Shareholder Activism in Asia - Confrontation gaining momentum - JP Morgan
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
MAY 2018 Shareholder Activism in Asia Confrontation gaining momentum
Published by J.P. Morgan’s M&A team in May 2018 Corporate Defense and Shareholder Activism David Hunker Head of Shareholder Activism Defense E: david.a.hunker@jpmorgan.com T: +1 212 622 3724 Global Investment Banking in Asia Kerwin Clayton Rohit Chatterji Co-Head of M&A Asia Pacific Co-Head of M&A Asia Pacific E: kerwin.p.clayton@jpmorgan.com E: rohit.chatterji@jpmorgan.com T: +852 2800 6555 T: +65 6882 2638 Tae Jin Park Koichiro Doi Head of Global Investment Banking, Head of Japan M&A Korea E: koichiro.doi@jpmorgan.com E: tae.jin.park@jpmorgan.com T: +81 3 6736 1861 T: +82 2 758 5101 Global Mergers & Acquisitions Hernan Cristerna Chris Ventresca Global Co-Head of M&A Global Co-Head of M&A E: hernan.cristerna@jpmorgan.com E: christopher.ventresca@jpmorgan.com T: +44 20 7134 4631 T: +1 212 622 2228 Kurt Simon David Freedman Global Chairman of M&A Head of M&A Capital Markets E: kurt.simon@jpmorgan.com E: david.freedman@jpmorgan.com T: +1 212 622 9882 T: +1 212 272 4209
SHAREHOLDER ACTIVISM IN ASIA | 1
Contents
1. The state of shareholder activism globally 2
Summary 2
The rise of global activism 3
2. Shareholder activism in Asia 5
Overview 5
Companies targeted 9
Activists targeting Asia 12
Common themes in Asia activism 15
Increasingly successful at affecting change 18
3. Implications for Asian companies 19
Communicate proactively and clearly with shareholders 19
Think strategically about all external communications 20
Proactively address corporate governance lightning rods 21
Be ready to engage if and when activists show up 21
4. J.P. Morgan M&A advisory solution and shareholder
activism expertise 232 | SHAREHOLDER ACTIVISM IN ASIA
1. The state of shareholder activism globally
Summary
Following a brief decline in assets under management for activist hedge funds in 2016,
largely driven by the collapse in oil prices, activist assets under management recovered
to reach a new all-time high of $125.6bn as of December 2017, representing a roughly 4%
increase from the end of 20161. While there were a number of reports of the end of
shareholder activism, this period only served to harden the focus of shareholder activists
and further expand their horizons. Shareholder activism is not a niche strategy to be
undermined by a single transient event, but a permanent investment strategy and asset
class that has changed the way companies interact with their shareholders.
Exhibit 1
Total direct activist hedge fund AUM ($bn)
140 $122.9 $125.6
$119.2 $121.2
120
100 $93.1
80 $65.5
60 $50.9
40
20
0
2011 2012 2013 2014 2015 2016 2017
Source: HFR Industry Reports © HFR, Inc.
Having spent 2016 focused on shoring up liquidity and rebuilding credibility, 2017 saw
some of the biggest names in activism once again put growing amounts of dormant capital
to work. Fewer campaigns were launched in the U.S. compared to 2016; however, larger
companies were targeted. Activism against issuers with market capitalization greater than
$10bn grew by 32%, with 25 campaigns initiated during 2017; while companies with market
capitalization of over $25bn were targeted 17 times, representing a 55% increase from 2016.2
2017 also saw a number of funds make their biggest investments to date, resulting in
some of the most high-profile campaigns in history. Trian Fund took a $3.5bn stake in P&G,
the largest company to ever face a proxy contest. P&G narrowly won the shareholder vote
against Trian, but appointed Nelson Peltz to its Board given the extremely narrow margin of
victory and feedback from shareholders during the campaign.
While activists targeting U.S. corporations continue to focus on board representation and
catalyzing M&A activity, campaigns geared towards operational improvement, often times
including calls for changes in management, are also being launched by activists increasingly
willing to invest over a multi-year time horizon.
1
Source: HFR Industry Reports © HFR, Inc.
2
Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove director(s),
remove officer(s) and vote/activism against a merger.SHAREHOLDER ACTIVISM IN ASIA | 3
Activists today come to the table more prepared than ever, spending considerable time and
resources to understand company financials, its customers and competitors, all in an effort
to find the best avenues of attack. Increasingly sophisticated, they have become experts
in courting shareholders, including retail investors, who have been the decisive vote in a
number of recent high-profile contests. With the long history of shareholder activism in the
U.S., however, viable targets have become fewer and more difficult to find, propelling activists
to explore new geographies to deploy their capital where often the targets present a more
attractive potential shareholder value creation story.
The rise of global activism
While U.S. shareholder activism activity has leveled off near historical highs, activity outside
the U.S. continues to increase significantly. Of the 662 new activism campaigns launched
globally during 2017, 344 – representing 52% – involved non-U.S. targets.3 This marks the
first year international4 activity surpassed U.S. campaigns. Growth in non-U.S. activism is
expected to continue as global institutional investors, who have long supported activism in
the U.S., begin to flex their muscle more actively around the world and domestic investors
continue to study their global peers and become more comfortable with the strategy.
Exhibit 2
Shareholder activism campaigns globally
700 645 662
621
600 528
500 455 242 308 344
403 177
400 351
130 179
300 83
200 351 379
268 273 276 337 318
100
0
2011 2012 2013 2014 2015 2016 2017
U.S. International5
2011 2014 2017
24%
34%
48%
52%
66%
76%
U.S. International5
Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove
director(s), remove officer(s) and vote/activism against a merger.
5
Defined as Europe, Asia and Australia.
3
S ource: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove director(s),
remove officer(s) and vote/activism against a merger.
4
Defined as Europe, Asia and Australia.4 | SHAREHOLDER ACTIVISM IN ASIA
Non-U.S. companies have now become some of largest companies to ever face a shareholder
activist. In the last year alone, Third Point launched a campaign against Swiss-giant
Nestle, and Elliott Management targeted Anglo-Australian miner BHP, while continuing
its ongoing campaign against Korean conglomerate Samsung. During 2017, over 60% of
global campaigns initiated against targets with market capitalization greater than $10bn
targeted non-U.S. companies.6 The trend toward large- and mega-cap activism will continue,
particularly outside the U.S., where these companies have not historically been targeted by
activists in large numbers.
No issuer, regardless of size or location, is protected from shareholder activism anymore.
Companies should work to understand their vulnerabilities, proactively take measures to
decrease the likelihood of an attack. They should also proactively engage with shareholders
and prepare to defend themselves in the event an activist appears.
6
S ource: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove director(s),
remove officer(s) and vote/activism against a merger.SHAREHOLDER ACTIVISM IN ASIA | 5
2. Shareholder activism in Asia
Overview
Investors in Asian issuers have historically taken a passive approach to their investments,
with public criticisms of companies, their management team or boards being a rarity.
Asian markets have, in the last few years, become more receptive to direct and open
engagement between investors and their portfolio company investments. As foreign activists
look to Asia for investing opportunities and domestic investors become more comfortable
exerting public pressure, management teams and boards across Asia will be forced to adapt
to a new reality where shareholders demand their voice is heard and enjoy the support from
other shareholders required to turn that voice into concrete action.
What seemed like insurmountable hurdles in the past no longer dissuade activists from
targeting a company if activists feel that a value creation proposition exists that they
can convey to shareholders. Complex ownership structures, such as cross-shareholding,
government participation and family control no longer insulate corporations, but are now
targets of criticism by activists and issues for investors to rally around.
Historically seen as reasons for activists to avoid Asia, those who control shareholder
structures, lack of transparency and engagement, frequent corporate scandals, as well as
subpar corporate governance, are now considered levers on which to pull in order to unlock
value. Activists are denouncing generational succession, urging companies to renounce
nepotism and favor merit when planning management transitions. Boards in the region,
frequently long-tenured and lacking independence and diversity, represent activist attack
opportunities as markets generally embrace activists who seek to add outside perspectives
to what may be viewed as an entrenched board.
In 2017, the number of activist campaigns in Asia grew to 106, accounting for 31% of total
non–U.S. activism activity7, up from 12% as recently as 2011. Since 2011, campaign volume
has grown at a compound annual growth rate of 48%. In 2017, 4 of the 10 most targeted
non–U.S. countries were in Asia.8
Activism in Asia is off to a strong start in 2018, with the number of campaigns launched
during the first quarter in line with those initiated during the same time period in 2017.
As a testament to the increased vulnerability of Asian issuers, and in particular,
conglomerates, this year has already seen Elliott Management target one of the region’s
most recognizable names: Hyundai. The fund disclosed it held over 1.5% in common shares
in each of Hyundai Motor Company, Hyundai Mobis Co. and Kia Motors Corporation, and
urged the group to adopt a holding company structure, reduce excess cash via capital return,
cancel treasury shares, implement a clearer shareholder returns policy and improve board
structure by increasing the ratio of independent directors and adding more diverse and
international candidates, among other suggestions.
7
Defined as Europe, Asia and Australia.
8
Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove director(s),
remove officer(s) and vote/activism against a merger.6 | SHAREHOLDER ACTIVISM IN ASIA
Exhibit 3
Shareholder activism campaigns in Asia
120
106
100 94
80 69
60 49
40 34
20 10 14
0
2011 2012 2013 2014 2015 2016 2017
Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove
director(s), remove officer(s) and vote/activism against a merger.
In a region where private engagement is still the preferred conduit for investor
dissatisfaction, available data likely underestimates the true number of shareholder
interventions.
Shareholder activism in Asia is expected to continue to grow at a steady pace, as the practice
becomes increasingly accepted and weaves itself into the fabric of Asian capital markets,
transitioning from a temporary to a permanent investment strategy.
Exhibit 4
Select drivers of growth in shareholder activism in Asia
Emboldened activists
• Increasingly global U.S. / European activists
• Increase in domestic funds willing to be active
Institutional investors Macro / company specific
• Local investors more Drivers • Low valuations
open to activism • Suboptimal balance
• Growing % of Asian
of sheets
equities owned by growth • Substandard corporate
foreign investors governance
Regulation
• Embracing shareholder value as a concept
• Promotes shareholder accountability
• Urges investors to increase dialogue with portfolio companiesSHAREHOLDER ACTIVISM IN ASIA | 7
Regulatory reform has further legitimized shareholder activism
Regulators are helping drive change in the region by enacting reform geared towards the
adoption of international best practices in investor engagement and corporate governance.
A series of recently adopted corporate governance and stewardship codes, as well as listing
rule amendments and others, are fueling activism by encouraging investors to be more
engaged, and companies to be more responsive and transparent. Furthermore, an increased
focus on minority shareholders has initiated a shift away from a more traditional stakeholder
model in a number of countries, increasing pressure on issuers to maximize value for
shareholders above all else.
Exhibit 5
Regulatory reform key focus areas
Key focus areas Commentary
Board and • Increased focus on board • Transparency around pay packages
management composition and effectiveness, and management remuneration
with a emphasis on independence • Transparency in CEO succession
and diversity planning and candidate
• Heightened scrutiny around management
self-dealing transactions
Shareholder • Implement IR policy, solicit • Encourage shareholders to actively
communications and understand the views of participate at meetings
and meetings shareholders • Implement best-in-class procedures
• Responsiveness to shareholders (e.g. adopt poll voting, e-voting,
seeking higher ROE abandon shadow-voting)
Institutional • Encourage institutional investors • Enhanced disclosure around
investors to have more active engagement institutional investors’ policies
with management, increase dialogue in stewardship and conflicts
• Encourage investors to of interest
demand higher returns and • Publish voting records
greater responsiveness to
shareholder concerns
Recent regulatory developments not only include the implementation of new stewardship
codes and corporate governance principles, but also the revision of those materials,
and others, sometimes including public consultations, demonstrating this new focus on
good corporate governance is an ongoing initiative to strengthen investor confidence rather
than a one-time effort.9
•
Singapore: In January 2018, the Corporate Governance Council released a consultation
paper on its recommendations to revise the Code of Corporate Governance.
The recommendations encourage board renewal, strengthening director independence
and enhancing board diversity. Also putting greater emphasis on disclosures of the
relationship between remuneration and value creation.
• Korea: In December 2017, shadow voting was abolished in Korea and a mobile voting
system to ease shareholders’ access to general meetings was introduced. In February
2018, the Financial Services Commission (FSC) announced a plan to, among other
things, facilitate and encourage minority shareholder participation at meetings for listed
companies. Korea published its Stewardship Code and revised its Code of Best Practices of
Corporate Governance in 2016.
9
Institutional Shareholder Services (ISS), the Monetary Authority of Singapore, the Hong Kong Exchanges and
Clearing Ltd. HKEX), the Securities and Exchange Board of India.8 | SHAREHOLDER ACTIVISM IN ASIA
• Hong Kong: In November 2017, the Hong Kong Exchanges and Clearing Limited (HKEX)
published a consultation paper seeking public feedback on its proposed changes to
the Corporate Governance Code and Listing Rules. Proposed changes aim to address
corporate governance concerns such as independence, overboarding, the responsibility
of the nomination committee and board diversity.
• India: In October 2017, the Committee on Corporate Governance submitted its report,
identifying key governance issues and proposing amendments to the Securities &
Exchange Board of India (Listing Obligations & Disclosure Requirements) Regulations.
Key recommendations focused on director independence and eligibility, board structure,
promoters and related party transactions, disclosure and transparency and investor
relations (including proposing a Stewardship Code for institutional investors).
• Japan: In May 2017, the Financial Services Agency of Japan finalized a revised version of
Japan’s Stewardship Code for Investors. The revised code, among other things, requests
asset owners to take a more active role in conducting stewardship activities and asset
managers to strengthen their governance and to manage conflicts of interest, and
requires proxy advisors to disclose their resources and processes for the purpose of
managing conflicts of interest. It also requests investors to disclose individual voting
records. In 2015 Japan implemented a Code of Corporate Governance, which included
the requirement for companies to appoint at least two independent outside directors,
or explain the reason for not complying.
• Taiwan: In 2016, Taiwan published its Stewardship Principles for institutional investors,
encouraging them to monitor and maintain dialogue with investee companies.
Effective from 2017, all companies are required to have at least two independent
directors – and 20% board independence – as well as disclose directors’ gender.
The Taiwan Stock Exchange revised the Corporate Governance Evaluation System to
put emphasis on English disclosure and e-voting (mandatory for all TWSE/TPEx listed
companies since January 1, 2018).
The increased focus on governance and engagement is already yielding results:
• In its Q4 2017 Asia-Pacific investment stewardship report, BlackRock reported 125
engagements with Asia-Pacific companies, 45 of which were “moderate” to “extensive”,
meaning more complex and involving more than one meeting. Governance was the most
discussed topic. BlackRock also reported it voted against one or more management
recommendations in 24% of meetings voted.10
• In 2015, and following pressure from APG Asset Management, Hyundai Motors set
up a governance committee with the purpose of monitoring the interests of minority
shareholders, and went on one of the first governance roadshows by a Korean issuer.
Hyundai increased its dividend payout and revealed a new Corporate Governance charter
(published in Korean and English).11
Some activist investors are citing these new principles when launching campaigns.
Argyle Street Management, a Hong Kong based fund, sent a letter to Toshiba in December
2017 asking the company to halt the planned sale of Toshiba Memory and consider an IPO or a
new sale process that could yield a higher valuation. In its letter, Argyle said: “As you would be
well aware, the Japanese government’s push for improvement in corporate competitiveness
and developments in Japan’s Corporate Governance Code encourages investee companies to
engage in constructive dialogue with institutional investors such as ASM.”12
10
Investment Stewardship Report: Asia-Pacific (Q4 2017), BlackRock, January 2018.
11
PG website, IR Magazine, March 21, 2017.
A
12
Argyle Street Management Ltd. December 11, 2017 letter to Toshiba Corp.SHAREHOLDER ACTIVISM IN ASIA | 9
Companies targeted
Activism has now been seen in all major economies in Asia, with Japan and Hong Kong
experiencing the most activity. As activism continues to develop and solidify its place in
Asian capital markets, we expect to see the total number of activist campaigns increase
significantly and for activists to begin targeting companies in secondary Asian markets.
Exhibit 6
Primary geographies for activism activity in Asia (2011–2017)
92 / 24%
24 / 6%
47 / 13%
87 / 23%
38 / 10% Total # of campaigns = 376
# of activist campaign /
% of total Asian activity13
Activism activity
64 / 17%
Lower Higher
Country 2017 activity (% of total) Commentary
Japan 32% • Spearheaded the corporate governance overhaul in
the region
• Capital allocation the most common activism theme
Hong Kong 24% • Finance and electronic technology sectors have been
targeted disproportionately
• Board representation the most common activism theme
Singapore 14% • Number of campaigns launched peaked in 2016
• Producer manufacturing and finance have been the most
targeted sectors so far
China 10% • Frequent target of short-sellers
• For the past few years, new campaign launches have been
evenly distributed between foreign and domestic activists
India 8% • Presence of several local proxy advisory firms
• Remuneration issues and transactions involving promoter
held assets have gotten the most attention
Korea 6% • Companies particularly vulnerable due to “Korea discount”
• Made headlines in 2015 when Elliott Management opposed
Samsung C&T’s merger with Cheil Industries
Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove
director(s), remove officer(s) and vote/activism against a merger.
13
Total Asian activity includes campaigns in countries not listed herein.10 | SHAREHOLDER ACTIVISM IN ASIA
Target size
Exhibit 7
Size breakdown (2011–2017)
>$10bn
13%
$1bn–$10bn
21%
$10bn >$1bn
Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove
director(s), remove officer(s) and vote/activism against a merger.
Note: Market capitalization data in USD, at time of campaign announcement. Excludes campaigns with
unavailable market capitalization data.
14
Defined as U.S., Europe, Asia and Australia.
15
S ource: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove
director(s), remove officer(s) and vote/activism against a merger.SHAREHOLDER ACTIVISM IN ASIA | 11
Target sector
Over the period from 2011 to 2017, campaigns in Asia have been more evenly distributed
across sectors than in other regions. Looking at the full data set (i.e. 2011–2017), no sector
surpasses 11% of total activity, unlike Australia, the U.S. and Europe, where – during the
same time period – the most targeted industries represented 40%, 19% and 15% of all
campaigns, respectively.16
Exhibit 9
Sector breakdown (2011–2017)
Finance
11%
Other Electronic Technology
32% 10%
Producer Manufacturing
10%
Process Industries
5% Consumer Durables
Consumer Non-Durables 7%
5% Consumer Industrial Services
Technology 7%
Services Services
6% 7%
Top sectors targeted as a % of total activity
20
17%
15% 15% 15% 15%
15 14%
13%
11%
10%
10
8% 8% 8%
5
0
2014 2015 2016 2017
Finance Electronic Technology Producer Manufacturing Consumer Durables Industrial Services
Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove
director(s), remove officer(s) and vote/activism against a merger.
Note: Excludes campaigns with unavailable sector data.
In more recent years, the same few industries have accounted for the bulk of activism
activity. In 2017, producer manufacturing grew by 167% compared to 2016, to become the
most targeted industry in Asia, with 16 campaign in the space.16
16
S ource: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types: board
control and representation, enhance corporate governance, maximize shareholder value, remove director(s),
remove officer(s) and vote/activism against a merger.12 | SHAREHOLDER ACTIVISM IN ASIA
Activists targeting Asia
Domestic activists have been, and remain, the main driving force behind shareholder
activism in Asia.
Exhibit 10
Investor breakdown by market
Investor breakdown (2011–2017)
capitalization (2011–2017)
100
3%
Both
3% 3%
Both
80 31% 44%
46%
60
Foreign
Foreign
35%
35% 40
66%
Domestic 54% 56%
Domestic
62% 20
62%
0
$10bn
Domestic Foreign Both
Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove
director(s), remove officer(s) and vote/activism against a merger.
Note: Market capitalization data in USD, at time of campaign announcement. Excludes campaigns with
unavailable market capitalization data.
Foreign
Prominent hedge fund activist investors are becoming more global, increasingly launching
campaigns outside their domestic markets, some, already with significant experience
targeting Asia.
• Third Point (U.S.): 3 of the 6 activist campaigns launched by Third Point during the past
three years targeted non-U.S. companies; 2 of them, Japanese.17
• Elliott Management (U.S.): Very likely the most global activist investor, has launched
campaigns across most regions, targeting some of the largest companies worldwide.
Since 2015 and through 2017, Elliott has initiated 17 campaigns against non-U.S. issuers,
representing about 37% of all new campaign announcements during that time period.
Recent targets include companies based in South Korea and Hong Kong.17
• ValueAct Capital (U.S.): In March 2018, Reuters reported the fund was considering
investing in Japan for the first time this year.
17
Source: SharkRepellent as of March 1, 2018. Represents all campaign types.SHAREHOLDER ACTIVISM IN ASIA | 13
Exhibit 11
Activists campaigns launched by foreign investors, by region (2011–2017)
100
82%
80
65%
60 51%
38% 34% 35%
40
6% 28%
19%
10%
20 12%
28%
19% 8% 18%
0 4%
Asia Europe Australia International18
U.S. activists Other foreign investors % of foreign campaigns launched by U.S. activists
Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove
director(s), remove officer(s) and vote/activism against a merger.
Note: Includes campaigns launched by foreign activists in conjunction with domestic investors.
18
Defined as Europe, Asia and Australia.
For the most part, foreign funds targeting Asia are attempting to incorporate lessons learned
from past failures, where culturally unsympathetic tactics proved ineffective. When disclosing
his positions in Fanuc, Third Point fund manager Dan Loeb, known for writing scathing public
letters, avoided personal attacks on management, choosing to compliment the business and
its leadership before suggesting ways in which value could be unlocked.
However, when dealing with an experienced activist, the threat of aggression is always latent,
and patience is limited. A moderate approach does not mean a fund will not turn hostile if
unable to get the desired results, or even a compromise, through collaboration. In Elliott’s
campaigns against Samsung and Bank of East Asia, for instance, Elliott used many of the
same aggressive and confrontational tactics that it has honed over the years against targets
in the U.S. and Europe, including public letters and presentations as well as litigation.
Exhibit 12
March 26, 2016
“We have no wish to create a public dispute at a future
Annual General Meeting, but of course are willing to do so
in order to protect our investment.”
Third Point letter to Seven & i14 | SHAREHOLDER ACTIVISM IN ASIA
Domestic
Despite the media attention given to high-profile international hedge fund activists when
they target Asian issuers, most activist activity in Asia is driven by domestic investors.
With the emergence of specialist funds, activism as an asset class continues to mature in
Asia; and while a significant number of campaigns are still being initiated by occasional
dissidents – usually existing long term investors, frequently individuals or concerned
shareholder groups – activity is expected to be increasingly driven by dedicated funds
pursuing activism as a primary strategy.
More in tune with local customs, domestic activists frequently attempt to position
themselves as constructive, engaged shareholders, hoping to find a more receptive
audience. However, and in the face of company inaction, local funds are increasingly
turning to U.S. activist tactics to try to accomplish by force what behind-the-scenes
negotiations fail to deliver.
Recent campaigns have seen the use of public letters and white papers, campaign websites,
shareholder proposals and even formal proxy fights.
Institutional investors have become supportive of activist interventions
Institutional investor support has been critical to the success and growth of activism in
the U.S. and Europe and will drive activist activity in Asia in the coming years. Historically
inclined to support management and avoid public confrontation, increasingly vocal
institutional investors no longer stand by silently in the face of underperformance.
Global institutional investors now have a long history of supporting shareholder activists
in their campaigns against U.S. and European companies. As shareholder registers across
Asia are increasingly comprised of the same global institutional investors seen in U.S. and
European shareholder registers – the same institutional investors who have shown their
support for activism in the U.S. and Europe – Asian issuers are finding themselves with a
significant number of shareholders who have proven to be inclined to support an activist,
if one were to emerge, and even initiate a campaign.
• In February 2016, BlackRock waged its first ever campaign against G-Resources,
a Hong Kong-listed company. BlackRock opposed G-Resources’ plan to live past the
sale of its main asset.
Domestic institutional investors are taking their cue from their global counterparts,
waking up to the idea that they can drive value creation at their portfolio companies
by being vocal with their demands for change, further increasing the pressure on Asian
issuers. Finally, new regulation encouraging shareholders to engage with their portfolio
companies, as well as corporate governance reforms, further propel an activism trend that
already has significant momentum.
• In March 2017, Hiromichi Mizuno, Chief Investment Officer of Japan’s Government Pension
Investment Fund (GPIF), encouraged asset managers to engage with issuers: “Instead of
just listening, we are requesting that asset managers have a continuous and constructive
dialogue with issuers”.19
• In June 2015, the National Pension Service (NPS), Korea’s largest institutional investor,
voted against the merger of two SK Group units arguing it would hurt shareholder value.
Companies can no longer assume institutional investors are management-friendly,
or presume their votes will favor incumbents. Instead, companies must adapt their activism
preparation and response tactics to a new reality where every substantial holder in a
company’s register is a potential activist or activist supporter.
19
Asian Investor, March 15, 2017.SHAREHOLDER ACTIVISM IN ASIA | 15
Common themes in Asia activism
Investors worldwide have grown weary of boards that they think are conflicted,
entrenched or do not represent minority shareholders’ interests. Even though direct public
attacks on board members are not as common in Asia as they are in the U.S., calls for
corporate governance reforms are increasing, and so are demands for direct shareholder
representation in the boardroom. 2017 saw the number of campaigns including a demand for
board seats for a shareholder increase to 50, an all-time high and almost four times what it
was in 2014.20
While most of the low-hanging activism fruit has already been picked in the U.S., many
obvious activist demands have not yet been seen across the Asian corporate landscape.
Conglomerate corporate structures and bloated balance sheets create attractive
opportunities for activists seeking to unlock value.
Of the various typical demands of shareholder activists, other than board representation,
return of capital and opposition to announced M&A transactions – where activists demand
improved consideration on announced transactions or oppose the transaction entirely –
have been the most common in Asia to date. Interested–party transactions, in particular,
are increasingly scrutinized and opposed, as well as any transactions within a conglomerate
structure whose sole purpose is perceived to be perpetuating a founding family’s influence.
Exhibit 13
Activist campaigns with at least 1 specific value proposition
45
40 41
35 34
31
30 28
25
20 15
15
10 6
5 4
0
2011 2012 2013 2014 2015 2016 2017
Asia Activist campaigns
Select value themes as a % of total activism activity (2011–2017)
Capital structure Opposition to announced deals Corporate strategy
24% 14% 13%
• Return capital to shareholders • Oppose acquisition • Spin-off business
• Restructure debt • Oppose merger • Split company
• Other capital structure • Oppose transaction terms • Divest assets / holdings
related items • Seek sale or merger
Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove
director(s), remove officer(s) and vote/activism against a merger.
Note: Individual campaigns may be classified under various value themes.
20
S ource: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:
board control and representation, enhance corporate governance, maximize shareholder value, remove
director(s), remove officer(s) and vote/activism against a merger.16 | SHAREHOLDER ACTIVISM IN ASIA
Capital allocation will remain a top priority for funds targeting the region in the near-term,
however, activism is expected to evolve similarly to how it has in the U.S. and to some
extent Europe, shifting towards corporate strategy and structure, asset mix and M&A.
As they experienced globally, conglomerates in Asia will face pressure to streamline their
operations and reorganize, companies with non-core business units to demerge, and
potential takeover targets to seek prospective buyers or explain clearly to shareholders
why they are not doing so.
Regardless of the specific criticism or value creation proposition, activists targeting Asian
corporations now demand that companies listen and engage. Dismissive boards and
management teams will face increasing pressure and harsh criticism if they refuse to
do so. To be clear, engagement is not the same as capitulation. Issuers must simply be
able to demonstrate that they are open to hearing the views and receiving input from all
shareholders, even those who may have an activist intent. Management teams and boards
should then consider that input when making decisions on behalf of the company and all of
its shareholders.
Shorting Asia
Activist short selling is one area where Asia has led the rest of the world, with some of the
most prominent short-sellers originating and perfecting their strategies on the continent.
Short-sellers bet against stocks, profiting if the company share prices decline.
Exhibit 14
Short-selling campaigns (2011–2017) Short selling campaigns in Asia
70 68
Australia
Europe 1%
6% 60
Asia 50
19%
40
34 34
30 29
23 22
20 15
U.S.
74% 10
0
2011 2012 2013 2014 2015 2016 2017
Source: Activist Insight as of March 1, 2018. Represents all short-selling campaigns.SHAREHOLDER ACTIVISM IN ASIA | 17
Tactics used by short-sellers are similar to the ones used by long activists in more traditional
activist campaigns. Short-sellers frequently make their positions public at industry
conferences, publishing their analysis in reports or white papers that lay out their views in
detail. Because the end goal is not to implement changes to raise the stock price, but rather
to convince the market that the stock is overvalued, they tend to be more aggressive than
long activists.
Most short-selling is carried out by specialized firms. GeoInvesting, Glaucus Research and
Muddy Waters have been particularly active in the region, with 36, 19 and 16 public short
attacks respectively.21 However, established activists have also used the strategy.
Hong Kong-based Oasis Management, best known for launching campaigns against some
of Japan’s most recognizable names, targeted Cyberdyne in 2016 calling it “one of the most
overvalued companies in Japan.” Pershing Square, a prominent U.S. activist who usually
follows a more traditional long-activist playbook, recently exited a very high-profile short
campaign against Herbalife, incurring losses in the process.
Short-sellers target companies with one of several potential issues, including aggressive
accounting practices, overestimating their addressable market, underestimating competition,
management or corporate scandals or outright fraud. These issues do not need to be proven,
as often even the speculation that a company has committed accounting fraud or some
other misdeed is enough to drive the share price down significantly, creating a profit for the
short-seller in the interim. In Asia, the most common themes to date have been business and
accounting fraud, which together with misleading accounting, amount to 73% of all shorts.21
Originally confined to lesser-known Chinese companies, in recent years, Asia has seen an
increased number of higher-profile companies fall victim to short-sellers. Hong Kong and
Japan have started to experience more activity in the past couple of years, but China still
accounts for most of the activity.
Companies should be ready to respond to a short seller as well as a traditional long activist
with many of the same tools and techniques. Being prepared to address an investor who is
publicly accusing the company of wrongdoing may help mitigate stock volatility and market
turbulence. As such, management teams and boards need to be able to quickly articulate the
fundamental value proposition of the company’s business model to the market, as well as
future drivers of incremental shareholder value. It is important to note, however, that each
case is unique. Given the rise in short-selling in recent years and the proliferation of new
funds focused on short-selling, an unknown activist short-seller may not have the necessary
market credibility to meaningfully impact the company’s share price with their public attack.
In these instances, a company must weigh the benefits of responding to the short attack
against the potential risks of legitimizing a short thesis that may otherwise not resonate
with shareholders.
21
Source: Activist Insight as of March 1, 2018. Represents all short-selling campaigns.18 | SHAREHOLDER ACTIVISM IN ASIA
Increasingly successful at affecting change
Activism in Asia has not yet been as successful as the strategy in the U.S. However, recent
high-profile wins signal a changing attitude and a shift towards higher activist effectiveness.
In a region where the default mindset resists pressure and sticks to the status-quo, some
companies have demonstrated a willingness to listen and even compromise. Some of the
most high profile victories so far have been achieved through collaboration. Yet, forceful
change has been proven possible in the face of uncooperative management teams
and boards.
Whether by force or through constructive engagement, and despite a lingering cultural
resistance, the change in activist success rates over the past few years is irrefutable.
Select examples of recent successes:
• In February 2018, the Samsung Electronics’ board recommended the appointment of
three new independent directors. The move to nominate both a foreign director and a
woman came amid pressure from Elliott Management to change the composition of the
board, arguing it lacked diversity.
• In June 2017, Reno –an investment vehicle for Yoshiaki Murakami– successfully elected
its nominee to the board of Kuroda Electric, despite opposition from the company.
The company later agreed to sell itself to MBK Partners. Murakami had lost a battle
against Kuroda in 2015, when he sought to get 4 outsiders, including himself, appointed
to the board.
• In March 2015, and following pressure from Third Point, Japanese industrial machinery
maker Fanuc announced it would return a portion of its cash reserves to shareholders,
also stating it would create a shareholder relations department, in an effort to increase
transparency and improve communications with investors.
Dissident success rates are expected to increase in tandem with societal acceptance of
shareholder activism in general. As activists continue to shed the label of “corporate raiders”
(for which they were known in the 2000s) and are increasingly perceived as “engaged
owners,” support for their value creation theses will rise.SHAREHOLDER ACTIVISM IN ASIA | 19
3. Implications for Asian companies
In the past, companies have prepared for activists by hiring advisors to identify
potential vulnerabilities, by briefing the board and by developing a “break glass” plan
to be implemented in the event an activist launches a campaign against the company.
With the evolution of the strategy, these reactive measures are still required, but are no
longer sufficient. As part of their business plans, Asian companies should look to employ
proactive measures, based on global best practices, aimed at eliminating the activist
threat before it ever materializes.
Communicate proactively and clearly with shareholders
Good communication with shareholders has been an essential part of the shareholder
activism preparation process for years. As the strategy and landscape evolve, companies
also need to consider other stakeholders in the course of their regular external outreach.
A robust communications plan should address multiple potential constituencies:
Exhibit 15
Stakeholder
Stakeholder constituencies
constituencies
Institutional investor Portfolio managers Key non-shareholder
governance teams influencers
Institutional investor governance teams
Just a few years ago, many large institutional investors outsourced voting decisions to
proxy advisors such as ISS and Glass-Lewis, which were the largest institutional investors.
A growing number of smaller institutional investors have built out internal corporate
governance teams tasked with making voting decisions and ensuring consistent voting
across investment vehicles. The team may operate independently from fund investment
professionals or, alternatively, may work in concert with them to make voting decisions.
Regardless, it is critical for companies to understand how each team thinks about corporate
governance issues as well as their vote decision-making process, and to engage with them as
part of the company’s regular outreach efforts.20 | SHAREHOLDER ACTIVISM IN ASIA
Portfolio managers
While large institutional investors have built in-house teams, many long-only fund managers
still retain some input over voting decisions. As activism has proliferated, portfolio managers
have become increasingly comfortable supporting activists and their campaigns.
A number of fund managers have developed relationships with established activists and
are increasingly expressing concerns about portfolio companies directly to activists.
This is being directed in addition to, or instead of, to the company, oftentimes encouraging
the activist to get involved. Ultimately, actively overseen fund managers can and do vote with
their feet regardless of their fund’s proxy voting decision process. As such, companies need
to ensure that this group understands their overall strategy, is supportive and feels that its
voice is being heard.
Key non-shareholder influencers
Key non-shareholder influencers include proxy advisors, corporate governance experts,
influential reporters and academic subject matter specialists. Because so much activism
occurs in the public spotlight, companies need to determine who these thought leaders
are and continue to keep them engaged. In the event of an activist campaign, having these
relationships also helps the company ensure that its side of the story is fairly portrayed.
Think strategically about all external communications
While it is still critical to understand how an activist might attack the company and to
prepare a plan for responding to an activist campaign, management and boards should also
strive to view the company’s long-term communications plan through the lens of activism.
The advent of activism among nontraditional constituencies, including non-shareholder
influencers, requires that the company not only prepare for the traditional activist but also
take a strategic approach to normal course shareholder communications and ongoing media
engagement. To that end, companies should seek to consistently convey the following key
points across all of their external communications platforms:
1. Well-developed corporate strategy
• Communicate financial and strategic priorities to investors effectively and consistently.
• Focus on delivering value for all shareholders.
• Tell the company’s story, beyond reporting results, by highlighting its strong trajectory
and any company “wins,” with a focus on being a responsible steward of shareholder
capital and proactively addressing inefficiencies.
• Address any “losses” head on, before an activist has the opportunity to capitalize
on them.SHAREHOLDER ACTIVISM IN ASIA | 21 2. Board and senior management engagement • Demonstrate senior management and director commitment to maximizing long-term shareholder value. • Engage regularly with shareholders and key influential third parties (media, academics, industry icons, etc.). • Ensure that top investors feel their concerns are being heard. 3. Appropriate corporate governance structure • Demonstrate a record of self-assessment and proactive change. • Recognize corporate governance trends and avoid becoming a governance laggard. • Identify globalization of corporate governance standards and move away from the status quo. Proactively address corporate governance lightning rods Virtually all activist campaigns involve criticism of a company’s corporate governance. No matter what the specific campaign demands are, the activist’s starting premise is likely to be that the management team and board have not acted to fully maximize shareholder value during their tenure. Heightened board scrutiny can make directors particularly vulnerable during activist campaigns, especially if the activist is trying to gain board seats. Directors should be prepared to have their collective competence and credibility challenged. Individual directors may also be singled out and targeted by attacks that can quickly turn personal and impugn reputations. To demonstrate their commitment to corporate governance excellence, companies should undertake periodic self-assessments to evaluate board composition and various hot-button corporate governance issues. Doing this proactively mitigates potential toeholds for activists who might otherwise include corporate governance changes as a valid campaign objective. It has become even more important today, as the top activists have access to a stable of well-qualified board candidates with expertise across industries, which comforts shareholders in ousting directors from boards with governance issues. Finally, companies should communicate to the broader shareholder base that they are regularly performing this type of self-evaluation, and that management and the board are focused on good corporate governance. Be ready to engage if and when activists show up Companies must be willing to engage in dialogue with all shareholders, including activists. However, it is important to prepare in advance for any prospective interaction with an activist because these discussions can rapidly transform into hostile situations. This shift can happen quickly and companies may not have the time to build an internal framework for responding to every stage of the campaign. This will cause confusion among management and the board, potentially giving the public perception of a disorganized response.
22 | SHAREHOLDER ACTIVISM IN ASIA
In planning for a potential activist campaign, companies should consider the following
best practices:
Exhibit 16
Best
Bestpractices
practices for preparing for
for activists
activists
1 Establish external • Establish internal activism team including key members across
and internal corporate functions and operating segments
• Engage roster of best-in-class activism advisors
working teams
– Investment bank
– Public relations firm
– Attorneys
– Proxy solicitor
2 Evaluate strategic • Update financial projections by segment, with reflection on
planning through peer benchmarking
• Consider the strategic importance of each segment and whether the
the lens of an activist market gives the company “full credit” for the value of the current
corporate structure
• Determine optimal capital structure
3 Complete scenario • Analyze vulnerabilities and produce a mock activist attack deck
planning/fire drills • Prepare standard responses to anticipated campaign attacks
• Prepare internal and external communication materials
4 Monitor • Closely monitor shareholder base on an ongoing basis
shareholder base • Understand shareholder motivations
5 Board should • Directors should be prepared for spotlight by activist
receive updates • Banker and lawyer updates with directors
at least annually – Current environment
– Fiduciary duty
– Legal considerations
• Proactively determine governance deficiencies and adopt
required policiesSHAREHOLDER ACTIVISM IN ASIA | 23
4. J.P. Morgan M&A advisory solution and
shareholder activism expertise
We advise corporations and institutions of all sizes on their most complex strategic needs,
in their home markets and around the world.
Clients benefit from customized solutions combining:
• In-depth knowledge of sector and market dynamics with M&A bankers based locally in
most major markets globally
• Innovative advice on valuation, transaction structures and deal tactics/negotiations
• Rigorous execution delivered with responsive and agile service
• Ability to partner with product experts across our full range of competencies, including
comprehensive financing through our debt and equity issuance platforms, as well as
derivatives and treasury services, including escrow services
J.P. Morgan provides M&A advisory solutions across the full strategic life cycle of our clients:
Shareholder insights and engagement strategy
J.P. Morgan has an extensive record of helping clients prepare for and respond to
shareholder activism. Our size and scale, wide array of product offerings and experience
enable us to provide a differentiated approach to shareholder activism defense for clients:
• Defense preparations for publicly announced and non-public approaches
• Dedicated shareholder activism advice
• Advisory services for corporate clients only
– J.P. Morgan does not advise shareholder activists on activist campaigns
– Interests are fully aligned with company interests and enhancing long-term
shareholder value
• Experience with all major activists in some of the most sophisticated campaigns around
the world
– Deep understanding of potential activist tactics
– Firsthand experience of what works when defending against an activist
• In-depth knowledge and understanding of how company shares are trading
– What types of investors are buying or selling
– Sentiment from traders and the broader market
Strategic expansion
• Acquisitions, including cross-border opportunities
• Mergers and joint ventures
Enhancing business value
• Corporate combinations
• Divestitures
• Capital restructuring projects
• Spin-offs and other repositioning24 | SHAREHOLDER ACTIVISM IN ASIA
Disclaimer: This material (including market commentary, market data, observations or the like) has been prepared by personnel in the Mergers & Acquisitions Group of JPMorgan Chase & Co. It has not been reviewed, endorsed or otherwise approved by, and is not a work product of, any research department of JPMorgan Chase & Co. and/or its affiliates (“J.P. Morgan”). Any views or opinions expressed herein are solely those of the individual authors and may differ from the views and opinions expressed by other departments or divisions of J.P. Morgan. This material is for the general information of our clients only and is a “solicitation” only as that term is used within CFTC Rule 1.71 and 23.605 promulgated under the U.S. Commodity Exchange Act. RESTRICTED DISTRIBUTION: This material is distributed by the relevant J.P. Morgan entities that possess the necessary licenses to distribute the material in the respective countries. This material is proprietary and confidential to J.P. Morgan and is for your personal use only. Any distribution, copy, reprints and/or forward to others is strictly prohibited. This material is intended merely to highlight market developments and is not intended to be comprehensive and does not constitute investment, legal or tax advice, nor does it constitute an offer or solicitation for the purchase or sale of any financial instrument or a recommendation for any investment product or strategy. Information contained in this material has been obtained from sources believed to be reliable but no representation or warranty is made by J.P. Morgan as to the quality, completeness, accuracy, fitness for a particular purpose or non infringement of such information. In no event shall J.P. Morgan be liable (whether in contract, tort, equity or otherwise) for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction. All information contained herein is as of the date referenced and is subject to change without notice. All market statistics are based on announced transactions. Numbers in various tables may not sum due to rounding. J.P. Morgan may have positions (long or short), effect transactions, or make markets in securities or financial instruments mentioned herein (or options with respect thereto), or provide advice or loans to, or participate in the underwriting or restructuring of the obligations of, issuers mentioned herein. All transactions presented herein are for illustration purposes only. J.P. Morgan does not make representations or warranties as to the legal, tax, credit, or accounting treatment of any such transactions, or any other effects similar transactions may have on you or your affiliates. You should consult with your own advisors as to such matters. The use of any third-party trademarks or brand names is for informational purposes only and does not imply an endorsement by JPMorgan Chase & Co. or that such trademark owner has authorized JPMorgan Chase & Co. to promote its products or services. J.P. Morgan is the marketing name for the investment banking activities of JPMorgan Chase Bank, N.A., J.P. Morgan Limited, J.P. Morgan Securities LLC (member, NYSE), J.P. Morgan Securities plc (authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority), J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188 and regulated by Australian Securities and Investments Commission) and their investment banking affiliates. J.P. Morgan Securities plc is exempt from the licensing provisions of the Financial and Intermediary Services Act, 2002 (South Africa). For Brazil: Ombudsman J.P. Morgan: 0800-7700847 / ouvidoria.jp.morgan@jpmorgan.com For Australia: This material is issued and distributed by JP Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) (regulated by ASIC) for the benefit of “wholesale clients” only. This material does not take into account the specific investment objectives, financial situation or particular needs of the recipient. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JP Morgan Australia Limited. © 2018 JPMorgan Chase & Co. All rights reserved.
You can also read
