Financial activism in the spotlight: How companies can protect themselves from short seller attacks

Identify targeted attacks, minimise risks, safeguard your reputation – prevention is key

By Melissa Birkmann, Consultant at Kirchhoff Consult, and Felix Zander, CEO at epp finance intelligence, in GoingPublic Magazine
 

A sudden drop in share prices, unsettled investors, damaged reputation – attacks by activist short sellers often hit companies with considerable force and regularly leave lasting scars. What begins as legitimate speculation can, in extreme cases, develop into a targeted attack on listed companies. But companies are not defenseless against these attacks.

Short sellers borrow shares, sell them, and speculate on falling prices in order to buy them back later at a lower price – an established element of functioning capital markets. Activist short sellers, on the other hand, go further: they target listed companies with public attacks in order to put pressure on their share price. To do this, they usually publish emotionally charged, often distorted information – mostly in the form of detailed research reports that are quickly disseminated via traditional and social media. The attacks are usually carefully planned months, sometimes years, in advance, but almost always take companies by surprise and therefore find them unprepared.

Recent analyses show that more than 62% of the affected companies have not recovered from share price declines of in some cases over 40% even a year after the short attack, with some of them becoming pawns on the capital market and suffering from follow-up attacks with high volatility. Internally, this can also cause share-based compensation programs for management and employees to lose their effectiveness, thereby weakening internal motivation and undermining trust in the company's management.

One key reason for the element of surprise is the false sense of security created by existing disclosure requirements. Net short positions must first be reported to BaFin once they reach 0.1% of a company’s issued share capital. However, disclosure in the Federal Gazette is only required once the threshold of 0.5% is exceeded. This can lead to significant discrepancies between actual and publicly reported short positions.

The targeted attacks on companies such as Grenke, Aurelius, or ProSiebenSat.1 illustrate that, following the U.S. and the U.K., German small- and mid-cap companies are now increasingly coming into the crosshairs of aggressive short-sellers as well. The key question, therefore, is:

How can companies take preventive measures against such attacks?

Effective preparation for potential short seller attacks systematically combines capital market communication, internal processes, risk management, and data-based environmental analysis. The aim is to be able to respond quickly, in a coordinated and credible manner in the event of a crisis.

The first priority is a consistent and transparent equity story combined with high governance standards. A key element here is regular and structured analysis of the company's environment in order to obtain a clear picture of its own situation. Value drivers and structures can thus be regularly reviewed and refined to minimize risks and weaknesses. Continuous and transparent communication with analysts, investors, and the media creates trust and enables realistic expectation management.

A perception study helps to identify external sentiment and potential irritants at an early stage. To this end, key capital market participants are asked for their assessment. The results of such studies should be regularly incorporated into strategic communication and internal company analysis.

Internal processes in particular must be prepared for emergencies, with a crisis team defined and clear responsibilities and decision-making paths established. Coordinated interaction between key functions such as the executive board, investor relations, communications, legal, finance, and controlling is essential. Furthermore, engaging with external advisors can prove highly valuable in times of crisis. Crisis training promotes cooperation between those involved and identifies weaknesses in the internal organization at an early stage. To this end, companies should prepare robust Q&A catalogues as well as holding statements for potential attack scenarios in order to shorten response times and coordination processes in the event of a short-seller attack and to optimize communication.
 

Act early instead of defending late

Financial activism is no longer a disruptive event, but rather a structural risk. OSINT (open source intelligence) analysis, which uses a specially developed AI system landscape to process a large amount of officially available data that is mostly unknown to the company, is another component of risk management. It focuses consistently on early detection and continuous assessment of potential vulnerabilities, including pattern recognition and sentiment analysis. Effective monitoring of market opinions, social media, and short positions provides important clues about potential risks. A distinctive feature in this context is the disclosure of short positions even below the reporting threshold. This information provides valuable insights into the free float and illustrates that even a strong anchor shareholder does not guarantee protection against a short attack.

In a volatile business world, uncertainty has become the norm, making it increasingly difficult to keep track of risks and vulnerabilities. Even risks that are no longer reported continue to exist and pose major challenges for companies, particularly in the areas of financial activism and short selling. However, protection is possible: companies should prepare early—for example, by regularly analyzing the business environment and maintaining continuous, transparent communication with the capital market. It is important to regularly review the perception of the equity story, value drivers, and core messages.

Felix Zander is CEO at epp finance intelligence and an expert in capital market and crisis communication. He has over 25 years of management experience at listed companies and has received several awards for his IR work. His focus is on strategic communication in sensitive market phases – from IPOs to financial activism.

Melissa Birkmann works as a consultant for investor relations and public relations at Kirchhoff Consult. She previously completed her master's degree in communication management at the University of Leipzig. During her studies, she focused on crisis communication, particularly in relation to short seller attacks.