Activist investors find more fertile ground in Europe

For all the frustrations caused by local peculiarities, Europe is gradually opening up to activist investors.

Dutch paint company Akzo­Nobel has rebuffed two offers.

For all the frustrations caused by local peculiarities, Europe is gradually opening up to activist investors.

The most recent high-profile case of European activism concerns Dutch paint company Akzo­Nobel, which has rebuffed two offers from its US peer PPG Industries. Elliott Management, among the best known New York activists, wants Akzo to enter talks with PPG, which reiterated its interest yesterday. German carmaker Volkswagen and French defence group Safran are also under scrutiny by London-based hedge fund TCI.

But a lower-profile case may have more to say about the direction of European activism: last year Germany experienced its first major successful proxy contest when a local firm, Active Ownership Capital, succeeded in removing the supervisory-board chairman of a mid-cap pharmaceutical company, Stada Arz­neimittel.

Germany was long considered off limits for activists, partly ­because of the less familiar double-board structure whereby a supervisory board with investor and labour representation scrutinises a management board. This means activists need to pay more attention to labour interests than in a comparable US or British situation.

But that hasn’t stopped some investors, most notably Swedish firm Cevian, which has built long-term stakes to win board seats at steel giant in ThyssenKrupp and industrial services group Bilfinger. The double-board system may even make it easier for investors to win board seats.

“Investors can get stuff done if they understand the market,” ­argues Hans-Christoph Hirt of Hermes, a fund manager that specialises in governance. He thinks posing tough questions at annual general meetings and commissioning “special audits” of management can work better than the classic US activist strategies in Germany.

A total of 97 companies faced public investor demands last year in Europe, up from 72 in 2015, according to Activist Insight. Britain still accounted for the bulk of the action, yet the fastest growth in cases last year came from former laggards Germany and Italy.

Changes in the investor base have supported activists. Institutional investors are more present than they used to be — even if two-thirds of the largest German companies are still controlled by big insider stakes, calculates Edmund Schuster, a professor at the London School of Economics. And institutional investors are under mounting political pressure to act as owners, rather than merely as holders, making them more likely to vote with activists who lead the charge.

An enduring problem with activism in Europe is that corporate law is different in each country. The arcane qualities of Dutch “stichtings” have become a sticking point in the AkzoNobel case. Although Elliott can, with the support of other shareholders, remove members of Akzo’s board, it is powerless to nominate replacements. This probably protects the company from hostile action. Similarly, TCI’s opposition to Safran’s proposed acquisition of local peer Zodiac has come up against the problem that investors don’t get a vote on big deals in France, as they do in Britain.

Activists looking to prosper in Europe need to master the local rules of the game.