Shareholder activism is here to stay



When the German utility groups E.ON and RWE recently announced an asset swap, a whole series of transactions with a total value of approximately €43bn that would change the European utilities landscape, many observers were stunned. The surprise was even greater when some commentators linked the deal, which is still be approved by the relevant antitrust authorities, to shareholder activism. Could it be that activists created so much pressure behind the scenes that a whole market could be changed? Or might the mere possibility of becoming the target of activist shareholders have led two large and traditional conglomerates to overhaul their business strategies? Maybe the market will never know the full answer to these questions, but it could well be the case.

In recent years, campaigns run by activist shareholders, both in and, increasingly, outside of the US, have led to remarkable results. In times when interest rates are low and with investment opportunities scarce, such success attracts followers, thus reinforcing the trend. Consequently, short sellers, activists aiming at maximising shareholder value and special situation arbitrageurs have had their fair share of financial returns. And this share might well be called fair, given that activist shareholders play an important role within the market. In their analyses on target companies, short sellers share information, thereby contributing to transparency, and arguably increasing overall market efficiency. Activists that focus on shareholder value, pressing for changes within governance structures or even for the break-up of conglomerates, allegedly make the case for all shareholders interested in increasing the value of their investment. Finally, even special situation arbitrageurs, not least due to minimum pricing rules, often succeed in reaching a higher consideration for the benefit of all shareholders.

Admittedly, there is a lot to be said for achieving such goals and higher prices for all. On the other hand, companies that become the target of activist campaigns can be severely harmed. Even if information published by short sellers finally proves to be inaccurate, the share price of the company will have suffered in the meantime, and value will have been destroyed. Such allegations are often proved neither right nor wrong. Furthermore, breaking up a conglomerate does not necessarily create more value than persevering with management’s long-term strategy might, probably, in part, based on synergies within the group that risk being forfeited in the event of a split.

These may be some of the reasons why US authorities now apply greater scrutiny, especially with respect to short selling campaigns. Moreover, US companies, having already been exposed to activist shareholders for a while, have learned to adapt to this situation. Communication of companies’ strategies has improved. Boards are increasingly diverse and have more independent directors, and sometimes such pre-emptive measures lead to a group being broken up, even without an activist already pressing for it. This mature environment has led many activists, often US hedge funds, to seek new opportunities. They have found them in Europe, the UK and especially in Germany, with its elaborate system of minority rights that can be used for more than just protection. Elliott’s varied role in the context of the STADA takeover, Cevian’s success in demanding the break-up of Bilfinger and the reorganisation of ThyssenKrupp, recent short selling attacks, such as that targeting ProSiebenSat.1, as well as formerly passive asset managers opting to more actively engage with the management of the companies they invest in, show that shareholder activism has become the new normal, including within the German market.

What will be the consequences of this growing trend? Demanding a change in the law does not help, and few in academia have called for existing rules to be tightened. The majority, however, have pleaded for the proper application of those rules, as the existing legal regime does allow for a healthy balance between market forces and protection. Such balance has not yet been tested for a long period, however. So-called ‘Deutschland AG’, characterised as it was by cross-shareholdings, a strong dependency on financing banks and boards filled with representatives of business partners, has only recently been broken up. Such encrusted structures factually overlaid what actually is a sustainable legal environment.

So, in Europe, much as in the US, it is the corporate culture that needs to progress toward better governance. Companies will put greater emphasis on transparency, not least by more clearly communicating their strategy. An active exchange will lead to management better understanding shareholders’ real interests, including topics such as long-term financial performance, environmental aspects or even social impact. Supervisory boards will become even more professional and diverse. In parallel, companies will prepare for potential activist campaigns so as not to individually pay the price for the market as a whole becoming more efficient. They will more closely monitor changes within their shareholder group, as well as shareholders’ investment and voting guidelines. Tracking short positions has already become indispensable. Defence manuals assigning responsibilities between internal and external resources to be retained in case of an attack, also laying out strategies and approaches to be applied toward an activist, the stakeholders and the media, will be part of the toolbox. Finally, conducting white paper exercises will become best practice. Management puts itself in the position of an activist and analyses whether the share price fully reflects a company’s intrinsic value, whether complex group structures hinder efficient management of certain businesses that would probably be better off if run independently, and whether respective action is advisable.

Not only will this readiness protect value that has already been created, but taking such measures will further increase shareholder value. Proactively tackling shareholder activism will help companies benefit from a trend they cannot hope to avoid in any case, and one that is here to stay. From this perspective, E.ON and RWE might well be considered frontrunners of a general development they have recognised as inevitable.


Michael J. Ulmer is a partner at Cleary Gottlieb Steen & Hamilton LLP. He can be contacted on +49 69 97103 180 or by email:

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Michael J. Ulmer

Cleary Gottlieb Steen & Hamilton LLP

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