Back in 2005, after Werner Seifert, then chief executive of Deutsche Börse, was unseated from his post by a gaggle of hedge funds, German regulator BaFin intervened, citing concerns that the funds had been ‘acting in concert’.
Had the group of investors been found to be ‘acting in concert’, it would have been forced to launch a takeover bid for the German stock exchange. In the end, however, while BaFin suspected the hedge funds had colluded to influence the composition of the board, the regulator was never able to prove it.
‘Although there were identical-looking letters written to Deutsche Börse from different shareholders, this was not sufficient for the supervisory authority to prove acting in concert,’ notes Christiane Hölz, a lawyer for stewardship services firm DSW.
The case sent shockwaves that were felt in Germany and beyond as foreign investors began to fear that even the merest mention of a governance issue to other investors could catapult them into a mandatory bid situation. ‘After the Deutsche Börse case, there were significant concerns from foreign investors about even getting together and talking about voting items on the AGM agenda,’ notes Dr Hans Hirt, European corporate manager at Hermes. ‘It’s had quite a direct effect on our engagement program because a lot of investors became scared to talk to each other, which is making it difficult for informed investors to take an active interest in companies.’
Europe-wide
The problem is not just confined to Germany. According to one investor in the Netherlands, the Dutch situation is set to become similarly confused. ‘The Dutch government is implementing the new takeover bids directive this month [November], and this will create the mandatory bid process in Dutch law,’ says Rients Abma, director of Eumedion, the Dutch pension fund association. ‘It’s still not clear in that directive what acting in concert means with respect to the mandatory bid, however, so investors are going to be very cautious.’
Unlike Germany, the Dutch securities regulator has provided some indications as to when ‘normal cooperation’ becomes ‘acting in concert’.
‘Firstly, when there is a series of ‘hot topic’ AGMs/EGMs that concern the strategy of the firm or the dismissal of the board, and secondly, where investors collectively decide to support the management or the shareholder proposal in a consistent manner,’ Abma explains. The latter will include instances where investors send identical letters bar the letterheads, use the same lawyer and/or jointly visit the company.
The Dutch government made it clear that voting agreements and pre-meetings of institutional investors could be indications of ‘acting in concert’ if the objective is to acquire control of a listed company. That objective is missing, however, if the cooperation between investors aims to establish a collective view on the corporate governance structure of the company. ‘Disappointingly, however, the government does not make clear what is meant by corporate governance structure,’ explains Abma.
Investors say the cost of the vague definitions will ultimately be borne by them. ‘In one instance we had to get detailed legal advice prior to the AGM, which came at a high cost to us and the other investors involved,’ explains Hirt. ‘Despite this, we were unable to obtain a list of things we could or couldn’t do, so we were very restricted. The issue of the election of supervisory board members is especially difficult.’
A universal solution
Investors argue that the mandatory takeover laws and concert party action needn’t be a headache for them. ‘In the UK it’s made very clear in the Takeover Code that concert party action is only when you acquire shares together, not when you have other dialogues or discussions,’ notes Hirt.
Rule 9, known as the mandatory bid rule, holds that where an investor has shares and then acquires shares (or interests in shares) that takes its holding through a 30 percent threshold, the investor must make a mandatory offer to all other shareholders.
The Takeover Panel considered treating investors that make changes to the board as acting in concert but backtracked because critics claimed this would be against the overall interests of corporate governance and shareholder activism. Instead, note 2 in section 9.1 of the code sets out the distinction between shareholders that are ‘board control-seeking’ and those that are not. That distinction rests on the relationship between the investors and their proposed board appointees.
Board control-seeking shareholders are those that are trying to impose board members who will represent those shareholders’ interests. ‘Are they putting on someone from their outfit who is going to represent their own interests, or are they putting on somebody who’s going to run the company in the interests of all shareholders?’ asks one insider.
Despite the existence of Rule 9, however, in the world of UK small caps there are still alleged examples of concert party action. A group of disgruntled AIM-listed World Television investors formed the World Television Shareholder Action Group after company chiefs announced that ‘the directors had, in effect, handed control of the company to a concert party (a single group of large shareholders) – and intended to de-list from AIM’.
Members of the action group argue that the concert party members fall foul of Rule 9 but, as yet, they have not received the judgment they want from the UK Takeover Panel.
Looking forward
Investors say the lack of clarity on concert party action hinders engagement. ‘The sad thing is that on the one hand governments are trying to promote active shareholders, but then they make it difficult for long-term shareholders to have these dialogues with each other. Needless to say, this is a little contradictory,’ complains Hirt.
Things are not all bad, however. ‘The situation improved in Germany after a recent judgment from the highest court there,’ Hirt adds. ‘But it still doesn’t provide the certainty required, because the judgment still covers only one specific set of circumstances. Ultimately, it all comes down to the definitions in the Takeover Directive, which are not sufficiently clear. The picture is quite a bleak one at present, and we are very keen for the commission to address this issue and provide some guidance in the form of recommendations.’
Meanwhile, German regulators are looking at more legislation to increase investor transparency and make it harder for shareholders to act in concert. Some expect the new laws will work against shareholders, however. ‘This new law will protect management and probably make life more difficult for investors,’ comments Hölz. One proposal, for example, is that investors are allowed to exercise their voting and dividend rights only if they are on the share register by name, rather than via their depositary bank.
A global problem requires a global solution, and instances such as these have led many investors to call for clarification at the highest level. ‘Ultimately, it needs to be the European Court of Justice that decides what the idea of acting in concert actually means,’ asserts Abma.
Until that happens, investors and issuers in Europe will be feeling their way in the dark.
