In an effort to end what she calls “undesirable economic activity” by hedge funds and others, Angela Merkel, Germany’s conservative Christian Democratic chancellor, is championing a new law that she and her coalition partners, the left-wing Social Democrats, hope will put an end to the shareholder pressure that has made life uncomfortable for German companies like Deutsche Börse. Two years ago the Frankfurt-based exchange operator was famously forced to abandon a bid for the London Stock Exchange and to dismiss both its chairman and its chief executive to meet the demands of a group of activist investors. This summer New York based hedge fund Atticus Capital, one of the leaders of that revolt, threatened to lobby other investors to oust the Deutsche Börse supervisory board if the exchange made acquisitions without shareholder approval. Such activist moves would become impossible under the proposed legal changes.
“We object to the rules being proposed, since they will inhibit constructive engagement between companies and shareholders,” says Peter Montagnon, chairman of the International Corporate Governance Network, an investor rights lobbying group based in London whose institutional investor members have more than $10 trillion under management. On behalf of the ICGN as well as the Association of British Insurers, where he is director of investment, Montagnon last month wrote to German Finance Minister Peer Steinbrück asking him to drop or amend the new law, known as the Act to Reduce Risks Associated with Finance Investments. Montagnon’s letters and another missive critical of the new law, sent by Stephan Howaldt, chief executive of Hermes Focus Asset Management Europe, which has $2.4 billion in assets, have galvanized opposition to the proposed law from the fund industry. Hedge funds, pension funds and mutual fund groups are planning to testify against the new law at hearings by the Bundestag’s finance committee that are likely to begin this month.
At the heart of the bill, unveiled in late September, is a more restrictive definition of the so-called acting in concert principle. Like most European countries, Germany mandates that investors who agree among themselves to jointly control a company’s long-term strategy must make a formal takeover bid for all shares if they acquire 30 percent or more of the company. The measure was meant to insure that minority investors would be paid a takeover premium in the event of a control change. Under the new proposal, investors could be deemed to be “acting in concert” whenever they engaged in coordinated conduct of any kind, such as consulting with each other on whether to vote for specific shareholder proposals or support particular board candidates.
The fund industry will definitely act in concert to oppose this law, but “whether that will result in a material change to the rules is anybody’s guess at this point,” says Howaldt.
