Shareholder activism in Belgium: boon or curse for sustainable value creation?

A teaser for the conference on 9 June 2022

Shareholder activism used to be rare in Belgium. According to two studies, there were only 9 hedge fund activist engagements in Belgium between 2000 and 2010, and 7 between 2010 and 2018. This is much lower than the number of activist campaigns in the US, even in comparison to the total number of listed companies. However, shareholder activism is said to enter a “golden age” in Europe, with more corporations than ever at risk of activism. A second important trend is the rise of “ESG activism”, where the tools of shareholder activism are used to pursue “ESG” (environmental, social and governance) objectives. Such ESG activism can be pursued because the activist believes that it could contribute to long-term shareholder value, but also from a non-profit perspective. An example of the latter is the “one share ESG activism” campaign against Solvay by the hedge fund Bluebell, which has urged Solvay to stop the discharge into the sea of waste from a soda ash production plant in Italy.

Shareholder activism in Belgium, and especially the recent trend of ESG activism, has not received much attention in Belgian legal scholarship, however. To fill this gap, we (the Federation of Belgian Enterprises (FEB) and the Jean-Pierre Blumberg Chair at the University of Antwerp) have decided to organize a one-day conference on 9 June 2022 to explore the present and future of activism in Belgium. 

Below, I give a small teaser of my introductory presentation.

Why has shareholder activism been relatively rare in Belgium?

The first question that arises is: why has shareholder activism been relatively rare in Belgium, especially in comparison with the US?

A first hypothesis could be that shareholder activists have fewer legal rights in Belgium than in the US. However, this argument seems unconvincing (see similarly: Cools, 2020). In Belgium, a 10% shareholder can ask to convene a general meeting, while in the US (at least in Delaware), this can only be done when it is provided in the charter, which is not common. Secondly, in the US, shareholders can only file non-binding shareholder proposals for the general meeting, which cannot involve the nomination of directors. In contrast, in Belgium, a 3% shareholder (which is lower than the typical ownership stake by a hedge fund activist) can file shareholder proposals, for example to nominate its own directors. These shareholder rights will be discussed in more depth during our conference by Pierre Nothomb from Deminor, and by Deborah Janssens and Sigrid Ververken from Freshfields. In any case, it seems that the lack of shareholder rights is not the cause for the different activism levels. 

A second, more plausible hypothesis is that securities laws in Belgium (and in the EU more generally) erect more barriers to activism than in the US. The reason is that activists often try to build a large stake in the target corporation before going public, so that they can profit from a value increase. Securities laws require the disclosure of significant shareholdings, however, starting from 5% in Belgium and the US. However, in the US, this disclosure is required only 10 days after crossing the threshold, while in Belgium this is required already after 4 trading days. In addition, in the US, activists can avoid disclosure by accumulating economic ownership without accumulating voting rights by purchasing equity-based swaps, which do not need to be disclosed immediately. In the EU, such swaps are also covered by the Transparency Directive, after amendments in 2013. These rules imply that activists in Europe can probably build lower stakes in the EU than in the US before they have to disclosure their ownership. Because the stock price typically goes up after activists disclose their ownership stake, this limits the profitability of activist campaigns. Finally, rules on insider tipping also seem to be stricter in the EU than in the US, which makes it more difficult for activists to assemble a so-called “wolf pack” of supporting investors before going public (see for this argument: Taleska, 2020). These rules are discussed in more detail during our conference in a presentation by Marijke Spooren from Cleary Gottlieb. The point that I want to make here is simply that the different securities laws could explain why shareholder activism is generally more difficult in the EU. However, this may change in the future, as the SEC is considering several reforms that would strengthen the disclosure rules for activists in the US (as discussed in this blogpost).

A third explanation has less to do with the legal differences and more with the type of corporations listed in Belgium. Compared to the US, Belgian corporations more often have a controlling shareholder, which makes it more difficult for shareholder activists to influence the management of the corporation. Research by the OECD also shows a relatively low level of institutional ownership in Belgium (compared to the US), while shareholder activists depend to a large extent on the support of institutional investors for their campaigns to be successful. Finally, many Belgian listed corporations are small caps. Because some of the costs of activism are fixed costs, a larger ownership stake is required in small caps for the benefits of shareholder activism to be worth the costs (as noted by a recent blogpost). Acquiring a large ownership stake is difficult because of the strict disclosure rules, however.

This does not mean that Belgian corporations are safe from shareholder activism. Even the stricter European disclosure rules still allow significant stakebuilding by activists. In addition, the growing number of institutional investors in Belgian listed corporations suggest that shareholder activism will only become more important, especially for large corporations without a controlling shareholder.

Would more shareholder activism be desirable?

An important question is of course whether more shareholder activism in Belgium would be a desirable evolution. The empirical evidence on this question is mixed and highly controversial. Nevertheless, a few trends can be identified. 

First, it is clear that shareholder activism leads to a short-term boost to the stock price, both in the US and internationally.

Secondly, it seems that this trend is not reversed in the long term. Some studies (in the US) even find positive long-term returns for shareholders after activist campaigns (for example Bebchuk, Brav & Jiang, 2015; Becht et al., 2017Cremers et al., 2021Brav, Jiang & Li, 2021), although another study finds no significant effect (positive or negative) on average when value-weighted returns are used. 

Thirdly, many studies (in the US) also find that hedge fund activism increases firms’ operating performanceplant productivity and innovation output. However, other studies find no increase in long-term operating performance.

Finally, there is some evidence (in the US) that activists simply transfer value to shareholders from creditorsemployeestaxpayers and the environment (although another study finds a positive effect on the environment).

This brief look at the empirical evidence suggests that activism seems to be generally good for shareholders, but may sometimes be bad for stakeholders. However, the recent trend of ESG activism implies that shareholder activism may also be beneficial for stakeholders, as will be discussed by Anna Christie (Edinburgh and Cambridge University) during the conference. There is even some recent evidence that suggest that ESG activism is effective in inducing better ESG performance (Barko et al., 2021Naaraayanan et al., 2021Azar et al., 2021).

This blogpost is not the place to settle the debate on the desirability of shareholder activism. Nevertheless, hopefully this teaser has triggered you to reflect on the following question: is shareholder activism a boon or a curse for sustainable value creation? Should you be interested in learning more about this question, you are very welcome to come reflect with us on 9 June.

The conference “shareholder activism in Belgium: boon or curse for sustainable value creation” takes place on 9 June 2022 at the offices of the FEB (Ravensteinstraat 4, Brussels). More information and registration via this link.

Tom Vos
Visiting professor at the Jean-Pierre Blumberg Chair (University of Antwerp)

Author: Tom Vos

Tom Vos is a visiting professor at the Jean-Pierre Blumberg Chair of the University of Antwerp, where he conducts research and teaching in the field of corporate governance. He is also affiliated as voluntary scientific collaborator with the Jan Ronse Institute (KU Leuven). His current research interest is short-termism in corporate governance.

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