Tak­ing ac­tivism on board

Re­cent events show big fund man­agers may be be­com­ing more activist, writes Ann Crotty

Financial Mail - Investors Monthly - - Feature -

Here’s a thought that could kill off ten­ta­tive signs of an uptick in share­holder ac­tivism: the com­pe­ti­tion au­thor­i­ties were among those look­ing on in­tently at Al­lan Gray’s re­cent Group Five activist out­ing and, word is, they weren’t as en­thralled with the out­come as many of us.

“Was that an ac­qui­si­tion of con­trol that needed to be no­ti­fied?” asked one stoney-faced com­pe­ti­tion lawyer, re­fer­ring to the new nonex­ec­u­tive direc­tors put in place af­ter the ex­tra­or­di­nary share­hold­ers’ meet­ing Al­lan Gray had de­manded.

For years SA’s pow­er­ful in­sti­tu­tional share­hold­ers de­fended their largely pas­sive ap­proach to their in­vestee com­pa­nies by ref­er­ence to what hap­pened at Com­parex in 2002. That was when Al­lan Gray, In­vestec As­set Man­age­ment and San­lam got to­gether and de­manded the re­place­ment of five nonex­ec­u­tive direc­tors they be­lieved were not do­ing a good job of di­rect­ing the firm’s re­sources. Their com­bined 38% stake gave them the mus­cle to sup­port their de­mands. All hell broke loose. There was no share­hold­ers’ meet­ing; the five direc­tors just handed in their res­ig­na­tions and the ac­tivistap­pointed crew stepped in.

But the direc­tors didn’t go qui­etly. They ran to the se­cu­ri­ties reg­u­la­tion panel (SRP) — pre­cur­sor to to­day’s takeover reg­u­la­tion panel — to lodge a com­plaint about con­cert par­ties ef­fect­ing a change of con­trol. They in­sisted this was an af­fected trans­ac­tion and, un­der the takeover code, a manda­tory of­fer had to be made to mi­nor­ity share­hold­ers.

It was a chill­ing prospect for the ac­tivists. “There is no way we want to take over Com­parex or run the com­pany,” said Al­lan Gray’s CEO at the time. “We are fund man­agers and we have a duty to look af­ter our clients’ in­vest­ments. The shares do not be­long to us but rather to our clients,” has be­come the stan­dard de­fence for ac­tive fund man­agers.

Crit­i­cal to the SRP’s de­ci­sion that no manda­tory of­fer was needed was that none of the three in­sti­tu­tions had bought shares ahead of their move on the board. But the SRP ac­tion dragged on and sucked up so much time and en­ergy it left a chill­ing mem­ory. For large in­sti­tu­tional fund man­agers who pre­fer to con­duct their busi­ness be­hind closed doors, the on­go­ing me­dia at­ten­tion was in­tensely dis­com­fit­ing.

Fif­teen years later, a spate of high-pro­file board bat­tles sug­gests the big fund man­agers are will­ing to risk a bit more ac­tivism. It’s not en­tirely their own choice: in­di­vid­ual ac­tivists such as Theo Botha, Al­bie Cil­liers and Chris Lo­gan are mak- ing the big guys look like part of the slack gover­nance prob­lem, all too happy to tol­er­ate in­ept or weak man­age­ment.

And there’s no doubt the “cor­po­rate gover­nance” in­dus­try has be­come pow­er­ful in its own right. Like it or not, sign­ing up to the UN’s Prin­ci­ples of Re­spon­si­ble In­vest­ment is oblig­a­tory in the fund man­age­ment in­dus­try, which means they have to ap­pear re­spon­si­ble.

The public is also wis­ing up to in­sti­tu­tional fund man­agers’ role in over­see­ing enor­mously well-paid ex­ec­u­tive teams.

The re­al­ity is that walk­ing away or ig­nor­ing the de­struc­tion of a feral man­age­ment team is no longer an op­tion for big share­hold­ers.

But while ev­ery­one is fo­cused on the takeover reg­u­la­tions, the re­al­ity is that in 2017 the most likely re­straint on cor­po­rate ac­tion lies with the Com­pe­ti­tion Act and its en­forcers, right up to eco­nomic devel­op­ment min­is­ter Ebrahim

Pa­tel, who likes to take pot­shots at any­thing that looks like monopoly cap­i­tal.

Takeover reg­u­la­tion panel ex­ec­u­tive director Lucky Phak­eng says the takeover reg­u­la­tions are not as ex­act­ing when it comes to de­ter­min­ing when a manda­tory of­fer is re­quired as the com­pe­ti­tion au­thor­i­ties are in de­ter­min­ing what is a no­ti­fi­able trans­ac­tion.

“A key is­sue is whether or not there’s been share buy­ing. If share­hold­ers are go­ing to vote in a par­tic­u­lar man­ner, that doesn’t au­to­mat­i­cally im­ply they’re act­ing in con­cert,” says Phak­eng, who be­lieves it’s im­por­tant that share­hold­ers ex­er­cise their rights.

He says dis­cus­sions be­tween fund man­agers such as Al­lan Gray and Coro­na­tion hap­pen from time to time, and would not nec­es­sar­ily be an is­sue. (The ex­change of in­for­ma­tion draft guide­lines re­cently re­leased by the com­pe­ti­tion com­mis­sion re­veal just how much tougher the com­pe­ti­tion en­forcers are on this point.) But the panel would be alerted to who is con­trol­ling the board af­ter a whole­sale change of direc­tors.

The prospect of the in­creas­ingly en­gaged, some might say in­tru­sive, com­pe­ti­tion au­thor­i­ties pick­ing through the cor­po­rate en­gage­ments of our large in­sti­tu­tional share­hold­ers might be all that’s needed to get them scur­ry­ing back un­der cover. The com­pe­ti­tion guys rarely do things quickly or qui­etly — ask Me­dia24, which only re­cently got sign-off on a re­struc­tur­ing it put in mo­tion in 2014. Ad­mit­tedly the Me­dia24/Novus re­con­struc­tion plan had some ma­jor flaws.

Around the same time Coca-Cola sought to re­ar­range a chunk of its African op­er­a­tions. The bev­er­age com­pany spent three years jump­ing through com­pe­ti­tion hoops be­fore get­ting the fi­nal OK.

AB InBev took no chances. Right at the start it en­gaged with reg­u­la­tors to en­sure its US$100bn ac­qui­si­tion of SABMiller en­joyed speedy pas­sage through the reg­u­la­tory process.

In short, the prospect of com­pe­ti­tion au­thor­ity in­volve­ment puts an end to any hope of a cor­po­rate quick-fix by a pow­er­ful in­sti­tu­tional share­holder. Speed is es­sen­tial in these mat­ters; a drawn-out bat­tle cre­ates huge disad­van­tages for the activist, not least of which is un­wel­come me­dia at­ten­tion. But even if the move is skil­fully struc­tured, there’s al­ways the chance of a dis­af­fected party try­ing to per­suade the com­pe­ti­tion tri­bunal it is a no­ti­fi­able trans­ac­tion.

One com­pe­ti­tion lawyer says Al­lan Gray made its move on Group Five “very skil­fully”, mak­ing sure to avoid any charge that it had wit­tingly or un­wit­tingly got con­trol. Though it only holds 27% of the shares and made sure not to buy more ahead of the meet­ing, sec­tion 12 (2)(c) of the Com­pe­ti­tion Act says a per­son is deemed to con­trol a com­pany if he or she “is able to ap­point or to veto the ap­point­ment of a ma­jor­ity of the direc­tors of the firm”. With the sup­port of other share­hold­ers, Al­lan Gray was able to ap­point five of the com­pany’s 10 share­hold­ers, so there was no ma­jor­ity.

The fund manager has also made much of the fact that it has no re­la­tion­ship with the direc­tors it nom­i­nated and has no in­ten­tion of be­ing in­volved in the run­ning of the com­pany.

Es­sen­tially Al­lan Gray has done what share­hold­ers are en­ti­tled to do, and should do, namely ap­point the board.

For Al­lan Gray an ap­pear­ance be­fore the com­pe­ti­tion tri­bunal might have caused dis­com­fort. The fund manager is not only the largest share­holder in Group Five, but also the largest in Basil Read and Aveng, and it has sub­stan­tial hold­ings in Mur­ray & Roberts and WBHO. All of them were fin­gered in the high-pro­file in­ves­ti­ga­tion into the con­struc­tion car­tel some years back.

Mak­ing things more com­pli­cated is Al­lan Gray’s hold­ing in Coro­na­tion, which voted in sup­port of its Group Five director se­lec­tion.

In­sti­tu­tional share­hold­ers who ar­gue pas­sion­ately that they do not own the shares and of­ten don’t even di­rect the vot­ing may even­tu­ally per­suade the com­pe­ti­tion au­thor­i­ties of that re­al­ity. But right now the big play­ers — Al­lan Gray, Coro­na­tion and the Public In­vest­ment Corp (PIC) — have just the sort of cross-hold­ings that worry com­pe­ti­tion au­thor­i­ties.

A re­cent re­port by Har­vard law pro­fes­sor Einer El­hauge, cir­cu­lat­ing among our com­pe­ti­tion en­forcers, con­tends: “The nat­u­ral con­cern raised by hor­i­zon­tal share­hold­ings is that firms are less likely to com­pete vig­or­ously with each other if they have com­mon own­ers.”

Just how se­ri­ously this is be­ing taken lo­cally was ev­i­dent in the mid­dle of a health market in­quiry, when the com­pe­ti­tion com­mis­sion re­leased a re­search note on cross-own­er­ships and cross-di­rec­tor­ships in the pri­vate health sec­tor. It in­evitably high­lighted Rem­gro’s role in the sec­tor, but also talked of fund man­agers with mi­nor­ity hold­ings hav­ing ways of in­flu­enc­ing man­age­ment.

Whether the reg­u­la­tors’ com­mit­ment is based on eco­nom­ics or ide­ol­ogy might be­come ev­i­dent if the gov­ern­ment-aligned PIC tries to push through the merger be­tween AfriSam and PPC. Will the com­pe­ti­tion au­thor­i­ties set aside their cross-own­er­ship con­cerns in ex­change for prom­ises of trans­for­ma­tion?

Nick Al­tini, a part­ner at Baker McKen­zie’s an­titrust and com­pe­ti­tion prac­tice, says the com­pe­ti­tion au­thor­i­ties are be­com­ing more so­phis­ti­cated in their deal­ings with the share­holder as­pect of com­pe­ti­tion. “It’s some­thing peo­ple need to re­alise, and when they work on a trans­ac­tion they need to know what, if any, cross-share­hold­ings there are.”

Al­tini says cred­i­ble struc­tures can of­ten be put in place to man­age po­ten­tial con­flicts.

So don’t give up on ac­tivism just yet.

Pic­tures: iSTOCK

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