Rethinking Acting in Concert: Activist ESG Stewardship is Shareholder Democracy

In May 2021, Engine No. 1, an investment fund, was lauded by the responsible investment community for successfully placing three dissident independent directors on ExxonMobil’s board. It achieved this by being a catalyst for institutional investors to become backers of environmental shareholder activism. The unprecedented success of Engine No. 1’s campaign has spurred calls for a new, more sustained, activist engagement model by institutional investors, now known as “activist stewardship”.



However, there is a significant legal hurdle that has been almost entirely overlooked by those calling for this new approach for institutional investors to become activist stewards: acting in concert rules. As we illuminate in this article, the legal barriers posed by acting in concert rules in virtually all jurisdictions prevent institutional investors from engaging in collective shareholder activism with the aim or threat of replacing the board (i.e., “activist stewardship”). Perversely, the current acting in concert rules effectively prevent institutional investors from replacing boards that resist (or even deny) climate change solutions – even if (or, ironically, precisely because) they collectively have enough shareholder voting rights to democratically replace the boards of recalcitrant brown companies. This heretofore hidden problem in corporate and securities law effectively prevents trillions of dollars of shareholder voting rights that institutional investors legally control from being democratically exercised to change companies who refuse to properly acknowledge the threat of climate change.



As we reveal, this perverse result has arisen because the legal rules concerning acting in concert were designed in a different age when contests of control – not activist ESG stewardship targeting the existential threat of climate change – formed the foundational rationale undergirding such rules. This has created a panoply of rules which disincentivize – and, in cases of mandatory bids and poison pills, may functionally disenfranchise – institutional investors from using aggressive tactics to drive climate change prevention initiatives supported by a majority of shareholders.



As such, we argue that the acting in concert rules must be reformed around the world to promote shareholder-backed climate initiatives – while still maintaining the fair and effective markets for corporate control, which was the original impetus for creating them. By designing a workable model for reforming acting in concert laws, we provide a solution to the problem of brown boards being undemocratically shielded by acting in concert rules.