Europe's Shareholders: To the Barricades

Investor activism comes of age

Wolfgang Vogler wasn't exactly the only novice investor to get a black eye when shares of Munich media company EM.TV & Merchandising plunged late last year. The 41-year-old aluminum company executive in the south German city of Kisslegg lost $3,800, scuttling plans to take his four kids on a vacation. But rather than meekly accept his fate, Vogler did something daring by European standards: He called a lawyer, who on behalf of 450 EM.TV shareholders demanded on Mar. 6, that CEO Thomas Haffa pay $12 million in damages. Under German law, that's the first step toward a lawsuit charging Haffa--who denies wrongdoing--with deliberately misleading investors about the health of the company.

Are European punters finally getting tired of getting kicked around by arrogant managers? The signs are promising. Across Europe, shareholders are going to court, uniting to oppose company policies, and occasionally even forcing change. On Mar. 2, for example, the supervisory board of steel and auto-parts giant ThyssenKrupp approved a management shakeup just minutes before the start of the company's annual meeting in Duisburg. The timing was no accident: The company faced more than 5,000 shareholders angry about top-level infighting at the company, which has struggled to boost results since a troubled merger two years ago. "People used to just take it," says Klaus Rotter, a lawyer based near Munich who is representing EM.TV shareholders. "Now they're refusing to be ripped off."

MANY FLAWS. In the U.S., shareholder activism has been around for decades. But in Europe, mass stock ownership is a new phenomenon. In Germany, the number of people who own stocks or mutual funds has more than doubled since 1997, to 12.3 million, according to the German Share Institute.

Now, the choppy stock markets are exposing the flaws of the weakest companies. Individual shareholders, stung by steep price drops, are beginning to discover they have rights--and are taking action. "No company is immune," says Sophie L'Helias, a French-American lawyer based in Washington, who has advised minority shareholders in protests targeting such companies as Eurotunnel and investment bank Lazard Freres. L'Helias is part of a minority-shareholder challenge to Schneider Electric's planned $7.3 billion acquisition of Legrand, a maker of electrical equipment. A lawsuit by a French shareholders' group charges that the Schneider bid values Legrand's nonvoting shares at far too low a price.

Granted, the number of shareholder lawsuits is still small. But it's up from practically zero a year or two ago. A suit filed in November against Germany's Infomatec, a maker of set-top boxes for TVs, was the first ever to seek damages from management for deliberately misleading shareholders.

Professional fund managers are also stepping up the pressure. Unlike small shareholders, who lack the financial clout to pressure management and are hiring lawyers to fight their battles, fund managers can simply threaten to sell their sizable stakes in companies, driving down the share price. Traditionally reserved in relations with management, European fund managers lately seem to be taking lessons from their assertive U.S. counterparts. In Britain, funds helped push Abbey National PLC to break off takeover talks on Feb. 28 with Bank of Scotland. The fund managers would rather see Abbey taken over by Lloyds Bank PLC. "We let our feelings be known," says Neil Woodford of Perpetual Investment Management Services Inc. in Henley-on-Thames. In Italy, institutional investors are mobilizing ordinary shareholders to block plans by Telecom Italia CEO Roberto Colaninno to convert nonvoting shares to voting shares. Holders of nonvoting shares are balking at paying a 48% premium.

It's still an uphill battle for these new activists, especially when it comes to suing companies over shareholder rights. In Germany and France, plaintiffs in shareholder suits can't force a company to hand over documents. Germany doesn't allow class actions, which makes it tougher for ordinary shareholders to pool their resources and take on a rich corporation. And the burden of proof is so high in cases accusing managers of giving out false information that lawsuits have little chance of success unless the manager is first convicted of criminal charges. Activists hope the German government will listen to their pleas for laws offering better shareholder protection. "The experience with EM.TV and other cases has shown there's a need to take action" and pass laws giving shareholders more protection, says Reinhild Keitel, a member of the board of directors of the Association for the Protection of Small Shareholders.

And even though Europeans are getting more restive, they probably still cut management more slack than their U.S. counterparts. While CEOs of companies such as Lucent Technologies or Gateway are taking a hike, DaimlerChrysler's Jurgen E. Schrempp, Deutsche Telekom's Ron Sommer, or Ericsson's Kurt Hellstrom still hold on to power even after massive declines in profit.

But even the most secure companies are feeling pressure. Prosecutors in Bonn have begun a preliminary investigation into whether Deutsche Telekom managers knowingly misled shareholders about the value of the company's real estate holdings. Italy's autocratic managers are feeling the heat, too. For years, powerful financial firm Mediobanca manipulated the corporate landscape pretty much as it pleased. But now Mediobanca CEO Vincenzo Maranghi faces serious opposition to his plans to merge Montedison, a holding company in which Mediobanca is a major shareholder, and Gruppo Falck. On Feb. 27, Montedison shareholders rejected the merger, saying the terms were too favorable to Falck. Even some of Mediobanca's own big shareholders, including Banca di Roma, stood against the merger. "Mediobanca will be unable to do the same easy business it did in past years," says Paolo Perrella, an analyst at Fortis Bank's Milan office.

"TOPPLED." The shareholder-rights movement is getting another push from U.S. arbitrage specialists, who have been attracted to dealing in Europe by a surge in mergers and acquisitions. One is New York's Guy P. Wyser-Pratte, who buys stakes in companies he considers badly managed and then tries to force a turnaround. Last year, Wyser-Pratte rallied minority shareholders in Groupe Andre, a French retailer, to oust the company's top management and install a new team. "It was the first time in France that you had a board toppled by outsiders," says shareholder activist L'Helias. "People were stunned." Wyser-Pratte is eying Germany and has already bought a stake in Rheinmetall, an engineering and defense company.

Pure economics should force the shareholder-rights movement to keep growing. Europeans, like Americans, need the superior returns stocks can provide to supplement the meager results of bonds and state pensions. In the long run, European shareholders cannot afford to give up on their activism. The region's shareholders have gotten a taste of their own potential power. Chances are they'll only want more.

By Jack Ewing in Frankfurt, with Carol Matlack in Paris, Gail Edmondson in Rome, Stanley Reed in London, and Katharine A. Schmidt in Stuttgart

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