The German market: An activism renaissance

Over the past year, German companies proved increasingly popular targets among shareholder activists. What might have driven this increase in activity?

Dr Thyl Haßler (TH): Lower valuation multiples, depressed price to earnings ratios and, accordingly, increased pressure from shareholders to maximize returns, offer greater potential for activist campaigns in undervalued targets in Germany, including seeking value accretive changes. Other key drivers have been the rising cost of capital for many companies, as well as supply-chain issues and asymmetric dependencies from foreign markets.

These factors have highlighted needs for reorganizations, spin-offs, M&A and other corporate transformations. Activists are anticipating this and have increasingly used these factors as the basis for their campaigns.

What key developments have you recently observed in shareholder activism in Germany?

Frederic Wuensche (FW): 2023 was one of the most active years ever for shareholder activism in Germany. Campaign focuses included leadership changes, operational enhancements, changes in strategy, improved capital allocation and portfolio actions to increase shareholder value. In addition, some activist shareholders demanded special audits to investigate management actions.

There were high-profile break-up campaigns at Bayer, Fresenius and Brenntag. At Bayer, several activist investors (including Inclusive Capital, Bluebell Capital Partners and Elliott Investment Management) demanded its breakup into separate pharmaceutical and agrochemicals companies, as well as replacing the CEO. Although the break-up has not been implemented (but is still under discussion), the replacement of the CEO was ultimately successful, and even supported by institutional investors.

Additionally, activist investor Jeffrey Ubben was elected to the sustainability board of Bayer and was further elected to the supervisory board at the 2024 annual meeting, again supported by institutional investors.

At Brenntag, PrimeStone Capital and Engine Capital successfully led a campaign to break up the company, with Brenntag announcing in December that it would reorganize its business into two independent divisions, starting in 2024.

TH: A recent noteworthy trend is that activist shareholders have increasingly demanded special audits to review management actions and to investigate alleged fiduciary breaches as part of their campaigns.

At Deutsche Wohnen's June 2023 annual meeting, Elliott Investment Management demanded a special audit to investigate a two billion euro ($2.1 billion) loan from Deutsche Wohnen to its shareholder Vonovia, which, according to the activist, was granted on unfavourable, non-market terms. Ultimately, Elliott was not successful with its demand, but the engagement nonetheless represented a new activism campaign focus.

Are there specific sectors that are targeted by investors?

FW: In 2023, activist shareholders focused mainly on four sectors: industrials, consumer goods, technology and healthcare. In particular, industrial companies continue to be under pressure due to weak profit margins caused by high personnel and energy costs. Their capital allocation and cash generation remain under particular scrutiny. The chemicals sector is also seen as a preferred target for activist shareholders due to low valuations and significant pressure to cut costs and implement structural changes.

Are activists in Germany increasing their focus on ESG issues?

TH: There was a slight decline in ESG-related campaigns in a challenging market in 2023 as investors placed a renewed focus on metrics such as margin growth, cash generation and return on capital. Nevertheless, with the importance of sustainability regulations growing, it is unlikely that the wider trend towards sustainable shareholder activism will decline in the near future.

We expect that activist shareholders will seek to put ESG items on the agendas of annual meetings more frequently. However, questions have arisen concerning ESG measures falling within the competence of the management board. This was highlighted in a 2023 decision, where a court clarified that shareholders could not require Volkswagen to include a shareholder proposal on its 2022 proxy ballot to enhance the board's reporting obligations regarding climate-related lobbying.

This article was originally published by Diligent.

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