Shareholder Activism Today: Did Barbarians Storm the Gate?

UC Davis Business Law Journal, Vol. 20, Issue 2 (Spring 2020), 207-252

44 Pages Posted: 14 Jul 2020 Last revised: 23 Nov 2020

See all articles by Brando Maria Cremona

Brando Maria Cremona

Bocconi University, Angelo Sraffa Department of Legal Studies

Maria Lucia Passador

Harvard University - Harvard Law School; Bocconi University - Department of Law; Universite du Luxembourg - Faculty of Law, Economics and Finance

Date Written: July 9, 2020

Abstract

Our study focuses on the impact of shareholder activism, which is gaining momentum and which is an expected-to-evolve phenomena in the near future. Mostly, we firstly aim to demystify the effects of such a controversial style of investment, that is perceived in a highly critical way, especially in Europe, where it nevertheless constitutes a considerable upward trend. Then, we intend to explore defense mechanisms implemented against this phenomenon, originally inspired by the mechanisms used to protect against hostile takeovers, but also immediately applied to tackle active investors. In fact, despite the potential creation of value, managers may wish to preserve the company from activist campaigns because such campaigns attract unfavorable public opinion and raise corporate governance issues that take time and attention away from the executives.

In Sections I through III of the paper, after defining and framing the phenomenon also with respect to the literature that covered this topic, we will outline the patterns of shareholder activism in the US and in the EU. The most important differences between the two markets will then be drawn, as well as the facets of the latter and in particular the United Kingdom, Italy, Germany, Spain, Sweden and Ireland. An empirical analysis of the main issues concerning the phenomenon in the two geographical contexts considered and case studies relating to the different countries mentioned above will follow. Specifically, with regard to the United States, the trends that characterize the evolution of the phenomenon itself will be identified and some correlations will be quantitatively assessed, while, as far as Europe is concerned, the research aims to give a comprehensive framework, as no systematic studies are available due to the absence of even remotely similar data to the ones regarding the overseas scenario.

In Sections IV through VII of the paper, instead, the defensive phenomenon is examined with respect to shareholder investor techniques. This perspective is substantially unexplored in the literature and lacks any strong empirical evidence, although it must be clarified that there are some studies relating to its first phase of implementation. Despite this, the issue is of great concern and interest, as the defense mechanisms at stake are now a service being provided for by the largest investment banks, which currently have a dedicated advisory team for this very specific aspect. So, if activism threatens companies, it provides an opportunity for investment banks to make a profit from their defense activities and build stronger relationships with companies. First, it is widely held that these tools are considered to promote the entrenchment of managers, destroy value or prevent the creation of value for shareholders. However, these conclusions derive from empirical research, which exclusively covered takeovers. Secondly, the few empirical studies about the subject focused only on the use of poison pills, staggered boards and dual-class shares in decreasing the likelihood of being targeted or on the removal by activist investors. Thus, it is not clear whether they are effective in pursuing their agendas.

We aim to develop the existing literature considering:

(i) the impact that the presence of defense mechanisms has on the equity value created by activist investors in the long-term; and

(ii) the degree of effectiveness of such instruments in preventing active shareholders from succeeding in their agenda.

This will be examined more closely in the context of the U.S. market, since it is not possible to examine the phenomenon in light of the available data for Europe, although it would be worthwhile to further explore this. Moreover, it should be noted that this study is limited to considering poison pills and staggered board defense mechanisms with reference to events that took place between January 2004 and December 2015 as far as companies operating in any industry are concerned, again due to the limited availability of data. The findings are very significant since they refute the (prevailing) statement according to which activists tend to target companies that generate little profit. On the contrary, target companies tend to outperform because of their high-risk profile. The results of the study also identify a negative correlation between the likelihood that an activist campaign is successful and the presence of defense mechanisms, which, this time, are in line with the academic trend developed up to now.

In addition, we will briefly delve into index funds and their relation to activist campaigns. In light of the substantive investments held by index funds in their portfolio companies, any potential support by passive managers for activist campaigns is paramount in order for the relevant hedge fund to secure victory against the incumbent management. Index funds are characterized by significant incentives to keep a deferential stance towards managers, but there is mixed evidence among scholars on whether such deference translates into an actual unwillingness to support activists.

The outcomes of this study are not only relevant in the eyes of activists, but also of shareholders, managers, and hopefully of potential investors seeking to replicate strategies pursued by activist investors themselves.

Keywords: corporate governance, shareholder activism, institutional investors, index funds, poison pills, staggered board, dual-class shares, empirical studies

JEL Classification: G34, G38, K2, K20, K22

Suggested Citation

Cremona, Brando Maria and Passador, Maria Lucia, Shareholder Activism Today: Did Barbarians Storm the Gate? (July 9, 2020). UC Davis Business Law Journal, Vol. 20, Issue 2 (Spring 2020), 207-252, Available at SSRN: https://ssrn.com/abstract=3640748 or http://dx.doi.org/10.2139/ssrn.3640748

Brando Maria Cremona

Bocconi University, Angelo Sraffa Department of Legal Studies ( email )

Via Roentgen, 1
Milan, Milano 20136
Italy

Maria Lucia Passador (Contact Author)

Harvard University - Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

Bocconi University - Department of Law ( email )

Via Roentgen, 1
Milan, Milan 20136
Italy

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

4, rue Alphonse Weicker - C221A
Luxembourg, L-2721
Luxembourg

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