At the end of April, Munich Re only narrowly avoided an embarrassing defeat at its annual shareholders’ meeting. The world's largest re-insurance firm wanted the authorization to raise extra capital by diluting shares if and when needed in the coming years. In the end it scraped above the 75-percent threshold of investors needed to back the controversial capital-raising plans.
And even that grudging blessing came only after executives scaled back their plans, pledging to increase its capital by a third of their existing share base at most in the coming years. Previously they'd asked for a cushion of almost 50 percent.
The tug-of-war between Munich Re and its shareholders is part of a growing trend in Europe's largest economy. Other major German companies can expect to face similar resistance in the coming weeks.
German companies will no longer receive a carte blanche for capital hikes at annual shareholders’ meetings. Ingo Speich, Union Investment
Fund managers are becoming increasingly reluctant to approve the creation of generous quantities of authorized capital. The traditional practice allows companies to raise capital through future share sales without going back to shareholders. But fund managers now want to prevent companies from launching major takeovers – using fresh capital – without giving shareholders a say.
“German companies will no longer receive a carte blanche for capital hikes at annual shareholders’ meetings,” said Ingo Speich, a portfolio manager at Union Investment, which has stakes in numerous top German companies.
Deutsche Bank is already getting a foretaste of this desire by investors to retake control. The bank, which just completed an €8 billion capital hike, is pushing for a new capital cushion amounting to 50 percent of its capital at the May 18 annual shareholders’ meeting. For Germany's largest bank, which has gone to the capital well four times since 2010, that's proving a tough ask from shareholders.
“We’re critical of that and we have already voiced our misgivings to the supervisory board,” said Michael Schmidt, head of corporate governance at investment company Deka Investment. Other fund companies also object to Deutsche Bank’s plan.
Investment companies are becoming more influential, not just when it comes to the remuneration of the management and supervisory boards but also regarding capital measures. Klaus W. Riehmer, lawyer at Mayer Brown
More broadly, Union Investment is pushing for a 20-percent ceiling on creating new authorized capital and limits the dilution of shareholdings to 10 percent at most. The company is prepared to make exceptions if the management and supervisory boards provide good reasons for the move, such as a planned takeover that makes business sense. Other big German fund companies have set similar limits.
Around half the shares in the top 30 German companies listed in the DAX index are held by foreign investors, according to consultancy EY. But German fund companies like Union Investment are influential. In all, German funds manage some €1.8 trillion in funds from private and institutional investors like insurers and pension funds.
“Investment companies are becoming more influential, not just when it comes to the remuneration of the management and supervisory boards but also regarding capital measures,” said Klaus W. Riehmer, a lawyer at law firm Mayer Brown.
Foreign shareholders by contrast often stay away from shareholder meetings of German companies and many of them are not used to the kind of rights their counterparts in Germany enjoy.
“In the US in particular, boards have greater flexibility in issuing capital for mergers. Here in Germany it’s more easy to use shares as an acquisition currency. That’s a competitive disadvantage for German companies,” Mr. Riehmer criticized.
We want to be consulted in transactions that have the potential to change the face and the risk profile of a company over the long term. Nick Huber, Deutsche Asset Management
The change in sentiment among German investors was triggered by chemicals and drugs group Bayer’s $64-billion takeover of U.S. seeds group Monsanto. Many big investors felt sidelined by the acquisition.
“We want to be consulted in transactions that have the potential to change the face and the risk profile of a company over the long term,” said Nick Huber, head of corporate governance at Deutsche Asset Management, a unit of Deutsche Bank. He demanded that shareholder meetings, which are the most senior decision-taking forums of companies, play a role in such decisions to give legitimacy to the managements’ plans.
Investment bankers love mergers and acquisitions because they’re lucrative, but they tend to make big shareholders nervous. And many managers are tempted to dip in their war chests right now. The economy is growing, earnings are up and it’s easy to raise capital by issuing high-priced shares. Borrowing is also cheap, with interest rates at rock-bottom levels.
“But such big transactions often aren’t in the interest of shareholders, because they can fundamentally change the risk of an established business model,” said Mr. Speich at Union Investment. That’s why big players like Union Investment or Allianz Global Investors (AGI), a subsidiary of Europe’s largest insurer Allianz, are insisting on a say in future megadeals.
In Bayer’s case, investors have repeatedly warned that the company mustn’t neglect its drugs business, a stable source of earnings for years, following its drive into agrochemicals with the Monsanto takeover. But they can’t stop the deal from going through. Bayer secured blanket approval from shareholders at the last annual meeting for a capital hike of up to €22 billion. It’s now raising capital to cover around €17 billion of the purchase price for Monsanto.
Germany’s big fund companies won’t be issuing blank cheques so readily in future. They want German supervisory boards to consult their owners more, although they acknowledge that it’s not the job of investors to micromanage and dictate corporate strategy. “But neither can we have managers building castles in the air and using takeovers to create poison pills so that they can’t be swallowed up themselves,” said Mr. Speich. Many megamergers end up failing, as the example of Daimler’s takeover of Chrysler had shown, he added.
Shareholders of Munich Re now have shown that the pressure they exert can have effect. Other DAX companies should take note.
Carsten Herz leads Handelsblatt's asset management and insurance coverage and is based in Frankfurt. Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Robert Landgraf is Handelsblatt's chief correspondent for the financial markets. To contact the authors: [email protected] , [email protected] , [email protected]