Forewarned Is Forearmed
Granular analysis of the share register also acts as part of the company's defence strategy against takeover by predators or intervention by unwanted activists. Having a good understanding of the ownership and trading of your shares over time allows you to spot unusual activity which can herald the arrival of an unwanted entity, either in real ("long") or synthetic (derivative) form.
Communication Is Key
The days of corporate predators buying slices of their targets by stealth are mainly over, as most acquisitions over recent years have been recommended offers, often carried out by Schemes of Arrangement. The best defence from takeover – or least the best way to secure the highest possible price – is to know your shareholders and regularly communicate with them.
Managing Activist Investors
Activist investors are trickier, especially the deep value players who may wish to create significant changes to your company in terms of strategy, Board composition or equity structure to realise their ambitions for your valuation. Many traditional investors may now style themselves as an activist, and even some "plain vanilla" players are taking more aggressive approaches to their engagement with companies than previously, but these firms are unlikely to resort to the various mechanisms used by the activist hedge funds to take positions in the shares of companies ahead of their intervention.
It is important to remember that an investment firm must reach a threshold of 5% of a company's issued share capital before it discloses as an asset manager. So, a hedge fund manager may hold positions through several funds via equity or derivative positions which are not themselves disclosable until they reach 3% each in aggregate.
Know Where To Look
Hedge funds can hold their shares (either long or synthetic) in all sorts of vehicles that may not be easily interrogated. These include;
- Bank proprietary trading accounts
- Multiple-tier sub-custodian accounts
- Private banks and wealth managers in tax-haven domiciles with strict rules on client privacy
- Private trusts or;
- Derivative positions such as Contracts for Difference ("CfDs”), options, futures and swaps.
Activists frequently move their shareholdings from one custodian to another, and sometimes across domiciles, to make tracking them down even more difficult.
Getting To The Truth
Companies Act s793 cannot help you in identifying the ownership of derivatives, but all is not lost: you can issue a notice to an activist to check their long position. You can also ensure that you track in fine detail who owns your shares, so you can spot changes to the constituency of the ownership of your stock, which would presage any attack, allowing you more time to build your defence case.
Activists are only successful where the other investors are supportive of their aims, so the best way to avoid activism is to understand investor sentiment and deal accordingly. Good IR is the best defence of all.
