IN-DEPTH: White & Case on its expansion to a tri-continental shareholder engagement practice
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Earlier this year, White & Case expanded its team to become a tri-continental shareholder engagement practice. Below, DMI discusses the evolving global activism landscape in the U.S., Europe and Asia with New York-based partner Richard Brand, London-based partner Tom Matthews and Tokyo-based partner Nels Hansen, who lead the U.S., U.K./Europe and Asia practices, respectively.
What is the importance of having the first tri-continental shareholder activism practice?
Richard Brand: Governance practices have evolved differently in different jurisdictions, but our clients, regardless of where they sit, are investing globally. By having a coordinated, strategic approach to advising investors around the world, we can leverage our experience in different jurisdictions for the benefit of our clients, while providing seamless service that is calibrated to the unique goals and considerations of clients we regularly work with.
Do you see U.S. activists targeting U.K. and Japanese companies in even greater numbers?
Tom Matthews: U.S. activists have been responsible for some of the highest profile campaigns in the U.K. market in recent years and we anticipate this trend continuing in the coming years.
Nels Hansen: We have seen some U.S. activists approaching Japanese companies, but there is a learning curve and only a handful have been repeat players here to date.
How about the reverse - foreign activists targeting U.S. companies?
TM: European and other foreign activists have historically conducted relatively few campaigns in the U.S. market. Our experience allows us to guide investors through the complex U.S. regulatory landscape, but there remain practical obstacles for investors seeking to enter the U.S. market (not least the cost of acquiring and holding a meaningful stake in listed U.S. companies, many of which have much larger market capitalizations than companies in other markets).
With the recent SEC guidance on 13D reporting, is the bar now even higher for institutional investors to back activists?
RB: The large passive funds have become more supportive of management in recent years, and there has been a divergence in voting behavior between the actively managed and the passive funds in contested situations, which cannot be explained solely by different interests or investment time horizons. The recent SEC guidance puts a spotlight on the important role that passive investors play in determining the outcomes of proxy contests and complicates efforts for both sides to engage with them.
Could that mean activists are more likely to aim for settlements?
TM: It is possible that reduced certainty as to where other investors stand may in some situations add to the desirability of a settlement, depending on how market participants ultimately react to the new guidance. In any event, we have been seeing a trend across the globe over the past few years towards increased private engagement and settlement between activists and companies, and we anticipate this trend continuing.
Are "white knight" transactions always a defensive move or an endorsement of the need for activists?
RB: “White knight” transactions are still few and far between and can be extremely risky for a company to attempt, because, if viewed as primarily a defensive measure, they can generate support for an activist across the rest of the investor base and lead to the very outcome that the transaction was designed to help avoid – the loss of a proxy contest.
While more U.S funds are said to be broadening their horizons to look for new opportunities in Europe, how are they adapting their engagement style?
TM: U.S. funds pursuing activism campaigns in the U.K. and Europe encounter a significantly less litigious environment, where campaigns are largely conducted through private and public engagement and in some cases proxy contests, with court involvement being much rarer. With a relatively low share ownership threshold for requisitioning ad hoc shareholder meetings in the U.K. and Europe, there is also significantly less emphasis on an annual proxy season.
What challenges do they face in certain European jurisdictions?
TM: Each European jurisdiction has its own legal, regulatory and cultural framework that impacts how best to conduct an activist campaign to maximize chances of success. In this context, some of the major markets in continental Europe are notably less straightforward to implement activism campaigns compared with the U.K. For example, the dual tier governance structure in Germany (with separate supervisory and management boards), as well as the division between the respective competences of shareholders and the board, can make it more difficult for an activist to bring about desired changes without a negotiated settlement.
In the Asia market, regulators have become more accepting of activism. Could that possibly change as we see more activists operating in the region?
NH: Regulators have a diverse array of stakeholders and opinions. In each market there is always a lobby of companies who oppose shareholders telling management what to do, and Asia is no exception. This lobby’s ability to hamstring shareholder activism and engagement varies based on a number of factors, but more activism can mean more companies who have a score to settle. It can also mean more success stories of companies that have been positively transformed with attendant benefits for the economy. We will see whether asset owners – including pension funds responsible for the livelihood of a growing portion of the population across aging Asia – are able to prevent such actions by aggrieved corporates in the years to come.
Board independence and qualifications are seen as key challenges in the Asia region. What are investors pushing for in this regard and what roadblocks are they facing?
NH: Investors have a concern that board members are serving the CEOs to receive a cash salary, and not the shareholders. Some investors ask to compensate board members in stock. Some investors ask for board members to be found by executive search firms rather than friends of the CEO, or to have real executive experience rather than being a professor, accountant or lawyer. Roadblocks vary but a big one in many boards is that CEOs are happy with boards they and their friends chose.
