What do activist shareholders have in their sights?

Activist shareholders are a permanent force in security markets today, but their motives and strategies are not always identical. But there are three areas on which institutional shareholders and dedicated engagement funds are most likely to focus their activist activities in the current financial year.

First, with the increasing momentum in merger and acquisition activity, expect to see shareholder activists seeking to persuade boards to undertake transformative transactions such as spinning off divisions to unlock 'hidden value', divest non-core businesses to eliminate a perceived 'conglomerate discount' or initiating a process to either sell the company or put it into play.

"A board's view on the strategic or economic merit of a transaction will continue to collide with the views of shareholders."
Alberto Colla, Corporate Partner, Minter Ellison

Secondly, expect to see key shareholders engage in so-called 'balance sheet' or 'financial engineering' activism, with their efforts directed at persuading boards to increase the gearing of their company to what is perceived to be a more optimal ratio, return excess capital to shareholders (including by capital reductions, share buybacks and special dividends), reduce costs (especially on marketing and R&D), and focus on maximising return on invested capital.

Thirdly, expect to see various forms of 'governance activism' invoked as a means to one of the above ends, rather than being an end in itself. This typically involves highlighting corporate governance lapses or invoking corporate governance 'best practices', often with a view to changing the composition of the board so that new directors nominated by the activist have clear air to pursue M&A activism or balance sheet activism.

If a corporate transaction such as a proposed merger, takeover or share buyback is announced, it's not unusual for affected shareholders to apply activist pressure, with a view to alter the course of the announced transaction (for example, by seeking a price increase from the bidder in a takeover, or marshalling broader shareholder support to vote down the proposal altogether). 

In the 2014 financial year, there were a number of instances where boards of ASX-listed companies announced a proposed significant corporate transaction, only to then find themselves responding to interventionist steps taken by key shareholders seeking to alter its course.

It is likely the course of corporate transactions this financial year will continue to be influenced by activist pressure applied by key shareholders.

We expect a board's view on the strategic or economic merit of a proposed corporate transaction will continue to collide with the views of key shareholders. When that happens, the resulting dynamics can lead to an impasse, causing the transaction to fail – or, in some cases, this can be the foundation for finding a creative solution to unify previously diverging views.

A lesson from recent examples of shareholder activism in corporate transactions is that boards need to better understand their shareholder base, develop a sense of their likely reaction to a potential transaction and have contingency plans to deal with an initial adverse reaction from key shareholders. 

This is important, because many key shareholders do not want to be made 'insiders' on a confidential basis before the transaction is announced, as that removes their ability to deal with their shares.

Alberto Colla is a Corporate Partner at Minter Ellison Melbourne and a leading expert on M&A and takeover transactions.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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