An Insightia interview with Tom Matthews and Sonica Tolani, partners, and Alex Woodfield, counsel, White & Case.
How is UK activism being impacted by current market conditions?
Sonica Tolani (ST): As with the wider global markets, the UK has recently been facing turbulent market conditions, with M&A activity and activism dampened by significant geopolitical uncertainty, rampant inflation, and interest rate rises.
Such dampening contrasts with the past few years, during which the UK has otherwise seen many activists seeking to increase value through M&A solutions. The viability and attractiveness of such transactions, and activists' appetite to push for them at the current time, are constrained by market conditions – particularly those requiring debt or equity financing.
UK companies suffering from depressed valuations may be considered as potential takeover targets. However, takeover offers, particularly those considered to be opportunistic, are expected to face increased scrutiny from shareholders, with potential for opposition and opportunities for bumpitrage.
What about UK activism more broadly?
Tom Matthews (TM): Whilst some of the most prominent recent campaigns have been undertaken by long-established activists, the universe of investors engaging in shareholder activism continues to expand. Existing activists are entering new markets, new activist funds are being established, and private equity, debt, and other investment funds are increasingly adopting activist techniques.
An increasing number of investors engaged in activism are also willing and able to consider pursuing and/or financing takeovers themselves, reflecting the broadening universe of activist investors, and activist fund structures becoming more flexible. Activists who are shareholders of UK companies with ongoing depressed valuations may have an incentive to consider a defensive bid, to avoid crystallising losses in the event of a sale to a third-party bidder.
How may current developments affect future shareholder voting?
Alex Woodfield (AW): Some of the largest institutional shareholders have been taking steps to pass through voting rights to underlying investors in some of their funds. Although this emerging trend towards "democratization" is currently in its early stages, we anticipate it is likely to become more widespread over time and may in the future impact proxy voting, particularly on topics such as board remuneration and ESG.
How do you expect the economic backdrop to impact investor views on remuneration for UK-listed companies?
ST: Whilst remuneration is a perennially sensitive topic for listed companies, we anticipate this year will see significant attention paid to executive remuneration in view of the cost-ofliving concerns for companies' own workforce and customers. There is also expected to be particular scrutiny of remuneration arrangements which have been impacted by geopolitical factors and other considerations outside of management's control.
AW: In some cases, remuneration arrangements may appear particularly generous due to using performance during the pandemic as a baseline, or as a result of companies profiting significantly from dramatic increases in energy prices resulting from the war in Ukraine. At the other end of the spectrum, many companies have received significant financial support from the government in respect of their energy bills.
How have recent developments been impacting investors' focus on ESG?
TM: With the war in Ukraine giving rise to public focus on unprecedented energy price rises and short-term energy security, some of the momentum behind environmental activism appears to have dampened, at least temporarily. However, sustainability remains a major focus for many investors and seems certain to reemerge as a key trend.
Through a combination of legal changes and voluntary guidelines, regulators and investors are seeking greater consistency from companies in their sustainability reporting, with a particular emphasis on clamping down on greenwashing.
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