NVS Novartis AG

FRANKFURT—Germany is gearing up for a rare proxy fight between activist investors and a company's incumbent management with pressure mounting on the board of generic drugmaker Stada Arzneimittel AG ahead of a shareholder meeting later this month.

Shareholder advisory firm International Shareholder Services is among those leading the charge against Stada's management, calling for the chairman of the company's supervisory board Martin Abend to be replaced by Eric Cornut, a former executive at Swiss drugs giant Novartis AG.

Mr. Cornut has been nominated for the chairmanship by Active Ownership Capital, a German activist investment fund which is Stada's largest individual shareholder with roughly a 5% stake.

Proxy fights remain relatively rare in Germany where it is usual practice for companies to have a supervisory board and a management board unlike the single-board structure typical in the U.S. or U.K.

A maker of household German cold treatment Grippostad and over-the-counter products like sunscreen with yearly revenue of €2.12 billion ($2.36 billion), Stada has been long been seen as a possible takeover target for bigger rivals or private-equity firms.

The company rejected an informal approach earlier this year by Polish peer Polpharma SA, which floated the idea of merging the two companies, according to people familiar with the matter.

These people added that a tie-up could have resulted in more than €140 million in yearly synergies. A spokesman for Stada declined to comment.

In the spotlight at Stada is what some investors see as a mismatch between the company's executive pay and its long-term earnings record

"There appears to be a misalignment between performance-linked remuneration and the company's actual performance," said ISS in the report dated Aug. 10

ISS said Stada's shares have "significantly underperformed peers" over the past couple of years. "Change on Stada's supervisory board is warranted due to weak past performance and governance," ISS said.

"We strongly disagree with ISS' evaluation and recommendations with regard to the supervisory board elections as well as executive board remuneration. We note that ISS appears to have had at least in parts access to incomplete or erroneous assumptions and data," Stada told institutional investors in a letter reviewed by The Wall Street Journal.

It added the activist fund's "proposal is aimed at obtaining full control over Stada via the supervisory board."

Stada's shares were flat over the past five years until February this year.

Since then its shares nearly doubled to currently above €50, partly fueled by hopes on a takeover offer. The Wall Street Journal reported in May that Stada held initial talks with private-equity firm CVC Capital Partners. People familiar with the matter said private-equity firms remain interested in a potential buyout.

In contrast, shares of U.S. rival Mylan NV gained around 150% over the past five years. On the other hand, shares in another rival, Perrigo Co., fell by more than 40%, mainly because of a steep decline this year after its CEO was tapped to lead Valeant Pharmaceuticals International Inc.

Stada is also reportedly under pressure from other quarters. Another shareholder adviser, Ivox Glass Lewis, recommended that investors vote against the company's management salary system, while supporting supervisory board chairman Mr. Abend, according to German daily Boersenzeitung.

U.S. activist investor Guy Wyser-Pratte told a German daily earlier this summer that he took a stake in Stada, saying the company had missed opportunities in the past and that it should team up with an international rival.

Write to Eyk Henning at eyk.henning@wsj.com

(END) Dow Jones Newswires

August 15, 2016 10:05 ET (14:05 GMT)

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