Recent Trends in Shareholder Activism in Germany

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Michael Ulmer
Partner at Cleary Gottlieb Steen & Hamilton LLP, Frankfurt aM

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2 Minutes

About a decade ago in Germany shareholder activism was mainly perceived as a feature of the US. The German market was seen as less attractive for activists. This has changed significantly. The remarkable outcome of activist campaigns in general and the increasingly limited investment opportunities in other markets have made Germany a focus of activists’ efforts. Only briefly interrupted by the COVID pandemic, this development turned shareholder activism into a prominent feature of the German market—and it is here to stay.

Activist shareholders have different objectives and in consequence take different approaches. Short sellers identify targets with complex business models, opaque accounting and potential irregularities. They use financial instruments to bet on falling share prices at the target, issue a report on their assessment of the target’s condition and exit the scene with a profit once the market reacts to their negative revelations. Real estate developer Adler, for example, was a recent target of a short‑selling attack by Viceroy. While such attacks can destroy value, market participants increasingly appreciate the supporting role these campaigns are playing in the overall effort to improve market transparency.

Special situation activists on the other hand make use of minority rights, threatening to block transactions such as takeovers or squeeze-outs from going through. Other shareholders benefit from the increases in offer prices such campaigns often lead to. These campaigns are a typical feature of M&A transactions and need to be reflected in transaction planning. Petrus’ campaign in the Advent / Centerbridge takeover of Aareal Bank is a topical example in this respect.

Finally, value-driven activists aim at increasing the target’s share price by pressuring its management to run a better business. This could be achieved by the activists seeking board representation as well as by using tools like media campaigns and open letters to shareholders. Improving a company’s governance structures, adapting its business model and strategy, changing executive compensation and even breaking up conglomerate structures form part of the activists’ agenda. Often, such campaigns take a long-term perspective. If they succeed in improving a target’s value, this is to the benefit of all shareholders.

The common factor underlying these different approaches is the activists’ primary mission to create economic advantages for themselves, partially shared by other shareholders. Recently though, so-called impact investors have entered the scene. They pursue a goal that is not directly related to the target’s business and economic performance—the fight against climate change. With a small stake in the target they aim at steering the company in a more climate‑friendly direction by mobilizing the clout of formerly passive institutional investors. A mutual fund backing such efforts adds significant leverage to the campaign and provides a reputational win for the activist, which in turn can also mobilize other shareholders. Recently, impact investors tried to force VW to be more transparent with respect to their lobbying efforts regarding climate-related regulation and pressed BMW’s board to take a more disruptive approach regarding new mobility concepts.

While activist shareholders with their campaigns have changed the corporate landscape and company culture in Germany, these latest developments might go too far. A company’s management walks a thin line when deciding what is in the company’s best—direct or indirect—interest and what mainly aims at pursuing general political goals. Blackrock is the most prominent example of an institutional investor being criticized for supporting impact investors in what some perceive as undue influence on business enterprises. It will be interesting to see whether this is only a bump on the impact investors’ road or whether they have reached the point where shareholder interest prevails over stakeholder interest.

Michael J Ulmer is a partner at Cleary Gottlieb Steen & Hamilton LLP and based in their Frankfurt office, Germany.

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