Editor’s Letter – Issue 116

September 2016

HAMLIN LOVELL

The Deal’s and ArrowCon Partners’ Corporate Governance and Activist Investing in Europe event, held in London this month, highlighted how activism is a global phenomenon that has coined a new word: “Bumpitrage”, or the practice of persuading acquirers to increase their bid.

EY’s Julie Hood has seen a doubling of activism in Asia, including in China, but the event mainly focused on Europe, where there are different corporate governance frameworks to navigate in different countries. It is crucial to understand the roles of dual management and supervisory boards. Many boards in Southern Europe lack a majority of independent directors, according to CIAM’s Anne Sophie D’Andlau. Amber Capital founder, Joseph Oughourlian, has often seen conflicts between controlling and minority shareholders in Southern Europe. Speakers from Germany, including EY’s Gerrit Frohn, argued that special rules applying to investor communications in Germany are much less clear than SEC rules. Schulte Roth & Zabel’s Jim McNally observed how thresholds for blocking stakes vary between European countries. Though activists in Europe generally start with a gentle approach, they can sometimes end up replacing boards. Teleios Capital, Makuria Investment Management, and Constructive Capital Partners, installed a new board at Kongsberg Automotive, for instance. Yet the obstacles to activism can sometimes seem insurmountable: workers represented on boards, under co-determination rules in Germany, have been blamed for scuppering the Linde/Praxair merger.

Most activist investors are private funds, often with long-term, locked-up capital. Some publicly listed closed ended funds pursuing activist approaches include Tony Attwood’s Gresham House, Edward Bramson’s Sherborne Investors, Richard Bernstein’s Crystal Amber, Bill Ackman’s Pershing Square Holdings and Dan Loeb’s Third Point.

Though activism at larger companies may hog the headlines, most activism takes place at smaller companies, where Activist Insight has identified more than 900 approaches that need not all be public. Activist fund managers with a focus on smaller and medium sized firms include Blue Harbour Group, Barington Capital Group and Voce, who have all been profiled in The Hedge Fund Journal.

It seems that activism is moving into the mainstream, as activist hedge funds may collaborate with, or pursue the same objectives as, pension funds. For instance, Chris Hohn’s hedge fund, The Childrens’ Investment Fund (TCI), and Hermes Investment Group, which manages one of the UK’s largest pension funds, have both made (separate) complaints about management remuneration at Volkswagen. Though active and highly concentrated hedge funds are the polar opposite of passive index tracking funds, the corporate governance departments of passive investors, such as Legal and General, have been seen voting in the same way as some activist hedge funds. This is just one reason why institutional investors are becoming more receptive to activism, in Europe and elsewhere. According to Goodmans LLP, Canada’s corporate laws have been reformed to greatly increase the potential for activism. We would not be surprised to see other countries following Canada’s lead.