The shareholder activist juggernaut continues

Session Co-Chairs

Trevor S. Norwitz Wachtell, Lipton, Rosen & Katz, New York

John Papanichola Slaughter & May, London

Panellists
Sophie Cornette de Saint Cyr Bredin Prat, Paris
Scott Grinsell Elliott Management Corporation, New York
Amy Lissauer Bank of America, New York
Heath Winter Institutional Shareholder Services, Maryland

Reporter
Ben Reckinger
Elvinger Hoss Prussen, Luxembourg
BenRECKINGER@elvingerhoss.lu

Wednesday 2 November 2022

Introduction

With billions in dry power and the global pandemic (hopefully) receding, shareholder activist funds are back at full speed, building stakes in companies, calling for structural, operational, personnel and capital structure changes, running proxy contests, pushing for (or resisting) mergers and acquisitions (M&A) transactions or holding up squeeze-outs. Their relationships with long-term institutional investors, strategic and private equity acquirers and other market participants are rapidly evolving.  Also in a state of flux are the rules governing their activities, sometimes to their benefit (the introduction of universal proxy cards in the US) and sometimes not (like tighter disclosure requirements on stake building). The tilt towards environmental, social and governance (ESG) adds a powerful new element into the mix. The session focused on what companies and the lawyers who represent them need to know about the evolving shareholder activist environment in various jurisdictions.

Trevor Norwitz and John Papanichola introduced the speakers on the panel and the topics to be covered in this session. The panel presented the activism landscape, discussed the rise of ESG activism, analysed what activists and proxy advisors look for and concluded with a set of quick highlights on the changing regulatory landscape for activism.

The activism landscape

Trevor Norwitz set the stage by explaining what the shareholding in a US public company typically looks like: approximately 30 per cent is held by retail investors, 20 per cent is held by the large index funds (ie, Blackstone, Vanguard, State Street, etc), 50 per cent is held by other institutional investors out of which half follow guidelines published by proxy advisors (ie, Institutional Shareholder Services (ISS)/Glass Lewis (GL)), and a minor portion (less than two per cent) is held by the board room.

After an illustrative activist filing, approximately 7.5 per cent is held by the activist, 7.5 per cent is held by so-called ‘fellow travellers’ of the activist, 25 per cent is held by retail investors, 20 per cent is held by the large index funds, 40 per cent is held by other institutional investors out of which half follow the ISS/GL guidelines, and a minor portion (less than two per cent) continues to be held by the board room. This means that, after an activist filing, a company can easily have approximately 35 per cent of its shareholders, being the activist, its fellow travellers and, possibly, the shareholders following the ISS/GL guidelines, voting against the leadership. This illustrates how challenging an activist filing can quickly become.

Against this background, Amy Lissauer presented the activism landscape. The current market volatility has created opportunistic buying windows for activist funds. In 2022, activism accelerated with more public and aggressive behaviour by activist investors. In recent years, there has been one big shift in the approach taken by activist investors. Traditionally, activists acquired a stake in a company, made the acquisition public and asked for change. Then came a period where activists initiated private dialogue prior to disclosing their positions in target companies, as a way to achieve a settlement. Recently, activists are again disclosing their stake publicly at the very beginning before engaging with targets because the announcement often suffices in driving stock prices up.

Lissauer highlighted another trend of activist investors that is to acquire stakes in large-cap companies by putting in record amounts of capital. Activist funds find it easier to sell their stake in those entities as opposed to stakes in small and mid-cap companies.

In addition, companies can nowadays be targeted by multiple activists at the same time. These activists do not necessarily coordinate and can have different views as to what the company should be doing. This results in an increase in proxy fights that need to be resolved.

Target companies are facing a new challenge which is that there are a lot of new players in the activist investor market. This makes it difficult for companies to identify activists before the activists publish the acquisition of their stake.

Finally, there has been an uptick in activist short selling campaigns. In a first step, activists bet against the stock price by short selling and then publish reports claiming that the value of the company should be less, hoping for the share price to go down. The panel discussed whether the typical disclosure of the activist’s short-sell position in the report published by the activist is sufficient disclosure to protect them.

John Papanichola then briefly presented the activist landscape in Europe. Shareholder activism is a more recent trend in Europe compared to the US. Similar to the US, however, shareholder activism is on the rise, including in all size companies and, particularly, in large companies. Approximately half of the campaigns happen in the UK, followed by campaigns in France, Ireland and then Spain. The central concerns raised by activists are the need to divest and/or restructure the business, ESG concerns, etc.

The rise of ESG activism

Sophie Cornette de Saint Cyr turned to the rise of ESG activism, particularly in Europe. This trend originated in the US, where approximately 50 per cent of activist campaigns are ESG-related. In Europe, only 25 per cent of campaigns are ESG-related, but the wave has not finished surging.

Today, there are certain investors that specialise in ESG campaigns. In Europe, the classic tools used by activist investors to achieve their agenda are meetings with management, meetings with shareholders, the publication of press releases, the tabling of resolutions at shareholders’ meetings, etc. Moreover, 55 to 60 per cent of ESG campaigns are successful.

The panel mentioned that the US has recently seen an anti-ESG campaigns wave. For example, an activist campaign involving Chevron demanded a full focus on profits and a disregard for the ESG components that reduced the company’s profits. It is possible that this trend may arrive in Europe as well.

What are activists and proxy advisors looking for?

Scott Grinsell explained what activists are looking for when considering making an investment. At the outset, Grinsell mentioned that there is a large range of activist investors and the approach taken varies between the various investors. Broadly speaking, however, certain indicators make a company a likely target for investors, such as prolonged underperformance of the stock and concerns around governance (eg, directors with close ties to management, long tenured directors).

Generally, due diligence on the target comes first, whereby activists considered whether there is an achievable path to unlock value. Scott Grinsell explained that activists have a high bar and want to understand the business to formulate a plan on how to fix it.

In addition to classic due diligence, engagement between the activist and the target company has become increasingly important. Activists are trying to work with the company to implement the changes they would like to see. As a result of this engagement, there has recently been a tendency to embark on private dialogue and settlement in order to avoid proxy fights.

Heath Winter presented what proxy advisors are looking for in activist campaigns. Firstly, proxy advisors consider whether there is a compelling case for change, meaning evidence that change is preferable to the status quo. Secondly, if there is a case for change, the proxy advisors are analysing which nominees are best suited to deliver the desired change (with particular regard for the independence, relevant experience, skills and resources of the nominees). The factors which are used to evaluate the case for change include the long-term financial performance of the company relative to its industry, the shareholder returns under the company leadership, the likelihood that the proposed goals and objectives can be achieved, the stock ownership positions, etc.

Proxy advisors are engaging with targets to obtain the information required to assess the case for change. The panel discussed the absence of a level playing field between the activist and the target company in their engagement with the proxy advisor, as activists are used to this engagement process whereas the target company typically is not.

Changing regulatory landscape for activism

Sophie Cornette de Saint Cyr mentioned that several new EU directives require increased disclosure by companies, in particular disclosure related to ESG (human rights, climate, etc) and generally non-financial disclosure, with disclosure becoming more detailed and more uniform across the board. This development generates new opportunities for activist investors.

In the US, universal proxy cards will be introduced, which favours activism and is likely to result in more proxy fights. Universal proxy cards will make it easier to appoint minorities to company boards and make it easier to achieve diversity in board representation, etc. On the other hand, there will be other changes that will hinder activism, such as potential new securities law regulations on disclosure.

The panel concluded the session by recommending that companies in the US and the EU prepare for potential activist investments. Companies should work with lawyers and bankers to help them get ready for a potential activist investment, by identifying weaknesses and addressing them or understanding how to respond and monitoring who buys their stock.