Hedge Fund Activism coming to Europe: Lessons from the American Experience

Hedge fund activists are the bright new hope of the shareholder empowerment movement. Free from conflicts of interest and with high-powered compensation incentives, activist hedge funds are shaking up corporate boardrooms. The recent surge in activism has provoked criticism against activist investors portrayed as short-term agitators seeking to obtain short-term profits at the expense of long-term value. Although the view of hedge fund activists as short-term speculators has been discredited by empirical evidence, innovative tactics employed by hedge funds allow them to secretly accumulate large stakes in target companies within a short-time period. In response to the adverse effects of activist tactics on market transparency and fairness, European regulators have tightened disclosure obligations for major blockholders with US regulators following suit. While calls for tightening disclosure obligations in the US have been accompanied by a lively debate between proponents and opponents of tighter disclosure rules, the amendment of disclosure rules in Europe was not preceded by any meaningful empirical analysis of the benefits and costs of tighter disclosure rules. The result is that current European disclosure rules tilt the balance heavily against activist investor seeking to operate in Europe. In line with the growing debate across the other side of the Atlantic which has highlighted the importance of empirical analysis before proceeding with a modification of disclosure rules, the present article urges European regulators to reconsider the current disclosure regime by conducting a careful empirical analysis of their benefits for market transparency and fairness and their costs on shareholders and companies as a result of a reduction in the incidence of activist shareholdings.