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- 1 Activist investors buy controlling interests in other firms.
- 2 Activist investors can be individuals as well as institutions.
An activist investor or activist shareholder can simply be an individual or an institutional investor. The term transitioned from “corporate raiders” in the 80s. The aim of activist investors is to acquire the targeted company by gaining seats on the board of the targeted company.
An activist investor’s strategies to acquire a firm involve hostile takeovers. This type of situation arises when the investor tries to take control of the company without the agreement of the Board of Directors. This is done with the motive of altering the operations of the firm in hope of unlocking the locked potential of the firm.
How Do Activist Investors Present Their Proposition?
The investors start by filing a Schedule 13D form with the US Security and Exchange Commission (SEC), which is mandatory to be filled within 10 days of owning 5% or more of the company’s voting shares.
The filers of schedule 13D must disclose every information to the SEC, including the reasons for acquisitions, future plans with the company, treatment of assets of the company, interest of shareholders, dividends and all other concerned requirements.
On the other hand, if the qualified institutional or individual investor doesn’t plan on changing the management style of the firm or alter its operations, then, they can file Schedule 13G, in which they are not required to present as many disclosures as the Schedule 13D filers.
Is the Future of Investor Activism Safe?
In the past, few claims had come up stating that “investor activism is dying”. This was majorly feared due to the altercations in the disclosures under Schedule 13D by the SEC.
In 2022, the SEC sent out a proposal to reduce the filing period from 10 days to 5 days. If this proposal gets accepted, then, it would definitely affect the workings of Schedule 13D and the investors will be obligated to disclose the details of the derivatives (such as, options). This would affect the economic interest of the company with no respect to the shareholder’s rights to the stock position of the firm.
Types of Activist Investors
Individual Investors
Individual investors are generally the people of high net worth and of great influence. Due to their accumulated wealth, they can buy a major fraction of a company’s voting shares in order to get enough voting rights to become a part of the Board of Directors.
To take an example, if the investor thinks that the capital of the firm is not being used in a competent manner, then, they can use their influence to change the capital usage structure of the firm.
Private Equity Firms
Private Equity Firms as activist investors use varied strategies in order to take control of a company. Most of the time the reason behind this is to take the company private from the public. Private Equity Firms are structured in a way that all the partners who own a consequential amount of funds in the company, enjoy the limited liability, whereas, there’s always a general partner who assumes unlimited liability. Private equity funds use funds of other investors on their behalf for a specified period of time.
Hedge Funds
Hedge funds have a number of ways by which they can take control of any firm.
Hedge funds as activist investors can act as an individual activist investor or as private equity funds. The sole purpose of hedge funds is to provide returns to their investors.
With a background in journalism, Ritika Sharma has worked with many reputed media firms focusing on general news such as politics and crime. She joined The Coin Republic as a reporter for crypto, and found a great passion for cryptocurrency, Web3, NFTs and other digital assets. She spends a lot of time researching and delving deeper into these concepts around the clock, and is a strong advocate for women in STEM.
