For example, Starboard Value, a hedge fund with a shareholding of 1.7% in Yahoo, put the company on the verge by pressing to replace Yahoo\u2019s entire board[xxiv]<\/a>. Yahoo finally decided to grant Starboard Value four seats in its board to focus on other relevant matters for the company (i.e. its sale to Verizon in 2017)[xxv]<\/a>.<\/p>\n

      In contrast, the UK\u2019s shareholder-centred approach in company law allows shareholders to overrule the board\u2019s decisions, making them more empowered than U.S. shareholders and allowing for more effective corporate governance practices. However, such practices are seen as guidelines rather than enforceable legal instruments.<\/p>\n

      In conclusion, it is hard to predict an outcome to the Facebook Case. It may pivot away from Zuckerberg\u2019s predominance in Facebook, or at least force him to make structural changes to its corporate structure. However, it should be kept in mind that the difficult position of Facebook\u2019s shareholders is not exceptional and is merely the result of the US regulatory framework. Thus, only a change in the law and in the courts\u2019 approach can tackle similar situations recurring.<\/p>\n

      Regardless of the result of the Facebook case, shareholder activism is increasing and becoming standardised practice.[xxvi]<\/a> A publicly traded company must be prepared to face it through different tools, which include clear corporate governance guidelines and other statutory remedies.<\/p>\n

       <\/p>\n

       <\/p>\n

      [i]<\/a> R. Brandom, \u201cInvestor groups call for Mark Zuckerberg to resign<\/em>\u201d,\u00a0The Verge,\u00a0<\/em>9 April 2018,\u00a0https:\/\/www.theverge.com\/2018\/4\/9\/17216474\/mark-zuckerberg-resign-investor-groups-facebook-scandal<\/a> (accessed 25 April 2018).<\/p>\n

      [ii]<\/a> A.O Hirschmanm,\u00a0Exit, Voice and Loyalty.<\/em>, Harvard University Press, Cambridge, MA, 1970, cited in C. Mallin,\u00a0The Role of Institutional Investors in Corporate Governance<\/em>, from Corporate governance, <\/em>Oxford: Oxford University Press, p. 106.<\/p>\n

      [iii]<\/a> S. Gillan and L. Starks, A Survey of Shareholder Activism: Motivation and Empirical Evidence<\/em>, 1998 cited in D. Katelouzou. “Week 4: Shareholder Activism.” October 2015. Microsoft PowerPoint presentation. Slide 4.Comparative Corporate Law module, Master of Laws (LLM) in The Dickson Poon School of Law, King\u2019s College London.<\/p>\n

      [iv]<\/a> G. Davies et al, Shareholder Activism. There\u2019s a lot of it about.<\/em> Legal and Commercial Publishing Limited, June 2008, p. 2.<\/p>\n

      [v]<\/a> D. Katelouzou. “Week 4: Shareholder Activism.<\/em>” October 2015. Microsoft PowerPoint presentation. Slide 21.Comparative Corporate Law module, Master of Laws (LLM) in The Dickson Poon School of Law, King\u2019s College London.<\/p>\n

      [vi]<\/a> G. Davies et al.,\u00a0ibid<\/em> 4, p. 7.<\/p>\n

      [vii]<\/a> In 2017, 27 of the 50 biggest hedge funds globally held shares in the social network company according to Market Watch, see S. Langlois, \u201cFacebook is racking up the likes among the world\u2019s biggest hedge funds<\/em>\u201d,\u00a0Market Watch,\u00a0<\/em>23 February 2017,\u00a0https:\/\/www.marketwatch.com\/story\/facebook-is-racking-up-the-likes-among-the-worlds-biggest-hedge-funds-2017-02-23<\/a> (accessed 25 April 2018).<\/p>\n

      [viii]<\/a> P. Loop, \u201c10 Minutes on hedge fund activism\u201d,\u00a0<\/em>PWC US<\/em>, June 2016, https:\/\/www.pwc.com\/us\/en\/10minutes\/assets\/pwc-10minutes-on-hedge-fund-activism.pdf<\/a> (accessed 25 April 2018).<\/p>\n

      [ix]<\/a> D. Katelouzou. “Week 4: Shareholder Activism<\/em>.” October 2015. Microsoft PowerPoint presentation. Slide 19.Comparative Corporate Law module, Master of Laws (LLM) in The Dickson Poon School of Law, King\u2019s College London.<\/p>\n

      [x]<\/a> Ibid 4, p. 6.<\/p>\n

      [xi]<\/a> Davies et al, Ibid 4<\/em>, p. 2.<\/p>\n

      [xii]<\/a> Financial Report Council. UK Corporate Governance Code. September 2014. https:\/\/www.frc.org.uk\/getattachment\/59a5171d-4163-4fb2-9e9d-daefcd7153b5\/UK-Corporate-Governance-Code-2014.pdf<\/a><\/p>\n

      [xiii]<\/a> C. Mallin,\u00a0The Role of Institutional Investors in Corporate Governance<\/em>, from Corporate governance, <\/em>Oxford: Oxford University Press, p. 109.<\/p>\n

      [xiv]<\/a> Financial Report Council. UK Stewardship Code. September 2012. https:\/\/www.frc.org.uk\/getattachment\/d67933f9-ca38-4233-b603-3d24b2f62c5f\/UK-Stewardship-Code-(September-2012).pdf<\/a><\/p>\n

      [xv]<\/a> C. Mallin,\u00a0The Role of Institutional Investors in Corporate Governance<\/em>, from Corporate governance, <\/em>Oxford: Oxford University Press, p. 112.<\/p>\n

      [xvi]<\/a> B. Cheffins,\u00a0The Stewardship Code\u2019s Achilles\u2019 Heel.<\/em> The Modern Law Review, Faculty of Law, University of Cambridge, 2010, p. 1012.<\/p>\n

      [xvii]<\/a> Above, 1013.<\/p>\n

      [xviii]<\/a> R. Kraakman et al. The Anatomy of Corporate Law. A Comparative and Functional Approach<\/em>. Oxford University Press, 2009, p. 68.<\/p>\n

      [xix]<\/a> G. Jackson, \u201cUnderstanding Corporate Governance in the United States<\/em>\u201d,\u00a0Hans B\u00f6ckler Foundation,\u00a0<\/em>October 2017,\u00a0https:\/\/www.boeckler.de\/pdf\/p_arbp_223.pdf<\/a> (accessed 26 April 2018).<\/p>\n

      [xx]<\/a> U.S. Securities Exchange Commission. Securities Exchange Act 1934 (as amended March 2018). http:\/\/legcounsel.house.gov\/Comps\/Securities%20Exchange%20Act%20Of%201934.pdf<\/a><\/p>\n

      [xxi]<\/a> S. Bainbridge: Director vs. Shareholder Primacy in the Convergence Debate, UCLA School of Law, Research Paper No.02-04, 200, cited in G. Jackson, \u201cUnderstanding Corporate Governance in the United States<\/em>\u201d,\u00a0Hans B\u00f6ckler Foundation,\u00a0<\/em>October 2017,\u00a0https:\/\/www.boeckler.de\/pdf\/p_arbp_223.pdf<\/a> (accessed 26 April 2018).<\/p>\n

      [xxii]<\/a> G. Jackson, \u201cUnderstanding Corporate Governance in the United States<\/em>\u201d,\u00a0Hans B\u00f6ckler Foundation,\u00a0<\/em>October 2017,\u00a0https:\/\/www.boeckler.de\/pdf\/p_arbp_223.pdf<\/a> (accessed 26 April 2018).<\/p>\n

      [xxiii]<\/a> S. Davidoff Solomon, \u201cAs Activist Investors Gain Strength, Boards Surrender to Demands<\/em>\u201d. DealB%k (New York Times Business Section blog). 14 October 2014, https:\/\/dealbook.nytimes.com\/2014\/10\/14\/as-activist-shareholders-gain-strength-boards-surrender-to-demands\/\u00a0(accessed 4 May 2018).<\/p>\n

      [xxiv]<\/a> M. de la Merced\u00a0and\u00a0V. Goel, \u201cYahoo Agrees to Give 4 Board Seats to Starboard Value\u201d, The New York Times,\u00a027 April 2016, https:\/\/www.nytimes.com\/2016\/04\/28\/business\/dealbook\/yahoo-board-starboard.html<\/a> (accessed 2 May 2018).<\/p>\n

      [xxv]<\/a> V. Goel, \u201cVerizon Completes $4.48 Billion Purchase of Yahoo, Ending an Era\u201d, The New York Times,\u00a013 June 2017, https:\/\/www.nytimes.com\/2016\/04\/28\/business\/dealbook\/yahoo-board-starboard.html<\/a> (accessed 2 May 2018).<\/p>\n

      [xxvi]<\/a> W. Turvill. \u201cWatch your step: Shareholder activism is on the rise and UK companies are among the most vulnerable\u201d. City A.M. 15 February 2017, http:\/\/www.cityam.com\/259145\/watch-your-step-shareholder-activism-rise-and-uk-companies<\/a> (accessed 2 May 2018)<\/p>\n","protected":false},"excerpt":{"rendered":"

      Wilfredo C\u00e1ceres Ghisilieri,\u00a0LL.M in International Financial Law at King\u2019s College London,\u00a0M&A Associate at Estudio Mu\u00f1iz (Peru). \u201cMark Zuckerberg\u2019s prepared testimony highlights a simple fact: He […]<\/a><\/p>\n<\/div>","protected":false},"author":119,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[204,182,205,203,210],"class_list":["post-867","post","type-post","status-publish","format-standard","hentry","category-articles","tag-cambridge-analytica","tag-corporate-governance","tag-facebook","tag-shareholders","tag-shareholders-activism"],"_links":{"self":[{"href":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/wp-json\/wp\/v2\/posts\/867","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/wp-json\/wp\/v2\/users\/119"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/wp-json\/wp\/v2\/comments?post=867"}],"version-history":[{"count":6,"href":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/wp-json\/wp\/v2\/posts\/867\/revisions"}],"predecessor-version":[{"id":883,"href":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/wp-json\/wp\/v2\/posts\/867\/revisions\/883"}],"wp:attachment":[{"href":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/wp-json\/wp\/v2\/media?parent=867"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/wp-json\/wp\/v2\/categories?post=867"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/wp-json\/wp\/v2\/tags?post=867"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}