Bob Marese is a Managing Director at MacKenzie Partners, a full-service proxy solicitation, stock monitoring and identification, investor relations and corporate governance consulting firm. Marese joined MacKenzie in 1994, and is currently responsible for oversight of European operations. He’s also responsible for the oversight of proxy and consent solicitations, proxy contests and corporate control events, and tender and exchange offers in both the United States and Europe.
Christopher P. Skroupa: Why are U.S. activists moving towards the U.K.? What is appealing about the U.K.?
Bob Marese: The recent rise of shareholder activism in the U.K. is largely attributable to two primary factors, and both relate to the available opportunities set for activists.
Most activists are value investors at heart, which means that they look for undervalued, underappreciated and mispriced securities that are trading at a discount to their intrinsic value, and look to some sort of catalyst – e.g., board representation, a strategic transaction, etc. – that will unlock that trapped value. U.S. equities have been in the midst of a sustained bull market for about nine years now – at least until the recent market volatility – and as a result, valuations of many companies have become stretched, particularly in certain sectors. With fewer undervalued targets to choose from domestically, many U.S.-based activists have begun looking to the U.K. and Europe; which was slower to recover from the global financial crisis, and where lower valuations might provide compelling entry points for activists with reasonable downside protection.
The other key factor that is driving activists abroad is the increased competition domestically among activists themselves. Over the past few years, activists were able to raise tremendous amounts of capital from investors, and dedicated activist funds proliferated as a result. Concurrently, you also have had a wave of traditional asset managers that have dabbled in activism as a way to drive returns. Many of the activists use similar screening criteria for their investments, and as a result, trades are getting increasingly crowded domestically. We have seen many situations where companies have had multiple activists holding their stock at the same time, not necessarily as part of a coordinated “wolfpack” effort, but simply because they all saw a similar opportunity. In Europe, where activism is still relatively rare, competition is less fierce, and price discovery can be slightly more limited, which creates the kind of price dislocations that activists love to exploit.
There are also some structural advantages to activists in Europe. For example:
- Classified boards and poison pills are unavailable to issuers in many jurisdictions;
- In the UK, shareholders are able to requisition a special meeting with just 5 percent of shares; and
- Some European jurisdictions also allow for a version of the universal proxy, which permits activists to have their director nominees included on the company’s proxy card, which can sometimes make it easier for them to achieve board representation.
An additional factor that makes the U.K. particularly attractive is that there is ample liquidity, which enables activists to enter and exit positions effectively.
Skroupa: How are U.S. activists shaping / impacting the nature of shareholder engagements in the U.K.?
Marese: U.K. issuers have been ahead of the curve on the issue of engagement for many years compared to their U.S. counterparts. In the U.K., engagement with issuers is the norm and takes place year-round, not just in the context of a proxy contest or a difficult vote. U.K. issuers have also long recognized the value of having their independent directors involved in discussions with investors, whereas U.S. issuers were reluctant to allow their directors to speak directly with shareholders for many years due to Reg. F-D and other concerns. As a result, most issuers in the U.K. have reasonably strong relationships with their largest institutions, and the engagement ecosystem there is extremely well-developed.
For U.S. activists, it can be challenging to enter the U.K. market as an outsider looking to shake things up, and they can sometimes be viewed with suspicion by U.K. institutional investors. So, rather than the activists shaping the nature of engagement with UK issuers, it is the activists that have had to alter their approach. Activists generally have to be more conciliatory and cooperative in interacting with U.K. companies and investors.
From the issuers’ perspective, when activism initially appeared as a U.S. phenomenon, the default position for many companies was to view activism as an attack that they ought to defend themselves against. Over time, that view has shifted somewhat, to the point that activism is now regarded as a challenge that should be addressed head-on, constructively through engagement. We expect that as activism continues to increase in the U.K., a similar transformation will take place there.
Skroupa: What indications are there as to how this trend will evolve in the U.K. and Europe?
Marese: As long as U.K. and European securities are undervalued relative to U.S. securities, activists will continue to look abroad for opportunities. Over time, activism will become more and more common in Europe, just as it has here in the United States. Despite the recent trend towards increased activism in Europe, many companies abroad are still unfamiliar with activism as a concept and may not be adequately prepared should an activist appear on their share register. We would strongly advise issuers to begin their preparations early – ideally on a “clear day.” That includes forming a core advisory team – comprised of outside counsel, PR firm and proxy solicitor – proactively engaging with shareholders and the proxy advisory firms, and encouraging the board to “think like an activist.”
What will be most interesting to see is whether or not activists can overcome some of the structural impediments that exist in Europe. For example, things like tenure voting and government ownership of some issuers can make activism incredibly challenging in France. In Switzerland, share blocking can immobilize shares prior to an annual meeting and prevent activists from trading in and out of their positions. And in Germany, the two-tiered board structure can limit the influence an activist can have, even if it does manage to win seats on the supervisory board.
Traditionally, these features have acted as structural barriers to activism in Europe and have largely prevented the kind of proxy contests that are common in the United States. However, in just the last few years, we have seen activists fight and win a proxy contest in Germany, and have seen some of the largest U.S. activists take positions in French and Swiss companies and advocate successfully for change. Without as many ways to exert leverage on issuers, activists in Europe often have to be more sophisticated in their approach, and it will be interesting to see whether these recent “proof-of-concept” activism campaigns encourage other U.S. activists to look towards Europe.
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