Shareholder Activism

Benefits and Drawbacks

by Marion Hartmann (Author)
©2014 Thesis LXVIII, 395 Pages


This book analyses and compares the benefits and drawbacks of shareholder activism in corporations under US American and German law, applying means of new institutional economics. The analysis concentrates on three fields of action of active shareholders in targeted corporations: nominations and elections, transaction decisions and financial decisions. The author evaluates and compares the effectiveness of the means which active shareholders use and of the limitations they face. She concludes that shareholder activism has benefits and drawbacks. Both require legal actions under the two jurisdictions, such as stronger nomination and election rights under US American law and more effective disclosure obligations under German law.

Table Of Contents

  • Cover
  • Title
  • Copyright
  • About the author
  • About the book
  • This eBook can be cited
  • Table of Contents
  • A) The thesis
  • I) Motivation
  • II) Aim, scope and method
  • 1) Aim
  • 2) Scope
  • 3) Method
  • B) Introduction to shareholder activism
  • I) What is shareholder activism?
  • 1) Definition of shareholder activism
  • 2) Motivation to become active
  • 3) History of shareholder activism
  • 4) Actors of shareholder activism
  • 5) Targeted firms
  • 6) Strategies and means used by active shareholders
  • 7) Criticism regarding active shareholders
  • II) Theoretical background of shareholder activism – legal and microeconomic
  • 1) The concept of the firm
  • 2) Authority allocation in the corporation
  • 3) The purpose of the corporation
  • 4) The corporate decision-making process
  • 5) The separation of ownership and control in the corporation
  • III) Systemic differences for shareholder activism in the United States and Germany
  • 1) Organizational authority allocation within the administration
  • 2) Markets
  • a) Number of corporations
  • b) Corporate finance
  • c) Shareholder structures
  • 3) Decision-making practice of the shareholder meeting
  • 4) Politics
  • 5) Labor interests according to German law
  • 6) Relevant law levels
  • IV) Structure and initial thesis
  • C) Part I: Shareholder impact on nomination and election procedures
  • I) Introduction
  • 1) Significance of nomination and election rights and procedures
  • 2) Shareholder influence on the amendment of and design of rules-of-the-game decisions and rule design
  • a) Shareholder means to influence rule-of-the-game decisions
  • i) Under U.S.-American corporate law
  • ii) Under German corporate law
  • b) Designing corporate rules
  • 3) Introducing hypothesis regarding the impact of active shareholders on nomination and election procedures
  • II) Shareholder impact on the nomination and election procedures under U.S.-American law
  • 1) Introduction
  • 2) Context of directorial nomination and election process
  • a) Removal of directors
  • b) Appointment and removal of executive officers
  • c) Practical relevance of nominating committees
  • 3) Legal analysis of the four issues related to nomination and election procedures
  • a) A closer look at the four issues
  • b) Starting point mandatory shareholder proposals
  • c) Exclusion under Rule 14a-8(i)(1) SEA
  • i) Rule 14a-8(i)(1) SEA in general
  • ii) Mandatory bylaw amendment proposals under Rule 14a-8(i)(1) SEA
  • (1) SEC staff decisions
  • (2) Court decisions
  • (3) Legal scholars
  • (4) Functional counter arguments
  • (5) Recent developments
  • d) Exclusions under Rule 14a-8(i)(8) SEA
  • i) The proxy access rule
  • (1) Significance of proxy access rule
  • (a) Theoretical alternatives
  • (b) Significance of the shareholder nomination right
  • (c) Counterarguments
  • (2) Chronological legal evaluation of proxy access proposals
  • (3) Potential Rule 14a-11 SEA (2003)
  • (4) AFCSME v. AIG
  • (5) SEC’s reaction to the Second Circuit decision
  • (6) Excursion: the internet age
  • (7) Recent developments
  • (a) On Delaware state level
  • (b) On federal administrative level
  • (c) On federal legislative level
  • (d) The final SEC move
  • (e) The very final move on the issue
  • ii) The majority-voting rule
  • (1) The prevailing default rule of plurality voting
  • (2) Voting options under the plurality-voting rule
  • (3) Arguments in favor of the majority-voting rule
  • (4) Counterarguments
  • (5) Recent moves in favor of majority voting
  • iii) The cumulative-voting rule
  • (1) Arguments for and against cumulative voting
  • (2) Rule-of-the-game level and rule design
  • III) Preliminary results regarding shareholder impact on nomination and election procedures
  • IV) Shareholder impact on nomination and election procedures under German law
  • 1) Context of supervisory board nomination and election
  • a) Removal strategy regarding members of the supervisory board
  • b) Composition of the management board
  • i) Appointment strategy
  • ii) Removal strategy
  • iii) Impact on management composition in practice
  • 2) The legal analysis of the four issues
  • a) Mandatory shareholder initiation of rule-of-the-game amendments
  • i) Relevant rule-of-the-game levels
  • ii) Mandatory shareholder initiation rights
  • iii) Counterarguments on mandatory shareholder initiation rights
  • b) Shareholder nomination right
  • i) Status quo under German corporate law
  • ii) Counterarguments on shareholder nomination right
  • c) Absolute majority-voting rule
  • i) Status quo under German corporate law
  • ii) Counterarguments on majority-voting rule
  • d) Cumulative-voting rule
  • i) Permissibility of cumulative voting
  • ii) Rule design proposal
  • V) Final thesis regarding the shareholder impact on nomination and election procedures
  • 1) Conclusion regarding German corporate law
  • 2) Comparing results with initial thesis
  • 3) Transfer of experiences with nomination and election procedures
  • D) Part II: Transaction activism
  • I) Introduction
  • 1) Definition of transaction activism
  • 2) Corporate decision-making authority in the transaction context
  • 3) Goals, directions and strategies of transaction activism
  • 4) Means to pursue transaction activism
  • 5) Potential and risks of transaction activism
  • 6) Introducing hypothesis with regard to transaction activism
  • II) Transaction activism under U.S.-American law
  • 1) Decision-making authority with regard to transactions
  • 2) General formal shareholder means
  • 3) Need of active shareholders to use informal means
  • 4) Constellations of transaction activism
  • a) Transaction activism targeting corporate merger decisions
  • i) Special formal means for shareholders of surviving corporations
  • (1) Under corporate law
  • (2) Under securities law
  • ii) Transaction activism aiming to prevent a merger
  • (1) Underlying interests
  • (2) Relevant shareholder means
  • (3) Examples
  • (a) Mylan/King
  • (b) Pharmacopeia/Eos Biotechnology
  • iii) Transaction activism aiming to facilitate a merger
  • b) Transaction activism targeting corporate acquisition decisions
  • i) Special formal means for the acquiring company’s shareholders
  • (1) Under corporate law
  • (2) Under securities law
  • ii) Transaction activism aiming to prevent an acquisition
  • (1) Underlying interests
  • (2) Relevant shareholder means
  • (3) Example
  • iii) Transaction activism aiming to facilitate an acquisition
  • c) Transaction activism targeting corporate divestiture decisions
  • i) Special formal means for shareholders of the divesting company
  • (1) Under corporate law
  • (2) Under Securities Law
  • ii) Transaction activism aiming to facilitate a divestiture
  • (1) Underlying interests
  • (2) Relevant shareholder means
  • (3) Examples
  • (a) Sears’ divestitures
  • (b) Mirant’s divestitures
  • iii) Transaction activism aiming to prevent a divestiture
  • 5) Transaction activism and means, conflicts of interest, legal limitations and the underlying theory
  • a) General analysis of the means used for transaction activism
  • i) Categorization of means
  • ii) Means under different constellations of transaction activism
  • iii) The proxy rules and the opportunities to escape them
  • iv) Proxy rules in the context of transaction activism
  • (1) Testing the waters
  • (2) Pure pressure campaigns and “just-vote-no” campaigns
  • (a) Pure solicitations of consent
  • (b) Just-vote-no campaigns
  • (3) Pre-proxy campaigns and proxy contests
  • (a) Pre-proxy campaigns
  • (b) Proxy contests
  • v) Frequency and effectiveness of analyzed means
  • vi) Support from Delaware’s courts
  • b) Potential conflicts of interest of active shareholders
  • i) Empty voting
  • ii) Hidden ownership
  • iii) Related non-host assets
  • iv) Lacking special regime
  • c) Constellations involving desirable transaction activism
  • d) Legal restrictions applicable to opportunistic transaction activism
  • i) Under securities law
  • (1) Proxy statement, § 14(a) SEA, Rule 14(a)-3(a) SEA
  • (2) Proxy antifraud rule 14a-9 SEA
  • (3) Beneficial ownership report, § 13(d) SEA
  • (a) Legal standard
  • (b) Group disclosure, Rule 13d-5(b) SEA
  • (c) Purpose disclosure, Schedule 13D item 4
  • (d) Deviating interests of active shareholders
  • (e) Remedies against violations of the section 13(d) SEA regime
  • (f) Practical relevance of section 13(d) SEA regime for active investors
  • (4) Short form beneficial ownership report, section 13(g) SEA
  • (5) Disclosure by institutional money managers, section 13(f) SEA
  • (6) General antifraud provision
  • (7) Regulation of fair disclosure
  • (8) Insider trading under section 10(b), Rule 10b-5 SEA
  • (9) Insider provisions, section 16 SEA
  • (10) Control person liability, section 20(a) SEA
  • (11) Reform intentions of the SEC
  • ii) Fiduciary duties under corporate law
  • (1) Status quo of shareholder fiduciary duties
  • (2) Proposed extension of fiduciary duties
  • iii) (More) Legal restraints and transaction activism constellations
  • e) Transaction activism and underlying corporate governance theories
  • III) Preliminary results regarding transaction activism
  • 1) Means of active shareholders
  • 2) Efficiency of existing legal limitations
  • 3) Separation of transaction activism constellations
  • 4) Transaction activism and underlying governance theories
  • IV) Transaction activism under German law
  • 1) Authority distribution in the transaction context
  • 2) General formal shareholder means
  • a) Initiation rights
  • b) Shareholder approval rights
  • c) Other shareholder rights
  • d) Capital markets law
  • 3) Constellations of transaction activism
  • a) Transaction activism targeting corporate merger decisions
  • i) Special formal means for shareholders of surviving corporation
  • (1) Report based shareholder approval
  • (2) Legal proceeding with regard to a merger
  • (3) Shareholder participation in necessary financial measures
  • ii) Transaction activism aiming to prevent a merger
  • (1) Underlying interests
  • (2) Relevant shareholder means
  • (3) Example
  • iii) Transaction activism aiming to facilitate mergers
  • b) Targeting tender offer decisions
  • i) Special formal means of shareholders of the acquiring company
  • (1) Regarding general acquisitions
  • (2) Regarding significant participation acquisitions
  • ii) Transaction activism aiming to prevent an acquisition
  • (1) Underlying interests
  • (2) Relevant shareholder means
  • (3) Example
  • iii) Transaction activism aiming to facilitate an acquisition
  • c) Targeting divestiture decisions
  • i) Special formal means of shareholders of the divesting corporation
  • ii) Transaction activism aiming to prevent a divestiture
  • iii) Transaction activism aiming to facilitate a divestiture
  • (1) Underlying interests
  • (2) Relevant shareholder means
  • (3) Example
  • 4) Transaction activism and targets, means, conflicts of interest, legal limitations and the underlying theory
  • a) Transaction activism targets under German shareholder structure
  • b) General analysis of means used for transaction activism
  • i) Categorization of means
  • ii) Relevance of formal and informal means
  • (1) Formal means
  • (a) Initiation rights
  • (b) Direct impact
  • (i) Fundamental transactions
  • (ii) Transactions subject to Holzmüller/Gelatine
  • (iii) Approval of capital measures
  • (c) Indirect impact
  • (i) Removal of supervisory board members, section 103 (1)
  • (ii) Removal of management board members, section 84 (3)
  • (iii) Special auditor, section 142
  • (iv) Litigation, sections 147 et seq.
  • (2) Informal means
  • iii) Transaction activism constellations and shareholder means
  • c) Constellations of desirable transaction activism
  • d) Potential conflicts of interest
  • e) Legal limitations for active shareholders
  • i) Under corporate law
  • (1) Impact on decision-making process
  • (a) Abuse of rights, section 242 BGB
  • (b) Fiduciary duty
  • (i) General applicability to active shareholders
  • (ii) Fiduciary duties and empty voting
  • (c) Ban on damages under group law, sections 17, 311 AktG
  • (d) Claim for damages, section 117 (1) AktG
  • (e) Liability as shadow director
  • (f) Immoral damage, section 826 BGB
  • (2) Impact prior to decision-making process
  • (a) Extra-institutional activities
  • (b) Information and equal treatment
  • ii) Capital markets law
  • (1) Notification obligations, sections 21, 22 (1), (2), 25, 25a, 27a WpHG
  • (a) Legal status quo
  • (b) Hidden ownership
  • (i) The notification regime prior to the AnsFuG
  • 1. Notification obligation under former section 25 WpHG
  • 2. Notification obligation under section 22 (1) sent. 1 No. 2 WpHG
  • 3. No notification under former regime, alternatives for new regime
  • (ii) The legislative response, the AnsFuG
  • (iii) European moves
  • (c) Empty voting
  • (i) Current notification regime
  • (ii) Discussion on disclosure of empty voting
  • (iii) Recent statutory provisions concerning short sales
  • (iv) European moves
  • (d) Related non-host assets
  • (2) Acting in concert
  • (a) Legal standard
  • (b) Acting in concert and transaction activism
  • (c) Acting in concert and conflicts of interest
  • (3) Insider trading
  • (a) Active shareholders and section 14 (1) WpHG
  • (i) Purchase of shares to impact corporate strategy in a beneficial way
  • (ii) Purchase of shares to pursue special interests
  • (iii) Sharing insider information with cooperating shareholders
  • (iv) Teleological approach and shareholder activism
  • (b) Administration and section 15 WpHG
  • (4) Ban of market manipulation, section 20a (1) WpHG
  • iii) Further legal restrictions
  • iv) Legal limitations and transaction activism constellations
  • (1) Disclosure of deviating interests
  • (2) Liability and transaction activism constellations
  • f) Transaction activism and underlying corporate governance theories
  • V) Final thesis regarding transaction activism
  • 1) Means
  • a) Direct impact
  • b) Indirect impact
  • c) Informal means
  • 2) Limitations relevant for active shareholders
  • a) Disclosure
  • b) Liability
  • 3) Constellations of desirable transaction activism
  • 4) Underlying corporate governance theories
  • E) Part III: Financial activism
  • I) Introduction
  • 1) Underlying interests of actors involved in financial activism
  • 2) Corporate financial measures
  • 3) Means to impact corporate financial decisions
  • 4) Firms targeted
  • 5) Corporate modes to fund distributions
  • 6) Concerns confronting financial activism
  • 7) Introducing hypothesis
  • II) Financial activism under U.S.-American law
  • 1) Authority distribution regarding corporate financial decisions
  • 2) Capital distributions
  • a) Active shareholders and share repurchases
  • i) Functional background of share repurchases
  • (1) KMG
  • (2) Mirant
  • ii) Examples
  • iii) Means and limitations
  • b) Active shareholders and dividends
  • i) Functional background of dividends
  • ii) Example
  • iii) Means and limitations
  • c) Active shareholders’ distribution preferences
  • 3) Active shareholders and corporate leveraging
  • a) Functional background of leveraging
  • b) Example
  • c) Means and limitations
  • 4) Means to facilitate capital structure amendments
  • 5) Criticism relating to financial activism
  • a) Foregoing interesting projects
  • b) Reduction of R&D expenses
  • c) Short-termism
  • d) Opportunistic repurchases
  • III) Preliminary results on financial activism
  • 1) Benefits
  • 2) Shareholder means
  • 3) Concerns
  • IV) Financial activism under German corporate law
  • 1) Authority distribution regarding corporate financial decisions
  • 2) Distributions
  • a) Financial activism example facilitation repurchase and dividend
  • b) Active shareholders and share repurchases
  • i) Functional background of share repurchases
  • ii) Means and limitations
  • (1) Means
  • (2) Limitations
  • c) Active shareholders and dividends
  • i) Functional background of dividends
  • ii) Means and limitations
  • (1) Legal frame for dividends
  • (2) Means
  • (3) Limitations on distribution volume
  • (4) Limitations on distribution key
  • d) Distribution preferences
  • 3) Active shareholders and corporate leveraging
  • a) Functional background of incurring corporate debt
  • b) Means and limitations
  • c) Example
  • 4) Means to pursue financial activism
  • 5) Concerns related to financial activism
  • a) Forced to forego promising projects
  • b) Reduction of R&D costs
  • c) Short-termism
  • d) Distributions excluding fellow investors
  • V) Final thesis regarding financial activism
  • 1) Facts and benefits
  • 2) Applied shareholder means
  • 3) Concerns and limitations
  • F) Conclusion
  • I) Summary and final thesis
  • II) How (active) shareholders should be dealt with
  • 1) Independent of being targeted
  • 2) Once targeted by active shareholders
  • 3) Once active shareholders have decided for confrontation
  • III) Outlook
  • Series index

← lxviii | 1 → A) The thesis

I) Motivation

According to the well-known U.S.-American financial investor Wyser-Pratte, who has been active since the 1970s, there are not only good active investors. There are also bad ones who trample the practices of local cultures, fire people, and enrich themselves at the expense of others, as some U.S.-American Funds have done. In Germany, the “Locust Debate,” a discussion about the benefits and drawbacks related to active investors, began in 2005. Franz Müntefering, at that time head of the Social Democratic Party in Germany, used active investors, whose presence in Germany was rather new, as scapegoats to win the 2005 election.2

In both Germany and the United States, the debate about the benefits and drawbacks of active shareholders is closely related to the question of the adequacy of existing provisions in restricting destructive activism, the necessity of additional statutory provisions to restrict active shareholders in negatively affecting targeted corporations, or the need to lift current legal limitations that apply to (active) shareholders. Recent data on the long-term effects of shareholder activism applied to U.S. firms relating closely to short-termism as the sharpest charge active shareholders in both countries have been confronted with has fueled the debate again.

II) Aim, scope, and method

1) Aim

This study seeks to answer the following question: to what extent do the benefits and drawbacks of shareholder activism require the amendment of the current law? This question includes determining the necessary legal means and limitations in maximizing the positive function of shareholder activism in improving corporate governance. Such means and limitations could reduce agency issues and costs resulting from the separation of ownership and control while minimizing the potential for shareholder activism to be abused by opportunistic shareholders. This thesis will examine the current opportunities for shareholder activism and determine whether these should be maintained, legally restricted or increased in the light of their potential for abuse by those with vested interests that drastically deviate from the interest of the corporation. The aim regarding ← 1 | 2 → the latter two scenarios is to propose legal amendments necessary to support the function of shareholder activism while at the same time preventing abuse that could harm the corporation and its investors.

2) Scope

This work will compare the U.S.-American corporate and securities law and the German corporate and capital market law relevant to determining the opportunities and restrictions for shareholders to actively influence publicly listed corporations. Because of the multiplicity of corporate laws at the state level in the United States, this work will concentrate on the corporate law of the State of Delaware, which is in practice the most significant among the different states in terms of laws governing corporations.3 Despite Delaware’s small size and population, a disproportionate number of corporations have incorporated there, including half of the publicly traded corporations and the majority of the large publicly traded corporations.4 Delaware’s popularity stems from its extraordinary flexibility regarding the arrangement of the articles of incorporation of corporations as well as the state legislators’ restrain in passing regulations.5

After a general introduction on shareholder activism and the underlying theories and relevant practical differences in the United States and Germany, this work will focus on three strategies repeatedly applied by active shareholders. The analysis will consider the means of active shareholders as well as the limitations they confront. Furthermore, it will take into account the controversies each strategy triggers.

3) Method

This work is a comparative analysis of the current opportunities and restrictions on active investors in public corporations imposed by American corporate and securities laws and the German corporate and capital-market regime that are pertinent to increasing control of corporate management as well as to the concerns confronting active shareholders.6

This study makes use of a functional approach7 that considers economic models of the firm, particularly the modeled assumptions and analytical methods of the New ← 2 | 3 → Institutional Economics8 regarding public corporations. These methods include complementary used-agency9 and transaction-cost10 theories of the firm11 as well as of nonlegal institutions. Transaction costs may result from trading relations between contractual partners and may be reduced in an organization like a firm. Agency costs, on the other hand, evolve in hierarchies based on incomplete information, permitting opportunism and different risk tolerances, among others. The aim of these approaches is to maximize the overall economic benefit of the involved parties by reducing the use of resources, including transaction or agency costs.← 3 | 4 →


2Martin Dowideit/Anette Dowideit, „Je mehr ein Fisch zappelt, desto größer ist er“, DIE WELT, Dec. 20, 2005, available at http://www.welt.de/print-welt/article185389/Je_mehr_ein_Fisch_zappelt_desto_groesser_ist_er.html.

3Becker, Verwaltungskontrolle durch Gesellschafterrechte, 1997, 105 et seq.; Greenfield, 67 LAW & CONTEMP. PROBS. 135, 135-37 (2004).

4Bebchuk & Hamdani, 112 YALE L.J. 553, 554 n.3 (2002): “Delaware is the state of incorporation for 51 percent of U.S. public companies and for 63 percent of Fortune 500 companies.”; Greenfield, supra note 4, at 135.

5Leyens, RabelZ 67, 57 (69 et seq.).

6Dannemann, Comparative Law: Study of Similarities or Differences? in Reimann/Zimmermann, THE OXFORD HANDBOOK OF COMPARATIVE LAW 383, 399 (2006).

7Michaels, The Functional Method of Comparative Law in Reimann/Zimmermann, THE OXFORD HANDBOOK OF COMPARATIVE LAW 339, 340 et seq (2006).

8Fleischer, ZGR 2001, 1 (3 et seq.).

9Jensen & Meckling, 3 J. FIN. ECON. 305 (1976).

10Coase, 4 ECONOMICA 386, 390 et seq. (1937): according to whom the market may be led by an invisible hand, so Adam Smith, but there is a cost of using this price mechanism; Williamson, Die ökonomischen Institutionen des Kapitalismus: Unternehmen, Märkte, Kooperationen, 1990, 17 et seq.

11POSNER, ECONOMIC ANALYSIS OF LAW 419 et seq. (420), 440 et seq. (2007); Ruffner, Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft, 2000, 131; Schäfer/Ott, Lehrbuch der ökonomischen Analyse des Zivilrechts, 2005, 645.

← 4 | 5 → B) Introduction to shareholder activism

I) What is shareholder activism?

1) Definition of shareholder activism

Shareholders dissatisfied with the management of a corporation or corporate performance may decide for the “exit” and adopt the “Wall-street-rule” by selling their shares. They may also continue to hold their shares without doing anything, better known as “loyalty.”12 Shareholders who aim to express their dissatisfaction employ a wide range of means lying between the sale of shares and the initiation of takeovers or LBOs.13 In 1972, Hirschmann defined this “voice” option as any attempt to change rather than to escape from an objectionable state of affairs through individual or collective positions to the management directly in charge, appeals to a higher authority with the intention of forcing a change in management, or various types of actions and protests, including those meant to mobilize public opinion.14 Its function is to alert a firm or organization to its failings while giving it some time and the choice to respond to the pressures that have been brought to bear on it,15 depending on the costs of alternatives.16 Nowadays, shareholder activism refers to the interest of shareholders in shaping the direction of their company through their participation in the normal processes that shape the company, such as voting through proxies during a shareholder meeting. At the other extreme lies the popular hedge fund practice of accumulating shareholder minority positions in public companies large enough to move the companies single-handedly in one direction or the other or in whatever form the activist practice may take. As a consequence, it is clear that the term refers to attempts by different types of shareholders to use whatever power they have as owners to influence the company’s behavior regarding a wide range of topics from corporate governance issues to pure management decisions.17 Despite this broad interpretation, active shareholders need to be distinguished from the German ← 5 | 6 → phenomenon of professional opponents, whose goal is obstruction when they file legal suits against corporations to extract personal benefits. In contrast, active shareholders generally aim to exercise constructive control over the corporate administration18.19 This introductory section on shareholder activism will therefore consider the varieties of shareholder activism regarding the actors and the strategies and means they apply to pursue them.

2) Motivation to become active20

There may be good reasons for shareholders of large public corporations to remain passive instead of exerting their rights. These reasons include shareholder confidence in managerial expertise, limited returns from potential corporate value increase for individual shareholders with minimal stakes, and free-riding issues21.22 Additional reasons are the dispersed ownership amongst many shareholders–requiring complicated and costly efforts to realize joint decisions (collective-action issue23)24–the quicker and less costly “exit” solution, the limited liability of shareholders,25 and legal obstacles preventing them from using formal accountability mechanisms26.27

Nevertheless, increasing numbers of shareholders decide to become active. “The main motive for active participation of institutional investors in the monitoring of cor
← 6 | 7 → porations has been the potential to enhance the value of their personal investments.”28 The rationale for shareholder activism arises from the need to resolve agency conflicts inherent in a public corporation. Shareholders, as the (economic) owners of the corporation, delegate the decision-making to managers. The board of directors, bound by fiduciary duties towards the shareholders, is supposed to control management. This structure is intended to avoid possible agency problems such as managerial opportunism, in which managers make decisions in their own interest, rather than seeking to benefit shareholders by maximizing shareholder value. Using their delegated responsibility of hiring, firing, compensating, and monitoring the managers, the board of directors can ensure that managers act for the benefit of shareholders.29 A need for shareholder activism arises when the board is not exercising its control task,30 and, therefore, the organizational structure cannot fulfill its task in reducing agency issues resulting from the opportunistic decisions and actions of the managers. Besides the stock market and the market for corporate control, shareholder activism is a means of a non-control related monitoring by active investors that can reduce or eliminate these agency issues.31

Shareholders, such as the decreasing number of blockholders in the case of German corporations and institutional shareholders in U.S. and German corporations, are a less diversified group. Due to the size of their shareholdings they have the opportunity to overcome rational apathy problems based on free-rider issues. The larger sizes of their stakes may allow them to be compensated for their efforts to become active. Furthermore, their large total investments reduce collective action problems, while access to greater amounts of capital allows them to circumvent legal obstacles. The size of their stakes provides them with stronger incentives to become active, since it is usually difficult to choose the “exit” option by selling their stake without giving a significant discount.32

← 7 | 8 → 3) History of shareholder activism

Shareholder activism has a longer history in the United States than in Germany. In the United States, shareholder activism has existed since the first half of the past century. After the adoption of the predecessor to Rule 14a-8 of the Securities Exchange Act of 1934,33 individual shareholders began to submit proposals that aimed to improve corporate governance as well as corporate performance.34 Several decades later, shareholders increasingly used these measures to focus not only on corporate governance, but also on social issues.35 Beginning in the mid-eighties, several groups of active shareholders emerged using shareholder proposals that generally aimed to raise awareness of the directors’ accountability to shareholders.36 During the mid-eighties and onward, the steadily growing amount of investments held by institutional investors37 led to their growing stakes in and impact on corporations and resulted in their active involvement, marked by the formation of the Council of Institutional Investors (“CII”). The CII started as a lobbying group for shareholder rights. Later it began to focus on advancing the perspectives of institutional investors. The CII initially focused on proxy proposals, but by the early 1990s it increasingly made use of its access to the administrations and the media. With the decline of the takeover market and the repeated amendment of securities rules beginning in the 1990s, communication among shareholders on matters of voting as well as with the administration was improved.38 The increasing ← 8 | 9 → impact of commercial shareholder advisory firms, especially of the former Institutional Shareholder Services Inc. (“ISS”),39 reduced collective action problems40 and brought the activism of institutional investors to the fore. In recent years, lightly regulated hedge funds in particular have demonstrated growing interest in participating more directly in the decision-making process of their targeted companies, thereby contributing to a partial redefinition of the activism phenomenon.41

In contrast, the phenomenon of shareholder activism in Germany is still a relatively recent one. Prominent cases involving Deutsche Börse AG, TUI AG, or CeWe Color Holding AG, which will be analyzed infra, occurred during the second half of the first decade of the new millennium.42 During the last seasons of shareholder meetings, shareholder activism became a reliable part. The number of active shareholders constantly increased in the last years, as indicated by the participation of active shareholders regarding the share capital.43 This development is based, amongst many reasons, on reforms of corporate law. These included the introduction of the record date through the UMAG44 in 2005, § 123 (3) sent. 3 AktG, making the deposit of shares superfluous while allowing even shareholders from abroad to register for participation. Other developments include the introduction of the shareholder forum, § 127a AktG, allowing shareholders to prepare common motions such as those according to §§ 122, 142 (2), 148 (2) AktG, and so on, seeking to increase ownership-based control in times of increasing freefloat and internationalization.45 Another contribution to this phenomenon is the recently enacted ← 9 | 10 → legislation permitting corporations to opt into a regime allowing shareholders to participate at a shareholder meeting and vote, both online, through amendments in their articles of incorporation, § 118 (1) sent. 2, (2) AktG. Further contributions include the increasing impact of proxy advisory firms.46 Beyond this, market prerequisites have been amended especially through the divestiture of theDeutschland AG.”47 Many of the banks,48 insurance companies, and industrial enterprises held share packages that became fragmented, leading to increased freefloat and decreasing presence rates during shareholder meetings. This made it easier for active shareholders to accumulate significant voting stakes.49 Furthermore, the resulting increase in the number of international institutional investors50 contributed to this movement. Among these were active shareholders, including particularly aggressive hedge funds,51 with relatively small shareholdings who approached management with specific requests regarding corporate policy,52 leading a change from management rule to shareholder rule.

As a consequence of the comparably short history of shareholder activism in German corporations, empirical data and experiences on the effect of shareholder activism on German corporations are correspondingly restricted. Therefore, this thesis will have to fall back on the use of data primarily from U.S. corporations’ experiences with shareholder activism, in few parts only allowing careful inferences to Germany.

← 10 | 11 → 4) Actors of shareholder activism

The actors of shareholder activism vary according to the goals, strategies, and means employed. Shareholder associations such as the CII in the United States or the Deutsche Schutzvereinigung für Wertpapierbesitz (“DSW”) and the Schutzgemeinschaft der Kapitalanleger (“SdK”)53 in Germany may exercise shareholder activism. Single minority shareholders and institutional investors can pursue it; the latter concentrate mainly on financial and sometimes strategic goals.54 The significant and steady growth of the stakes in public corporations held by institutional investors—currently representing about three-fourths of the investments in the 1000 largest firms in the United States55— has made them the most important active investors. In Germany, the most active shareholders are domestic and international traditional investment funds, followed by hedge funds and other funds, including private equity funds.56 International investors represent 79 percent of the active investors in Germany.57

A generally acknowledged definition of institutional investors does not exist. They may be comprised of independent legal entities whose core business is the professional management of assets on behalf of their clients and who manage a significant amount of funds that they tend to invest in a highly diversified manner.58 Institutional investors include pension funds, mutual funds, banks, insurance companies, broker/dealers, and hedge funds.59

In the United States, hedge funds (which become active60) have proven to be the preeminent activist shareholders.61 The funds they manage have increased rapidly to about $1.7 ← 11 | 12 → trillion in 2008.62 Instead of concentrating on corporate governance, they have targeted specific aspects of the corporate business or management such as transaction decisions as shareholders of the acquirer or target63 or the amendments of the financial and capital structure of the targeted corporation. Soft forms of shareholder activism have been applied by public pension funds and mutual funds. They are mainly related to corporate governance issues and make use initially of precatory shareholder proposals and resolutions later complemented by private negotiations with the boards.64 However, in recent years, mutual funds particularly have gone beyond such a soft form of activism. For instance, they prevented the sale of the targeted corporation before a substantial rise in price, often teaming up with hedge funds, who took the lead.65 Mutual funds are legally restricted by semiannual disclosure obligations regarding their securities ownership, tax-based diversification requirements, and potential redemption requests at short notice requiring liquidity in their investments. Furthermore, regulations hinder performance-based payments to the fund management company and a lack of incentives regarding shareholder activism results from their being indexed. This is complemented by the costs related to more active activism as well as conflicts of interest resulting from their affiliation with other financial institutions.66 Public pension funds, in contrast, are not subject to diversification requirements or restraints on performance-based fees, nor do they have business ties possibly jeopardized by activism. However, they are confronted with political constraints and conflicts of interest, and their executives face low pay, making them less effective and less supported by other investors.67 Hedge funds, on the other hand, are not confronted by the legal constraints facing mutual funds,68 but only by the constraints confronting regular investors.69 The conflicts of interest they are involved in are not as strong, as they are not affiliated with other financial institutions. Furthermore, management fees based on absolute return and proportionally larger investments per corporation have dramatically increased throughout the 2000s, providing hedge funds with stronger incentives to activism. This was made possible through debt-equity ratios beyond two in larger corporations as the financial resources available to hedge funds increased. Moreover, hedge funds make use of financial instruments, which allow ← 12 | 13 → them to reduce costs and strengthen their incentives to pursue activism.70 Finally, their proceedings are very sophisticated regarding their choice of targets, their strategies, and the means they use, including going public with their demands.71 There is hope that hedge funds will finally resolve the issue regarding “who will be responsible for monitoring the managers when there is a separation of ownership and control in the public corporations that dominate our economy?”72 But their precise procedures also provoke concerns.73

Active shareholders usually hold minority positions between 5 and 10 percent, the latter particularly pertaining to the United States.74 A growing stake not only increases the impact of active shareholders, but it also results in economies of scale regarding the control of management. Furthermore, larger stakes make an active shareholder more credible. In case of friction he will scarcely be able to exit the corporation quickly.75 Applicable rules have the consequence that active shareholders usually keep their shareholdings below 10 percent, particularly under the U.S. securities regulator’s short-swing profit rules, as well as additional disclosure obligations.

5) Targeted firms

Targeted firms include all industry sectors, but specialized firms seem to be preferred.76 Until recently, U.S. firms targeted by active shareholders were characterized as poor ← 13 | 14 → performing corporations, whose shares were held by many institutional investors with low inside ownership and whose governance structures were evaluated as comparably poor.77 Meanwhile, the increase in experience and data about shareholder activism in U.S. firms and the altered strategies of active shareholders have changed the overall picture of target firms. Targets still have significantly higher institutional ownership, explainable by the need to rely on the expertise and the support from fellow shareholders to implement the changes given their minority stakes in the target firms.78 Stock market liquidity possibly increases the likelihood of becoming a target because liquidity allows active investors to easily accumulate their stake and monitoring costs may be quickly compensated through trading profits.79 Targets of hedge funds80 are particularly characterized as having comparably low market to book ratio as compared to firms targeted by passive shareholders.81 However, they are characteristically profitable firms with sound operating cash flows and return on assets.82 Views on market capitalization,83 payout ← 14 | 15 → ratios,84 and cash level85 prior to intervention diverge among legal scholars. But data increasingly support the idea of a preference for small targets,86 which can be explained by the lower amount needed for substantial minority stakes and by the ability to avoid an excessive amount of idiosyncratic risk87 with low payout ratios88. They invest after judging that their input by itself can cause the value to register. They are pursuing primarily one of three strategies: to get the target to sell itself at a premium (especially when merger waves apply to the concerned industry), to get the target to sell or spin off a significant asset, so-called “unbundling” (when a discount of around 15 percent applies), or to get the target to pay out spare cash.89

Data regarding firms outside the United States seem to confirm these characteristics.90 Available data on German targets are still comparably limited. Active shareholders seem to prefer corporations possessing several of the following characteristics: strong freefloat, low shareholder presence, undervalued assets, heterogeneous fields of business, unspecified strategic position, and/or controversial management.91

← 15 | 16 → 6) Strategies and means used by active shareholders

The goals pursued by active shareholders today are, based on the numbers of institutional investors among the active shareholders, mainly financial in nature and aim to increase the value of their personal investment by raising the stock price or realizing the distribution of corporate capital to the shareholders. Sole strategic goals, such as the aim to improve the general corporate governance and social aims, have become rather secondary.

Active shareholders pursue several strategies to attain these objectives that vary according to the type of active shareholders.92 These range from influence on corporate governance issues to strategic operative issues. The former refer to strategies applied by traditional active investors that aim to amend the corporate rules-of-the-game, while the latter involve corporate transaction decisions or financial and capital structure related decisions of the corporate management. The latter are preferred strategies of hedge funds93 usually based on a careful prior analysis of the targeted corporation.94 In general, active shareholders concentrate on the implementation of generalized strategies related to agency issues, like changes in corporate governance or payout policies on free cash flows, rather than on issues specific to a limited number of targeted firms.95 This approach allows active investors to significantly lower costs when launching a new campaign because they can shift to the use of publicly available information while increasing the likelihood that the strategies are appreciated by market participants, resulting in inflated stock prices and support from fellow shareholders.96 Several investors often act jointly to produce the necessary impact for pursuing a corresponding strategy.

Active shareholders who have decided to raise their “voice” against management and to pursue one or several of the mentioned strategies have a wide array of specific means at their disposal. On an abstract level, active shareholders employ several means to pursue their strategies. These can range from means exercised during the shareholder meeting, such as electing directors in U.S. corporations or supervisory board members of German corporations, respectively, to those exercised at all other times, such as personal talks between active shareholders and members of the administration. These comprise means exercised prior to the formation of the corporate decision as well as those ← 16 | 17 → exercised during its formation. Others range from means explicitly mentioned by statute (shareholder approval of a merger) or precedent (approval of a fundamental corporate decision according to the Holzmüller/Gelatine jurisprudence) to means not explicitly provided by either (“Vote-no campaigns”). Finally, the means of communication may be private or public. The former can simply be a phone call or personal talk to a member of the administration while the latter can involve such means as using media campaigns addressing personal or issue-related critiques.97 Traditional active shareholders as well as hedge funds use an array of divergent means.98

The analysis will focus on three of the most relevant strategies of active shareholders that impact on the corporate governance, corporate M&A decisions, and financial structure of targeted corporations. As a corollary, the different means used by active shareholders to pursue these strategies will be analyzed.

7) Criticism regarding active shareholders

Despite pinning hope on active shareholders, especially hedge funds, to reduce agency issues and resulting costs that would consequently raise shareholder value in targeted corporations,99 their impact has often been tainted with issues concerning opportunistic behavior motivated by vested interests at the expense of the other shareholders of the target. Concerns relate to hedging strategies based on the use of new financial instruments that can lead to decoupling the financial interests of shareholders from their control rights100 as well as larger stakes in third corporations. The “sharpest” accusation ← 17 | 18 → against active shareholders is that they are only acting to realize short-term benefits to the detriment of long-term corporate performance.101 Other concerns are related to the sophistication of some of the active shareholders who may use their strategies to attain personal benefits that are not accorded to the rest of the shareholders.102

II) Theoretical background of shareholder activism – legal and microeconomic

The functional comparison of shareholder activism under U.S.-American and German law requires an understanding of the relevant theories underlying both legal systems of corporate law.

1) The concept of the firm

The theoretical understanding of the corporation as a firm is helpful regarding questions concerning the internal environment of the corporation and the parties involved who are subject to the relevant corporate law.103 It is the first step in understanding the purpose of the internal authority distribution according to both jurisdictions at stake.

The U.S.-American and German understandings of the corporation differ significantly. Under German legal theory, corporations are a legal entity. On the other hand, economically oriented scholars of corporate law who consider the firm as a nexus of contracts have influenced the U.S.-American perspective.104

The German legal theory is determined by the conception of the firm as a separate legal entity independent of its members, having its own separate objective apart from the interests of its shareholders as well as its own rights and duties.105 This conception allows a strict separation between the internal relations of shareholders amongst each other or towards the corporation and the external relations of the corporation with third persons.106 Disputes about the nature of the corporation as a legal person awarded by the ← 18 | 19 → legal system107 or a real social organization with its own body, organs, spirit and soul108 happened in the past due to its relevance for the external relations of corporations.109 Meanwhile, legislation and court rulings have made the decision superfluous.110

In the Anglo-Saxon literature, the debate has been of little relevance in the past decades.111 The growing acceptance of microeconomic approaches and knowledge of corporate law by German corporate scholars,112 a long tradition for U.S.-American scholars, seems to have rekindled this old German dispute.113 The U.S.-American understanding of the firm, introduced by the landmark paper of Ronald Coase,114 is based on the understanding that the firm constitutes an alternative to the market. While it is the price mechanism that directs the resource allocation via exchange transactions in the market, authority and directions by an entrepreneur, similar to a relation between employer and employee, accomplish the allocation of factors of production in the firm.115 Consequently, the use of the firm for the allocation of resources allows for the reduction of transaction costs under certain circumstances as compared to the use of the market mechanism.116

Jensen and Meckling objected to Coase’s understanding of the firm as an entity in which activities were governed by authority.117 According to their conception, the firm is “simply a legal fiction which serves as a nexus for a set of contract relationships among individuals.”118 This individualistic conception119 leads to a new order that allows concentrating on voluntary exchanges and occurring transaction costs as well as work-sharing delegation and delegation costs.120 The nexus of contracts of a firm comprises several agency relationships, as they exist in numerous other contractual relationships with the focus on the relationship between shareholders and management.121 Contracts are not to be understood as contracts in the sense of civil law, but rather as wholly legal relationships based on the will of the involved actors, whether directly or indirectly.122 A separate corporate interest apart from the interest of the involved individuals is not justifiable under this concept.123

← 19 | 20 → Concentrating on the individualistic character124 of the involved actors allows a shift in focus to the contractual relationship between the fiction of the firm and the reciprocity of the firm’s inputs and outputs. In this case, the question regarding what belongs to the firm and what lies outside of it loses its significance125.126 The central feature of this approach is that the consequent hypothetical market from which it cannot be distinguished may govern the company.

Even though the nexus of contracts theory appears similar to the fictional conceptions based on Savigny’s understanding of the corporation,127 it is at odds with the legal understanding of the corporation. First, it is not a legal but an economic theory.128 The significance of the term contract under this conception is far wider than the legal terminus,129 thus preventing legal scholars from drawing any direct conclusions.130 Further, it is a conception of the firm, which is not identical with the conceptions of the legal person. The former includes also business owners of companies without entrepreneurial purpose.131 Regarding its content, the conception contradicts the legal understanding of the corporation as a distinct entity and artificial person.132 This is so because a corporation not only owns the assets of the company, but it may also take action to enforce its legal rights and is responsible for its own debts apart from the rights and debts of its shareholders.133 This latter principle constitutes the basis for the concept of limited liability, allowing investors to minimize their personal risk by offsetting any risk incurred by their investment in a single corporation through diversification.134 Finally, experts have cast doubt on the consistency of the conception of the firm as a nexus of contracts.135

Despite these provisos, the contractual approach should not be completely abandoned. By deconstructing the corporate entity, it sheds light on the internal perspective of a corporation.136 It helps to focus on the relationships between the relevant actors of the firm, such as shareholders and management, who act based on reciprocal expectations and behavior.137

← 20 | 21 → 2) Authority allocation in the corporation

Views about the allocation of corporate authority, particularly in the relationship between administration and shareholders, diverge, even on the question of ultimate control.

The economic foundation of the concept of shareholder primacy, which favors the maximization of wealth of the shareholders as residual claimants,138 represents the understanding that the ultimate power rests with the shareholders as the (economic139) owners of the corporation140.141 Therefore, the relationship between shareholders and directors is a principal-agent relationship142 in which corporate directors have the fiduciary duty to make decisions in the best interest of the shareholders.143

Those in favor of the team production theory provide another approach.144 This concept forms the counterpart of the contractual approach145 and is aligned with the communitarian understanding that aims to maximize stakeholder wealth analyzed infra.146 Proponents assert that the main economic function of the public corporation is to provide a vehicle through which shareholders, creditors, executives, rank-and-file employees, and other potential corporate stakeholders can, for their own benefit, jointly relinquish control over the resources to a board of directors.147 In this regard, the directors, as a mediating hierarchy, are seen as trustees of the corporation who balance the interests of competing team members rather than acting as agents.148

The main argument of the team production theory is that corporate productive activity requires contributions from multiple parties such as creditors, employees, managers, and local government, who in return expect to be compensated according to the contracts.149 Strict shareholder primacy would discourage groups from making firm-← 21 | 22 → specific investments that can be essential to the firm’s success, leading ex ante or ex post to inefficient results. Therefore, from an efficiency standpoint, corporate directors should be required to maximize the sum of all returns to the groups participating in the firm. Public corporations would then be empowered to refrain from opportunistic exploitation of non-shareholder constituents, reducing the transaction costs associated with obtaining relationship-specific investments.150 This approach represents an alternative to the principal-agent approach151 which is not able to explain problems such as the exclusion of shareholders from the board, the meaning and function of the corporation’s “legal personality,” derivative action procedures, the structure of director fiduciary duties, and the limited number of shareholder voting rights.152

This approach is limited to public corporations, assuming that non-shareholder constituents are particularly vulnerable to opportunism.153 However, supporters of the approach have not shown why non-shareholder participants in publicly held corporations are more vulnerable to opportunism than in private corporations, especially since certain facets of public corporations, such as the separation of ownership and control, render shareholders themselves more vulnerable than in private firms. Furthermore, this approach undermines the shareholder’s role as the primary monitor and severely constrains the incentive of directors to maximize anything but their own welfare, leading to increased transaction costs.

The final approach is that of director primacy.154 It is aligned with the contractual theory as well as the shareholder value approach analyzed infra. Under this approach, the authority to make decisions is vested in the board of directors, which represents not agents, but rather the embodiment of the corporate principal,155 serving as the nexus of the several contracts that make up the corporation. Since the corporation is seen as something that cannot be owned, the shareholders merely hold a contractual entitlement to a residual claim on corporate assets and profits. Even though shareholder wealth properly controls decision-making, decisions are centralized through the board, which is an essential attribute of efficient corporate governance.

The different theoretical approaches regarding the allocation of authority in a corporation are relevant to an analysis of shareholder authority regarding certain actions. Shareholder actions regarding the corporate decision-making process may be evaluated differently depending on the underlying theoretical framework and the allocation of authority in ← 22 | 23 → the corporation. Under the principal-agent–approach156 prevailing under U.S.- American law, the final authority rests with the shareholders; the director primacy theory identifies the board of directors as the principal; and finally, the team production theory focuses on the interests of all corporate stakeholders as the reason why authority is handed to a third party.

3) The purpose of the corporation


ISBN (Hardcover)
Publication date
2014 (February)
Transaktionsentscheidungen share repurchases Fusionen Devestition dividends leveraging acquisitions Aktienrückkäufe
Frankfurt am Main, Berlin, Bern, Bruxelles, New York, Oxford, Wien, 2014. LXVIII, 395 pp.

Biographical notes

Marion Hartmann (Author)

Marion D. Hartmann studied law at the Humboldt University of Berlin and at the Université de Genève. She completed the LL.M. program at Duke University (USA), and the legal clerkship at the Higher Regional Court of Hamburg. She received her doctorate from the Humboldt University of Berlin and currently works as a corporate attorney of law in Hamburg.


Title: Shareholder Activism
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