LatAm shareholder activism faces economic and cultural obstacles, say panellists
Shareholder activism is on the rise in Latin America, but activists still face challenges, including family-controlled companies and low levels of equity transactions, limiting their opportunities to impact companies’ corporate governance structures, heard delegates at Latin Lawyer Live 9th Annual M&A conference in São Paulo.
Shareholder activism describes how shareholders influence company behaviour by exercising their rights as partial owners, by putting pressure on boards and executive management. These methods can range from creating a dialogue with a board to releasing letters to the media.
Shareholder activism is a common method of boosting corporate governance practices in the US and in global asset management landscapes, but traditional corporate structures in Latin America remain a big obstacle for activists in the region. Many listed companies there are family-owned and dominated by a very tight group with significant voting rights. Activists try to effect different strategies for companies by getting seats on their boards or getting access to privileged information. “I think we are still at the very beginning of this conversation here in our market,” says Monique Mavignier, partner at BMA - Barbosa, Müssnich, Aragão in Brazil.
Trading activity in Latin America’s equity capital markets is lower than in more developed markets, which poses challenges for activists trying to build up sizeable company stakes. This makes it particularly difficult for shareholder activists to build up large stakes without being detected. “It means activists can’t sneak attack when it comes to taking over parts of companies,” said Avinash Mehrotra, managing director of the investment banking division at Goldman Sachs. Activists want to increase their stakes in an undetectable way, but that is difficult when transactions are few, Mehrotra clarified.
Another challenge is that Latin American media may not support shareholder activists’ cause to affect the corporate structures of listed companies. “There’s a perception among activists that the press may be less accommodating to them, which has incited a lot of activism caution in the Latin American market,” explained Mehrotra. However, Mexican media is taking an approach that is more similar to that of the US and is more outspoken against public companies and their shareholders. “In the Mexican market specialised media is becoming more active, you can see the media is publishing results and criticising the performance of some of the listed companies, so there is a trend there,” said Manuel Galicia of Galicia Abogados.
Indeed, negative media coverage is fuelled by the perception that the actions of shareholder activists can create havoc for the companies they put pressure on. Mavignier cited the case of Brazilian construction company Gafisa, where a proxy fight took place and a group of dissident shareholders lacking a strategic stake in the company won four seats on the company’s nine-member board. Under the guise of good governance, they raised their stake to get control of the company, dismissed the management and changed how the company was run. “A few months afterwards, they were forced to sell their equity stake because the shares had dropped to a very low price. The company had to dismiss more than half of its workforce and struggled a lot,” says Mavignier. Such cases have created a narrative in some markets, like Brazil and Mexico, that activists create a risky and less competitive environment and only have short-term interest in companies.
Looking ahead to the future of shareholder activism in Latin America, panellists warned that shareholder activists should be clear about their aims and should clarify the strategies and capital allocation paths they set out for companies. “If not, we might find ourselves in a position where companies don’t have the right capital structure or leverage long term,” said Mehrotra.
The conference was chaired by Francisco Müssnich and Monique Mavignier of BMA - Barbosa, Müssnich, Aragão, and Paola Lozano and Paul Schnell from Skadden, Arps, Slate, Meagher & Flom. Coverage of the conference will continue in the following days.