IN-DEPTH: Germany’s activism resurgence
With shareholder activism relatively subdued in the U.K., Europe’s traditional hotbed, Germany is seeing an upturn in activist demands.
Five Germany-based companies were targeted by primary- and partial-focus activists in 2023, up from four in 2022 and three in 2021, with last year’s advances accounting for 14% of all European campaigns in the period, the highest level of activity in the region since 2020, according to Diligent Market Intelligence’s (DMI) Activism module.
Meanwhile, activism in the U.K. has held relatively flat in recent years with 12 companies targeted by primary- and partial-focus activists in 2023, down from 13 in 2022 and the lowest number recorded since 2019. In all, U.K. issuers accounted for 32% of all companies targeted in the region last year, versus 36% in 2022 and 41% in 2021.
“If you go back four or five years, Germany was vying with France as the number two target market for activists in Europe,” Paul Kinrade, managing director at Alvarez & Marsal’s activism practice, told DMI. “Now Germany is clearly the second market after the U.K., which has been holding steady.”
French companies accounted for 8% of activity in the wider European region in 2023, in line with 2022 and well below the 14% recorded in 2019. In the first quarter of this year, just one French company has attracted activist attention while three German companies have been targeted.
German appeal
Germany offers plenty of opportunities for activist investors. The market is relatively undervalued, with German companies trading at an average price-to-earnings ratio of 12.83, cheaper than any major European market except Italy, and a fraction of the 24.5 multiple on U.S. stocks.
The market has plenty of industrial and healthcare conglomerates which, Kinrade noted, are attractive to activists because of the wealth of opportunities they offer when it comes to enhancing performance, especially while waiting for the M&A market to open up again.
“At industrial businesses you've got the real estate footprint, you've got employees, you've got margins, you've got insource and outsource, supply chains. There are many different levers [activists] can focus on to drive shareholder performance,” Kinrade said.
In one of Europe's most contentious proxy fights, German chemicals company Brenntag faced demands from U.S. activists Engine Capital and PrimeStone Capital to separate out its specialties division. Despite gaining support from proxy advisors Institutional Shareholder Services (ISS) and Glass Lewis, a possible first in German corporate history, the activists failed to win two contested board seats at Brenntag’s June 15 annual meeting.
More recently, German pharma and crop sciences group Bayer nominated Jeffrey Ubben, founder of Inclusive Capital Partners, as a non-executive director as it faces multiple calls from activist Bluebell Capital to separate its crop science from its pharma business due to a lack of synergies.
German law also grants significant rights to individual shareholders, including the right to file countermotions in person at a general meeting and file proposals regarding the election of supervisory board members or auditors. Such on-the-day proposals can typically only be voted on by shareholders attending the meeting, potentially enabling an activist to pass measures with a smaller, more supportive pool of voters.
One of the clearest examples of this tactic came in 2019, when London-based hedge fund Pelham Capital won a seat on the supervisory board of Scout24 by filing a counterproposal at the company's annual meeting.
Two-tier boards
Securing a seat on the supervisory board, however, is only the first step in any activist campaign in Germany, due to its unique two-tier board structure.
Unlike the one-tier board structure commonly implemented in the U.S., U.K. and most other markets, Germany, as well at the Netherlands, has a two-tier board structure consisting of a management board (responsible for decisions related to day-to-day operations), and a supervisory board, (responsible for overseeing the management board, but typically uninvolved in operational decisions).
Shareholders of German companies can only elect supervisory board members, not management board members, and as a result cannot launch proxy fights aimed directly at the CEO or other executives, a common activist tactic in other markets.
“CEOs and chief financial officers (CFOs) in the U.K. and U.S. are up for reelection on a regular basis, but in Germany you can’t touch them,” noted Angelika Horstmeier, managing director at Alliance Advisors, who is responsible for the German market.
“Activism has to work in a funny way in Germany,” she explained, with activists first seeking a seat on the supervisory board and, if successful, using that position to influence management changes. “It's a long-winded way that's quite complicated, so Germany is not an easy country in which to do activism.”
Proxy advisors have noted that there is a long-standing and controversial practice in Germany for top executives to join a company’s supervisory board at the end of their operational careers, which can raise concerns regarding their independence. Earlier this year, proxy advisor Institutional Shareholder Services recommended investors replace the supervisory board chairs of BASF and Munich Re, both of whom previously served as CEOs of their groups.
Last October, U.S. activist fund Cannell Capital initiated a campaign to replace the supervisory board of VIA Optronics, accusing its members of ignoring potential wrongdoing by its founder Jürgen Eichner and overseeing a 94% stock price to plunge in a little under three years. In April, CFO Markus Peters and Vice-Chair Arthur Tan announced their resignations, while shortly after the company revealed it would be delisting its shares from the U.S. market.
Domestic investors
One of the most significant changes in Germany has been the increasing role of domestic investors, with local shareholders Union Investment and Deka Investment among those to launch campaigns last year.
Company founders and other insiders have also become more willing to use activism to enhance shareholder value.
On April 24, flatexDEGIRO Group CEO Frank Niehage stepped down due to “differing views on the strategic development and for the benefit of the company,” weeks after the digital finance company's co-founder and top shareholder Bernd Förtsch told the media that the company needed “new blood.”
Upon his departure, Niehage claimed he had resigned to "avoid further damage" to the company's reputation and accused Förtsch of trying to get a seat on the supervisory board "through the back door.”
