Shareholder Activism in Germany
What is shareholder activism about? Activism is nothing else but a shareholder taking a minority position in a listed company and trying to exercise influence on management to increase the share price. That’s all. It’s about value, not values. Activists seek meetings with management, use shareholder rights, look for support from other shareholders, and use media campaigns to promote their objectives. This works in every jurisdiction. In 2018, we had about 15 campaigns in Germany. We had a very spectacular case with thyssenkrupp. You know thyssenkrupp is the old steel company that is now a conglomerate. It was in a crisis with a depressed share price. Activists came in and required the split up of the company into two separate companies. They started a public campaign, and after some changes in the board, the management finally followed suit. The share price went up by 20%. This was a classic U.S. campaign but it happened in Germany, right here.
What kind of changes do activist shareholders try to bring about?
We see some recurring themes in activist campaigns. The most straightforward one is changes in management and board composition. Another one is improvement of corporate governance, changes in management compensation and changes in strategy in general, in particular M&A. The third one, also a favorite one, is return of excess cash to shareholders. But, surprisingly enough, it’s not all about cost-cutting, returning of capital, streamlining of portfolio, etc. Recently, we have seen that activists pursue completely different goals. They look for better corporate social responsibility.
Is M&A really one of the topics of activists?
One of the favorite topics of activists is M&A because this is immediately value-enhancing. So, we can distinguish three types of campaigns. One is, break up the company or sell assets to streamline the portfolio. The second one is, stop or sweeten pending deals, and a third one is, sell the company. The last one is self-auctioning, which we haven’t seen so often in Germany, but this will change. We had STADA, which is a perfect example. STADA was an underperforming company with a governance problem. Activists came in, changed the board, and changed the articles to facilitate share transfers. They set the stage for taking private, and this is exactly what happened — financial sponsors came, the company started an auction and was sold at the end.
Will we see more activism in Germany and how can Kirkland & Ellis help?
We will see more activism in Germany, mainly for three reasons. One: it’s simply an attractive business model for activists. Two: we see at the moment declining share prices and activists will try to capitalize on it, and it’s always easier to increase share price if you start from a low level. And third: we see more and more money flowing into index funds. These funds are a generally passive investor, but they increasingly take an interest in corporate governance issues to enhance performance and share price from which they benefit. They make a perfect ally for activist campaigns.
We at Kirkland & Ellis are uniquely positioned to help companies in these situations. We have an extensive activist defense practice in the U.S. We can simply combine the experience we gained in the U.S. with our knowledge of the legal framework in Germany and advise companies how to react in these situations.