Australian shareholder activism is on the rise and corporates need to be prepared.
In recent months, we have witnessed an intense period of public activism. A diverse group of corporates have attracted activists’ attention.
We predict that public activism is on the cusp of emerging as a prominent and enduring feature of the Australian market. Companies of all stripes should consider their readiness.
What will drive Australian activism?
Australia has long had legal settings that should facilitate activism: a 5% shareholding threshold to requisition meetings, a 20% ceiling on aggregate shareholdings when jointly proposing a board spill, and our “two strikes” rule on remuneration, among other features.
Notwithstanding, widespread public activism has not taken hold.
So, what has changed that will sustain the recent trend? We identify 3 key catalysts.
- Pure-play activism returns: Over the period 2010-2016, activist hedge funds have returned, on average, 8.57% per annum.1 Over the same period, assets under management of activist hedge funds have grown from around US$47 billion to US$113 billion.2 This capital needs a home.
- Low foreign activist penetration: Between 2013-16, only 14% of public activists in the Australian market had headquarters outside of Australia.3 In the context of a saturated US landscape, foreign investors will perceive greater likelihood of outperformance in the relatively uncrowded Australian market.
- Growing domestic scene: The domestic activist pool continues to expand. Look for 3 investor classes to grow in prominence:
- Passive managers BlackRock, Vanguard and State Street are an established force in the global governance conversation and feature heavily on Australian registers. With the growth in passive assets under management, their views will increasingly inform domestic activism trends.
- The A$345 billion of superannuation invested in Australian equities is increasingly under activist stewardship.4 Various super funds have been willing to enter the fray.
- Activism is no longer the domain of large-scale managers only. Anonymous individuals with a laptop can, and will, wage campaigns.
How will activist investing evolve in Australia?
Aside from volume growth, our predictions for near-term trends in Australian activism are:
- Increased large-cap targets: Historically, the small-cap materials space has been the focal point of Australian activism. As large capital pools are put to work, large-cap companies will increasingly be targeted.
- Value themes: Corporate governance themes will remain a mainstay. However, watch for increased use of value themes (e.g. demands for corporate break-ups, M&A and shareholder distributions), particularly in the case of large-caps.
- Cultural complexity: Foreign activists will disrupt the traditional practice of “behind closed doors” activism in Australia. Increasingly, unresponsiveness to private overtures will be met with overt aggression, particularly from investors with US market pedigrees.
- Investor co-operation: Activists are known for their collaboration. Foreign activists will look to local associates for investment origination and assistance in navigating local conditions. This will include domestic long-only institutions.
- Growth in activist shorting: Activist investors will increasingly employ short strategies, particularly given the prevailing low growth environment.
- Published forensic analysis: Activists will progressively publish sophisticated forensic analysis of targets. Past corporate disclosures will be combed through for points of leverage.
What can Australian boards do to prepare?
There are 6 key preparatory steps that companies should take.
- Establish internal and external working teams (lawyers, bankers, and investor and public relations advisers). No corporate should attempt to prepare for, nor respond to, activism without expert advisers.
- Invest time in response planning. The objective is not to have a playbook for every conceivable activist episode. Rather, the purpose is to ensure that the company is match-fit and armed with a flexible response framework. Utilise an internal and external “red” team to prepare simulated activist campaigns. Assimilate lessons learned from those campaigns, and the experiences of others, into response plans. Look beyond immediate crises and test contagion risk: rarely are crises isolated events.
- Know the makeup of your shareholder base and engage regularly with key stakeholders. It is much harder for activists to ambush you if you have an open dialogue with your members.
- Keep a vigilant eye on the activist universe. Do not assume that long-term institutional investors will remain benign. They can, and will, make public demands. Companies need to screen for activist positions in both the equities and derivatives markets.
- Be ready to engage with activists and other stakeholders when a campaign is launched. The board’s response should always be consistent with the company’s best interests as a whole. Best practice has moved on from “just say no” and other rote responses. Boards need to understand activists’ claims and clearly articulate a response.
- Activism preparedness is not a “set and forget” matter. Boards and management need to: regularly discuss the company’s activism profile; revisit response planning; consider corporate actions (including M&A) through an activist lens; and, routinely take advice on market developments.
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Herbert Smith Freehills is the market leader in Australian activism. Our presence in the major global markets provides us with a deep understanding of the evolving international activism landscape. By drawing on our Head Office Advisory, transactional and dispute specialist teams, we deliver a complete activism defence solution to our clients. If you have any questions regarding the preparedness of your company, please contact one of the Herbert Smith Freehills corporate team.
- Source: Preqin.
- Source: Preqin.
- Source: Shams Pathan.
- Source: APRA.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2019