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Understanding Shareholder Rights

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Elliott Management, a US-based activist investment firm known for investing in undervalued companies, bought a 4% stake in Cognizant Technology Solutions(NASDAQ Trade Symbol – CTSH) for $1.4 Bn in 2016. Soon after buying the stake, it shot a letter to the board of cognizant mentioning that the company’s share price is undervalued compared to its peers and there is a potential upside of 50% if the company changes course in its business strategy. The 16-page letter laid out the path to improving operational efficiency, capital allocation, and oversight. What followed was management’s rigorous course correction to improve profitability. Sure enough, the company was able to deliver on margins – In the three months to March 2017, margins improved to 18.3% compared to 16.1%* earlier. As a result of the improved profitability, the stock went up in price. Elliot made a handsome 50% return on its investment when it sold its stake in mid-2018.

What Elliot did is termed as shareholder activism. Investopedia explains shareholder activism as a way that shareholders can influence a corporation’s behavior by exercising their rights as partial owners. As part of shareholder rights, the investor can demand from the board to direct the management to change the business strategy. In the case of Elliot, it backed up the demand by solid research on competition and levers to profitability. With its focused activism, Elliot was able to successfully drive its agenda to the board and management.

The Regulation subject of the uniform CPA examination has good learnings on the statutory liabilities and responsibilities of a shareholder. Check out the CPA section on our website for more details.

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