As with everything else in life, “it depends.”

1. We receive this question with some frequency. Typically, a portfolio manager wonders if activist investing requires 10% or 20% or more of the outstanding shares, which it almost always does not. So, one general answer is also, “less than one might think.”
   

In activist investing it does depend - on what the investor wants to accomplish. In our experience, investors have one or both of two goals:

1. ❖publicity, mostly for themselves or their cause
   

2. ❖change, in the company leadership, strategy, operations, or finances.
   

It takes very few shares to get some publicity, and more to change a company. Since we at TAI are interested in improving underperforming companies, we’ll focus more on the latter goal. Yet, we can’t ignore that some investors like publicity, too, sometimes for good reasons.

It also depends on whether you want to appeal to company leadership, or other shareholders. It takes fewer shares to appeal to other shareholders, who matter more than company leadership anyway.

We can think of two different ways to understand more specifically what it takes to gain publicity or change a company: legal and practical.

Legal Guidelines

At the very minimum, an investor needs one share for one day. That gains admission to the annual meeting, and thus the right to propose resolutions and nominate directors. It also allows investors to request books and records under Delaware law, and under most other states’ laws.

The next level is $2,000 worth of shares for one year. There, SEC regulations require management to publish a shareholder resolution in the company’s proxy materials. An investor actually can submit a resolution with fewer shares (at least one), but management need not include it with the rest of the proxy stuff.

That’s it, as far as the law goes. Other ownership levels trigger various disclosure obligations, but no other legal requirements pertain to communicating with management or other shareholders, nominating director candidates, requesting books and records, or any other exercise of shareholder rights.

Practical Guidelines

One share or $2,000 worth of shares is a minuscule investment. These days a band of gadfly individual investors, frequently with only the $2,000 minimum, lobs numerous resolutions at public companies on the whole range of social, environmental, and good-governance subjects. Companies must include these resolutions in proxy materials, proxy advisors then research them, and institutions vote on them. So, these shareholders do get some publicity, and win a vote once in a while.

No one takes this level of investment (or these proposals) seriously. What level will they take seriously?

1. We’ve heard of investors that have an impact with not much more than these minimums. Eric Jackson at Ironfire Capital evidently drove CEO changes at Yahoo and Motorola with 96 and 134 shares of each company, respectively. Those shareholdings, along with a great deal of effort and some clever Internet-working, gained Ironfire some valuable publicity: for the case for change at those companies, and for Ironfire itself. We haven’t heard of any others like that, though.
   

We should distinguish between what other investors and company leadership take seriously. Other investors respect and appreciate a thoughtful case for change, especially coming from another investor (rather than an investment bank, analyst, or consultant). So, they will take a call from, and possibly vote for, an investor with a good case and fewer shares, say a few thousand, or a smaller fraction of a percent.

An investor with a larger percentage, even above the 5% disclosure level for filing a Form 13D, would have the credibility to call other investors mostly on the basis of the size of the holding. So, fewer shares calls for a better pitch, which in turn demands for more effort.

On the other hand, company leadership doesn’t much care about an activist investor’s thoughtful case. They simply pay more attention to larger shareholders. In our experience, executives at larger companies will talk to investors with 0.25% or more of the shares outstanding. Or, at least investors can talk to IR there.

At smaller companies, without IR departments, you’ll need a percent or more of the outstanding shares in order to talk to management or the BoD.

Importantly, talking to other investors matters much more than to company leadership. With the right case, and just enough shares, an activist can put together a group of investors in a way that multiplies their own holding. At that point, the company will take your call.

So, some general principles to keep in mind:

1. ❖Achieving meaningful change in a portfolio company, rather than just getting publicity, requires more shares.
   

2. ❖There exists a kind of trade-off between having fewer shares and doing more work, or having more shares and doing less.
   

3. ❖Appealing to investors matters more than appealing to company executives.