3. "The New Barbarians — Shareholder
Activists Have Europe in Their Sights“
Skadden, January 2014
“What’s Driving the Rise of Shareholder Activism in Europe?”
Latham & Watkins June 2015
Shareholder Activism: Coming to Europe
ValueWalk, September 2015
Hedge Fund Activism Takes Root in Europe,
Financial Times, May 2016
“American activist Investors Take Another Charge at Europe,
Wall Street Journal, April 2015
“European companies need to
prepare for a wave of activist
campaigning”, Moelis, April
2014
Activist Hedge Funds Eye European Targets
Institutional Investor, June 2014
10. Brunswick 2016
10
Governance Preference for non-
public channels
Blockers – poison pills,
state intervention or
family ownership
Lack of local
relationships
Shareholder activism landscape
What accounts for the differences across the Atlantic?
11. “What is a “constructivist”? A revolutionary
Russian artist?A bricklayer? Or an investor
who buys into European companies
planning to help raise their value
but doesn’t like being called an “activist”?
The third answer is right. “
Jonathan Guthrie, Financial Times, April 2006
15. Brunswick 2016
15
Stay rational War footing?
ContextKnow your
shareholders
Know your
enemy
Toughing it out
To parley or not
to parley
Frustrating
action
Pre-empt or
wait?
Actions or
words?
Our approach to activism preparedness
Key considerations
Editor's Notes
The reasons for the vastly different outcomes on either side of the Atlantic are many and various. These include:
Better UK governance: anecdotally, there is a perception that UK corporates have a better level of dialogue with their shareholders and there are many more avenues for UK investors to put their concerns to company Board, than in the US, where separation of chairman and chief executives roles is still unusual and Boards are not felt to be as independent. UK investors often say they are happier using forums such as the ABI (Association of British Insurers) Investment Committee to put pressure on Boards.
Preference for non-public, non-confrontational channels. European institutions are unhappy at voicing public opposition to company managements. At least one fund, Sweden’s Cevian has made a virtue of European-style activism, which prefers behind-closed-doors dialogue to noisy public campaigns.
In Continental Europe, many large corporates have supportive family or broader shareholder blocks, or government as shareholder, which can be guaranteed to support management in any confrontation, as well as an ability to deploy poison pills or call on state intervention as a last resort.
Activists particularly those based in the US seem to lack the relationships or natural supporters among the broader shareholder base. Without local knowledge and sensitivity to local mores can often call the reaction of other local stakeholders badly wrong.
How to respond?
So how should companies respond?
Stay rational. Corporate managements can often react very emotionally to challenge. Activists can play on that by couching their attacks in very personal terms. They know that companies often reject otherwise sensible proposals because “they are not invented here”. This can play into the activists’ hands, by undermining management credibility, offering the activist a toehold which they can build on. A rushed statement that closes off otherwise sensible options can be regretted later.
War Footing? Faced with an activist coming on the register, a company should assemble an advisory team to evaluate, prepare a battle plan and war game scenarios. Ability to respond rapidly to what is potentially a fast moving situation depends on having a close-knit advisory team integrating communications, legal and investment banking advisors, with short lines of communications and the authority to take decisions. Even where an activist has yet to spell out their demands, the team can help identify vulnerabilities and develop strategies for addressing them.
Know your enemy. Activists tend to find a formula that works and stick to it. Knowing how the activist has behaved in similar situations will give you a good guide as to how they intend to proceed. Activists also vary greatly in their level of aggression, the strength of their relationships and the depth of their research: what may be an appropriate response to one may not work for another. Intelligence on their other positions, insight into the fund’s recent performance may also be invaluable. Funds may be pushing an agenda such as merger with another business where they have a position which may not be in the interest of the broad mass of shareholders. Many funds are opportunistic “special situations” funds, and may be may only go public if they feel they have exhausted other options. Some play at being “reluctant” activists, as a way of garnering broader support before pouncing.
Know your shareholders. Activists take minority positions and in large cap situations, particularly, will be heavily reliant on their ability to mobilise other shareholders in support of their position. Knowing what your own shareholders feel and think is fundamental. If dialogue with shareholders is generally good and they understand and support management’s strategy, there is a high chance of being able to see off the activist approach. However, if shareholders are unhappy and the activist is latching on to a genuine sense of grievance, an aggressive response by the company may make matters worse. Traditional long-only funds are often reluctant to be seen to side with activists: a pragmatic compromise can leave management in control and isolate the activist. Equally, some may choose to sell down, rather than find themselves having to have uncomfortable conversations with management, providing more loose stock for activists to pick up.
Context: Activists often need a catalyst to give their campaign the necessary fuel to get off the ground. Events such a succession of profits warnings, or a decision by a company to launch a bid for a competitor, are often the trigger for an activist campaign. An activist may take a position in anticipation of such a catalyst, like a sleeper waiting for the signal to become active. They may even be aware of potential issues such as a downturn in a market segment before management themselves are aware. Management aware of difficult issues coming down the pipe should bear this in mind.
To Parley or not to Parley? There is a lot to be said for engagement, particularly if the activist is willing to engage in private with management before going public, or will at least suspend hostilities for the duration. Firstly, it can be an invaluable source of intelligence about what the activist is looking for and where there might be common ground. Secondly, it can give the company time to evaluate the proposals, sound out other shareholders and prepare a considered response. It can also take some of the heat out of the situation. There is a “moral high ground” argument. It shows respect and it can be easier to defend a decision to reject an activist proposal when the management can show they have at least given it due consideration. Otherwise supportive shareholders may object in principle to management refusing to meet a significant shareholder simply because they are an “activist”, or refusing to entertain ideas that could potentially create shareholder value particularly in a situation where a company is underperforming. Many activists have valuable insight that comes from engaging with senior management in a variety of companies which can be of great benefit. On the other hand, some activists are known for using management meetings as a way of extracting inside information, browbeating reluctant managements with persistent demands, and exploiting otherwise confidential information as part of their press campaign. In some jurisdictions, there may be disclosure issues in, for instance, telling an activist that similar proposals for, say, a break up, had been considered in the past, particularly if these had not be shared with the market.
Pre-empt or wait? One of the big advantages activists have is they control the agenda, timing their interventions for maximum impact. Beating them to the mike, can neutralize that advantage, wrong-foot the activist, and allow the company to demonstrate confidence that they have the right strategy. The risk is that it gives the oxygen of publicity to a campaign which might never otherwise have got going. Important to underscore that an aggressive response can only work if the company has absolute confidence that its shareholders are right behind management. Otherwise, it could badly backfire. There is also often a hiatus between an activist appearing on a share register and their tabling their demands. It may be better to wait until the company knows what the target is before firing off all their ammunition.
Frustrating action: Some jurisdictions allow frustrating actions including changing by-laws or corporate statutes to make it harder for the activist to garner support, issuing new capital to dilute activists’ holdings, bringing in supportive shareholders including Government or Government agencies, or offering to buy the activist out. Such measures tend to more effective in countries like Japan or France, where there is little sympathy for activism. It can however backfire badly. In Holland, activists successfully challenged a poison pill when deployed against them by Stork, a conglomerate they targeted for break up. More famously Deutsche Boerse, lost both chairman and chief executive after a revolt by otherwise passive shareholders outraged at their insistence on deploying legal means to frustrate activists.
Toughing it out: This is easiest where the activists’ proposals can be clearly shown to be unreasonable and impractical, particularly where companies have already thoroughly investigated the options and rejected them as unworkable, or the activist has demonstrably failed to address fundamental structural issues such as regulation or competition constraints. In some of the situations described above, some activists have sold down their positions after failing to get any traction. Persistence to the point of obstinacy, is however, a powerful weapon. Companies have businesses to run, activists do this kind of thing for a living. They may have a higher pain threshold.
Actions or words? Where a situation goes public, winning the communications battle is important, although one must never lose sight of the fact that the real focus of the fight has to be on winning the hearts and minds of the shareholders and the media is only one of several channels in that regard. Waging an outright public campaign against a vociferous activist can be relatively straightforward, although naturally the most vulnerable companies will inevitably be those who do not have the right relationships in place and are not as skilled in deploying the full comms toolkit as they should be, which these days increasingly involves familiarity with digital media. As in any defence situation, including an M&A defence, the starting point is always having a clear narrative, and clear engagement plan covering off key stakeholders and potential third party advocates. Even where, it makes sense not to address the activist or their demands directly, it is often advisable to raise the tempo of business as usual communications, leveraging natural communications points such as earnings, investor roadshows and product launches to hammer home the corporate story. Timely and accurate feedback from investors will help determine whether the company needs to go further and address specific investor concerns. In many cases, companies have had to consider bringing forward strategic announcements, strengthening governance, refreshing strategy or finding other more palatable ways of unlocking shareholder value. Either way, managements will want to ensure these are well communicated and as far as possible get at least some of the credit for taking action rather than having it all attributed to the activist.
