Mapping transparency: Spotting the activist

How hard is it to get to the bottom of your shareholder base? Part four

Most companies will engage in shareholder ID at least once a year when their fiscal year ends, three months prior to their annual general meeting, in order to capture the voting rights. This approach means any activist shareholders may also be identified, and any potential problematic issues or threats coming to the meeting can be overseen in advance by the board.

‘We can understand when an activist investor may be amassing a small stake and give our clients a probability as to whether [the activist is] holding a position or not, based on the ownership patterns we recognize,’ Scheer says. ‘Different hedge funds use certain prime brokers in certain markets and seeing the group of them come up and leave together is certainly one strong indication, pointing to a name that might be a threat. It’s something that’s so very nuanced and specialized that you need to be an expert in a certain market.’

About a third of Simms’ work is commissioned in the context of a transaction, be it a hostile takeover, activist attack, straightforward M&A deal, spin-off or delisting. ‘If you’re in a deal, you can have percentages making the difference as to whether it goes through or not,’ he stresses. ‘Without this forensic analysis, you can lose out on a technicality because someone hasn’t been identified. But you could need ID for as simple an event as a company moving sectors, or reaching the top of its growth curve: when that happens, all the sector or growth funds, respectively, will sell out.’

Thanks to the impact of corporate governance and initiatives such as the European Union’s newly updated Shareholders’ Rights Directive, the market should get more and more transparent for the issuer over time, Simms believes. Eventually companies may get to a point where they have a full view of their investor base.

‘That’s the golden goose, what everybody’s after,’ he says. ‘The best [others] will see is in the public domain but I wouldn’t rely on that. What they’re never going to see is who’s got it and how they’re holding it: that will only be available to the corporate itself.’

Beneficial interest: The big short

Short positions are notoriously hard to get disclosed, though there has recently been a push for more transparency about derivatives such as contracts for difference. ‘Our approach allows us to spot the clues to what could be going on behind it,’ says Alison Owers of Orient Capital, who regrets there isn’t more disclosure around short positions. ‘There are rare examples of disclosure but unfortunately, that’s not the way the legislation is set up to work right now.’

Analysis of the share register can help confirm shorting suspicions. Several institutions, especially passive investors, are renowned for lending their shares for a profit, explains LS Global’s Lucas Scheer.

‘We can tell the difference between stock lending and actual stock selling by a fund when the filing reveals a much larger position than the custodian shows in the share register,’ he says. ‘We recognize when a popular sovereign wealth fund has its shares loaned, for instance, when its shares are not fully voted at an AGM because many of them are on loan at the time of record date. It’s a matter of interpreting the patterns we see in numerous cases.’

This article appeared in the fall 2017 issue of IR Magazine

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