Confrontational activism rare in the UK
High-profile campaigns at Rolls-Royce and Alliance Trust take a British tack
Europe’s defences remain strong against the threat of US style shake-ups despite several high-profile battles between investor groups and British and European directors.
Two years ago, Freshfields Bruckhaus Derringer and Linklaters, two large international law firms, warned British companies that US hedge funds were coming to Europe, keen to shake out some of the cash that was piled up on corporate balance sheets. Britain would be their first port of call, said the lawyers keen to help companies put up their defences.
Also that year Bill Ackman, the US activist founder of Pershing Square Capital, said Europe “was a good 10 years behind the US in the degree of shareholder activism”, adding that pressure to meet pension obligations “will make shareholders inherently more active”. He was right. European investors, under pressure from regulators to push for better corporate governance and prevent the failings that led to the banking crisis, have started pushing companies harder to improve governance and returns.
But by the summer of 2015, Mr Ackman’s message to investors had changed. As he took a 7.5 per cent stake in US-listed snacks business Mondelez, he said he still has plenty to do in the US without venturing abroad.
There were high-profile confrontations in the UK in 2015 — notably Electra Private Equity Investment trust, Alliance investment trust and Rolls-Royce, the engineer.
But Piers Prichard Jones, a London-based Freshfields partner, says: “Activism hasn’t really taken off in the way that people thought it would two years ago.
“Taking big positions and agitating for change is still relatively uncommon. There is still the desire in the UK to do things behind closed doors. And Europe is even harder to break into,” he adds.
US activists may have missed their opportunity, he suggests. European companies are underperforming their US competitors but they have been spending their cash on mergers and acquisitions, and lifting dividends — up 15 per cent across Europe last year. And now dividends are expected to tail off as the corporate outlook falters and interest rates rise.
Linklaters maintains that 2015 has still been a record year for activism globally, citing figures from Activist Insight, a specialist database showing that there were more than 860 actions globally in 2015. That is an increase of 170 per cent since 2011.
The biggest rise was in the US, where actions tripled, but actions in Europe rose 126 per cent over five years “with the UK [being] the most targeted jurisdiction”.
But Activist Insight’s data uses a broad definition of activism that goes well beyond US-style “proxy fights” involving public confrontations and shareholders threatening court action to gain board seats. It includes anything from mainstream institutions voicing widespread concerns over the Tesco accounting debacle to Thorntons, the chocolatier bought by Ferrero, where shareholders lobbied privately for change.
Most of the big 2015 investor campaigns in the UK ended up with consensual resolutions rather than proxy fights.
New York-based Elliott Associates first began building its stake in Alliance Trust in 2011. Its goal was similar to those of arbitrageurs, sometimes dubbed vulture funds, that have for decades picked off investment trusts whose shares trade at wide discounts to the value of underlying assets.
But the effort ended with Alliance appointing two “independent” non-executive directors at Elliott’s behest.
ValueAct’s campaign to shake up Rolls took a similar approach. In November, the San Francisco fund increased its stake in the engineer to 10 per cent after a series of profit warnings. ValueAct is pressuring for board seats, cost cuts, disposals and a change in strategy. But the fund, which typically holds stakes for long periods, prefers to work with management and talks about injecting private equity disciplines into public companies.
Graham Bird of Gresham Strategic says this form of activism has been around in the UK since the 1990s. “A lot of engagement happens, but using influence rather than legal threats,” Mr Bird says. He doesn’t think the aggressive US style tactics will gain much traction in Europe “particularly given the momentum in markets now”.
Perhaps the nearest the UK got to confrontational activism in 2015 was the attack against Electra by Sherborne, a UK-quoted company backed by some of Britain’s biggest investment institutions and founded by Edward Bramson, a British lawyer based in New York. The row between Electra directors and Mr Bramson became as bitter as any in the US.
Eventually Mr Bramson won a seat on the Electra board. But it was a struggle. “Most UK shareholders dislike confrontations with boards to become public except as a last resort,” says the UK head of a big investment group.
Although US companies routinely give board seats to activists, UK shareholders continue to worry that adding an investor with a short-term agenda to the board will undermine the independent non-executives charged with representing all shareholders.
Activist battles in Europe are often long and hard and for every activist campaign that succeeds in the UK, another fails. Sherborne, for example, bought shares in Electra’s direct rival 3i Group before withdrawing without comment and taking on Electra.
That resistance, alongside the rising costs and probability of lower returns, will continue to hold back the promised wave of aggressive UK activism for a while yet.