How to deal with activist shareholders?

Chairman Roger Yates and the rest of Electra Private Equity’s board undoubtedly breathed a sigh of relief after the firm’s EGM on October 6, when more than 60 percent of shareholders in the UK-listed investment trust voted to reject all the proposals put forward by Sherborne Investors’ Edward Bramson.

Max King of Investec Asset Management, an Electra shareholder, told attendees that Bramson – who wanted board seats for himself and his associate, plus the opportunity to lead a strategic review – didn’t give shareholders anything solid to cling onto.

“He did not share with us any insights whatsoever about any of the companies in the Electra stable. He had no insights, no thoughts, no opinions, no plans, nothing whatsoever,” King said. In fact, he added, since Bramson had (by his own admission) not visited a single Electra business, he “was in a very poor position to criticise the current strategy of the management”.

Bramson didn’t get his way this time. But he has succeeded in the past, notably when he wrested control of F&C from then-chairman Nick MacAndrew in 2011. 

And it’s likely he – and others like him – will succeed in the future. According to research by global law firm Linklaters, there’s now $100 billion of firepower available to activists globally. In the first six months of this year, activist shareholders launched 272 actions, compared to 520 interventions in the whole of 2013. What’s more, 60 percent of this year’s interventions have been successful.

Investment trusts, with their listed top companies and underlying portfolio companies, are particularly ripe targets – which means they need to put together a plan of action in case they end up in activists’ sights, according to Linklaters corporate partner Charlie Jacobs.

“What we’ve been saying to clients for a while is there’s potentially a missing chapter from your defence manual, which is how you prepare for an activist appearing on your register and how [you] deal with that,” Jacobs says.

Bramson’s attack on Electra followed the pattern of many such challenges: activist makes aggressive public statements against the company, before pushing for board seats at the expense of incumbents and putting forward a strategy for overhauling the business.
Electra, in Jacobs’ view, dealt with the situation admirably, publicly refuting Bramson’s claims and recommending to shareholders that the status quo be maintained.

“I think the Electra board did well because they looked prepared; they engaged,” Jacobs said. “You have to engage with an activist, is the honest answer, because they’re a shareholder and you need to talk to your shareholders. But that doesn’t necessarily mean rolling over.”

Electra certainly didn’t roll over: its strong rebuttal of Bramson’s critique was enough to convince shareholders. But Bramson didn’t come away empty-handed, either. A few hours after the meeting, Electra announced it would be launching a review covering its fee arrangement, capital structure and distribution policy.

“Often you do see some concession to the activist down the line, even if the board says, ‘Well, it was our idea in any event,’” Jacobs said. “Long term shareholders are not necessarily aligned with activists, but they can benefit from a board knowing they are under the activist spotlight and having to really focus on shareholder returns.”

Indeed, Bramson – who has so far shown no sign of divesting his 20 percent stake – has already instigated changes that could benefit himself and other shareholders
“The pressure on the board to perform remains while the activist is on the register,” says Jacobs. “Even if the activist does not succeed with their campaign, marginal gains, such as the price when they exit being higher than their entry price, is a form of success.” ?