Investor Activism Study: German corporations lack adequate protection against investor attacks

• German companies are increasingly being targeted by activist investors
• Two-thirds of German companies have no contingency plan in place
• Complex business models increase the risk of a short attack

Berlin – Increasing numbers of companies in Germany are facing pressure from activist investors and potential attacks by short sellers. German companies are mostly ill-prepared, with the result that more and more activists are finding it easy to exert influence.

Those are the findings of the Investor Activism Study carried out by the German Federal Association of Corporate Lawyers (BUJ) in conjunction with Corporate Legal Insights (CLI) and commercial law firm CMS. A total of 102 legal departments at listed corporations in Germany took part in the representative study. “The study clearly shows that many companies in Germany need to boost their efforts to deal with activist investors. There is a lack of awareness around preventing external reshaping of the company,” said BUJ president Götz Kaßmann.

Investor activism refers to active influence exerted by investors on listed companies. “There are plenty of opportunities for activists to bring about changes using the various rights enjoyed by shareholders under German stock corporation law. Companies would therefore be well advised to consider appropriate preventive measures and develop a defence strategy ahead of any potential activity,” commented Dr Peter Hennke, head of the BUJ’s Corporate section.

Activist investors can be divided into two categories: activist shareholders who wish to increase the company’s stock market value, and short sellers whose aim is exactly the opposite. Companies are increasingly being targeted by activist investors, in Germany as elsewhere. According to the study, one in three of the companies surveyed (around 37 per cent) in Germany has already been affected by shareholders seeking to gain influence.

In particular, companies need to take action against potential attacks by short sellers (“short attacks”). Short sellers seek to benefit from a falling share price and publicly criticise the company in order to bring about a share price collapse. The further the stock falls, the higher their profit.

Investors are demanding information

Shareholder activism is mainly making its presence felt through increasing demands by shareholders for information, with a majority of the companies surveyed taking that view. More than one in three legal departments state that shareholders are increasingly insisting on their statutory right to information, with members of senior management teams also being directly contacted much more frequently. Investors are increasingly seeking personal contact with the management board or supervisory board according to a third of the survey participants (33 per cent). “Most investors restrict themselves to more or less intensive engagement with management, e.g. the big asset managers, pension funds or sovereign funds and family offices,” said CMS partner and co-author Dr Andreas Zanner. “As a commercial law firm, over the last few years we have noticed a significant increase in such activity by shareholders and investors in Germany and beyond.” Most of the companies surveyed (66 per cent) believe that investors will step up their activities in future, for instance through asserting their right to information, direct communication with the board or by public criticism. This expectation arises in part as a result of the impact of digital business models on corporate strategy and the more challenging market environment.

However, perceptions differ across the individual sectors. While the insurers and financial services providers involved in the study overwhelmingly (83 per cent) expect an increase, companies from the real estate industry remain relaxed. Only one in four respondents (25 per cent) in the property sector share their colleagues’ concerns.

No defence strategy in place

Only a minority of companies have already devised a counter-strategy. Just two in five respondents (38 per cent) have put a contingency plan in place for these types of events. Having said that, around a quarter of the companies surveyed are planning to implement a defence strategy. That does mean, however, that two-thirds of companies are not prepared for potential attacks, despite widespread awareness of the problem.

Shareholder activists aim for higher returns

The main goals of activist shareholders are a higher total shareholder return and improvement in the company’s performance. Around one in five survey participants (21 per cent) agree with that view. Activists also want to change the composition of the management and/or supervisory board in order to bring about strategic changes for their own benefit (19 per cent of respondents). Two out of five respondents (39 per cent) believe that activists are seeking changes around the level of equity or financial reporting and in the areas of compliance or corporate governance.

Short attacks – an underestimated threat?

Short attacks represent a significant risk to listed companies. Most of the companies surveyed do not expect their company to be targeted by any such attack and thus remain relaxed about the threat. Only around seven per cent of the heads of legal surveyed can see themselves facing a short attack. CMS partner and co-author Dr Richard Mayer-Uellner: “Given the increase in short attacks, management and supervisory boards of companies which are potential targets should address the risks and consider possible counter-measures.”
Complex corporate structures are a key avenue of attack when short sellers start looking at their options. A total of 36 per cent of the companies surveyed see a risk in this regard. Almost one in five respondents (18 per cent) fears that an attack could undermine their entire business model, believing that short sellers would focus on finding deficiencies or gaps in the compliance structure. A further sensitive factor is insider information. A total of 27 per cent of respondents worry that insiders might pass on information, which they believe could open the gates to short sellers.

Lax risk management

Most companies (around 82 per cent) do not expect any specific short seller activity. This may be a high-stakes error: according to the study, only around a quarter of companies have a risk and prevention management system in place to handle attacks by short sellers. Most of the preventive measures cited are limited to analysing trading and increased communication with opinion leaders. CMS partner Mayer-Uellner sees this as inadequate: “Companies need to recognise the criteria that might attract short sellers and analyse any weak points. Companies likely to face attack should have contingency guidelines in place ready for any attack. While short attacks cannot be completely prevented, it is possible to contain the negative consequences.”

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