The news that Sotheby's Chief Executive Bill Ruprecht had been toppled by US activist investor Daniel S. Loeb came as no surprise to seasoned observers of the auction house. The battle, begun almost a year ago with Loeb's purchase of a stake in the company and public accusations of Ruprecht's "lacklustre" leadership and extravagance, appears to have been won.

Loeb's victory at the venerable British auction house announces the UK arrival of this style of US shareholder activism - characterised by Loeb and his fellow billionaire Carl Icahn. A little like the US soldiers during the Second World War, they are flush with cash - and they are over here.

What do we mean by shareholder activism?What is true of auction houses is true of other industries: there is always room for further efficiencies, and it's not surprising to see any shareholder expect to see their investment succeed. But activist investors are a far cry from their predecessors 20 years ago, when holders of a single share were in it for the tea and biscuits at the AGM - and the chance to put a question to the chief executive. Now, they are a real force - hunting the corporate seas like sharks sensing blood in the water. Their influence is growing and their goal is to turn companies around, clear out incompetent or greedy management - and make a great deal of money out of it.

Where has it come from?Across the pond. Icahn is the United States' most renowned activist investor, known recently for persuading eBay to spin off its digital payments business, PayPal, prompting the departure of its chief executive. He has also just won a battle with Hertz - where Mark Frissora has been replaced as Chief Executive by a successor whom Icahn has personally approved.

Activism in the US has essentially won government sanction, says Josh Black, Managing Editor of the 2014 Activist Investing Annual Review. "The key difference is that today's activists are aligned with other shareholders and do have to generate a return for them," adds Black. "More institutions and pension funds are focused on what shareholders can do to improve companies."
"The forecast is for levels of activism to continue to rise; boards of UK companies should be aware and prepared to respond" The view of activists as 1980s-style 'corporate raiders' has been well and truly buried, according to the Chair of the Securities and Exchange Commission, Mary Jo White. She points out that activist investors may only own 1% of shares, yet "there is widespread acceptance of many of the policy changes that so-called 'activists' are seeking to effect."

So is the UK set to replicate that trend?Well, where the US is leading, Europe and the UK are following fast. Fund managers such as Guy Jubb at Standard Life and Neil Woodford of the top-performing Woodford Investment Management are not corporate raiders in the same way as Icahn, but they are active investors who strongly influence the direction of the companies with which they engage. Woodford, for example, helped to block the merger of BAE Systems with its European defence rival EADS in 2012 because he felt the company would become a puppet of the French Government. He also holds a significant stake in AstraZeneca as he believes its rejected suitor Pfizer might return. 

Activist Insight, a global information source on activist investment, recently released Activist Investing in Europe, in association with US law firm Skadden, Arps. It says that the UK is seen as the most activist-friendly jurisdiction in Europe, "judged on its regulatory regime and the sentiment of institutional investors. This has led to a high number of activist campaigns and managers focused exclusively on the UK, including RWC Partners, Toscafund and GO Investment Partners". Cevian Capital, Elliott Associates and Sandell Asset Management also have offices in London.

Activists with experience of the UK market say the ability to requisition a shareholder meeting with just 5% of the investor base is the most powerful of the tools at their disposal, and often encourages directors to give shareholders a private hearing first.

The UK is already the second most active market in the world, although it is a long way behind the US, says Black. "The trend of shareholders and corporations working more closely together to improve shareholder value is going to continue to be an issue. Some activist investors in the US have looked at the UK and several advisory firms are discreetly setting up offices there, although this could continue at a trickle rather than a stream."

What about institutional investors?Institutional investors are activists too, maintains the report, particularly in their opposition to management on remuneration issues, a problem that has resurfaced in 2014 following 2012's 'shareholder spring'. 

However, while institutions are said to be supportive of activists in private, they are less likely to praise individual activists in public. Nevertheless, UK shareholders are under pressure to be more vocal, and recent takeover battles have seen institutions arguing publicly over deals, a debate necessitated by changes to takeover rules, which may deny shareholders the opportunity to consider an offer if they don't force management to engage with the bidder.

Politicians, the press and regulators are calling for shareholders to be more engaged with portfolio companies, rather than simply exiting a stock if they are unhappy. A Collective Engagement Working Group has been formed by the main UK institutional shareholder representative bodies (the Association of British Insurers, the Investment Association, and the National Association of Pension Funds). Its primary aim is to identify how investors can work together in their engagement with listed companies to improve sustainable, long-term company performance and overall returns to shareholders. The Working Group has now created the Investor Forum, which is open to institutions wishing to engage with UK-listed companies, including asset managers, asset owners and international investors.

So should we brace ourselves for 2015?These developments, say Scott Hopkins and Lorenzo Corte in the report, "have the potential to create a 'perfect storm' of shareholder activism in the UK. The forecast is for levels of activism to continue to rise; boards of UK companies should be aware and prepared to respond."

As 2015 plays out, "we will see at least a dozen companies next year, perhaps AIM-listed companies and a couple of FTSE 250 companies, being looked at by activists," says Black, along with "a number of quarrels between the companies and their institutional shareholders."

The original version of this article was published in the December 2014 print edition of the Review.