ACTIVISTS IN THE SHADOWS

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THE M&A ADVISOR SYMPOSIUM REPORT

STALWARTS ROUNDTABLE – ACTIVISTS IN THE SHADOWS

JANUARY 2015

At The M&A Advisor’s International Financial Forum at Bloomberg’s London headquarters on 22nd October 2014, Aaron Kirchfeld, European M&A reporter at Bloomberg News, chaired a panel discussion entitled “Activists in the Shadows.”

The key question posed to the assembled panel of shareholder activism experts was whether the United Kingdom and Europe were about to experience aggressive US-style shareholder activism.

There are cultural differences that may inhibit some the practices pursued by activist funds in the United States. However, there are other aspects of shareholder and corporate behaviour and corporate governance structures in the United Kingdom and Europe that suggest that this region is ideally suited for activist funds to play a more active role in seeking to improve shareholder benefits.

This report sets out the discussion at a moment when United Kingdom and European shareholder activism may be at a tipping point. It will benefit those who may be unfamiliar with how to prepare to meet the activist challenge. It will also be an update for those who follow the activist market.

Aaron Kirchfeld Team Leader for European Deals

Bloomberg News

Gary WeissManaging Director

Head of Corporate Defense EMEA Head of Nordic

Mergers & AcquisitionsJ.P.Morgan

Selina S. Sagayam Partner

Gibson, Dunn & Crutcher

Cas Sydorowitz CEO, Corporate Advisory

Georgeson

Jonathan Doorley Managing Director

Sard Verbinnen & Co

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Contents

Executive summary 1

Introduction 1

An activist point of view 2

The target’s defence 2

Taking long-only investors for granted 4

Activism - good or bad? 5

Video interviews 6

Symposium session video 7

Contributors’ profiles 8

Publisher 10

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Executive summaryActivist investors are becoming more active in Europe, but will US-style activism transfer so easily to the multi-faceted countries of Europe—where business cultures vary so widely from one to another? Moreover, activism can take many forms, with the spectrum of activist fund approaches ranging from subtle to vitriolic. This panel of experts brought with them many years of activist experience both in the United States and in Europe. The clear conclusion from this lively and thought provoking discussion is that, when it comes to shareholder activism, there is no “one-size-fits-all”.

IntroductionAt The M&A Advisor’s International Financial Forum at Bloomberg’s London headquarters on 22nd October 2014, a panel of experts discussed the evolving landscape of shareholder activism in the United Kingdom and Europe. The panel included:

Aaron Kirchfeld | Team Leader for European Deals, Bloomberg News Gary Weiss | Managing Director, Head of Corporate Defense EMEA, Head of Nordic Mergers & Acquisitions, J.P.Morgan Selina S. Sagayam | Partner, Gibson, Dunn & Crutcher Cas Sydorowitz | CEO, Corporate Advisory, Georgeson Jonathan Doorley | Managing Director, Sard Verbinnen & Co

Aaron Kirchfeld began by asking Selina Sagayam if activism was really happening in Europe. She replied that it did happen, but research doesn’t indicate that it is happening to any great degree. However, she stated further, this is because much activism happens privately, behind closed doors. This reflects cultural differences between the way business is done in the United States and Europe.

The moderator referred to research that suggests that 20% of activism happens here in Europe, while the rest is transacted in the United States. He then asked Gary Weiss whether this was borne out by his own experience.

Weiss replied that that there had been a lot of activism going on behind the scenes, saying, “Funds with an activist bent to them and dedicated activist funds are allocating more capital to Europe, because they see potential.”

Weiss went on to say that the space occupied by the activist asset class had become quite crowded: “They now see much greater opportunity to unlock value here in Europe. However, there may be more concentrated shareholder registers in Europe, and more political interference, and maybe they will not be able to achieve success rates over here as high as those they have achieved in the United States.”

However, Weiss went on to point out that there had been some high-profile examples where activists have come in and forced businesses to restructure. This is an encouragement to other activists who may follow.

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“Their campaigns may not be as vocal as we have seen in the United States. But they are on the registers, they are writing letters to the companies, they are showing up at the investor meetings. They are demanding to see the CEOs. I do think there is a pretty active backdrop right now,” concluded Weiss.

An activist point of viewThe moderator asked Cas Sydorowitz how he would advise a US-based activist investor who was keen to expand business on this side of the Atlantic.

He replied that the shareholder bases here would be somewhat differently constituted as compared to the United States, particularly in terms of being able to communicate with them. There are various market regulations in the United Kingdom and across Europe that prevent activists writing to all of the shareholders for example. In Europe it is not as transparent as the United States when it comes to identifying who the shareholders are.

Sard Verbinnen’s Jonathan Doorley, whose firm acts predominantly for corporate clients in activism matters, noted that in Europe the corporate governance cultures typically tended to be much stronger than in the United States. On that basis, he continued, “An activist fund looking to be successful in Europe can’t just wrap itself in the governance flag and not offer a fool proof agenda…you need to do your homework and make sure you have a rock-solid these to offer other shareholders.”

Mr. Doorley added that some activists had come to Europe and simply asked for seats on the boards of target companies, and lacked a well-thought-out alternative strategy. The moderator then referred to the case of US-based Nelson Peltz’s Trian Fund Management investment on French food giant Danone; this was a difficult situation to navigate as an activist investor, as the company is of importance to the French at a political level.

The target’s defenceJonathan Doorley pointed out that, historically, many publicly listed corporates would have prepared a hostile takeover defence plan. This is now evolving to also include an activist defence plan. Said Doorley:

“This includes having a robust investor relations programme. This is where your strategic plan is well articulated to the market and where you have a good understanding of shareholder sentiment. Because if you wait for the activist to surface you are already on your back foot and it’s too late.”

Doorley also noted the importance of CEO and board level engagement with shareholders, and that the market understands what strategic and operational steps are being taken to create shareholder value.

Asked if his clients had contacted him with concerns about the risks of potential activist activity in Europe, Gary Weiss said that they had, stating:

“Everyone has witnessed the very high-profile campaigns in the United States. They’ve witnessed a proliferation of these campaigns and are often running global businesses with operations in the

“In Europe it is not as transparent as the United States when it comes to identifying who the shareholders are.”– Cas Sydorowitz

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United States and shareholders there too...they want to know more about the risks and issues that they may potentially face, and want to increase their awareness of what activism is about.”

He went on to note that those activists that had taken a more cooperative long-term shareholder approach had in some cases met with some success in Europe. In some cases they were even welcomed, but added, “There have been some vitriolic campaigns in Europe as well. So I think you will see a proliferation of activity in Europe, and I think you will see a variety of styles too, just as in the United States.”

Reflecting on the culture of shareholder activism in Europe, Selina Sagayam noted that a particular area of the law that gives concern in Europe was that of “collusive action,” saying: “There is hyper-sensitivity to this in the United Kingdom and around Europe and about the concept of the ’concert party.’ The majority of the queries that we get are around this [and] shareholders [who] are trying to seek support in advance of going public…need to be wary of being viewed as trying to form a concert party.”

Sagayam went on to note that there had recently been a change in the regulatory landscape in both the United Kingdom and Europe to facilitate collective action between shareholders, saying, “In the United Kingdom in June of this year, a new investor forum was launched…with the specific purpose of bring shareholders together in what is hopefully a safe collective forum to engage with shareholders.”

Ms. Sagayam also noted that, across Europe as a whole, the European Securities and Markets Authority (ESMA) issued a white list of the kinds of actions that were allowable without falling foul of the concert party accusation:

“That, I think is one of the key differences that activists need to be particularly aware of when working in Europe.”

Sagayam further explained that the United Kingdom concert party rules originally derive from the Takeover Code, but she pointed out that the Takeover Panel has sought to make clear that it is not trying to prevent responsible shareholder engagement. Similarly, the United Kingdom Government has drawn up a stewardship guide to encourage active dialogue between shareholders and the companies whose stock they hold.

She added that an emerging trend in the United Kingdom was the development of long only institutional investors such as Standard Life and M&G becoming involved in shareholder discussion – with or without an activist fund on board.

Gary Weiss endorsed this view from his experience: “We have a seen a number of high profile situations involving traditional long fund investors among others, taking up very vocal, active positions in a stock. This is actually working on two levels. Either they have themselves been vocal or they have put money out with the activists. The activists will say they are ’acting for the silent majority.’ The long only investors often prefer not to compromise their own access to their investee companies so are happy to see the activist investors lead the charge.”

“There is hyper-sensitivity to ‘collusive action’ in the United Kingdom and around Europe and about the concept of the ‘concert party.’”– Selina S. Sagayam

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Taking long-only investors for granted“One of the situations we’ve noticed is that some businesses may actually take their long-only investors for granted,” Sard Verbinnen’s Jonathan Doorley added. Clearly this is mistake and if the investor feels that it is not being listened to, it may well turn to an activist for assistance. Furthermore there seems to be a view in some quarters that investors holding as little as one per cent of the shares may have insufficient influence to be worth listening too. According to Gary Weiss, this would also be a mistaken assumption, because it does “represent skin in the game.”

Asked what he thought the main goals of activist investors typically were, Weiss responded that prior to the crisis, they tended to revolve around corporate governance and balance sheet discipline, and such issues as attempting to persuade management to make share buy-backs and/or pay a larger dividend. However, since the crisis, Weiss said, issues of corporate clarity have taken centre stage. For example, questions raised may surround whether the collection of businesses in a conglomerate make sense together, and whether it would make more sense to make disposals.

“Deconglomeratisation is certainly a big topic,” Jonathan Doorley confirmed. “Most activist investors believe that companies and CEOs have to earn the right to run a conglomerate. They believe that if you can’t prove that you’re capable of running disparate businesses under one corporate umbrella then you should spin some of them off.”

Moving on to the question of how activists may mount a proxy fight, Georgeson’s Cas Sydorowitz explained that in the US, this involved multiple mailings to shareholders, providing them with cards to enable those shareholders to mandate the activists to act on their behalf along the lines suggested by their campaign. Said Sydorowitz:

“In Europe, especially in the United Kingdom, the community is much smaller. The list of registered shareholders that the activist could mail is much less, and you can’t reach to the underlying beneficiaries behind banks and brokers. So while the mailing costs are much smaller than they typically are in the United States, the activist has to concentrate on communications. This means getting their messages out in the public domain so that they can explain their investment thesis, and then going out on the road to meet as many of the long-only investors as possible.”

Sydorowitz also referred to non-shareholders who could be highly influential. He referred to ISS as an example of one of these. If the shareholders are in fact ETF funds or quant funds, they may simply follow advice given to them by such service providers as ISS. Therefore, activists need to understand the importance of reaching out to these types of firms.

Jonathan Doorley added that other stakeholders that couldn’t be ignored included regulators, politicians, and employee unions, saying: “All of those people have an opinion and a vested interest in the outcome, and they can’t be ignored.”

Asked by the moderator if within Europe, corporate structures in different countries acted as barriers to activist activities, Gary Weiss agreed that they did. The issue was often whether it was

“Most activist investors believe that companies and CEOs have to earn the right to run a conglomerate.” – Jonathan Doorley

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possible to gain board seats. Company structures that effectively led to self-perpetuating boards, presented a particular challenge.

A key question then raised by the moderator was how big a stake would typically be required to get a foot in the door. Selina Sagayam replied that there was no hard and fast rule. A one percent stake might be sufficient to gain the required influence at some businesses. At AIM-listed companies, a larger stake might be necessary.

“From a legal perspective, if you are looking at calling a shareholders’ meeting then you would need to speak for five per cent of the shares.”

Jonathan Doorley added that it was important “that your ask was proportionate to your stake. We have seen activists trying to achieve massive corporate change on the back of very small shareholdings, and these have typically failed miserably.”

The panel generally agreed that companies from all sectors were potentially vulnerable to activists, and that size is no barrier. Companies as large as Apple, P&G and Pepsi have all come under attack in the past.

Activism - good or bad?The moderator then raised the bigger philosophical question of whether activism was morally good or bad.

Cas Sydorowitz’ view was clear. “Activism is essentially a means for unlocking value,” he said. “If there is not enough self-critical thinking within a business, activism may be the catalyst that can bring it about. I don’t think that activism is a bad thing. Everyone is interested in increasing shareholder value but often it becomes a question of whether the time horizons of management and the activists are aligned.”

Jonathan Doorley responded that he didn’t regard activists as inherently good or evil, but rather that they were not created equal. Some activists are genuinely focused on enhancing shareholder value while others use public campaigns as marketing events to further their own agenda of gathering additional assets under management.

Gary Weiss saw activism as the “natural outgrowth of shareholder democracy. This is the idea that shareholders should have a voice in the way companies are run.”

Weiss continued, stating: “In the aftermath of the financial crisis, people were bemoaning, ‘Where were the shareholders?’ There was a sense that you wanted shareholders to be engaged, to be constructive and not passive. The risk is that you throw out the baby with the bathwater.”

Selina Sagayam pointed to research data from FTI Consulting released early in 2014. This concluded that there was plenty of evidence that activist involvement had made a significant contribution to total shareholder returns (TSR). In the period of two or three years following activist action, TSR improved by up to five per cent on a sustained basis.

“Activism is the natural outgrowth of shareholder democracy. This is the idea that shareholders should have a voice in the way companies are run.”– Gary Weiss

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To watch exclusive M&A Advisor interviews with these industry experts on “Activists in the Shadows” click on the following images:

Selina S. Sagayam Partner Gibson, Dunn & Crutcher

Video interviews

Gary WeissManaging Director Head of Corporate Defense EMEA Head of Nordic Mergers & AcquisitionsJ.P.Morgan

Jonathan Doorley Managing Director Sard Verbinnen & Co

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To watch Stalwarts Roundtable “Activists in the Shadows” at M&A Advisor’s International Financial Forum in London, click on the following image:

Activists in the Shadows

Symposium session video

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Contributors’ profilesAaron Kirchfeld is a Team Leader for European Deals at Bloomberg News, where he helps cover M&A, IPOs and activism. He has worked at Bloomberg for more than 8 years covering finance and M&A, including the financial and sovereign debt crisis in Frankfurt. He moved to London more than two years ago to focus on deals, where the team has broken top stories including the GE acquisition of most of Alstom, the Holcim-Lafarge merger and Glencore’s planned combination with Rio Tinto. Before joining Bloomberg in 2006, Aaron worked for several years at a unit of the Frankfurter Allgemeine Zeitung in Germany. Born in Portland, Oregon, he has spend most of his professional career abroad.

Gary Weiss is a Managing Director and Head of Corporate Defense EMEA as well as Head of Nordic Mergers & Acquisitions at J.P. Morgan. His principal areas of responsibility include cross-border public market transactions, corporate defence, and restructurings. Gary has been with J.P.Morgan since 2005. He previously has been Head of the European Financial Institutions Group and Head of European Technology Investment Banking for Merrill Lynch. Mr Weiss received a Bachelor of Arts, Phi Beta Kappa, Magna cum laude, from Brown University, in 1983, and a Masters of Public Administration from the John F Kennedy School of Government at Harvard University in 1986. Recent deals include: Mojang’s $2.5b sale to Microsoft; TDC’s $2.2b acquisition of GET; Verizon’s acquisition of 45% stake in Verizon Wireless from Vodafone; Nokia’s sale of its D&S division to Microsoft SKF’s acquisition of Kaydon; and DSM’s merger of DPP with Patheon.

Selina S. Sagayam is a Partner in the London office of Gibson, Dunn & Crutcher and a member of the firm’s international Mergers and Acquisitions, Capital Markets and Securities Regulation and Corporate Governance Practice Groups. Ms. Sagayam’s practice is focused on international corporate finance transactional work, including public and private M&A, joint ventures, international equity capital markets offerings and advisory work focused on corporate governance and securities law advice. Ms. Sagayam’s practice is also noted for her expertise in financial services and regulatory advice. She advises boards and senior management of international corporations, exchanges, regulators, investment banks, and financial sponsors (private equity and hedge funds) on such issues. Ms. Sagayam is regarded as one of the leading public M&A advisers in the United Kingdom and has advised on hostile, competitive and recommended takeovers. Ms. Sagayam is dual qualified, having started her legal career as a barrister. She was seconded to Charterhouse Bank in 1997 (Group Legal & Compliance) and to the Takeover Panel in the role as Secretary for a two year period (2004-2006). Prior to joining Gibson Dunn in January 2007, Ms. Sagayam practised in London in a leading international law firm for 11½ years. Ms. Sagayam is a member of Gibson Dunn’s Global Diversity Committee and chairs its London Diversity Committee.

Aaron Kirchfeld Team Leader for European Deals Bloomberg News

Gary WeissManaging Director Head of Corporate Defense EMEA Head of Nordic Mergers & AcquisitionsJ.P.Morgan

Selina S. Sagayam Partner Gibson, Dunn & Crutcher

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Cas Sydorowitz is the CEO of Georgeson Corporate Advisory. Mr. Sydorowitz has been with Georgeson for close to 15 years, bringing with him five years’ experience in international investor relations and shareholder identification. He is responsible for Georgeson’s Northern European Proxy and Corporate Advisory business. He has an expert knowledge of global proxy voting mechanics and key governance matters affecting issuers and shareholders globally. Having worked for several activists and against many more, Mr. Sydorowitz has in-depth experience to support investors or issuers in complex, sensitive activist campaigns. He remains an ongoing advisor to the United Kingdom Department of Business, Innovations and Skills (Formerly the DTI) as well as the United Kingdom Takeover Panel and the London Stock Exchange on various corporate actions, and proxy related matters. Mr. Sydorowitz, while a New Yorker, has been in London for 12 years. He maintains membership in the ICGN, a global governance-related organisation that set the agenda for the global governance debate between issuers and shareholders. He has participated in various industry organisations including the Shareholder Voting Working Group in the United Kingdom and European Industry working committees on Target 2 Securities, Legal Certainty and the Working Group for Market Standards for General Meetings.

Jonathan Doorley is a Managing Director and Co-Head of the London office of Sard Verbinnen & Co, a leading financial communications firm. He provides Sard Verbinnen’s clients with strategic communications counsel on M&A transactions, shareholder activism, regulatory investigations, IPOs, management changes, crises, and other special situations. He also advises a number of public companies and investment firms on developing and executing domestic and multi-country media and investor relations programs. He has significant experience advising on cross-border engagements throughout North America and EMEA. He joined Sard Verbinnen in 2006 and was based in the firm’s New York office until 2013. Prior to joining the firm, he worked at Morgan Stanley in New York. He earned an M.B.A. from The University of North Carolina’s Kenan-Flagler Business School and a B.A. from Wake Forest University. He currently serves on an Advisory Board for the Partnership for Inner-City Education and is a member of the Communications Committee of the FDNY Foundation and Chatham House: Royal Institute of International Affairs.

Cas Sydorowitz CEO, Corporate Advisory Georgeson

Jonathan Doorley Managing Director Sard Verbinnen & Co

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