The Legal Determinants of Shareholder Activism: A Theoretical and Empirical Comparative Analysis
Social Science Research Network
In recent years, activist hedge funds have spread from the United States to other countries in Europe and Asia, but not as duplicates of the American practice. Rather, there is a considerable diversity in the incidence and the nature of activist hedge fund campaigns around the world. What remains unclear, however, is what dictates how commonplace and versatile hedge fund activism will be in a particular country. This Article addresses this question by pioneering a new approach to understanding
... h to understanding the underpinnings and the role of hedge fund activism, following activist hedge funds as they select a target company that presents high-value opportunities for engagement (entry stage), accumulate a nontrivial stake (trading stage), then determine and employ their activist strategy (disciplining stage), and finally exit (exit stage). The Article then identifies legal parameters for each activist stage and empirically examines why the incidence, objectives, and strategies of activist hedge fund campaigns differ across countries. The analysis is based on 432 activist hedge fund campaigns during the period of 2000-2010 across 25 countries. The findings suggest that the extent to which legal parameters matter depends on the stage that hedge fund activism has reached. Mandatory disclosure and rights bestowed on shareholders by corporate law are found to dictate how commonplace hedge fund activism will be in a particular country (entry stage). Moreover, the examination of the activist ownership stakes reveals that ownership disclosure rules have important ramifications for the trading stage of an activist campaign. At the disciplining stage, however, there is little support for the conjecture that the activist objectives and the employed strategies are a reflection of the shareholder protection regime of the country in which the target company is located.