UK/EU Corporate Governance Update: New Tools and Guidance for the Active Investor

January 28, 2014

On 12 November 2013, the European Securities and Markets Authority (“ESMA“) published a long-awaited statement[1] setting out guidance for investors on shareholder co-operation and “acting in concert” under the European Directive 2004/25/ac on Takeover Bids (“TBD“)[2].  The guidance which sets out a White List of acceptable activities took immediate effect as at the date of publication.

A few weeks later, a report of the Collective Engagement Working Group (“CEW Group“) was published[3] announcing the launch of an Investor Forum in the UK to facilitate engagement between investors and UK public companies through the operation of Engagement Action Groups.  The Investor Forum is expected to be operational by the end of June 2014.

This Alert summarises the guidance from ESMA and provides an overview of the proposed role of the Investor Forum and Engagement Action Groups.


There are a number of issues and risks which a shareholder who wishes to engage in collective action in relation to a publicly listed company (the “Active Shareholder“) needs to be wary of. The new guidance and tools summarised in this alert can assist the Active Shareholder in navigating some of these challenges. A brief reminder of these issues, some of which were addressed in the CEW Group Report, is set out below:

  1. Risk of triggering a mandatory takeover bid — This can be an issue when the aggregate holding of the Active Shareholder and other persons “acting in concert” with it exceeds certain specified thresholds. This can be triggered when the group of shareholders “come together”, or, having come together acquire further shares and (in some EU jurisdictions) when they propose resolutions to change the board of the listed company[4].
  2. Risk of breaching rules on market abuse and/or insider dealing — Certain information about and/or acquired ruing the course of collective action can amount to non-public price sensitive information, and hence may restrict the ability of the Active Shareholder to deal in securities of the listed company.
  3. Risk of triggering other regulated control or disclosure levels — Regulatory approvals may be required in certain regulated sectors (e.g. banking and financial institutions) if the shares or voting interests held by the Active Shareholder and other persons it has engaged with on a collective basis exceed specified levels.  For example, the EU Acquisitions Directive[5]  has a trigger requiring regulatory approval if 10% or more of the shares or voting rights are required in certain financial institutions.[6]   The disclosure rules under the EU Transparency Directive [7]  may also be triggered when a person, directly or indirectly, (the later extending to interests held under a common understanding) acquires interests in listed companies which exceeds or passes through specified thresholds.  The Active Shareholder will need to consider whether or not to take account of the holdings of other parties they are engaging with on a collective basis when complying with their public filing obligations.
  4. Risks of engaging in the public domain: Contractual control and related issues — The Active Shareholder will also need to consider and weigh up the pros and cons of the publicity around collective action, particularly if unsuccessful in their objectives.  What legal or contractual controls or protections should they put in place before formally engaging with other shareholders or distributing/publishing materials in connection with their collective action? To what extent will the Active Shareholder be tainted by undertaking collective action with certain person(s) in relation to one company, when engaging again with the same person(s) in relation to another company? In particular, having been treated as concert parties on a specific matter in relation to company ‘A’, will they be presumed to be acting in concert in relation to future engagements on other issues in relation to different investee companies?
  5. Risks of triggering merger control and anti-trust law restrictions — In certain circumstances, collective action may have implications under domestic and EU anti-trust laws.  This issue would need to be considered by the Active Shareholder on a case by case basis.


Regulatory Background

Since 2005, public M&A bids across the 30 member states in Europe have been harmonised to some degree under the TBD.  One of the key provisions of the TBD is the “mandatory bid rule” embodied in Article 5.1 of the TBD.

This provides:

“Where a natural or legal person, as a result of his/her own acquisition or the acquisition by persons acting in concert with him/her, holds securities of a company as referred to in Article 1(1) which, added to any existing holdings of those securities of his/hers and the holdings of those securities of persons acting in concert with him/her, directly or indirectly give him/her a specified percentage of voting rights in that company, giving him/her control of that company, Member States shall ensure that such a person is required to make a bid as a means of protecting the minority shareholders of that company. Such a bid shall be addressed at the earliest opportunity to all the holders of those securities for all their holdings at the equitable price as defined in paragraph 4.”

The specified percentage for these purposes has been left to each member state to set and varies from between 30% to 50% plus 1 share.  In the United Kingdom for example, the primary threshold at which the mandatory bid obligation is triggered is at 30% of voting rights.

The other key element of the mandatory bid rule is the concept of “acting in concert”.  The TBD definition of “persons acting in concert” is as follows:

“‘persons acting in concert’ shall mean natural or legal persons who cooperate with the offeror or the offeree company on the basis of an agreement, either express or tacit, either oral or written, aimed either at acquiring control of the offeree company or of frustrating the successful outcome of a bid”.

However the application and interpretation of the concept of concertedness is one, due to its heavily factually-based nature and potential breadth of scope, which has proved to be challenging in practice for many investors and a many have been caught on the wrong. The risk of triggering a mandatory bid can be very significant[8] and an area the European Commission has identified as one needing urgent clarification to help to lessen uncertainty for investors who wish to co-operate with each other on issues impacting publicly listed companies. It has been recognised that shareholders often wish to co-operate for a variety of reasons on a host of issues for the purpose of exercising good corporate governance but have been stymied in many cases due to the fear of triggering the mandatory bid obligation.

Further, on review of the specific rules and regulations on concert parties in the relevant EU member states, there is significant disparity and diversity of approach.  In some EU member states, there is little more than a “copy out” of the definition from TBD, but even in other members states where more comprehensive definitions, presumptions and related concepts have developed[9], there still continues to be significant ambiguity and uncertainty in terms of what is and is not acceptable practice for purposes of the mandatory bid regime.

The challenge faced by investors navigating the rules is exacerbated as each of the national competent authorities will decide a case on its own facts. The detailed application of the broad principles under the TBD to specific cases is rarely made public and this lack of access to the precedent and reasoning of regulators can make it difficult for market participants to engage in collective action.

Getting off the “Black List” and on to the “White List”

To bridge this gap of uncertainty for investors and introduce a measure of commonality into the EU, following work undertaken by a group of representatives from different EU member states, ESMA published the statement in December in which it has said that whenever shareholders engage in certain activities on its “White List”, such co-operation will not, in and of itself, lead to the conclusion that these shareholders are acting in concert.  The list of activities is set out below:

(a)        entering into discussions with each other about possible matters to be raised with the company’s board;

(b)        making representations to the company’s board about company policies, practices or particular actions that the company might consider taking;

(c)        other than in relation to the appointment of board members, exercising shareholders’ statutory rights to:

(i)         add items to the agenda of a general meeting;

(ii)        table draft resolutions for items included or to be included on the agenda of a general meeting; or

(iii)       call a general meeting other than the annual general meeting;

(d)       other than in relation to a resolution for the appointment of board members and insofar as such a resolution is provided for under national company law, agreeing to vote the same way on a particular resolution put to a general meeting, in order, for example:

(A)       to approve or reject:

            (i)         a proposal relating to directors’ remuneration;

            (ii)        an acquisition or disposal of assets;

            (iii)       a reduction of capital and/or share buy-back;

            (iv)       a capital increase;

            (v)        a dividend distribution;

            (vi)       the appointment, removal or remuneration of auditors;

            (vii)      the appointment of a special investigator;

            (viii)     the company’s accounts; or

            (ix)       the company’s policy in relation to the environment or any other matter relating to social responsibility or compliance with recognised standards or codes of conduct; or

(B)       to reject a related party transaction.

Uncertainties and Differences Persist

It has taken eight years since implementation of the TBD for ESMA to agree and publish this basic guidance for shareholders.  However we must not look a gift horse in the mouth as the White List is a useful piece of guidance. Investors however should be wary[10] that differences continue to persist between member states[11]. The key differences include:

(i)         different levels at which a mandatory bid can be triggered;

(ii)        the introduction of  a list of situations where parties are presumed to be acting in concert and the onus of rebutting it rests on them;

(iii)       the impact (if any) of shareholders coming together without any further acquisitions of shares;

(iv)       whether shareholders who co-operate together in relation to board appointments are acting in concert;

(v)        the impact of shareholders co-operating to propose certain changes to the board of the company; and

(vi)       the nature and scope of the national derogations available from the requirement to make a mandatory bid.

The Active Shareholder will need to consider each case on its facts, the specifics of takeover legislation as implemented on a state by state basis and, where necessary, seek guidance from relevant national regulators.


Background to the Creation of the Investor Forum

In June 2011, the UK Secretary of State for Business, Innovation and Skills tasked renowned economist Professor Kay to review whether the equity markets in the UK gave sufficient support to the key objective of developing British companies’ capacity for innovation, brands and reputation and the skills of their workforce.  In July 2012, Professor Kay published his final report[12] and one of the recommendations in his report was the establishment of an investors’ forum to facilitate collective engagement by investors and UK companies.  He saw the forum as an opportunity of collective action to help “improve the performance of a company”.

In its response to the Kay review, the UK Government accepted this recommendation and tasked a small group of senior figures in industry to review how, through engagement with asset owners and managers, listed companies can improve sustainable, long-term company performance and overall returns to end savers. In conjunction with this, the Collective Engagement Working Group was formed in April 2013, and it published its final report on 3 December 2013.

Investor Forum — Set up & Scope

The CEW Group agreed that an Investor Forum should be established and that it is working to see it operational by the end of June 2014. The key conclusions of the CEW Group are:

  • A new Investor Forum for Collective Engagement should be created to:
    • Ensure the opportunity for inclusion and participation of the broadest possible range of institutional investors (especially international asset owners and asset managers and sovereign wealth funds)
    • Operate Engagement Action Groups (“EAGs”) to maximise strength of voice and achieve positive results where there are shared concerns about a particular company
    • Drive cultural change and promote the commitment of more resource to long-term stewardship and engagement by institutional investors.
  • Cultural change is needed. Asset owners, asset managers and companies need to develop a shared sense of partnership, with the objective of promoting long-term strategies for prolonged competitive advantage at companies — leading to sustainable wealth creation for all stakeholders.
  • Major listed companies should hold an annual strategy meeting for institutional investors, outside the results cycle, where investors and company executives can link governance to the company’s long-term strategy without the focus on short-term results.
  • Engagement on governance issues should be integrated into the investment process.
  • Routine remuneration matters are not expected to be a core focus for the Forum.
  • The Forum should have its own secretariat to progress the Forum’s objectives and manage the EAGs.

Role of & Participating in the Forum

Formation of EAGs: The EAGs would be set up on a company by company basis. The Secretariat would engage on a confidential basis with shareholders to identify whether there was sufficient support/”critical mass” on particular issues and also to identify investors who would be willing to form part of the core membership of a specific Engagement Action Group.  The Forum’s initial thought is that around 10 investors would be an optimum number for each EAG.

Initial Engagement with Investee Companies: The Secretariat would be responsible for engaging directly with investee companies — this is envisaged as usually commencing with a letter to the chairman, requesting a meeting with pre-identified agenda items.

Communication Tools: The Secretariat would also consider issues around and the manner of dissemination of views amongst Forum participants on specific matters in relation to specific EAGs.  This may involve publication in a general press release, though the Group envisaged that there may be matters specific to a particular investee company which may need to be communicated privately by the Secretariat to that company or by a meeting between the company and representatives of the relevant EAG.

Participant Undertakings: Investors should note as a condition to participation in the Forum, the Group will require participants to agree to a Participant Undertaking which will require investors to acknowledge the rules of the Forum, agree that it operates in accordance with applicable laws and sign up to specific confidentiality obligations.  Breach of the undertaking of rules to the Forum would result in a participant being expelled from the Forum.

Navigating Legal & Regulatory Hurdles: Finally from the Active Shareholder’s perspective, it should be noted that the Forum is alive to the potential legal issues and risks (see section A. above) that can arise in the course of collective engagement and have addressed these in their report.  In addition, the Secretariat envisages that it will liaise, where appropriate, with the UK Takeover Panel for guidance and a ruling if there is any doubt over proposed action.


These recent developments in shareholder engagement are to be welcomed and move things forward in terms of equipping shareholders who take their stewardship duties with tools to engage with companies on a constructive basis.  This change has come about in the context of a new landscape in Europe on the issue of shareholder activism — a shift from the perception that all activists are driven by short-term gains to recognition that engagement with rather than stonewalling the active shareholder can contribute to increased wealth creation by companies for the benefit of all shareholders.

   [3]   IMA Publication for the Collective Engagement Working Group –

   [4]   Note: The actual thresholds and the scope of the triggers vary from member state to member state in the EU

   [5]   Directive 2004/39/EC as amended by Directive 2007/44/EC

   [6]   Note: In the UK the “change of controller” regime, which implements the Acquisitions Directive, requires approval of the Prudential Regulatory Authority and/or Financial Conduct Authority when certain thresholds are exceeded or passed through in UK authorised financial institutions.

   [7]   Directive 2004/109/EC as amended by Directive 2013/50/EU

   [8]   In the UK for example, a party who has triggered a mandatory bid will be required to extend a fully-funded cash offer to all other shareholders at the highest price it has paid for the shares in the past 12 months.  The permitted conditions of a mandatory bid are limited to an acceptance condition set at 50% and (if relevant) securing regulatory approval.

   [9]   For example, the UK rules and practice on concert parties are highly developed. The UK regulator has also issued guidance for investors on this issue – Takeover Panel Practice Statement 26 on Shareholder Activism –

  [10]   In the UK for example, the UK Code on Takeovers and Mergers list certain relationships where parties are presumed (unless rebutted) to be acting in concert.  Further, UK mandatory bids can also be triggered upon “board control seeking resolutions” being proposed by a shareholder and persons acting in concert with it.

  [11]   See section 5.1 and Appendix B of the ESMA Statement

  [12]   Kay Review of Equity Markets and Long Term Decision Making  – – see page 51

We will continue to monitor these and other related developments and keep you updated as both regulation and market practice unfolds.  Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or the following lawyers in the firm’s London office: 

Selina Sagayam (+44 20 7071 4263, [email protected])
Jeffery Roberts (+44 20 7071 4291, [email protected])

For information about Gibson Dunn’s Hostile M&A and Shareholder Activism Practice, please visit

© 2014 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.