Derivative activists

Elliott Advisors is on the warpath again. Last week it was reported that the activist firm had ’grabbed 5% of the shares’ of over 50s travel and insurance group Saga Plc. According to reports, this heralded a move top push for options including break up of the business. So it’s just the latest example of shareholder activism? Well, not quite.
If you look closely at filings triggered by Elliott it’s not clear whether it actually holds any Saga shares. If you read the TR1 notice issued by Saga on 17 July (relating to thresholds being crossed on 12 July) the percentage of voting rights attached to shares held by Elliott reported is zero. However, voting rights through financial instruments are reported as being at 5.141%. And if you read further into the TR1 form it is reported that these rights are attached to equity swaps. So Elliott has an economic interest in the performance of Saga shares, but it’s not clear that it actually holds any shares themselves. And this is not a new thing.
If we look back to 2018, Elliott was involved in a couple of other campaigns of note – at Whitbread and GKN. In the former case it successfully sought the sell-off of Costa Coffee by Whitbread, and during the campaign was described in some reports as Whitbread’s largest shareholder. But if you look, for example, at the TR1 form issued by Whitbread on 16 April last year, Elliott’s voting rights attached to shares stood at 0.01%, or 18,701 shares, whereas voting rights through financial instruments stood at 5.29%. In this case Elliott used Contracts for Difference (CFDs) as its derivative of choice.
And how about GKN? Once more, Elliott was described as a major shareholder yet a Form 8.3 (a different type of notice triggered during takeovers) issued on 23 March last year showed no shareholding, but voting rights via derivatives at 3.84%, again using CFDs.
When the GKN takeover looked to be at risk of failing, Elliott publicly supported Melrose Industries (which, incidentally, it was simultaneously shorting). Notably in its statement of support, also issued on 23 March, Elliott talked of having an economic interest in the shares of GKN, rather than holding shares. In addition Elliott said it was intending to ’support’ Melrose’s offer for GKN shares, rather than tender shares, which is what a shareholder accepting the offer would do, and, indeed, what Elliott called on other shareholders to do in its statement.
Does any of this matter? Well, at the least we should be careful how we describe firms like Elliott engaging in this type of activity. In cases like Saga, Whitbread and GKN they are really a ’derivative activist’ rather than a ’shareholder activist’ since their economic interest in the target companies is overwhelmingly through derivatives, not shares. But more generally, activity like this further degrades the concept of ’shareholding’ and the notions of ownership and stewardship that are supposed to be part of it. Is it acceptable that Elliott can intervene in such a fundamental way in the structure (or ownership in the case of GKN) of listed companies without ever having a meaningful shareholding? And despite having such a significant impact on major UK-listed public companies, Elliott doesn’t even comply with the Stewardship Code. It says that while ’the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code’. Which is an interesting choice of words, because if you Google that exact phrase it turns up in dozens of other firms’ non-compliance statements, along with most of the rest of the blurb Elliott uses. It’s just boilerplate blah.
As with other aspects of modern capital market activity, probably the best that can be said of it is ’you might not like it, but it’s not against the rules’. Elliott can seek to break up companies, or support them being taken over, without having a meaningful shareholding. But it’s OK, because there’s nothing preventing it. That seems to be a very low bar to clear.

Leave a Reply

Your e-mail address will not be published. Required fields are marked *