Company response strategies

Preparation

What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?

In general, directors are obliged to enable all shareholders to exercise their rights in a proper and unimpeded manner. Shareholder activists and other shareholders must be treated equally. Board decisions regarding activist proposals are subject to the same standard of care as other board decisions.

What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?

As a general measure, companies should identify potential vulnerabilities by analysing their business and strategy as an activist shareholder would do.

Following such analysis and risk-assessment, the following defence measures should be considered:

  • preparing investor or public relations statements;
  • implementing a ‘one voice policy’;
  • appointing a rapid reaction team; and
  • analysing the shareholder structure and other ‘early warning signs’ on a regular basis.

Shareholder activism has increased significantly in recent years in Germany. According to Lazard, in 2018, there were 58 campaigns of activist investors targeting listed companies in Europe, a significant number hereof being directed at targets in Germany.

Defences

What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?

Available structural defences are:

  • the existence of majority shareholders;
  • preference shares (non-voting shares);
  • restricted transferability of registered shares;
  • staggered terms of members of the supervisory board; and
  • delisting.

Other factors that make a company more likely to be targeted are:

  • a high free float (traditionally low attendance of free float at shareholders’ meetings);
  • a specific capital structure, eg, significant cash positions or defensive financial gearing or strong cash generation opportunities not being utilised;
  • an unsatisfactory share price performance or a vague business strategy that leads to poor business prospects;
  • a conglomerate structure; and
  • takeover and restructuring situations.

New rules on delisting from regulated markets require that an unconditional tender offer be made to all shareholders (section 39, BörsG). This will result in a more complex and costly delisting process and presumably limit the role of delisting as a defence mechanism against activist shareholders.

Based on the new Shareholders’ Rights Directive, companies will be entitled to identify their shareholders and to obtain information regarding shareholder identity from any intermediary in the chain that holds the information. The purpose is to facilitate the exercise of shareholder rights and their engagement with the company. The member states may provide that companies are only allowed to request identification with respect to shareholders holding more than a certain percentage of shares or voting rights that will not exceed 0.5 per cent.

The new requirements aim to increase transparency and help the companies in their approach to shareholder engagement. Institutional investors and asset managers will either have to develop and publicly disclose a policy on shareholder engagement or explain why they have chosen not to do so.

Owing to the important influence on voting behaviour of investors, proxy advisers will also be subject to transparency requirements (eg, disclosure of methods and main sources of information) and a code of conduct.

Details remain to be seen since national implementation is not due before 10 June 2019.

Reports on proxy votes

Do companies receive daily or periodic reports of proxy votes during the voting period?

There is no statutory proxy voting system outside the shareholders’ meeting. The corporate charter may provide that shareholders vote in writing or by way of electronic communication. However, a vote made in such a way becomes binding only at the beginning of the voting procedure in the shareholders’ meeting. Until then, any vote made in writing or by electronic communication may be rescinded by the shareholder.

In practice, votes cast outside the shareholders’ meeting are kept confidential, and there is no exchange between management and shareholders on votes submitted before the shareholders’ meeting.

Private settlements

Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?

Private settlements with activists are not explicitly prohibited. However, any settlement with activists has to be in the best interest of the company, comply with the principle of equal treatment of shareholders (section 53a, AktG) and may not lead to a repayment of capital other than distributable profits (section 57, AktG). As a consequence, any private settlements that lead to an economic advantage for activists holding at least one share has to be published and benefit the other shareholders equally. Private settlements can, as the case may be, bring about inside information that is subject to the mandatory rules on the disclosure of inside information.