Shareholder Activism Dealt A Blow In Australia's Federal Court

In Short

The Background: In RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756 (10 July 2017) ("Brickworks case"), a large institutional investor sought to dismantle a cross shareholding arrangement between two publicly listed Australian companies on the basis that the cross shareholding was oppressive to minority shareholders. It was alleged that the cross shareholding entrenched the incumbent boards, depressed both companies' share prices and disenfranchised minority shareholders.

The Result: The Federal Court of Australia emphatically dismissed the claim, holding that reasonable directors would not, in this situation, consider maintenance of the cross shareholding to date to be unfair or oppressive. On the contrary, the court held that directors of both boards had diligently discharged their obligations to act in the best interests of the company, and the cross shareholding had facilitated long-term strategic decision-making and commercial stability. The claimant failed to establish that the founding family of one of the companies (the Millner family) exercised the alleged level of control or influence over the companies' boards, that the cross shareholding had negatively impacted the companies' share price or that the unwinding of the cross shareholding would necessarily deliver value for shareholders.

Looking Forward: In an environment of increased shareholder activism in Australia, the decision will serve as a cautionary tale to would-be activists that the court's role is not to step into the shoes of directors to make commercial decisions about matters where reasonable minds may differ. The judgment serves as an endorsement of long-term and well-documented commercial planning, notwithstanding the challenges presented by shareholder activists.

The Background

The cross shareholding arrangement was entered into by Brickworks Limited ("Brickworks") and Washington H Soul Pattinson and Company Limited ("Soul Pattinson") in 1969. At the time of the Court's decision, each of Brickworks and Soul Pattinson was the largest shareholder in each other, with Brickworks owning approximately 43 percent of the shares in Soul Pattinson, which, in turn, had an interest of about 44 percent in Brickworks.

In the 1980s, one of Australia's largest fund managers, Perpetual Limited, through its custodian's nominee, RBC Investor services Australia Nominees Pty Limited ("Perpetual"), acquired shares in both Brickworks and...