Shareholder Activism: Recent Developments in Europe

2020 was like no other year, including for share­holder activists. The surge of the Covid-19 pandemic made the number of campaigns drop drastically in the second quarter of the year, while the lasting crisis eventually made many companies more vulnerable to activists in the second half of 2020. In Europe, shareholder activism actually experienced a relatively successful year (1), highlighting a growing importance of ESG-related campaigns (2) and, thus, making the question of (better) regulation of activist investors still relevant (3).

1. Pandemic’s Impact on Activism Strategies and Responses in Europe

1.1 2020 did not discourage activists in Europe

On a global scale, the Covid-19 pandemic caused shareholder activism to decline, with 13% fewer campaigns in 2020 than in 2019. This decrease was particularly significant in the U.S. where activist campaigns were down 34% in 2020.1

However, this was not the case for Europe which experienced an opposite trend, making 2020 a record year in terms of shareholder activism, with an increase in campaign activity by 21% in 2020 as compared to 2019. This growth was mainly due to the important number of raids launched at the beginning and at the end of the year.¹ In fact, at the peak of the Covid-19 crisis and in the following months, namely between March and September 2020, the number of activist campaigns initiated in Europe significantly decreased, as it was also the case for the U.S.1 Yet, this does not mean that no shareholder activist seized during such period the opportunity to raid on vulnerable companies trying to cope with the burst of an unprecedented crisis.

An example of such activist attack is the one launched by Cerberus against Commerzbank in June 2020. Amid the crisis, the New York-based hedge fund started criticizing the German bank’s governance, strategy and performance. In particular, Cerberus requested the appointment of two of its nominees to the bank’s supervisory board and the implementation of a new strategy, qualifying Commerzbank’s performance as “disas­trous”.² Although the bank initially rejected the activist’s requests, the pressure from Cerberus prompted the departure of Commerzbank’s CEO and Chair­man.³ The new CEO appointed in September 2020 decided to implement a cost cutting strategy, following, notably, Cerberus’ proposals.⁴

The Covid-19 outbreak also did not stop ongoing campaigns at that time against European companies. For instance, after having raised its stake in Lagardère in February 2020, Amber Capital put forward several resolutions ahead of the French company’s 2020 AGM to replace most of its supervisory board members with a view to revamping the group’s governance, in particular through the removal of Arnaud Lagardère as the company’s manager and the dismantling of its legal form as a société en commandite par actions.⁵ As in the meantime the Covid-19 crisis broke out, Arnaud Lagardère called the activist’s requests “irresponsible” and the timing of its attack “inappropriate” in light of the challenges faced by the group.⁶ Although Lagardère’s shareholders eventually rejected Amber Capital’s proposals, notably with the support of two allies, Vivendi and Fimalac,⁷ the activist campaign at Lagardère was far from over. In fact, in August 2020, Vivendi and Amber Capital requested the convening of a new shareholder meeting in order to replace the company’s supervisory board members granting three seats to Amber and one to Vivendi.⁸ The supervisory board of Lagardère rejected this request, arguing that there was no legitimate motive to urgently call a further general meeting.⁹ Following this refusal, Amber and Vivendi sued the company, but finally lost the case in December 2020 when the Paris Court of Appeal upheld a previous decision which had turned down the activists’ requests.¹⁰

The rise in the number of raids against European companies in 2020 is fully in line with the recent emergence of Europe as the new activists’ playground. With the important level of campaigns each year and the subsequent increase of awareness surrounding the issues raised, the U.S. market has become increasingly saturated for shareholder activists in the last few years. This situation has thus pushed activists to look for new opportunities on the other side of the Atlantic. Consequently, the European activist market has been constantly growing and the continent now faces twice as many campaigns as there were five years ago. While the United Kingdom and Germany are usually the most targeted European countries, France is gaining the attention of activist shareholders, with 6.2% of French public listed companies having been subject to an activist campaign in the last five years.¹¹ Nonetheless, it should be noted that, historically, Europe has been considered a difficult market to penetrate by activist investors due to its complex and highly fragmented regulations, the significant number of family/state-owned companies and the public opinion’s negative perception of activist campaigns.

1.2 Overview of activists’ focus in 2020

M&A is traditionally one of activists’ favorite focus. However, 2020 was not a normal year for the worldwide M&A market. In fact, although the 2020 total value of deals was only down 5% from 2019, it was the end of the year which accounted for most deals with an increase in the global M&A activity of 88% in the second half of 2020 compared to its first half. But the relative recovery of the global M&A market in 2020 was also due to European deals’ surge which made up for the U.S. M&A slowdown.¹² This particular situation explains why the Old Continent did not experience any major shift in activists’ focus in 2020: the M&A-related campaigns remained the most common type of activist intervention in Europe, with governance-related raids coming in second.¹³

For instance, some activists pushed for spin-offs in 2020, such as Third Point which, in February 2020, successfully called on the British insurer Prudential to separate its U.S. and Asian businesses.¹⁴ Following activist’s requests, Prudential then announced, in August 2020, its intent to spin off its U.S. business and focus on Africa and Asia.¹⁵

The French group Suez has also been facing an M&A-related activist campaign since September 2020. In response to Veolia’s proposed takeover bid, Suez’s board of directors expressly stated that it was opposed to any combination with Veolia and put forward a poison pill, through a Dutch Stichting, intended to prevent any acquisition of its main assets in France. Two activist investors, CIAM and Amber Capital, openly criticized Suez’s board for its unilateral decision without consulting the Suez shareholders, and for its refusal to examine the merits of Veolia’s offer. In particular, on several occasions, CIAM threatened Suez’s board members to hold them liable for their misconduct towards shareholders and is currently planning to push for the replacement of more than half of Suez’s directors at the company’s 2021 AGM.¹⁶

Nonetheless, the Covid-19 pandemic also contributed to disrupting companies’ operations and exposing all inconsistencies and flaws of their strategies. Companies’ capacities to effectively manage their business under crisis conditions and to quickly adapt to a changing situation have notably been scrutinized by share­holders, opening doors to activist campaigns. This emergence of new corporate difficulties caused a 16% increase in strategy and operations-related activist demands.¹⁷ A similar trend could be discerned globally, in particular in the first half of 2020, as activists increasingly turned their focus to operational improvements and management change instead of M&A objectives and buybacks.¹⁸

2. Increasing Significance of ESG Activism

2.1 Growing investors’ and shareholders’ commitment

Given the rise of worldwide awareness on Environ­mental, Social, and Governance (ESG) related issues, investors have been recently facing a significant pressure from the public opinion to start integrating ESG criteria in their investment strategy, which is likely to continue to grow as investors become subject to additional disclosures requirements in this respect.¹⁹ Thus, some recent commitments toward ESG have been made by major institutional investors. For instance, in May 2020, Amundi Asset Management announced that it had signed the Tobacco-Free Finance Pledge engaging to exclude cigarette makers from its actively managed open-funds.²⁰ Similarly, UBS Asset Management announced in September 2020 that it had made a commitment to broaden the suite of climate solutions available to its clients, in particular, in order to meet the “growing interest from clients in aligning their investment goals with their environmental objectives and mitigating climate-related risks in their portfolios”.²¹

The growing significance of ESG criteria also applies to activist investors: while they used to select their investment targets based solely on the identification of suboptimal capital allocation, financial strategy weaknesses, M&A opportunities and/or potential governance improvements, they now tend to include in their analysis (and to grant prominent importance to) social and environmental criteria as well, consistent with the sustainability-related disclosure requirements to which some investors have recently become subject. This approach and the resulting investors’ commitments, do not only contribute to increasing the number of ESG-related campaigns, but also to turning traditionally more passive investors into potential shareholder ac­tivists.

BlackRock is a good example of this phenomenon. In July 2020, it published an Investment Stewardship Report called “Our approach to sustainability” in which it indicated that sustainability is central to the way the firm invests and manages risk, stressing that BlackRock has a responsibility to its “clients to make sure companies are adequately managing and disclosing sustainability-related risks, and to hold them accountable if they are not”. In this context, in the July 2020 report, BlackRock also stated that, in 2020, it had identified 244 companies that are making insufficient progress integrating climate risk into their business models or disclosures. BlackRock furthermore specified that of these 244 companies, it had taken voting action against 53 and had put the remaining 191 companies “on watch”, meaning that if they do not make significant progress, they risk BlackRock’s voting action against management in 2021. The list of those 53 companies against which BlackRock had taken action was fully disclosed in the report, showing that some major European companies have already been targeted by BlackRock in 2020, including French Air Liquide, Czech CEZ, Swedish Volvo, Polish PGE, and German Daimler, Lufthansa, HeidelbergCement, and Uniper. At the start of 2021, BlackRock published another report called “Our 2021 Stewardship Expectations” further setting out voting guidelines and strengthening the active approach of BlackRock’s investments. In the report, the U.S. investment firm expressly asked companies to “demonstrate Board and workforce diversity consistent with local market best practice, an understanding of key stakeholders and their interests as well as plans to align their business with the global goal of net zero GHG (greenhouse gas) emissions by 2050”. It also indicated that it had committed to support more ESG-related shareholder proposals.

ESG-related involvement is also increasing among shareholders that now target more and more companies with resolutions over climate change. For instance, ahead of Nestlé’s 2021 AGM, Ethos and seven Swiss pension funds proposed a shareholder resolution in order to submit the group’s climate strategy to an advisory vote of the shareholders, stressing that they expect to make this practice permanent. Nestlé’s board wel­comed this proposal and announced in March 2021 that it will present its strategy for achieving its goal of “net zero emissions by 2050” to shareholders for a vote at the upcoming AGM on April 15, 2021.²²

As such, a greater level of shareholder involvement in companies’ governance matters, in particular to foster ESG performance, is actually promoted by European Union institutions. Directive (EU) 2017/828 of May 17, 2017, amending Directive 2007/36/EC as regards to the encouragement of long-term shareholder engagement, and which provides that “effective and sustainable shareholder engagement is one of the cornerstones of the corporate governance model of listed companies” and that “greater involvement of shareholders in corporate governance is one of the levers that can help improve the financial and non-financial performance of companies, including as regards environmental, social and governance factors, in particular as referred to in the Principles for Responsible Invest­ment, supported by the United Nations”. There are also discussions at European Commission (EC) level aimed at determining a possible framework under which sustainability-related disclosures could be subject to a specific shareholder vote. In its consultation on the renewed sustainable finance strategy, the EC indeed asked whether “action is necessary to allow investors to vote on a company’s environmental and social strategies or performance”. In its response to this public consultation, dated July 15, 2020, ESMA suggested that the EC consider giving shareholders a general advisory vote on the annual non-financial statement as an “effective tool for investors to voice any concern they might have on the way investee companies approach sustainability risks”. In addition, from October 2020 to February 2021, the EC conducted a public consultation on sustainable corporate governance based on an E&Y study it had commissioned,²³ which invited stakeholders to consider, among others, whether to require companies and directors to take account of stake­holders’ interests (including, e.g., human rights violations, environmental pollution and climate change) in their corporate decisions beyond the current requirements of EU law, and whether to impose new requirements on boards to enhance their sustainability ex­pertise.

In any event, while investors and in particular share­holder activists are looking to gain a strengthened influence over the social and environmental aspects of issuers’ strategy, they still have to deal with the EEA member states’ current legal and regulatory framework. As of today, the main leverage of activist investors lies in shareholder meetings with the right to question the management and put items or resolutions to the agenda of the meeting. The use of public statements and “name-and-shame” actions may also be implemented by activists to bring management’s attention to ESG-related issues, regardless of the target company’s regulatory framework.

2.2 Growing number of ESG-related campaigns

The increasing commitment of investors leads to a higher number of ESG-related activist campaigns.

One of the leaders of climate-driven positions since 2019, is The Children’s Investment Fund (TCI). In the past two years, especially given its CEO’s recent “Say On Climate” global campaign, the British fund has criticized and requested change in environmental policies from a number of European companies such as French Safran, Airbus and Vinci, and Spanish Aena.²⁴ Regarding the latter, TCI recently succeeded in making the Spanish airport group’s shareholders approve the company’s new action plan under which airports in Aena’s network will be 100% energy self-sufficient and carbon neutral by 2026.²⁵

Just like in performance-related campaigns, activists strive to correct stock mispricing and reveal companies’ intrinsic value, in ESG-linked attacks they aim at un­veiling companies’ “greenwashing”, thus aligning the market’s perception of a given firm’s sustainability with the reality. For instance, in December 2020, Bluebell Capital Partners launched a campaign against the Belgian chemicals multinational, Solvay, which is rated very highly by ESG ranking providers. Questioning the very merit of those ratings, the activist targeted the group over the management of its soda ash factory’s waste in Italy as well as requested a full decontamination of the shores on which Solvay discharges its waste.²⁶

Another example of a successful ESG campaign relates to the French company Total. Prior to Total’s 2020 AGM, eleven European management companies, led by Meeschaert Asset Management, had put forward a resolution to amend provisions in the company’s by-laws relating to the management report. Under the new provisions, the annual management report would be notably required to detail the company’s strategy in order to align its activities with the objectives of the Paris Climate Agreement. In response, Total announced an increase in its environmental ambitions, with an aim to reach net zero GHG emissions in its worldwide operations by 2050.²⁷ In the meantime, another shareholder activist, PhiTrust, proposed an additional resolution on the amendment of the company’s by-laws, requesting that the company’s board of directors’ decisions expressly take into consideration social and environmental issues.²⁸ On May 29, 2020, while Total’s shareholders did not approve the resolution proposed by the eleven investors led by Meeschaert, they did approve the by-law’s amendment requested by PhiTrust.²⁹ This activist pressure contributed to triggering further transformation of the group, as Total now aims at becoming a broad energy company and, accordingly, has recently asked for shareholders’ approval to change its name to TotalEnergies.³⁰

On the other side of the coin, advanced ESG transitions may also attract activists’ interests, in particular with respect to the ability of companies to balance sustainability and financial performance.

3 Regulation of Shareholder Activism

3.1 Call to better control activist investors

Europe has a history of distrust towards activists. While in the U.S., activists are recognized for their positive impact on the targeted companies’ value creation, this is not the case in Europe where they are mostly viewed as greedy and unwelcome investors.³¹ This negative perception of shareholder activism has been notably linked to the idea of sovereignty and “national jewels”: a foreign investor that dares attack a European family-owned or state-supported domestic group is often badly looked upon by the public opinion and the media.

In this context and given the increase of activist activity in Europe in the last few years, the recent call for shareholder activism’s regulation, led by France, comes as no surprise. In fact, on April 28, 2020 the French Autorité des marchés financiers (AMF) published a report on shareholder activism in which, while it acknowledged the role of activists in improving corporate governance and defending the interests of minority shareholders, it proposed several actions in order to mitigate and prevent “excessive” activist behaviors that could adversely affect the proper functioning of financial markets. The AMF then updated some of its recommendations on March 17, 2021 to, inter alia, (i) clarify that, subject to Market Abuse Regulation,³² issuers may reply during “quiet periods” to public statements made against them, (ii) recommend to shareholders launching a public campaign against a company to provide the latter, without delay, with all materials setting forth their projects, proposals and the reasons thereof (e.g., “white paper”) as well as make this information public, (iii) advise that, in the context of tender offers, the public statements of bidders and target’s shareholders comply with the obligation of special vigilance,³³ and (iv) recommend to issuers to foster dialogue with shareholders through the appointment of a lead director in charge of main shareholders’ concerns, in particular those relating to ESG strategies.

The French regulator also stressed that some measures should be implemented at the European level and, accordingly, undertook to coordinate with ESMA and the EC in that respect.

3.2 Difficulties raised by activism’s regulation

The first and main issue of activism’s regulation is the difficulty in defining what is shareholder activism, which at first glance appears to be a relatively polymorphic concept referring to various practices and multiple players. Defining shareholder activism is all the more difficult now that, in recent years, the thin line between activists and other “regular” investors has become increasingly blurred as more and more private equity funds go active (in particular as regards ESG-related issues). The French AMF’s April 2020 report illustrates these difficulties, as the AMF declined to adopt a legal definition of shareholder activism, given that “to attain their goals, activist shareholders may use legal means available to all shareholders, so that no irrefutable criterion seems capable of intrinsically defining an “activist” shareholder and making an indisputable distinction between such activist and a simply “active” shareholder”.

In fact, many investors that are identified as activists today are simply long-term minority shareholders which are actively involved in a given company’s performance, strategy or governance. For example, before launching its campaign against Danone in early 2021, Artisan Partners had been a “passive” shareholder of the French company for almost a year. Given Danone’s 2020 performance, the investor decided to support Bluebell Capital’s requests, eventually causing Danone’s CEO and Chairman, Emmanuel Faber, to step down.³⁴

In order to make themselves heard, today’s activists rely on common, legal shareholder rights (such as the rights to question the management and put items to the agenda of a meeting). In this way, activist investors contribute to democratizing the use of these rights, leading the way to other shareholders and showcasing that minority investors can effectively push for change in companies. In the end, many of so-called activists are merely “vocal” investors that aim at rallying other shareholders around a common vision for a given company’s value creation. This was, for instance, the case of Léon Bressler and Xavier Niel, two renowned French businessmen, who, in October 2020, opposed Unibail-Rodamco’s recovery plan which included a EUR 3.5bn capital increase and aimed to address the French group’s heavy debt. The two investors campaigned for Unibail-Rodamco to sell its U.S. assets, and succeeded in making the company’s shareholders reject the capital increase contemplated under the recovery plan. The shareholders’ support also resulted in Bressler and Niel joining Unibail-Rodamco’s supervisory board as well as in the departure of the group’s CEO.³⁵ Another example of an active shareholder which does not coincide with the conventional image of a hedge fund activist investor is the Bill & Melinda Gates Foundation Trust. In Europe, the Foundation and its vehicle investment, Cascade Investment, notably fought against the Saint-Gobain’s takeover bid for the Swiss construction chemicals maker Sika, launched in 2014. As a shareholder of Sika, the Bill & Melinda Gates Foundation Trust and Cascade Investment successfully opposed the offer alongside the company’s board and other investors, eventually leading to Saint-Gobain’s exit from Sika in May 2020.³⁶

Nonetheless, with no clear definition of shareholder activism, any attempt to regulate activist practices increases the risk of making all shareholders’ engagements and investments more burdensome and costly. Any additional constraint, irrespective of its benefits in the context of activism, contributes to reducing the competitiveness of European markets, which, especially in the context of Brexit, is not desirable.

In this respect, one may question the very merit of regulating shareholder activism. Current European and national regulations already impose substantial constraints on activist investors, while providing for deterrent response mechanisms in the event of market abuses that may be committed by an activist. Implementing a successful campaign in Europe is, therefore, already fairly difficult with very low activists’ success rates in many European countries (40% in Germany and only c. 20% in France).³⁷ From a European perspective, shareholder activism is also no longer a foreign threat, given that more and more campaigns are launched by local activists, such as Swedish Cevian, Swiss Veraison or French CIAM and Phitrust. Finally, it should be noted that today’s shareholder activism, especially considering its recent ESG-related trends, mostly pursues long-term constructive strategies, involving all target’s stakeholders.

4. Conclusion

Just like the financial crisis of 2008 contributed to showcasing a number of failures and weaknesses of companies worldwide, thus directing shareholder activism towards different practices and concerns, the ongoing Covid-19 crisis may also open doors to new types of activism. Although it is still too soon to assess whether the current crisis is a new turning point for the activist phenomenon, the Covid-19 pandemic has for sure demonstrated the persistence of activist investors in Europe, with a new particular focus on ESG-related issues.