It is a truth universally acknowledged that shareholder activism is no longer an exclusively US phenomenon[1] and, likewise, that the “Covid Pause” in this field is nearly over.[2] While at the beginning of the pandemic, in fact, it was stated that “[s]hareholder activists have been largely (and strangely) quiet in the month of March as the COVID-19 pandemic has challenged our society and economy [but]they will come storming back in the coming months as the first signs of economic recovery—or at least signs of the market bottom—emerge,”[3] albeit with extended timelines, “[w]ith two-thirds of U.S. nomination windows opening from December 2020 through February 2021 and strong momentum in Europe and APAC, 2021 is poised for heavy campaign activity.”[4]
We performed a study analyzing the phenomenon of shareholder activism in the EU.[5] The study aimed to determine the level and category of activism and to identify the most susceptible companies. The data illustrated that shareholder activism is considerably spreading across the EU (with 165 public engagements of activist investors from January 2004 to September 2017 and 125 companies targeted by 62 activist investors in the major EU companies), where its effects still need to be clarified.[6]
First, in order to sketch the European landscape, it is necessary to identify and explore the characteristics of the phenomenon[7] in the United States (where wolf-packs are also reported),[8] then, by contrast, to focus on Europe, bearing in mind both the national facets and the academic positions expressed so far.
In this landscape, it is worth emphasizing that in the US (i) the financial crisis had no impact on the overall number of campaigns and (ii) hedge funds (and, among them, individual hedge funds) play a key role and are frequently involved in campaigns.[9] Although the study of European cases is less straightforward since there is no corresponding and comparable form of disclosure to Schedule 13D (or, more precisely, to Item 4’s “declaration of intent”),[10] the EU is not immune to the US’s influence.[11] Nevertheless, the following (striking) differences stand out: (i) EU activist investors have long been perceived as disturbers or speculators; (ii) activists tend to be hostile towards non-domestic markets, which led activists to target their activities especially in the US; and (iii) EU listed companies’ securities have a lower level of both capitalization and liquidity, as well as a different ownership structure, i.e. elements that, when taken together, distinguish this scenario from the US scenario in terms of activism.[12] It might seem that activism is harmful as it is short-term oriented, whereas activist institutional investors were found to have an average holding period largely comparable to that of the majority of active market investors.[13] What is surely distinctive is the fact that activists seem to privilege campaigns aimed to obtain representation within the board and companies often undertake buyback campaigns.[14]
Specific attention has also been paid to index funds and to their interconnection with the efforts of activists as, given the role they play and due to their portfolios, they represent a cornerstone of, and could be a key weight in, activist campaigns, swinging the scales in the opposite direction to that of the incumbents. On closer inspection, however, index funds have plenty of reasons to hold a deferential position vis-à-vis managers.[15]
Although results show that a good reputation, the adoption of best practices, the ability to generate high returns for shareholders, and the capacity to establish positive relationships between shareholders and management is the very best antidote – the defense mechanism that companies naturally have – is particularly significant to deeply explore the available defensive measures. In other words, managers aim to protect themselves from campaigns (which mislead the public and raise governance issues) and, to this end, they employ techniques which are commonly used in the struggle against hostile takeovers.[16] Such defense mechanisms (staggered boards, poison pills, dual-class shares – and, in general, provisions enabling enhanced voting majorities – blank-check preferred shares, poison pills, and golden parachutes)[17] are – remarkably – provided as an additional advisory service by large investment banks,[18] which somehow benefit from such a scenario. Still, these techniques might raise a problem that is worth mentioning here, namely the possibility to foster the entrenchment of managers, which increases their slack and destroys shareholder value. These are considerable uncertainties, raising two research issues, which – at least up to now – could only be addressed in relation to the US market, as it is the only meaningful one in this respect, namely: (i) the impact of defensive tactics on the share value created by activist investors in the long run and (ii) the effectiveness of this tool in preventing activists from succeeding in their campaigns.
Although considerations can only be limited to staggered boards and poison pills, our results are significant as they show that defense mechanisms seem to negatively impact the equity value of companies, and, in line with the mainstream view, the chances of success of activist campaigns are related to the presence of defense mechanisms.[19] More specifically, the presence of poison pills and staggered boards both weaken the effectiveness of such campaigns by 6.9%.[20]
The study’s findings are remarkable not only for activists, but also for shareholders, managers and, hopefully, potential investors seeking to replicate the activist investors’ own strategies. On the one hand, therefore, the effects of such a controversial style of investment, that is perceived in a highly critical way, especially in Europe, where it nevertheless constitutes a considerable upward trend, have been demystified; on the other hand, in terms of the analysis of defense mechanisms, we are still at the starting blocks, and the road we are trudging seems all uphill. Therefore, we believe that a truly useful and significant future research path would be to broaden the current study in time and scope (to include other defense mechanisms), and to enlarge its geographical scope to the EU. As mentioned, the European activist sector is booming; but it is not yet as widely “trackable” through standardized disclosure mechanisms, nor as thoroughly “covered” by databases, as its US counterpart.
[1] E.g. Marco Becht, Julian Franks, Jeremy Grant & Hannes Wagner, The Early Returns to International Hedge Fund Activism: 2000–2010, 31 J. Applied Corp. Fin. 62 (2019); Marco Becht, Julian Franks & Jeremy Grant, Hedge Fund Activism in Europe (ECGI Working Paper No. 283, 2010), https://ssrn.com/abstract=1616340.
[2] Jim Rossman et al., Annual Review of Shareholder Activism, Harv. L. Sch. F. on Corp. Governance (Jan. 25, 2021).
[3] Jody Foldesy, Eye of the Storm: Preparing for the Next Surge of Shareholder Activism, Bos. Consulting Grp. (Apr. 8, 2020), https://www.bcg.com/ja-jp/eye-of-the-storm-preparing-for-the-next-surge-of-shareholder-activism (“While the first three months of the year put activism on its lowest trajectory since 2012, we are advising our clients to use this lull to prepare for a resurgence of activity in the second half of 2020 or early 2021.”).
[4] 2020 Review of Shareholder Activism, Lazard (Jan. 12, 2021), https://www.lazard.com/media/451536/lazards-2020-review-of-shareholder-activism-vf.pdf. See also Keith E. Gottfried, Preparing for Shareholder Activism in the Wake of COVID-19, Harv. L. Sch. F. on Corp. Governance (Nov. 30, 2020); Eleazer Klein, Shareholders’ Rights & Shareholder Activism 2020, Harv. L. Sch. F. on Corp. Governance (Nov. 15, 2020); James E. Langston & Claire Schupmann, The Changing Face of Activism, Harv. L. Sch. F. on Corp. Governance (Jan. 27, 2021); Paul Tiger et al., Preparing for Shareholder Activism in 2021, Harv. L. Sch. F. on Corp. Governance (Jan. 4, 2021).
[5] For the complete study, see Brando Maria Cremona & Maria Lucia Passador, Shareholder Activism Today: Did Barbarians Storm the Gate?, 20 U.C. Davis Bus. L.J. 207 (2020).
[6] For a specific (UK-only) study, see Posi Olatubosun & Jill Atkins, Shareholder Activism in the UK, in De Gruyter Studies in Corporate Governance 4 (2021).
[7] Lazard, supra note 4. In academic literature, see generally Wolf-Georg Ringe, Shareholder Activism: A Renaissance, in The Oxford Handbook of Corporate Law and Governance 387, (Jeffrey N. Gordon & Wolf-Georg Ringe eds., 2018); Matthew R. Denes et al., Thirty Years of Shareholder Activism: A Survey of Empirical Research, 44 J. Corp. Fin. 405, 406-20 (2017); Martin Lipton, Dealing with Activist Hedge Funds and Other Activist Investors, Harv. L. Sch. F. on Corp. Governance (Jan. 20, 2020); Jim Rossman et al., 2019 Review of Shareholder Activism, Harv. L. Sch. F. on Corp. Governance (Jan. 30, 2020); Lucian A. Bebchuk et al., Dancing with Activists (ECGI Working Paper No. 604, 2019), https://ssrn.com/abstract=2948869; Matteo Tonello & Matteo Gatti, Board-Shareholder Engagement Practices: Findings from a Survey of Sec-Registered Companies (Director Notes, Dec. 13, 2019), https://ssrn.com/abstract=3503657.
[8] Cf. Anita Indira Anand, Shareholder-Driven Corporate Governance and Its Necessary Limitations: An Analysis of Wolf Packs, 99 B.U. L. Rev. 1515 (2019); Gaia Balp & Giovanni Strampelli, Institutional Investor Collective Engagements: Non-Activist Cooperation vs Activist Wolf Packs, 14 Ohio St. Bus. L.J. 135 (2020), https://ssrn.com/abstract=3449989; Carmen X.W. Lu, Comment, Unpacking Wolf Packs, 125 Yale L.J. 773 (2016).
[9] Cremona & Passador, supra note 5, at 213.
[10] As a consequence, the date of engagement chosen is that of public demand, not that of disclosure – even though the two often coincide. To this end, data can be easily retrieved thanks to Thomson Reuters Corporate Governance Intelligence.
[11] See, e.g., Becht, supra note 1. Tech and retail companies are particularly active in campaigns, followed by companies in the financial, energy and healthcare fields. Cremona & Passador, supra note 5, at 224.
[12] Cremona & Passador, supra note 5, at 218-22.
[13] Cremona & Passador, supra note 5, at 217-32.
[14] Cremona & Passador, supra note 5, at 219.
[15] Cremona & Passador, supra note 5, at 211.
[16] Mike Burkart & Samuel Lee, Activism and Takeovers, Harv. L. Sch. F. on Corp. Governance (Feb. 20, 2018).
[17] Cremona & Passador, supra note 5, at 240-46.
[18] David Benoit & Justin Baer, Goldman Sachs Recaptures Mojo with DuPont Win, Wall St. J. (May 21, 2015).
[19] See Rodd Schreiber et al., Novel Defensive Tactics Against Shareholders, Harv. L. Sch. F. on Corp. Governance (Oct. 18, 2017), https://corpgov.law.harvard.edu/2017/10/18/novel-defensive-tactics-against-activist-shareholders/; see also Nicole M. Boyson & Pegaret Pichler, Hostile Resistance to Hedge Fund Activism, 32 Rev. Fin. Stud. 771 (2019).
[20] Cremona & Passador, supra note 5, at 251.
