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Key trends in shareholder activism
Shareholder activism in Germany exhibits many features, and campaigns seen most often follow different approaches. With their attacks, short sellers aim to bring down the target’s share price to maximise individual short-term profit. Other activists take a medium to long-term perspective and try to create value for all shareholders by changing the way the company is managed. This might range from changing corporate governance structures to breaking up the company. Special situation activists make use of takeover scenarios or corporate measures that cannot be implemented without the votes resulting from their shareholdings and entail payment of adequate compensation to affected shareholders. Owing to the general principle of German corporate law that shareholders must be treated equally, raising the price to be paid for the company’s shares ultimately benefits all shareholders exposed to the respective situation.
Short sellers are increasingly active in Germany. Their campaigns start with the activist identifying a promising target. Complex business models and unclear strategies, opaque accounting and potential irregularities in financial reporting, and close financial or personal links between management and major shareholders often serve as a basis for their attacks.
The short seller then bets on a falling share price, using financial instruments. Often the activist, with the help of financial institutions, borrows shares in the target company and sells them immediately with the intention of repurchasing the shareholding at a lower price once the campaign has its effect. Following the sale of the lent shares, the activist publishes a report on the target company, sharing the analysis of the company’s potential weaknesses and making the case that the company is overvalued and its share price inflated. Usually, these reports are accompanied by managed media coverage. Short selling campaigns gain additional momentum once the falling share price triggers stop-loss orders. Further, if the target’s share price rose quickly in the past, shareholders that bought cheap are generally willing to exit quickly once they observe the first signs of a downward trend. Sometimes, several activists proceed together right from the beginning of an attack. More often though, the short seller will already have repurchased the shareholding for a then lower price and transferred it back to the lender when other activists join the campaign, waiting for a second wave or just hoping to benefit from the momentum created by the attack.
Although the target of a short selling campaign needs to allocate significant resources to counter the attack, suffers from a falling share price and may take a long time to recover, short selling cannot be qualified as an outright negative. As long as applicable disclosure requirements are met, no inaccurate or misleading statements are disseminated and existing conflicts of interests are made public, campaigns can contribute to transparency and thereby increase overall market efficiency.9 This effect is mediated by the fact that negative consequences of an attack cannot be controlled so as to remain commensurate with the overall situation.
Value-driven activists’ aim is to achieve the opposite. They hope their campaigns will increase the target company’s value and the price of its shares. Companies with a low valuation, conglomerates perceived as sedate and enterprises that have not adapted to the fast-moving markets they operate in all qualify as potential target for their campaigns. Some activists have a special focus on executive compensation, compliance or good governance; others construe value more broadly, and also pursue ethical or ecological objectives.10
The main aim of most value-driven activists is to push management to run the company’s business in a way they deem more efficient, thereby raising its valuation. Campaigns often challenge business models and corporate strategy. Changes within the boards are sought to gain direct influence on respective decision-making. Press campaigns and open letters to all shareholders accompany such efforts. Executive compensation is frequently identified as an inappropriate cost factor and good governance construed as the means to achieve the final goal. In this context, activist shareholders do not shy away from suggesting significant cost cuts, share buy-backs, changes to the company’s financing structure or the sale of less profitable businesses. Breaking up conglomerates to increase the valuation of its individual parts by creating more flexible and focused entities that are managed at a level closer to their business is in many cases the ultimate ambition.
While activist shareholders following this approach take minority stakes in the target company, they use several tools to increase their influence. Media campaigns that denounce inefficiencies and demand measures with an alleged direct impact on the share price help to win over other shareholders. More passive investors, such as asset managers, and pension and mutual funds are more and more often backing such campaigns, either in full or at least those elements that are within the focus of their investment guidelines, such as good governance or executive compensation. An increasing number of institutional investors announced their intention to more actively pursue such goals in the future, and have now begun to act accordingly.11 With most shareholders’ interest in increasing the value of their investment being aligned with this main objective of the activists, even a campaign based on a small shareholding can find majorities at shareholders’ meetings, especially given that proxy advisory services are now regularly seen in the German market.
For years now, special situation activists have achieved a certain notoriety in Germany. They make use of scenarios where the votes resulting from their shareholding are required to either allow a takeover to succeed or to implement specific corporate measures.
The qualified majorities required to take a company private by way of a squeeze-out (95 per cent or 90 per cent in the event of a merger-related squeeze-out), to merge or to reorganise a company (75 per cent), or to enter into a domination and profit and loss transfer agreement with the company (75 per cent), provide the platform for their campaigns. The latter threshold is of utmost significance, especially in takeover scenarios. Without a domination and profit and loss transfer agreement being in place with the target company after a takeover, the major shareholder cannot instruct the management of a publicly traded company on how to run its business. Measures required to realise synergies could not, therefore, be implemented. In addition, the company’s cash flows could not be used to refinance the acquisition. This is one reason most public takeover offers are subject to the condition that 75 per cent of the company’s shares are tendered.12 Given that a significant number of shareholders usually ignore a takeover offer or deliberately keep all or parts of their shareholdings, even a stake well below 25 per cent could lead to a takeover offer failing. Special situation activists build such stakes when a takeover is announced or once corresponding rumours become more reliable. In the course of the takeover process, they agree a price with the bidder for which they would tender their shares, thereby significantly increasing the likelihood of the takeover offer being successful. Pursuant to the pricing rules under German takeover law, the price, on a per share basis, would also need to be offered to all other shareholders.
This approach is also used by special situation activists in the event of corporate measures that are not directly related to a takeover. The activists build and sell a stake that is required to implement upcoming corporate measures such as a squeeze-out, a merger, other reorganisations or entering into a domination and profit and loss transfer agreement. These corporate measures imply that all shareholders are made an offer to trade in their shares for an adequate compensation. The valuation of the company performed to calculate the compensation aims at determining the intrinsic value of the company. Although the price the shares trade at on the stock exchange plays an important role in this respect, other than in a takeover scenario, the price paid for shares held by an activist does not generally have to be taken into account.
Each shareholder is entitled to challenge the adequacy of the compensation offered in these contexts. The compensation finally decided by the courts to be adequate is owed to all shareholders that traded their shares. In consequence, special situation activists successfully challenging and increasing the original compensation offered help all shareholders to realise the full value of their investment.
Recent shareholder activism campaigns
In recent years, the number of campaigns run by activist shareholders in Germany increased significantly and shareholder activism is now perceived as one of the key trends in the market. The following recent campaigns are of particular interest.
Advertising company Ströer, financial investor AURELIUS, media group ProSiebenSat.1, financial services provider Grenke and real estate developer Adler all recently came under attack from short sellers.
In the case of Ströer (2016), activist Muddy Waters, having built a short position, publicly made the case that the equity story of the company’s initial public offering had not been followed up on, and entering the digital media sector rather than fostering international expansion was not convincing. Further, the company’s accounting was challenged, and transactions between board members and the company were questioned, accompanied by hints at the lavish lifestyles of the CEO and members of the founder’s family. Muddy Waters liquidated its short position once the company’s share price had fallen significantly.
AURELIUS was attacked by Gotham City (2017). Building up a short position was followed by the publication of a research report that claimed shares were trading at a highly inflated price. The company’s business model was challenged and the way it accounted, in particular, for the profits of portfolio companies was described as inappropriate. Adding that the management had already sold their shares in the company below market increased the blow to the share price. Subsequently, Gotham City liquidated its short position.
Viceroy ran a short-selling attack against ProSiebenSat.1 (2018) briefly after it became known that the media group had to leave the leading German index DAX 30. The activist claimed the company’s shares were trading at four times their real value. The practice of investing in young enterprises, in connection with granting them free slots for television advertisements, was cited as a means to inflate profits. Further, the media group’s business strategy in a quickly changing and internet-dominated environment was heavily criticised. As to be expected, within minutes, the falling share price had destroyed a significant portion of investors’ wealth.
In 2020, Viceroy attacked Grenke. The report published by Viceroy argued inappropriate accounting in connection with M&A transactions, conflicts of interest resulting from related party transactions, insufficient KYC processes and a significant lack of liquidity. Independent special audits have not rebutted these accusations in full, and the company’s share price has not yet recovered from the effects of the campaign.
Real estate developer Adler was targeted by Viceroy in 2021. With the short-selling attack, Viceroy claimed that the group had entered into related party transactions to the detriment of its shareholders, had overvalued its real estate portfolio and had manipulated its accounting. An independent special audit could not rebut these allegations. Following further revelations, the group’s auditor declared itself unavailable for a new mandate.
As previously with Bilfinger – where Cevian some years ago became the biggest shareholder, took two seats on the supervisory board and transformed the struggling building conglomerate into a more focused industrial service provider – the Swedish activist, now with Elliott, is pressing for radical change at industrial giant ThyssenKrupp (2017–2020).
Second only to Krupp Stiftung, Cevian holds a large stake in ThyssenKrupp. For some time, ThyssenKrupp’s management had been working on a new strategy for the group that is active in diverse business areas, including steel production, trading and plant construction, as well as ship and elevator building.
Against the background of financial results that persistently failed to meet Cevian’s expectations, the activist was demanding a break-up of the group, arguing that overall valuation could be increased significantly by creating more focused and efficient, independently managed enterprises. Management resisted these demands. This was when Elliott acquired a stake in ThyssenKrupp that, together with the shareholding of Cevian, equals that of Krupp Stiftung. Together, the activists initially pressed for adjustment of the terms of a steel joint venture that had been agreed with Tata Steel and that did not ultimately obtain antitrust clearance. Shortly thereafter, the CEO of ThyssenKrupp as well as the chair of the supervisory board resigned from their offices. The new CEO presented a plan to split the group, ultimately resulting in two listed entities. Krupp Stiftung, which had originally opposed a break-up, signalled it would back this plan. Cevian obtained a second seat on the company’s supervisory board, whose new chair is also well known to the activist from past cooperation. Owing to adverse market conditions, the new CEO’s plan was finally renounced and the CEO was replaced by the chair of the supervisory board. Under her lead the precious elevator business was sold. The search for partners or even buyers interested in the steel, shipbuilding and certain other businesses has started.
Elliott is also pursuing several other interests in the German market. At plant and mechanical engineering specialist GEA, Elliott successfully pushed for replacement of the long-time CEO, and for further changes within the company’s management and supervisory boards. The new management committed to overhaul the group to improve its financial performance (2018–2019). Groupe Bruxelles Lambert supported these efforts.
When SAP announced it would undertake a comprehensive review of its business, which will be overseen by a newly created management board committee, and further raised its financial targets, Elliott concurrently released a statement in support of such measures, and revealed it had acquired a significant shareholding in the software company (2019).
Upon pressure from Elliott, the shareholders’ meeting of Uniper was supposed to vote on the energy group being required to prepare the conclusion of a domination agreement with Finnish Fortum. Their takeover attempt had led to a deadlock situation at Uniper. Knight Vinke pushed for a vote on seeking a break-up of the company at the same shareholders’ meeting. Both activists withdrew their requests immediately before the meeting. Fortum agreed to buy them out (2019).
At online trading platform Scout24, Pelham Capital together with Elliott and others, found a majority within the shareholders’ meeting to elect their nominee as member of the supervisory board. In a second step, Elliott successfully pressed for the sale of Autoscout24, the company’s profitable car trading business (2019).
Rumours that Elliott is pursuing a split of Bayer, making use of the challenges following Bayer’s acquisition of Monsanto, have not proven true (2018–2020).
Pharmaceutical company STADA is probably still the most prominent example of a German company being targeted by activist shareholders in recent years (2016–2017). With its two business segments – generic and over-the-counter products – a CEO holding office for over 20 years, with one of the more generous compensation packages on the market, a rather reclusive supervisory board chair and a less than optimal financial performance, STADA offered many features to pique activists’ interest.
Thus, AOC, together with others, built up a stake of approximately 5 per cent in the company and pressed for cost-cutting and improved performance. Further, they aimed to replace nearly all shareholders’ representatives on the supervisory board. Both the management and the activist applied sophisticated media strategies to win over the shareholder majority for their respective case. Finally, the company’s general counsel took over from the CEO and the chair, as well as other members of the supervisory board, was replaced.
Whether solicited by the activist or solely attracted by separable business units and unrealised upside potential, STADA drew strong and increasing interest from several private equity investors. This was when the new CEO decided to run a structured sales process for the company, ending in Bain and Cinven submitting a public takeover offer for all STADA shares. As usual, the offer was made subject to 75 per cent of the shares being tendered so a domination and profit and loss transfer agreement could be put in place, and the company’s cash flows used to partly refinance the acquisition.
Another activist entered the scene. Elliot acquired a stake in STADA big enough to hinder this condition being met, even with a finally lowered acceptance threshold. The takeover offer fell through. Based on an exemption granted by the BaFin, the private equity houses followed up with a second attempt in which the offered price was acceptable to Elliott. At this stage, AOC had already sold its shares with a high profit. To miss no opportunity, Elliott then bought further STADA shares and made clear it would in any case challenge the adequacy of the compensation offered to shareholders in the context of the domination and profit and loss transfer agreement to be entered into following the takeover.
In response to the struggle of German lender Commerzbank during the financial crisis, the German state took a significant stake in the company. Later, Cerberus took an interest in the German banking market and acquired stakes in both Deutsche Bank and Commerzbank. As performance targets for both banks were not being met, Cerberus, with support of the German state, pushed for a merger of the two banks. Merger talks failed and instead as an alternative, Commerzbank looked towards restructuring the company.
Cerberus was critical that this approach would not go far enough and consequently, in two letters to the bank’s boards, Cerberus called for significant change to the supervisory board, the management board and the company’s strategic plan. Additionally, Cerberus demanded a right to fill two seats on the supervisory board. This turn of events finally led to the replacement of several members of the supervisory board, including its chair, and of the CEO (2020–2021).
When Advent and Centerbridge tried to take over Aareal Bank by way of a public takeover offer, Petrus and other activist shareholders built a stake in Aareal Bank and finally blocked the takeover, convincing shareholders that the offer price would be too low. They argued that a divestiture of the bank’s IT subsidiary Aareon would create significantly more value for shareholders.
When, following this failed attempt, the CEO of Aareal Bank opened up to the idea of divesting Aareon, a concept he had rejected before, Petrus and the other activist shareholders instead struck a deal with Advent and Centerbridge to back a new public takeover offer with a higher offer price (2021–2022).
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