Taking activism on board
Recent events show big fund managers may be becoming more activist, writes Ann Crotty
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.