Some countries are moving to limit activists and strengthen companies
If you ask a European about shareholder activism, you will typically hear that this is an American idea, about as refined as a barroom brawl. In Europe, you will hear, disagreements with shareholders are resolved in a quiet and civilized way, without recourse to proxy fights, verbal jousting in the press, or forced ousters of management.
Is this really the case? The answer seems to be both yes and no. While disagreements between European companies and their shareholders are usually resolved quietly and in private, investors in Europe are every bit as forceful as their US counterparts. Although they tend to shun the idea of a corporate shoot-out at high noon and seem to favor behind-the-scenes persuasion, European investors are increasingly assertive about their strategic preferences.
Lately, though, fears of engagement by the wrong kind of shareholder — mainly foreign-based hedge funds with short-term outlooks — have started to intrude on this gentlemanly confabulation. Several European governments have taken, or are considering taking, steps to strengthen corporate defenses against activist shareholders, both to limit their takeover powers and to restrict their influence on companies in general.
This, say shareholder rights advocates in Europe, is a classic case of political overreaction. In an effort to limit the takeover powers and strategic influence of hostile parties, they say, governments might approve rules that block legitimate and useful participation by existing shareholders.
‘The intent of some of these measures is to scare off outside activists, but the actual result would be to scare off long-term investors from talking with each other,’ says Michelle Edkins, chairwoman of the shareholder rights committee of the International Corporate Governance Network (ICGN).
Crashing the ‘concert party’
The proposal currently attracting the most attention is a bill by the German government that would expand the definition of ‘acting in concert’, a legal term referring to collaboration or collusion among shareholders. A group of shareholders owning at least 30 percent of shares and cooperating toward a particular — as yet undefined — joint goal could be found to be a ‘concert party’ with effective control of the company, and therefore required to offer to buy-out the rest of the shareholders.
A draft bill now under review in the German parliament would assume the presence of a ‘concert party’ if shareholders representing 30 percent of shares have similar interests, for example in changing the company strategy. In other words, under the bill companies and prosecutors would have a much lighter burden of proof of collusion on the part of those shareholders.
The intent of the proposal is to improve transparency for all shareholders, so that they are protected from a subset of owners with its own agenda and effective control of the company.
Despite its good intentions, this proposal, which may yet be substantially revised, has shareholder groups incensed. ‘One might think the law has only one objective: to limit the risks for the directors vis-à-vis active investors,’ says Christiane Hölz, a lawyer for DSW, the German Shareholder Association.
A similar legislative proposal is pending in the Netherlands. Shareholder rights groups there say the bill leaves the definition of ‘acting in concert’ unclear. The resulting uncertainty, they warn, would put a damper on legitimate communication among shareholders, and on the growing trend of dialogue between shareholders and company directors.
‘We are concerned that there is an emerging view that shareholders acting as responsible owners and engaging with companies and one another is somehow threatening to companies,’ Edkins says.
Anglo-Saxons at the gates
The German and Dutch proposals surfaced after foreign hedge funds made highly public raids on domestic companies. In Germany in 2005, the Children’s Investment Fund and other UK-based hedge funds were able to scuttle plans by Deutsche Börse to acquire the London Stock Exchange. In the process, they succeeded in ousting much of the German exchange’s top management. In the Netherlands, the impetus was the targeting of industrial conglomerate Stork by UK hedge fund Centaurus Capital, and the eventual sale of Stork to UK private equity firm Candover.
Expanding the definition of a ‘concert party’ could well discourage such boardroom highjacking attempts, but could also discourage legitimate communication among smaller shareholders.
‘These proposals are responses to political pressures,’ says Michael McKersie, manager of investment affairs for the Association of British Insurers. ‘But it is hard to constrain behavior this way without infringing on shareholders’ rights to act responsibly. It would be easy for directors to use this to prevent legitimate action by shareholders.’
‘The danger is that legislation would overreact, and make it harder for small shareholders to work with other shareholders to hold management to account,’ says Hans-Christoph Hirt, director of corporate governance and engagement for Hermes Pensions Management.
Hermes is calling for a clarification at the European Union level of the term ‘acting in concert’, to minimize possible confusion caused by varying interpretations of the term in national legislation.
The French ‘non’
But ‘concert party’ determinations are not the only weapons against unwanted outsiders. In France, the government adopted legislation in 2006 allowing company directors, with shareholder approval, to adopt a kind of poison pill to discourage takeovers. The measure allows companies to issue warrants (dubbed ‘bons Breton’ after finance minister Thierry Breton) to existing shareholders at cut-rate prices to block hostile takeovers. This came after an attempt by Italy’s Enel energy conglomerate to acquire Gaz de France. It also followed rumors that US-based PepsiCo was interested in French dairy giant Danone.
French resistance to foreign takeovers scored another success in April, with the withdrawal by Spanish building firm Sacyr Vallehermoso from its year-long effort to take over French construction and public works giant Eiffage. During the protracted acquisition struggle, Eiffage suspended the voting rights of Spanish investors including Sacyr Vallehermoso, accusing them of colluding with each other.
While suspending would-be buyers’ voting rights is an unusual tactic, European companies are becoming increasingly partial to stronger defenses against takeovers. In April shareholders in Belgian healthcare group UCB and Capgemini, Europe’s largest IT consultancy, were scheduled to vote on poison pill proposals. In the case of Capgemini, the poison pill comes in the form of none other than bons Breton warrants.
Shareholders arise
On the other hand, shareholders have been less enamored with such poison pills, and have not been shy about saying so.
Shareowners of several big French companies, including water giant Veolia Environment, eyeglass-lens maker Essilor, and oil field services firm Technip, all voted against poison pills last year. Previously, shareholders of Dutch-Belgian financial services giant Fortis rejected a poison pill proposal.
Nor have shareholders been shy about opposing company directors on other issues. In 2007, shareholders at Sweden’s Ericsson rejected a management pay package, and this year shareholders at Philips in the Netherlands did the same.
This is something new in Europe, suggesting the emergence of more assertive shareholders. Such rebuffs ‘were unheard of only a couple of years ago,’ says Jean-Nicolas Caprasse, head of governance services in Europe for RiskMetrics Group.
As family ownership gives way to shareholding by institutional investors in Europe, and as regulators increase those investors’ duties to represent beneficiaries’ interests, shareholder engagement is rising steadily, Caprasse adds. For example, ‘more and more shareholders are voting, and not just voting passively but making reasoned decisions,’ he says. One indication: Between 2005 and 2007, the number of ballots and votes processed by RiskMetrics in Europe doubled.
Capturing the public mood
Moreover, lately some shareholders in Europe are making their views known to a broader public. In April two high-profile shareholder activists went public with demands that Deutsche Bank separate investment banking from other operations within two years. The two shareholders, Ekkehard Wenger and Leonhard Knoll, got their proposal onto the agenda for the bank’s annual meeting at the end of May. The same duo has publicly lambasted DaimlerChrysler’s 2007 share buyback and called for a special audit of that process.
Similarly, two large shareholders at German travel giant TUI have successfully pushed management to reverse their long-standing strategy of including ocean shipping in the company’s business mix. In March CEO Michael Frenzel bowed to pressure from shareowners John Fredriksen of Norway and Guy Wyser-Pratte of the US, and said the company would sell or spin-off container shipping subsidiary Hapag-Lloyd in the next year.
In neighboring Switzerland, meanwhile, shareholders in UBS successfully pushed for a €9.4 billion ($15 billion) rights issue and the ouster of chairman Marcel Ospel. Is this evidence of a more muscular European shareholder — someone starting to walk and talk like his brash American counterpart?
To hear European shareholder rights advocates tell it, that is not likely to happen. Unlike shareholders in US companies, owners of European companies have legal rights that make confrontational tactics unnecessary. These legal rights include the right to call for audits, put binding resolutions on the annual general meeting agenda, remove individual directors, and vote on executive pay. Moreover, they say, active behind-the-scenes engagement by shareholders is good for companies — and companies know it.
The governance community is taking note. ‘There has been a huge change in attitude toward activist shareholders in recent years,’ says Hirt. ‘We have seen more constructive dialogues between major shareholders and board members. Boards have learned to appreciate that shareholders have something to contribute.’
