A Diligent interview with Tom Matthews, Sonica Tolani and Alex Woodfield, partners, White & Case.
Are any specific demands being more frequently adopted in activist campaigns involving UK companies?
Tom Matthews (TM): We are seeing a renewed focus on M&A-related activism campaigns. Break-ups of large conglomerates have once again become a key activist campaign thesis in the UK. Such campaigns can allow shareholders to extract untapped value through various methods, including spin-offs of undervalued profitable businesses or the sale of business lines outside a group’s core business.
Sonica Tolani (ST): In light of the continuing strength of US markets and the perceived under-valuation of UK companies, there have been, and we expect to see further, activist-led campaigns pushing certain companies to either add a US stock exchange listing or move their primary listing to the US. Such a campaign may also form part of a break-up thesis, e.g., an activist may push for a division of a company with strengths in the US being spun-off and listed in the US.
Some UK companies have advocated for increasing CEO pay packages in line with US peers, in a bid to remain competitive. How might this impact investor engagements pertaining to pay?
Alex Woodfield (AW): The UK public markets have recently seen a growing debate regarding the impact of remuneration on companies being able to hire and retain top executive talent, in the context of maximizing the attractiveness of listing in the UK. Investor associations have, in turn, been suggesting potentially greater flexibility.
Activist investors have often considered the remuneration models traditionally preferred by UK institutional investors to be insufficiently aligned to shareholder returns, whilst inhibiting companies’ ability to adequately reward exceptional performance, and that companies are reluctant to depart from such traditional models. With signs that some boards are being emboldened by the public debate, we expect to see a renewed push from activists on this topic
2022 saw lots of first-time activists, did you see this trend continuing in 2023?
TM: In Europe, a record 31 new activists launched public campaigns during 2023, not only a new high, but over double the figure for 2022. Two-thirds of these first-time European campaigns were M&A-related, and we would expect this trend to continue with improving M&A markets.
This emergence of new activists reflects an everexpanding universe of investors engaging in shareholder activism. We continue to see experienced activist investors entering new markets, the establishment of new activist investment funds and the adoption of activist strategies by other market participants.
ST: Amidst the growing universe of activist investors, we are also seeing more activists considering participating in or financing takeovers themselves. Whilst markets as a whole have performed more strongly in recent months, some sectors continue to suffer from depressed or stagnant valuations. This may incentivize activists to defensively bid for companies to avoid crystallizing losses in the event of a sale to a third-party bidder.
How have ESG engagements evolved in the UK in 2023 and early 2024?
AW: Whilst ESG remains high on the agenda of most boards, environmental activists continue to push for greater action. We anticipate those activists may focus more on non-litigious engagement with UK companies (including shareholder resolutions), a potential consequence of a recent court defeat (including an adverse costs award) for environmental advocacy organization ClientEarth
By contrast, there are some signs of skepticism towards companies’ environmental strategies, including assertions by certain activists that certain companies’ environmental strategies need to afford more weight to shareholder value. Whilst we do not expect skepticism in the UK and Europe to be as vocal as the anti-ESG movement in the US, activist investors advancing pro-environmental campaigns seem likely to be rare.
