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Shareholder Activism in AsiaConfrontation gaining momentum

MAY 2018

SHAREHOLDER ACTIVISM IN ASIA | 1

Published by J.P. Morgan’s M&A team in May 2018

Corporate Defense and Shareholder Activism

David Hunker Head of Shareholder Activism Defense E: [email protected] T: +1 212 622 3724

Global Investment Banking in Asia

Kerwin Clayton Co-Head of M&A Asia Pacific E: [email protected] T: +852 2800 6555

Tae Jin Park Head of Global Investment Banking, Korea E: [email protected] T: +82 2 758 5101

Rohit Chatterji Co-Head of M&A Asia Pacific E: [email protected] T: +65 6882 2638

Koichiro Doi Head of Japan M&A E: [email protected] T: +81 3 6736 1861

Global Mergers & Acquisitions

Hernan Cristerna Global Co-Head of M&A E: [email protected] T: +44 20 7134 4631

Kurt Simon Global Chairman of M&A E: [email protected] T: +1 212 622 9882

Chris Ventresca Global Co-Head of M&A E: [email protected] T: +1 212 622 2228

David Freedman Head of M&A Capital Markets E: [email protected] T: +1 212 272 4209


Contents1. The state of shareholder activism globally 2

Summary 2

The rise of global activism 3

2. Shareholder activism in Asia 5

Overview 5

Companies targeted 9

Activists targeting Asia 12

Common themes in Asia activism 15

Increasingly successful at affecting change 18

3. Implications for Asian companies 19

Communicate proactively and clearly with shareholders 19

Think strategically about all external communications 20

Proactively address corporate governance lightning rods 21

Be ready to engage if and when activists show up 21

4. J.P. Morgan M&A advisory solution and shareholder activism expertise 23

2 | SHAREHOLDER ACTIVISM IN ASIA

1. The state of shareholder activism globally

SummaryFollowing a brief decline in assets under management for activist hedge funds in 2016, largely driven by the collapse in oil prices, activist assets under management recovered to reach a new all-time high of $125.6bn as of December 2017, representing a roughly 4% increase from the end of 20161. While there were a number of reports of the end of shareholder activism, this period only served to harden the focus of shareholder activists and further expand their horizons. Shareholder activism is not a niche strategy to be undermined by a single transient event, but a permanent investment strategy and asset class that has changed the way companies interact with their shareholders.

Exhibit 1

Total direct activist hedge fund AUM ($bn)

$50.9$65.5

$93.1

$119.2 $122.9 $121.2 $125.6

20110

20

120140

20132012 20152014 2016 2017

100806040

Source: HFR Industry Reports © HFR, Inc.

Having spent 2016 focused on shoring up liquidity and rebuilding credibility, 2017 saw some of the biggest names in activism once again put growing amounts of dormant capital to work. Fewer campaigns were launched in the U.S. compared to 2016; however, larger companies were targeted. Activism against issuers with market capitalization greater than $10bn grew by 32%, with 25 campaigns initiated during 2017; while companies with market capitalization of over $25bn were targeted 17 times, representing a 55% increase from 2016.2

2017 also saw a number of funds make their biggest investments to date, resulting in some of the most high-profile campaigns in history. Trian Fund took a $3.5bn stake in P&G, the largest company to ever face a proxy contest. P&G narrowly won the shareholder vote against Trian, but appointed Nelson Peltz to its Board given the extremely narrow margin of victory and feedback from shareholders during the campaign.

While activists targeting U.S. corporations continue to focus on board representation and catalyzing M&A activity, campaigns geared towards operational improvement, often times including calls for changes in management, are also being launched by activists increasingly willing to invest over a multi-year time horizon.

1 Source: HFR Industry Reports © HFR, Inc.2 Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:

board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.


Activists today come to the table more prepared than ever, spending considerable time and resources to understand company financials, its customers and competitors, all in an effort to find the best avenues of attack. Increasingly sophisticated, they have become experts in courting shareholders, including retail investors, who have been the decisive vote in a number of recent high-profile contests. With the long history of shareholder activism in the U.S., however, viable targets have become fewer and more difficult to find, propelling activists to explore new geographies to deploy their capital where often the targets present a more attractive potential shareholder value creation story.

The rise of global activismWhile U.S. shareholder activism activity has leveled off near historical highs, activity outside the U.S. continues to increase significantly. Of the 662 new activism campaigns launched globally during 2017, 344 – representing 52% – involved non-U.S. targets.3 This marks the first year international4 activity surpassed U.S. campaigns. Growth in non-U.S. activism is expected to continue as global institutional investors, who have long supported activism in the U.S., begin to flex their muscle more actively around the world and domestic investors continue to study their global peers and become more comfortable with the strategy.

Exhibit 2

Shareholder activism campaigns globally

2011 2012 2013 2014 2015 2016 20170

100200300400500600700

U.S. International5

344

337

308

662

318379

242

621 645

177

528

351

179

455

276273

130403

268

83351

2011 2014 2017

24%34%

76%66%

52%

48%

U.S. International5

Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.5 Defined as Europe, Asia and Australia.

3 Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.

4 Defined as Europe, Asia and Australia.


Non-U.S. companies have now become some of largest companies to ever face a shareholder activist. In the last year alone, Third Point launched a campaign against Swiss-giant Nestle, and Elliott Management targeted Anglo-Australian miner BHP, while continuing its ongoing campaign against Korean conglomerate Samsung. During 2017, over 60% of global campaigns initiated against targets with market capitalization greater than $10bn targeted non-U.S. companies.6 The trend toward large- and mega-cap activism will continue, particularly outside the U.S., where these companies have not historically been targeted by activists in large numbers.

No issuer, regardless of size or location, is protected from shareholder activism anymore. Companies should work to understand their vulnerabilities, proactively take measures to decrease the likelihood of an attack. They should also proactively engage with shareholders and prepare to defend themselves in the event an activist appears.



2. Shareholder activism in Asia

OverviewInvestors in Asian issuers have historically taken a passive approach to their investments, with public criticisms of companies, their management team or boards being a rarity. Asian markets have, in the last few years, become more receptive to direct and open engagement between investors and their portfolio company investments. As foreign activists look to Asia for investing opportunities and domestic investors become more comfortable exerting public pressure, management teams and boards across Asia will be forced to adapt to a new reality where shareholders demand their voice is heard and enjoy the support from other shareholders required to turn that voice into concrete action.

What seemed like insurmountable hurdles in the past no longer dissuade activists from targeting a company if activists feel that a value creation proposition exists that they can convey to shareholders. Complex ownership structures, such as cross-shareholding, government participation and family control no longer insulate corporations, but are now targets of criticism by activists and issues for investors to rally around.

Historically seen as reasons for activists to avoid Asia, those who control shareholder structures, lack of transparency and engagement, frequent corporate scandals, as well as subpar corporate governance, are now considered levers on which to pull in order to unlock value. Activists are denouncing generational succession, urging companies to renounce nepotism and favor merit when planning management transitions. Boards in the region, frequently long-tenured and lacking independence and diversity, represent activist attack opportunities as markets generally embrace activists who seek to add outside perspectives to what may be viewed as an entrenched board.

In 2017, the number of activist campaigns in Asia grew to 106, accounting for 31% of total non–U.S. activism activity7, up from 12% as recently as 2011. Since 2011, campaign volume has grown at a compound annual growth rate of 48%. In 2017, 4 of the 10 most targeted non–U.S. countries were in Asia.8

Activism in Asia is off to a strong start in 2018, with the number of campaigns launched during the first quarter in line with those initiated during the same time period in 2017. As a testament to the increased vulnerability of Asian issuers, and in particular, conglomerates, this year has already seen Elliott Management target one of the region’s most recognizable names: Hyundai. The fund disclosed it held over 1.5% in common shares in each of Hyundai Motor Company, Hyundai Mobis Co. and Kia Motors Corporation, and urged the group to adopt a holding company structure, reduce excess cash via capital return, cancel treasury shares, implement a clearer shareholder returns policy and improve board structure by increasing the ratio of independent directors and adding more diverse and international candidates, among other suggestions.

7 Defined as Europe, Asia and Australia.8 Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types:

board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.


Exhibit 3

Shareholder activism campaigns in Asia

10 1434

49

69

94106

0

20

120

100

80

60

40

2011 20132012 20152014 2016 2017

Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.

In a region where private engagement is still the preferred conduit for investor dissatisfaction, available data likely underestimates the true number of shareholder interventions.

Shareholder activism in Asia is expected to continue to grow at a steady pace, as the practice becomes increasingly accepted and weaves itself into the fabric of Asian capital markets, transitioning from a temporary to a permanent investment strategy.

Exhibit 4

Select drivers of growth in shareholder activism in Asia

Driversof

growth

Emboldened activists• Increasingly global U.S. / European activists

• Increase in domestic funds willing to be active

Macro / company specific• Low valuations

• Suboptimal balance sheets

• Substandard corporate governance

Institutional investors• Local investors more

open to activism• Growing % of Asian

equities owned by foreign investors

Regulation• Embracing shareholder value as a concept

• Promotes shareholder accountability• Urges investors to increase dialogue with portfolio companies


Regulatory reform has further legitimized shareholder activismRegulators are helping drive change in the region by enacting reform geared towards the adoption of international best practices in investor engagement and corporate governance. A series of recently adopted corporate governance and stewardship codes, as well as listing rule amendments and others, are fueling activism by encouraging investors to be more engaged, and companies to be more responsive and transparent. Furthermore, an increased focus on minority shareholders has initiated a shift away from a more traditional stakeholder model in a number of countries, increasing pressure on issuers to maximize value for shareholders above all else.

Exhibit 5

Regulatory reform key focus areas

Key focus areas Commentary

Board and management

• Increased focus on board composition and effectiveness, with a emphasis on independence and diversity

• Heightened scrutiny around self-dealing transactions

• Transparency around pay packages and management remuneration

• Transparency in CEO succession planning and candidate management

Shareholder communications and meetings

• Implement IR policy, solicit and understand the views of shareholders

• Responsiveness to shareholders seeking higher ROE

• Encourage shareholders to actively participate at meetings

• Implement best-in-class procedures (e.g. adopt poll voting, e-voting, abandon shadow-voting)

Institutional investors

• Encourage institutional investors to have more active engagement with management, increase dialogue

• Encourage investors to demand higher returns and greater responsiveness to shareholder concerns

• Enhanced disclosure around institutional investors’ policies in stewardship and conflicts of interest

• Publish voting records

Recent regulatory developments not only include the implementation of new stewardship codes and corporate governance principles, but also the revision of those materials, and others, sometimes including public consultations, demonstrating this new focus on good corporate governance is an ongoing initiative to strengthen investor confidence rather than a one-time effort.9

• Singapore: In January 2018, the Corporate Governance Council released a consultation paper on its recommendations to revise the Code of Corporate Governance. The recommendations encourage board renewal, strengthening director independence and enhancing board diversity. Also putting greater emphasis on disclosures of the relationship between remuneration and value creation.

• Korea: In December 2017, shadow voting was abolished in Korea and a mobile voting system to ease shareholders’ access to general meetings was introduced. In February 2018, the Financial Services Commission (FSC) announced a plan to, among other things, facilitate and encourage minority shareholder participation at meetings for listed companies. Korea published its Stewardship Code and revised its Code of Best Practices of Corporate Governance in 2016.

9 Institutional Shareholder Services (ISS), the Monetary Authority of Singapore, the Hong Kong Exchanges and Clearing Ltd. HKEX), the Securities and Exchange Board of India.


• Hong Kong: In November 2017, the Hong Kong Exchanges and Clearing Limited (HKEX) published a consultation paper seeking public feedback on its proposed changes to the Corporate Governance Code and Listing Rules. Proposed changes aim to address corporate governance concerns such as independence, overboarding, the responsibility of the nomination committee and board diversity.

• India: In October 2017, the Committee on Corporate Governance submitted its report, identifying key governance issues and proposing amendments to the Securities & Exchange Board of India (Listing Obligations & Disclosure Requirements) Regulations. Key recommendations focused on director independence and eligibility, board structure, promoters and related party transactions, disclosure and transparency and investor relations (including proposing a Stewardship Code for institutional investors).

• Japan: In May 2017, the Financial Services Agency of Japan finalized a revised version of Japan’s Stewardship Code for Investors. The revised code, among other things, requests asset owners to take a more active role in conducting stewardship activities and asset managers to strengthen their governance and to manage conflicts of interest, and requires proxy advisors to disclose their resources and processes for the purpose of managing conflicts of interest. It also requests investors to disclose individual voting records. In 2015 Japan implemented a Code of Corporate Governance, which included the requirement for companies to appoint at least two independent outside directors, or explain the reason for not complying.

• Taiwan: In 2016, Taiwan published its Stewardship Principles for institutional investors, encouraging them to monitor and maintain dialogue with investee companies. Effective from 2017, all companies are required to have at least two independent directors – and 20% board independence – as well as disclose directors’ gender. The Taiwan Stock Exchange revised the Corporate Governance Evaluation System to put emphasis on English disclosure and e-voting (mandatory for all TWSE/TPEx listed companies since January 1, 2018).

The increased focus on governance and engagement is already yielding results:• In its Q4 2017 Asia-Pacific investment stewardship report, BlackRock reported 125

engagements with Asia-Pacific companies, 45 of which were “moderate” to “extensive”, meaning more complex and involving more than one meeting. Governance was the most discussed topic. BlackRock also reported it voted against one or more management recommendations in 24% of meetings voted.10

• In 2015, and following pressure from APG Asset Management, Hyundai Motors set up a governance committee with the purpose of monitoring the interests of minority shareholders, and went on one of the first governance roadshows by a Korean issuer. Hyundai increased its dividend payout and revealed a new Corporate Governance charter (published in Korean and English).11

Some activist investors are citing these new principles when launching campaigns. Argyle Street Management, a Hong Kong based fund, sent a letter to Toshiba in December 2017 asking the company to halt the planned sale of Toshiba Memory and consider an IPO or a new sale process that could yield a higher valuation. In its letter, Argyle said: “As you would be well aware, the Japanese government’s push for improvement in corporate competitiveness and developments in Japan’s Corporate Governance Code encourages investee companies to engage in constructive dialogue with institutional investors such as ASM.”12

10 Investment Stewardship Report: Asia-Pacific (Q4 2017), BlackRock, January 2018.11 APG website, IR Magazine, March 21, 2017.12 Argyle Street Management Ltd. December 11, 2017 letter to Toshiba Corp.


Companies targetedActivism has now been seen in all major economies in Asia, with Japan and Hong Kong experiencing the most activity. As activism continues to develop and solidify its place in Asian capital markets, we expect to see the total number of activist campaigns increase significantly and for activists to begin targeting companies in secondary Asian markets.

Exhibit 6

Primary geographies for activism activity in Asia (2011–2017)

Total # of campaigns = 376

Activism activity

# of activist campaign / % of total Asian activity13

HigherLower

92 / 24%24 / 6%

87 / 23%

64 / 17%

47 / 13%

38 / 10%

Country 2017 activity (% of total) Commentary

Japan 32% • Spearheaded the corporate governance overhaul in the region

• Capital allocation the most common activism theme

Hong Kong 24% • Finance and electronic technology sectors have been targeted disproportionately

• Board representation the most common activism theme

Singapore 14% • Number of campaigns launched peaked in 2016

• Producer manufacturing and finance have been the most targeted sectors so far

China 10% • Frequent target of short-sellers

• For the past few years, new campaign launches have been evenly distributed between foreign and domestic activists

India 8% • Presence of several local proxy advisory firms

• Remuneration issues and transactions involving promoter held assets have gotten the most attention

Korea 6% • Companies particularly vulnerable due to “Korea discount”

• Made headlines in 2015 when Elliott Management opposed Samsung C&T’s merger with Cheil Industries

Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.13 Total Asian activity includes campaigns in countries not listed herein.


Target size

Exhibit 7

Size breakdown (2011–2017)

<$1bn66%

>$10bn13%

$1bn–$10bn21%

Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.Note: Market capitalization data in USD, at time of campaign announcement. Excludes campaigns with unavailable market capitalization data.

Small-cap companies have historically accounted for the bulk of activism targets in Asia; however, recent years have seen an increase in large-cap issuers facing shareholder challenges. 2016 and 2017 alone saw 54 campaigns launched against companies with market capitalization greater than $1bn, representing 49% of all targets in that size range since 2011. 16 of those 54 campaigns involved targets larger than $10bn.15

Compared to other regions, Asia has one of the largest percentages of large-cap and mega-cap activism activity.

Exhibit 8

Size comparison as a % of activism activity (2011–2017)

Europe Asia U.S. Australia Global140

10

20

30

40

50

$1bn-$10bn >$10bn >$1bn

28%

20%

48%

21%

13%

34%

20%

7%27%

7%4%11%

20%

9%29%

Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.Note: Market capitalization data in USD, at time of campaign announcement. Excludes campaigns with unavailable market capitalization data.14 Defined as U.S., Europe, Asia and Australia.



Target sectorOver the period from 2011 to 2017, campaigns in Asia have been more evenly distributed across sectors than in other regions. Looking at the full data set (i.e. 2011–2017), no sector surpasses 11% of total activity, unlike Australia, the U.S. and Europe, where – during the same time period – the most targeted industries represented 40%, 19% and 15% of all campaigns, respectively.16

Exhibit 9

Sector breakdown (2011–2017)

Finance11%

Electronic Technology10%

Producer Manufacturing10%

Consumer Durables7%

Industrial Services7%Technology

Services7%

ConsumerServices

6%

Consumer Non-Durables5%

Process Industries5%

Other32%

Top sectors targeted as a % of total activity

2014 2015 2016 20170

5

10

15

20

Finance Electronic Technology Producer Manufacturing Industrial ServicesConsumer Durables

17%

15% 15% 15% 15%14%

11%

8% 8% 8%

13%

10%

Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.Note: Excludes campaigns with unavailable sector data.

In more recent years, the same few industries have accounted for the bulk of activism activity. In 2017, producer manufacturing grew by 167% compared to 2016, to become the most targeted industry in Asia, with 16 campaign in the space.16



Activists targeting AsiaDomestic activists have been, and remain, the main driving force behind shareholder activism in Asia.

Exhibit 10

Investor breakdown (2011–2017)Investor breakdown by market capitalization (2011–2017)

Domestic62%

Both3%

Foreign35%

Domestic62%

Both 3%

Foreign35%

<$1bn $1bn–$10bn >$10bn0

20

40

60

80

100

Domestic Foreign Both

66%

31%

3%

54%

46%

56%

44%

Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.Note: Market capitalization data in USD, at time of campaign announcement. Excludes campaigns with unavailable market capitalization data.

ForeignProminent hedge fund activist investors are becoming more global, increasingly launching campaigns outside their domestic markets, some, already with significant experience targeting Asia.

• Third Point (U.S.): 3 of the 6 activist campaigns launched by Third Point during the past three years targeted non-U.S. companies; 2 of them, Japanese.17

• Elliott Management (U.S.): Very likely the most global activist investor, has launched campaigns across most regions, targeting some of the largest companies worldwide. Since 2015 and through 2017, Elliott has initiated 17 campaigns against non-U.S. issuers, representing about 37% of all new campaign announcements during that time period. Recent targets include companies based in South Korea and Hong Kong.17

• ValueAct Capital (U.S.): In March 2018, Reuters reported the fund was considering investing in Japan for the first time this year.

17 Source: SharkRepellent as of March 1, 2018. Represents all campaign types.


Exhibit 11

Activists campaigns launched by foreign investors, by region (2011–2017)

Asia Europe Australia International180

20

40

60

80

100

U.S. activists Other foreign investors % of foreign campaigns launched by U.S. activists

19%

19%

38%

51%

82%

35%

65%

34%

6%

28%12%

8%4%

28%

10%

18%

Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.Note: Includes campaigns launched by foreign activists in conjunction with domestic investors.18 Defined as Europe, Asia and Australia.

For the most part, foreign funds targeting Asia are attempting to incorporate lessons learned from past failures, where culturally unsympathetic tactics proved ineffective. When disclosing his positions in Fanuc, Third Point fund manager Dan Loeb, known for writing scathing public letters, avoided personal attacks on management, choosing to compliment the business and its leadership before suggesting ways in which value could be unlocked.

However, when dealing with an experienced activist, the threat of aggression is always latent, and patience is limited. A moderate approach does not mean a fund will not turn hostile if unable to get the desired results, or even a compromise, through collaboration. In Elliott’s campaigns against Samsung and Bank of East Asia, for instance, Elliott used many of the same aggressive and confrontational tactics that it has honed over the years against targets in the U.S. and Europe, including public letters and presentations as well as litigation.

Exhibit 12

March 26, 2016

“We have no wish to create a public dispute at a future Annual General Meeting, but of course are willing to do so in order to protect our investment.”

Third Point letter to Seven & i


DomesticDespite the media attention given to high-profile international hedge fund activists when they target Asian issuers, most activist activity in Asia is driven by domestic investors. With the emergence of specialist funds, activism as an asset class continues to mature in Asia; and while a significant number of campaigns are still being initiated by occasional dissidents – usually existing long term investors, frequently individuals or concerned shareholder groups – activity is expected to be increasingly driven by dedicated funds pursuing activism as a primary strategy.

More in tune with local customs, domestic activists frequently attempt to position themselves as constructive, engaged shareholders, hoping to find a more receptive audience. However, and in the face of company inaction, local funds are increasingly turning to U.S. activist tactics to try to accomplish by force what behind-the-scenes negotiations fail to deliver.

Recent campaigns have seen the use of public letters and white papers, campaign websites, shareholder proposals and even formal proxy fights.

Institutional investors have become supportive of activist interventionsInstitutional investor support has been critical to the success and growth of activism in the U.S. and Europe and will drive activist activity in Asia in the coming years. Historically inclined to support management and avoid public confrontation, increasingly vocal institutional investors no longer stand by silently in the face of underperformance.

Global institutional investors now have a long history of supporting shareholder activists in their campaigns against U.S. and European companies. As shareholder registers across Asia are increasingly comprised of the same global institutional investors seen in U.S. and European shareholder registers – the same institutional investors who have shown their support for activism in the U.S. and Europe – Asian issuers are finding themselves with a significant number of shareholders who have proven to be inclined to support an activist, if one were to emerge, and even initiate a campaign.

• In February 2016, BlackRock waged its first ever campaign against G-Resources, a Hong Kong-listed company. BlackRock opposed G-Resources’ plan to live past the sale of its main asset.

Domestic institutional investors are taking their cue from their global counterparts, waking up to the idea that they can drive value creation at their portfolio companies by being vocal with their demands for change, further increasing the pressure on Asian issuers. Finally, new regulation encouraging shareholders to engage with their portfolio companies, as well as corporate governance reforms, further propel an activism trend that already has significant momentum.

• In March 2017, Hiromichi Mizuno, Chief Investment Officer of Japan’s Government Pension Investment Fund (GPIF), encouraged asset managers to engage with issuers: “Instead of just listening, we are requesting that asset managers have a continuous and constructive dialogue with issuers”.19

• In June 2015, the National Pension Service (NPS), Korea’s largest institutional investor, voted against the merger of two SK Group units arguing it would hurt shareholder value.

Companies can no longer assume institutional investors are management-friendly, or presume their votes will favor incumbents. Instead, companies must adapt their activism preparation and response tactics to a new reality where every substantial holder in a company’s register is a potential activist or activist supporter.

19 Asian Investor, March 15, 2017.


Common themes in Asia activismInvestors worldwide have grown weary of boards that they think are conflicted, entrenched or do not represent minority shareholders’ interests. Even though direct public attacks on board members are not as common in Asia as they are in the U.S., calls for corporate governance reforms are increasing, and so are demands for direct shareholder representation in the boardroom. 2017 saw the number of campaigns including a demand for board seats for a shareholder increase to 50, an all-time high and almost four times what it was in 2014.20

While most of the low-hanging activism fruit has already been picked in the U.S., many obvious activist demands have not yet been seen across the Asian corporate landscape. Conglomerate corporate structures and bloated balance sheets create attractive opportunities for activists seeking to unlock value.

Of the various typical demands of shareholder activists, other than board representation, return of capital and opposition to announced M&A transactions – where activists demand improved consideration on announced transactions or oppose the transaction entirely – have been the most common in Asia to date. Interested–party transactions, in particular, are increasingly scrutinized and opposed, as well as any transactions within a conglomerate structure whose sole purpose is perceived to be perpetuating a founding family’s influence.

Exhibit 13

Activist campaigns with at least 1 specific value proposition

4 6

15

28 3134

41

0

202530

45

1510

5

3540

2011 20132012 20152014 2016 2017

Asia Activist campaigns

Select value themes as a % of total activism activity (2011–2017)

24%

Capital structure

14%

Opposition to announced deals

13%

Corporate strategy

• Return capital to shareholders• Restructure debt• Other capital structure

related items

• Oppose acquisition• Oppose merger• Oppose transaction terms

• Spin-off business• Split company• Divest assets / holdings• Seek sale or merger

Source: SharkRepellent and Activist Insight as of March 1, 2018. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.Note: Individual campaigns may be classified under various value themes.



Capital allocation will remain a top priority for funds targeting the region in the near-term, however, activism is expected to evolve similarly to how it has in the U.S. and to some extent Europe, shifting towards corporate strategy and structure, asset mix and M&A. As they experienced globally, conglomerates in Asia will face pressure to streamline their operations and reorganize, companies with non-core business units to demerge, and potential takeover targets to seek prospective buyers or explain clearly to shareholders why they are not doing so.

Regardless of the specific criticism or value creation proposition, activists targeting Asian corporations now demand that companies listen and engage. Dismissive boards and management teams will face increasing pressure and harsh criticism if they refuse to do so. To be clear, engagement is not the same as capitulation. Issuers must simply be able to demonstrate that they are open to hearing the views and receiving input from all shareholders, even those who may have an activist intent. Management teams and boards should then consider that input when making decisions on behalf of the company and all of its shareholders.

Shorting AsiaActivist short selling is one area where Asia has led the rest of the world, with some of the most prominent short-sellers originating and perfecting their strategies on the continent. Short-sellers bet against stocks, profiting if the company share prices decline.

Exhibit 14

Short-selling campaigns (2011–2017) Short selling campaigns in Asia

U.S.74%

Australia1%Europe

6%

Asia19%

2011 20132012 20152014 2016 20170

10

40

50

70

30

20

60

68

23

15

2934 34

22

Source: Activist Insight as of March 1, 2018. Represents all short-selling campaigns.


Tactics used by short-sellers are similar to the ones used by long activists in more traditional activist campaigns. Short-sellers frequently make their positions public at industry conferences, publishing their analysis in reports or white papers that lay out their views in detail. Because the end goal is not to implement changes to raise the stock price, but rather to convince the market that the stock is overvalued, they tend to be more aggressive than long activists.

Most short-selling is carried out by specialized firms. GeoInvesting, Glaucus Research and Muddy Waters have been particularly active in the region, with 36, 19 and 16 public short attacks respectively.21 However, established activists have also used the strategy.

Hong Kong-based Oasis Management, best known for launching campaigns against some of Japan’s most recognizable names, targeted Cyberdyne in 2016 calling it “one of the most overvalued companies in Japan.” Pershing Square, a prominent U.S. activist who usually follows a more traditional long-activist playbook, recently exited a very high-profile short campaign against Herbalife, incurring losses in the process.

Short-sellers target companies with one of several potential issues, including aggressive accounting practices, overestimating their addressable market, underestimating competition, management or corporate scandals or outright fraud. These issues do not need to be proven, as often even the speculation that a company has committed accounting fraud or some other misdeed is enough to drive the share price down significantly, creating a profit for the short-seller in the interim. In Asia, the most common themes to date have been business and accounting fraud, which together with misleading accounting, amount to 73% of all shorts.21

Originally confined to lesser-known Chinese companies, in recent years, Asia has seen an increased number of higher-profile companies fall victim to short-sellers. Hong Kong and Japan have started to experience more activity in the past couple of years, but China still accounts for most of the activity.

Companies should be ready to respond to a short seller as well as a traditional long activist with many of the same tools and techniques. Being prepared to address an investor who is publicly accusing the company of wrongdoing may help mitigate stock volatility and market turbulence. As such, management teams and boards need to be able to quickly articulate the fundamental value proposition of the company’s business model to the market, as well as future drivers of incremental shareholder value. It is important to note, however, that each case is unique. Given the rise in short-selling in recent years and the proliferation of new funds focused on short-selling, an unknown activist short-seller may not have the necessary market credibility to meaningfully impact the company’s share price with their public attack. In these instances, a company must weigh the benefits of responding to the short attack against the potential risks of legitimizing a short thesis that may otherwise not resonate with shareholders.

21 Source: Activist Insight as of March 1, 2018. Represents all short-selling campaigns.


Increasingly successful at affecting changeActivism in Asia has not yet been as successful as the strategy in the U.S. However, recent high-profile wins signal a changing attitude and a shift towards higher activist effectiveness.

In a region where the default mindset resists pressure and sticks to the status-quo, some companies have demonstrated a willingness to listen and even compromise. Some of the most high profile victories so far have been achieved through collaboration. Yet, forceful change has been proven possible in the face of uncooperative management teams and boards.

Whether by force or through constructive engagement, and despite a lingering cultural resistance, the change in activist success rates over the past few years is irrefutable.

Select examples of recent successes:• In February 2018, the Samsung Electronics’ board recommended the appointment of

three new independent directors. The move to nominate both a foreign director and a woman came amid pressure from Elliott Management to change the composition of the board, arguing it lacked diversity.

• In June 2017, Reno –an investment vehicle for Yoshiaki Murakami– successfully elected its nominee to the board of Kuroda Electric, despite opposition from the company. The company later agreed to sell itself to MBK Partners. Murakami had lost a battle against Kuroda in 2015, when he sought to get 4 outsiders, including himself, appointed to the board.

• In March 2015, and following pressure from Third Point, Japanese industrial machinery maker Fanuc announced it would return a portion of its cash reserves to shareholders, also stating it would create a shareholder relations department, in an effort to increase transparency and improve communications with investors.

Dissident success rates are expected to increase in tandem with societal acceptance of shareholder activism in general. As activists continue to shed the label of “corporate raiders” (for which they were known in the 2000s) and are increasingly perceived as “engaged owners,” support for their value creation theses will rise.


3. Implications for Asian companies

In the past, companies have prepared for activists by hiring advisors to identify potential vulnerabilities, by briefing the board and by developing a “break glass” plan to be implemented in the event an activist launches a campaign against the company. With the evolution of the strategy, these reactive measures are still required, but are no longer sufficient. As part of their business plans, Asian companies should look to employ proactive measures, based on global best practices, aimed at eliminating the activist threat before it ever materializes.

Communicate proactively and clearly with shareholdersGood communication with shareholders has been an essential part of the shareholder activism preparation process for years. As the strategy and landscape evolve, companies also need to consider other stakeholders in the course of their regular external outreach. A robust communications plan should address multiple potential constituencies:

Exhibit 15

Stakeholder constituencies

Institutional investor governance teams

Portfolio managers Key non-shareholder influencers

Stakeholder constituencies

Institutional investor governance teamsJust a few years ago, many large institutional investors outsourced voting decisions to proxy advisors such as ISS and Glass-Lewis, which were the largest institutional investors. A growing number of smaller institutional investors have built out internal corporate governance teams tasked with making voting decisions and ensuring consistent voting across investment vehicles. The team may operate independently from fund investment professionals or, alternatively, may work in concert with them to make voting decisions. Regardless, it is critical for companies to understand how each team thinks about corporate governance issues as well as their vote decision-making process, and to engage with them as part of the company’s regular outreach efforts.


Portfolio managersWhile large institutional investors have built in-house teams, many long-only fund managers still retain some input over voting decisions. As activism has proliferated, portfolio managers have become increasingly comfortable supporting activists and their campaigns.

A number of fund managers have developed relationships with established activists and are increasingly expressing concerns about portfolio companies directly to activists. This is being directed in addition to, or instead of, to the company, oftentimes encouraging the activist to get involved. Ultimately, actively overseen fund managers can and do vote with their feet regardless of their fund’s proxy voting decision process. As such, companies need to ensure that this group understands their overall strategy, is supportive and feels that its voice is being heard.

Key non-shareholder influencersKey non-shareholder influencers include proxy advisors, corporate governance experts, influential reporters and academic subject matter specialists. Because so much activism occurs in the public spotlight, companies need to determine who these thought leaders are and continue to keep them engaged. In the event of an activist campaign, having these relationships also helps the company ensure that its side of the story is fairly portrayed.

Think strategically about all external communicationsWhile it is still critical to understand how an activist might attack the company and to prepare a plan for responding to an activist campaign, management and boards should also strive to view the company’s long-term communications plan through the lens of activism. The advent of activism among nontraditional constituencies, including non-shareholder influencers, requires that the company not only prepare for the traditional activist but also take a strategic approach to normal course shareholder communications and ongoing media engagement. To that end, companies should seek to consistently convey the following key points across all of their external communications platforms:

1. Well-developed corporate strategy• Communicate financial and strategic priorities to investors effectively and consistently.

• Focus on delivering value for all shareholders.

• Tell the company’s story, beyond reporting results, by highlighting its strong trajectory and any company “wins,” with a focus on being a responsible steward of shareholder capital and proactively addressing inefficiencies.

• Address any “losses” head on, before an activist has the opportunity to capitalize on them.


2. Board and senior management engagement• Demonstrate senior management and director commitment to maximizing long-term

shareholder value.

• Engage regularly with shareholders and key influential third parties (media, academics, industry icons, etc.).

• Ensure that top investors feel their concerns are being heard.

3. Appropriate corporate governance structure• Demonstrate a record of self-assessment and proactive change.

• Recognize corporate governance trends and avoid becoming a governance laggard.

• Identify globalization of corporate governance standards and move away from the status quo.

Proactively address corporate governance lightning rodsVirtually all activist campaigns involve criticism of a company’s corporate governance. No matter what the specific campaign demands are, the activist’s starting premise is likely to be that the management team and board have not acted to fully maximize shareholder value during their tenure. Heightened board scrutiny can make directors particularly vulnerable during activist campaigns, especially if the activist is trying to gain board seats. Directors should be prepared to have their collective competence and credibility challenged. Individual directors may also be singled out and targeted by attacks that can quickly turn personal and impugn reputations.

To demonstrate their commitment to corporate governance excellence, companies should undertake periodic self-assessments to evaluate board composition and various hot-button corporate governance issues. Doing this proactively mitigates potential toeholds for activists who might otherwise include corporate governance changes as a valid campaign objective. It has become even more important today, as the top activists have access to a stable of well-qualified board candidates with expertise across industries, which comforts shareholders in ousting directors from boards with governance issues.

Finally, companies should communicate to the broader shareholder base that they are regularly performing this type of self-evaluation, and that management and the board are focused on good corporate governance.

Be ready to engage if and when activists show upCompanies must be willing to engage in dialogue with all shareholders, including activists. However, it is important to prepare in advance for any prospective interaction with an activist because these discussions can rapidly transform into hostile situations. This shift can happen quickly and companies may not have the time to build an internal framework for responding to every stage of the campaign. This will cause confusion among management and the board, potentially giving the public perception of a disorganized response.


In planning for a potential activist campaign, companies should consider the following best practices:

Exhibit 16

Best practices for preparing for activistsBest practices for preparing for activists

• Establish internal activism team including key members across corporate functions and operating segments

• Engage roster of best-in-class activism advisors – Investment bank – Public relations firm – Attorneys – Proxy solicitor

1 Establish external and internal working teams

• Update financial projections by segment, with reflection on peer benchmarking

• Consider the strategic importance of each segment and whether the market gives the company “full credit” for the value of the current corporate structure

• Determine optimal capital structure

2 Evaluate strategic planning through the lens of an activist

• Analyze vulnerabilities and produce a mock activist attack deck• Prepare standard responses to anticipated campaign attacks• Prepare internal and external communication materials

3 Complete scenario planning/fire drills

• Directors should be prepared for spotlight by activist• Banker and lawyer updates with directors – Current environment – Fiduciary duty – Legal considerations• Proactively determine governance deficiencies and adopt

required policies

5 Board should receive updates at least annually

• Closely monitor shareholder base on an ongoing basis• Understand shareholder motivations

4 Monitor shareholder base


4. J.P. Morgan M&A advisory solution and shareholder activism expertise

We advise corporations and institutions of all sizes on their most complex strategic needs, in their home markets and around the world.

Clients benefit from customized solutions combining:

• In-depth knowledge of sector and market dynamics with M&A bankers based locally in most major markets globally

• Innovative advice on valuation, transaction structures and deal tactics/negotiations

• Rigorous execution delivered with responsive and agile service

• Ability to partner with product experts across our full range of competencies, including comprehensive financing through our debt and equity issuance platforms, as well as derivatives and treasury services, including escrow services

J.P. Morgan provides M&A advisory solutions across the full strategic life cycle of our clients:

Shareholder insights and engagement strategy

J.P. Morgan has an extensive record of helping clients prepare for and respond to shareholder activism. Our size and scale, wide array of product offerings and experience enable us to provide a differentiated approach to shareholder activism defense for clients:

• Defense preparations for publicly announced and non-public approaches

• Dedicated shareholder activism advice

• Advisory services for corporate clients only

– J.P. Morgan does not advise shareholder activists on activist campaigns

– Interests are fully aligned with company interests and enhancing long-term shareholder value

• Experience with all major activists in some of the most sophisticated campaigns around the world

– Deep understanding of potential activist tactics

– Firsthand experience of what works when defending against an activist

• In-depth knowledge and understanding of how company shares are trading

– What types of investors are buying or selling

– Sentiment from traders and the broader market

Strategic expansion

• Acquisitions, including cross-border opportunities

• Mergers and joint ventures

Enhancing business value

• Corporate combinations

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• Capital restructuring projects

• Spin-offs and other repositioning

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