Shareholder activism is having a moment and reflects a global trend: The number of activist campaigns is at a record high, according to research by the investment bank Lazard, as is the amount of capital tied up in them. In some respects, however, the more interesting story is not the rise in activist investment activity, but the recent evolution in the aims and tactics of activist investors.
The research showed that 2018 saw a record number of campaigns at U.K. listed companies by investors aiming to shape management priorities, staging 25 interventions at British firms last year (up from 11 in 2017) and 2019 has continued in the same vein.
The activist shareholder—generally a venture capital or hedge fund—seeks to change the behavior of the company in which they hold a position. Classic governance concerns often form the subject matter of these interventions, and challenges to executive pay continue to grab headlines: the likes of Barclays, Schroders, and Standard Chartered have all seen recent shareholder protests over remuneration. Other activists use their position to promote environmental, social, and governance concerns.
More recently, however, activists have sought to influence major strategic decision-making, particular mergers and acquisitions activity. ValueAct Capital successfully urged a public to private transaction on Merlin Entertainments earlier this year, while activists Elliott Advisors and Sachem Head Capital Management
Traditionally, achieving activist goals relied almost exclusively on placing a representative inside the boardroom. The typical U.K.-focused activist investor, while taking only an 8% to 9% stake in their target firm, invariably sought to translate that stake into a directorship. In response, managers trying to block the activist’s reforms would seek to prevent the appointment or isolate the appointee.
Times have changed, however. Shifts in corporate control are no longer viewed as the sole point of leverage. We are seeing activists increasingly prioritize engagement with the existing board of directors rather than attempting to change its composition.
In the U.K. context, shareholder advice on corporate governance or strategy is traditionally tendered in private. But where that is perceived to fall on deaf ears, the trend—heavily influenced by U.S. practices—is to take the matter public. Open letters, “white paper” reports and press coverage of their ideas for change all form part of the modern activist investor’s armory.
That shift has, in turn, affected the response of U.K. firms under activist scrutiny. Boards are now more willing to engage publicly with advice, criticism, and complaint.
The Changing Role of Activist Shareholders
The U.S. vogue for proxy battles has not swept across the Atlantic with quite the same force. But the well-publicized dispute between Coast Capital and the board of FirstGroup saw the former, which owns 10% of the latter, win other major investors around to oppose the re-election of FirstGroup chairman Wolfhart Hauser. With 30% of votes cast against him, Hauser stood down to be replaced by the well-regarded David Martin.
The outcome demonstrates a truth about activism that may be overlooked by lawyers experienced only in helping clients fend off a perceived threat. The role of activists is more nuanced; far from the “corporate raider” caricature, their emergence on a firm’s radar can catalyse fresh ideas, engaging other shareholders into a healthy debate about the company’s future.
Advisers to activists both need to understand this, but also to help their clients to know what goes on in the boardrooms of U.K. PLCs and to help their message to land.
It is just as well that activist investment can represent a positive force, as we anticipate these trends continuing into 2020. As my colleagues Arun Birla and Matthew Poxon point out, the falling pound has acted as a spur to overseas investment, with vibrant activity continuing in the U.S.-U.K. corridor.
Against this backdrop, activist shareholders require increasingly sophisticated advice in order to fulfill their aims. New tactics can make activism more effective, but come with different legal and reputational risks. Just as PLCs are often advised to prepare for activism, so too do activist investors need support to refine an approach increasingly carried out in the public eye.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Roger Barron is a partner in the London office of Paul Hastings, specializing in corporate law, including public and private mergers and acquisitions, demergers and reorganizations, and corporate finance. He is also a key boardroom adviser to a number of the firm’s FTSE 100 and FTSE 250 clients, offering strategic guidance and counsel on corporate governance.