Shareholder activism is by no means a new concept. There have been activist funds around for a considerable period of time, although their targets have often been smaller companies struggling to cope with their listed status. City law firms would not traditionally have been a natural place from which such funds would obtain legal advice, but the situation has now changed.
M&A activity goes through differing phases, looked at it from the lawyer’s point of view. The 1980s witnessed a huge outburst of hostile bid activity, followed by a serious retrenchment in all sorts of public bids. There was then significant growth in private equity-backed deals and the development of public-to-private transactions for ever-larger companies. More recently the dramatic escalation in the use of schemes of arrangement is likely soon to be followed by a sharp decline in their use.
City law firms have a choice as to whether they seek to adapt themselves to changing practices. The innate caution of City lawyers usually means that reactions are slow and ponderous, especially where market development is showing signs of being risky. Firms also have different attitudes to developments based on where they are starting from. For the most part, however, the only thing that complacency ensures is that firms do not capitalise early enough on developments that may be both exciting and rewarding in the long term.
The main example of this is the venture capital/private equity market. The original venture capital concept by definition dealt in smaller companies and developing situations. As a consequence it did not attract substantial fees. Gradually the more successful venture capitalists started to undertake larger deals and began to tiptoe into the listed company market. I well remember the impact on the traditional market sentiment of some of the earliest phase two public-to-privates (phase one having involved the sorry tale of Gateway in the late 1980s).
When Andrew Cook promoted a bid for his own company William Cook in order to fend off the hostile bid from Triplex Lloyd in the second half of the 1990s, the culture clash between the private equity backers and the providers of leveraged finance and the investment banks conducting the actual takeover bid was something to behold. Now, of course, the private equity houses are all very familiar with the rules and investment bankers are all very familiar with the wishes and appetites of the private equity houses. Put simply, the law firms that invested in their relationships with the venture capitalists gained a considerable head-start over other City firms that waited and only responded much later when the venture capitalists grew into successful private equity houses. Arguably, by waiting, they may have missed a few years of fee pressure from these sorts of clients, but in doing so they also missed out on developing client loyalty and learning about a new way of doing deals as it was happening.
A law firm that wants to stay ahead of the game has to seek to identify trends before it is too late to participate in them. When activism meant a few tiny funds sniping at beleaguered listed companies, devoting resource into this area could have been questioned. Certainly, the work of establishing hedge funds has been going on for some time and has been undertaken by firms with specialist fund practices. Such firms, however, are often not specialist M&A firms.
Ashurst has operated in the hedge fund market for some time, particularly on M&A/private equity and distressed debt deals, and I believe that the firm is well positioned to grow its position in acting for the funds that are going to be major M&A players for the foreseeable future. The idea is also that, by acting for them, we can advise corporate clients better on how to respond to activist hedge funds and deal with them. There is nothing opportunistic about this in any negative sense. It reflects the view that firms can never afford to be complacent.