Edition: April/June 2019
Editorials

SHAREHOLDER ACTIVISM

A fine line

To what extent is collaboration permitted between asset managers,
representing such asset owners as pension funds, without
contravening the companies and competition regulations?
Financial journalist Ann Crotty attempts to find out.

If you set out to design a system that would allow inept corporate executives to function unchecked by the owners of those companies, it would look a lot like the system we have. It wasn’t intended to be this way.

On paper, major legislative changes over the past 20 years looked certain to enhance oversight and ensure better governance in the corporate sector. Those changes included the fundamental rewrite of the Companies Act, improved disclosures and a tougher competition regime. They pointed to a much more vigorous investment environment.

Yet practice has fallen short of promise. Powerful institutional shareholders appear to have sat on their hands while generously-paid executives weren’t up their jobs at such erstwhile JSE stars as Barloworld and Edcon, Ellerines and JD Group. Even the once-great Woolworths is these days looking less great.

There are recent occasions when institutional shareholders acted to stop the slides, for example at PPC and Group 5. And a chastened Allan Gray moved adroitly to rein in the feral management at Net1 when things got really out of hand.

But by-and-large the institutions tend to prefer private one-on-one engagements to public confrontations. They’re also nervous of being seen to assert their cumulative authority because of competition constraints. A block of like-minded shareholders with say 30% of a company, when knocking at the door of its board, would carry more clout acting together than each having small percentages acting individually.

A vigorous approach is all the more necessary given that the lack of liquidity in many companies’ shares makes it difficult for institutions to offload large parcels when they’re unhappy with the business or its management. They’re essentially trapped. Of course, at a price, they could dump the shares and run as Coronation did quite spectacularly from African Bank in 2014.

Jackson

The 2008 Companies Act of 2008, effective from 2011, appeared set to shake things up. It states as part of its mission that “the law should protect shareholder rights, advance shareholder activism and provide enhanced protections for minority shareholders”. These bolstered rights were supposed to introduce a fundamental shift in power to shareholders.

Unfortunately, exercising these rights requires the consent of the board. Ask activists such as Albie Cilliers or Chris Logan how easy that is. Even powerful institutional investors struggled against recalcitrant boards at PPC and Group 5.

And there certainly wasn’t much sign of the enhanced rights’ effectiveness when a group of shareholders got together in 2018 to try and appoint directors in a bid to halt the sharp decline at Grand Parade Investments. After a remarkably hostile shareholders’ meeting in October, which was unilaterally abandoned by the board, the GPI activists had to await the annual general meeting to secure appointments of their two candidates.

Also last year, a group of powerful institutional shareholders was reduced to pleading with various boards of the Resilient group, urging them to resolve the allegations that had prevailed for several months. In the fourth letter, sent eight months after the initial allegations had already wiped out billions of rand in value, the shareholders said they believed “that the boards need to act more decisively in order to unambiguously address these concerns”.

The tone was more ‘Sunday school ma’am’ than financial hitman. But this was evidently as far as asset-manager signatories (including the PIC, Allan Gray, Prudential, Sanlam, Stanlib, Investec, Old Mutual and Coronation) felt they could go. Even then, one signatory admitted to being extremely nervous about dispatching the letter.

The tone was more ‘Sunday school ma’am’ than financial hitman. But this was evidently as far as asset-manager signatories felt they could go.

Notwithstanding the new Companies Act, after 16 years the ‘Comparex case’ still haunts many institutional investors. Back in 2003 the Securities Regulation Panel (forerunner to the Takeover Regulation Panel) had to rule on whether three asset managers – which together owned more than 35% of voting shares in JSE-listed Comparex – had acted in concert to reconstitute the Comparex board.

A shareholding of 35% being considered to represent control, the issue was whether the shareholders’ joint action represented a change in Comparex control and so triggered an offer to minorities.

The SRP found that the three firms – Allan Gray, Coronation and Sanlam, joined by RMB group, bringing their total to almost 46% in various portfolios – had not initiated an “affected transaction”. They therefore did not have to make a mandatory offer for the buyout of Comparex minorities.

“We won the legal battle but we lost the war,” recalls one. The institutions were unable trade their shares for the two years that the case dragged on. It was a public fight that absorbed substantial resources for minimal return, and for the two years the institutions faced the chilling prospect of making an offer for 100% of Comparex. This was a nightmarish set of circumstances for shareholder activism.

Now move on to March 2012 when, in an attempt to encourage activism, the UN-backed Principles for Responsible Investment body sought guidance from the Takeover Regulation Panel on the circumstances that would trigger a mandatory offer by institutions acting cooperatively.

The response from the TRP was vague. It indicated that there’d be no problems if the investors simply discuss matters of mutual interest or share their views relating to concerns about particular companies. “A concert party is only formed where shareholders agree a common plan under which to work together,” said the PRI.

However, its guidance note elaborated that acting in concert doesn’t automatically trigger a mandatory offer even if investors hold more than 35% ahead of any agreement. The critical issue is whether any additional shares were bought after agreeing to the action.

TRP deputy executive director Basil Mashabane says he can’t recall, subsequent to promulgation of the new Companies Act, when any institutions acting in concert were forced to make a mandatory offer: “The panel would have to consider an allegation. Every case is different.”

But it’s no longer just the JSE-related regulators watching out. The institutions must also ensure their cross-shareholdings don’t run afoul of the competition regulations.

Remarkably, the Competition Commission wasn’t dragged into the Group 5 battle launched by Allan Gray which had significant stakes in other construction-sector stocks. The battle saw the Group 5 board being restructured in a move that could have flagged a change in control.

In the US, where the three biggest index funds (BlackRock, Vanguard and State Street) together constitute the largest shareholder in 88% of S&P 500 firms, authorities are concerned that firms are less likely to compete vigorously with each other if they have common owners. This is notable in the US banking and the airline industries.

In SA the trend might be in the opposite direction. Certainly, the number of major players has increased significantly since the 1980s when Old Mutual, Sanlam and Liberty dominated the investment landscape. In addition, the opening up of the economy has seen international investors holding upwards of 30% in several JSE-listed companies.

Despite this, amendments to the Competition Act require the Commission and Tribunal to consider the extent of cross-holdings in any merger. And, as in the battle over Sovereign Food, a board under siege from shareholders cooperating can always scuttle off to the commission with claims there’s been a change in control.

Old Mutual Investment Group’s governance and engagement manager Rob Lewenson says the PRI is seeking clarity on the scope for collaborative engagement within SA’s competition law. Taking the Resilient matter, he’s pleased with the outcome of engagement with the group companies and describes a complex cooperative process designed not to contravene regulations or antagonize the targeted boards.

It might need more than PRI guidance notes to persuade institutions to set aside their seemingly instinctive aversion to publicity and to risk relationships sustained behind closed doors. There’s also an aversion to disclosing their hands to competitors, which is a precondition for cooperation.

Many SA asset managers are signatories to the PRI, as they are to the Code for Responsible Investing in SA. Both seek to promote shareholder activism. How better than if asset managers and asset owners, such as pension funds, cooperate (“collude” being such an ugly word) in the interests of their clients and beneficiaries without fear of consequence?

Roll on a test case.