Proxy Fight

What Is A Proxy Fight?

By definition, a proxy fight occurs when a group of shareholders in a company combines forces to vote out the current management or  the board of directors to take control over the company. 

To put it another way, a proxy fight is an unfriendly battle between shareholders and senior management over corporate governance. The ultimate goal of a the fight is to collect enough shareholder votes to get the results shareholders want.

Proxy fight are sometimes utilized as a strategy in hostile takeovers—acquisitions of a target company without the approval of the company's board. 

Many reasons a target company can reject a merger or an acquisition offer. For example:

• It can be that the bid undervalues the company
• The deal does not make strategic sense
• The acquirer's long-term prospects are questionable

In the case of a hostile takeover, the external acquirer may try to influence existing shareholders to vote out some or all upper management to make the acquisition happen. This is typically done through a proxy advisory firm hired by the acquiring company.

Reasons Behind a Proxy Fight

Below are the possible reasons behind a proxy fight:

1. Continued low earnings generated by a company.

Earnings per share (EPS) is the most crucial metric to measure a company's performance. If a company's EPS falls, it is often observed as a sign that its management is not running it well. 

When a company continues to generate low earnings for a prolonged period, shareholders may want to vote the management out via proxy voting.

2. The company fails to represent the interest of its shareholders (the principal).

This happens very often among public companies. 

When the management makes decisions that benefit only the wealth generation of its own, shareholders may opt to vote out the management to safeguard their interests. 

3. Weak corporate governance can lead to a lack of management trust among the shareholders. 

On the other hand, good corporate governance ensures an open exchange of information between the management and shareholders. 

Considering there will always be an information asymmetry between the two parties, weak corporate governance would make stakeholders distrust the management. It can be a reason for shareholders to challenge the management in a proxy contest.

4. Corporate takeovers can be a catalyst for a proxy battle. 

As mentioned above, in a scenario of a hostile takeover, the acquiring company may persuade the target company's shareholders to vote against the target's upper management, who is opposed to the takeover.   

Types of proxy fight strategies

Proxy fights can involve a variety of strategies, and the specific approach taken by activist investors depends on their goals and the circumstances surrounding the company in question.

Here are some common types of strategies employed in proxy fights:

1. Board Overhaul Strategy: Activists seek to replace a significant portion or all of the current board of directors with their own nominees. This strategy is used when activists believe that the current board is ineffective, lacks independence, or is not acting in the best interests of shareholders.
2. Policy Change Strategy: Activists focus on specific policy changes within the company rather than a complete board overhaul. They may propose changes to executive compensation plans, corporate governance practices, or strategic decisions, aiming to improve overall corporate performance.
3. Mergers and Acquisitions (M&A) Strategy: Activists advocate for the company to explore mergers, acquisitions, or divestitures to enhance shareholder value. This strategy is often used when activists believe that the current management is not effectively pursuing growth or value-creation opportunities.
4. Dividend and Capital Allocation Strategy: Activists push for the company to return more capital to shareholders through increased dividends, share buybacks, or other means. The goal is to boost the stock price and return value to investors.
5. Operational Improvement Strategy: Activists focus on operational changes within the company, such as cost-cutting measures, restructuring, or the appointment of a new CEO with a specific turnaround plan to improve the company's financial performance.
6. Environmental, Social, and Governance (ESG) Strategy: Increasingly, proxy fights are related to ESG concerns. Activists may target companies for their environmental impact, labor practices, or ethical considerations, seeking changes in these areas to align the company with responsible and sustainable practices.
7. Shareholder Rights and Corporate Governance Strategy: Activists may advocate for improved shareholder rights, such as equal voting rights for all shareholders, changes to the company's bylaws, or the elimination of anti-takeover provisions that they believe hinder shareholder influence.
8. Communication and Public Relations Strategy: Effective communication with shareholders and the public is crucial in proxy fights. Activists may use media campaigns, social media, and public statements to garner support for their cause and sway shareholder opinion.
9. Legal and Regulatory Strategy: Activists may employ legal and regulatory tactics to challenge the company's actions or decisions, such as filing lawsuits, requesting investigations, or filing complaints with regulatory authorities.
10. Negotiation Strategy: In some cases, proxy fights may lead to negotiations between activists and the company's management or board. Activists may seek to reach a settlement that addresses their concerns without going through a full-blown proxy battle.

Each of these strategies serves a specific purpose and can be tailored to the unique circumstances of the company and the goals of the activist investors.

How Does Proxy Fight Work?

Dissatisfied shareholders of a company usually lead to proxy battles. They may have tried to address the company's board regarding a specific management decision, but the board has failed to listen and refused to make any changes to the problem.

When this happens, the dissatisfied shareholders can gather other shareholders to pressure the board to make changes in the company by leveraging their votes and voting against senior management or campaigning to replace the board at the Annual General Meeting (AGM).

It is worth noting that shareholders generally do not vote at the AGM directly. Instead, a proxy (or a representative) to whom shareholders grant the authority would vote on their behalf.

In general, shareholders have the right to decide on the management actions listed below via voting:

• Corporate governance documents details
• Mergers or acquisition deals
• Corporation dissolution
• Asset sales 
• Directors election

Corporate Takeover

In the case of a corporate takeover, the acquirer may send a proxy statement called Form DEF 14A to the target company's shareholders. 

The proxy statement usually contains the target company's financial and other information and the proposed deal's details.

A third-party proxy solicitor is usually hired to reach out to shareholders on behalf of the acquiring company to sway their voting positions further. 

Suppose the acquiring company successfully compels the significant shareholders to present its proposal. In that case, the acquiring company can be granted the authority to vote as a proxy for the target shareholders.  

Sometimes, the ownership of the stocks belongs to a broker rather than shareholders. In such a situation, the proxy solicitor would consult with the brokerage firm to solicit its voting positions.

Then, individual shareholders or brokerage firms would either cast their votes or authorize a proxy to vote. The voting result would be handed to a stock transfer agent, who would submit the result to the target company’s corporate secretary before the shareholder’s meeting.

Suppose the acquiring company wins the proxy contest. In that case, it can elect most of the target’s board members to approve the acquiring company’s bid and finalize the merger or acquisition deal.

Defense Mechanisms in Proxy Fights

It is worth noting that, in general, proxy battles are hard to win because companies are usually equipped with preventative corporate governance tactics such as staggered boards and have restrictive bylaw requirements. 

Different from a normal board of directors, a staggered board, also known as a classified board, is a board of different classes of directors. Whereas in a normal board, all directors are elected at once, in a staggered board, only one class is changed every election term.

If a proxy battle happens, companies put staggered boards in place to prevent shareholders from voting out the entire board all at once. 

In addition to staggered boards, companies can also deploy golden parachutes as a defense mechanism to safeguard top executives’ interests in a hostile takeover. 

A golden parachute is a contract that guarantees a significant amount of compensation (including large bonuses, stock compensation, and sometimes ongoing benefits) to the upper management members when they are forced to leave in case of an unwanted takeover.

An acquirer may think twice before proceeding with a takeover if a target company has a golden parachute in place, as the acquirer would be responsible for paying the upper management of the target company their lucrative severance packages.

Steps Included In A Proxy Battle

Listed below are steps included in a proxy battle: 

1. An acquirer approaches a target company with an offer but gets rejected, and/or shareholders are unhappy or dissatisfied with corporate governance and board decisions.
2. An acquirer and/or a group of dissident stakeholders of the target company come together and initiate a proxy fight against the target and pressure the target’s board to change.
3. The alliance of stakeholders and investors warns that they will use their proxy votes. 
4. If shareholders and/or the acquiring company collected enough support, they can vote against the management and elect the entire board or some board members.
5. The newly-elected board members will act accordingly to the interest of the shareholders and/or the acquiring company, attempting to promote and finalize the deal.
6. If shareholders and/or the acquiring company fail to win the proxy contest, then the target company's board of directors and management remain the same.  

Examples of Proxy Fight

The purpose of these proxy fight examples is to showcase how activist shareholders engage in battles with companies to influence corporate decisions. Proxy fights typically arise from disagreements on strategic direction, governance, or financial matters.

These cases highlight diverse motivations, such as advocating for mergers, improving transparency, or addressing management concerns.

These fights underscore the influence of activist investors and their ability to shape a company's decisions through proxy contests. They also reveal the challenges activists face in rallying shareholder support and overcoming corporate defenses. Let's see come examples described below. 

Carl Icahn Vs. Yahoo

An example of a proxy fight is Microsoft’s unsolicited offer to buy Yahoo in 2008. Microsoft offered to purchase the company for $31 per share, and the board of directors at Yahoo claimed the offer undervalued their company.

As a result, Yahoo’s board delayed any further negotiations with Microsoft. As a result, Microsoft retracted its offer on May 3, 2008, and shortly after that, Carl Icahn (American financier) initiated a proxy battle to replace Yahoo’s board of directors. 

Icahn, a significant Yahoo shareholder at the time, wanted to replace Yahoo’s board with one that would try to arrange a successful merger with Microsoft. He believed that the potential merger would enhance value through synergies. 

Despite Microsoft making the initial bid, Yahoo was eventually bought by Verizon for $4.48 billion. 

Hyundai Vs. Elliott Management

U.S. activist hedge fund Elliott Management infamously lost its proxy fight with South Korean auto giant Hyundai Motor Group in 2019 and, as a result, sold all its shares (worth more than $1 billion) in Hyundai in 2020. 

Elliott briefly scored a victory against Hyundai in 2018 when the U.S. hedge fund stopped a corporate restructuring, which Elliott claimed lacked business rationale and was unbeneficial to shareholders.

In 2019, Elliott initiated a proxy battle against Hyundai because the U.S. hedge fund was unhappy about the South Korean auto maker’s dividend plan. 

While Elliott argued that Hyundai’s cash reserves exceeded the industry average, Hyundai claimed that the cash was needed for new investments in acquisitions and self-driving car technology.

Unfortunately, Elliott lost the battle as it failed to convince enough shareholders to agree with its demands of the $6.2 billion one-off dividend payments and seats on the board of Hyundai.

Campbell Soup Vs. Third Point

In 2018, the U.S. hedge fund Third Point led by activist investor Daniel Loeb started a proxy battle against the soup company Campbell Soup, during which Third Point attempted to overhaul Campbell’s board and install its people.

Third Point was unhappy with Campbell’s lagging share price and capital structure. In addition, Loeb argued that a face-paced takeover spree had left Campbell with much debt. 

On the contrary, Campbell claimed it had a strategic plan to bring the company back from its lack of focus. 

After months of fighting, the two parties settled their battle, with Campbell expanding its board from 12 to 14 seats and adding 2 out of 5 nominees from Third Point to the board. 

Third Point also agreed to drop its lawsuit against the soup company and withdraw the three unelected nominees.

Guyana Goldfields Vs. Shareholders

The Canadian mid-tier gold producer, Guyana Goldfields, was caught in a proxy fight in 2019 against a group of dissident shareholders led by the company’s former CEO, Patrick Sheridan, who accused the company’s then-CEO Scott Caldwell of a series of allegations of misconduct.

In addition, the dissident shareholders were also dissatisfied with the company’s poor performance. The company's gold in Proven and Probable Reserves declined by about 1.7 million ounces from 2018 to 2019.

This battle ended in mid-2019, with Guyana Goldfields agreeing to appoint two experienced mining executives to join the board and depose two long-serving directors. In addition, the company decided to have a succession plan for the CEO role.

Luby’s Vs. Bandera Partners

Cafeteria chain Luby’s defeated the New York-based hedge fund Bandera Partners in a proxy contest in 2019. Bandera owned about 10% of Luby’s shares at the time and wanted more accountability and oversight by the board. 

Bandera’s co-founder Jeff Gramm who ran the fund, had openly criticized the dining chain for its declining share price and overly compensated upper management. 

Even though from the very beginning, the proxy contest was deemed to be hard for Bandera as the Pappas family controlled about 37% percent of Luby’s stock, the hedge fund carried on with the battle, tirelessly trying to win as many votes from shareholders as possible. 

Unfortunately, Bandera was outvoted by other investors and lost its bid for four board seats. As a result, all nine nominees from Luby’s were elected. 

A proxy fight can be an effective strategy for shareholders to influence and guide the company's direction and for potential acquirers to take control of the target. However, proxy battles are hard to win because of the defense mechanisms. 

Aberdeen Standard Investments Vs. Toshiba 

In 2020, a significant proxy battle unfolded between Aberdeen Standard Investments, a major shareholder of Toshiba, and the Japanese conglomerate itself. This contentious dispute was rooted in concerns surrounding Toshiba's corporate governance and accounting practices.

Aberdeen Standard Investments, representing a substantial stake in Toshiba, aimed to instigate meaningful changes within the company.

At the heart of the proxy fight was the objective to enhance transparency and safeguard shareholder rights at Toshiba, a company grappling with past accounting scandals and corporate mismanagement.

Aberdeen sought to steer Toshiba toward improved practices, ensuring that the interests of all shareholders were adequately represented and protected.

However, the proxy battle encountered staunch resistance from Toshiba's existing management and board of directors, setting the stage for a highly contentious showdown.

Proxy fights of this nature underscore the important role that activist shareholders play in advocating for corporate accountability and governance reforms, especially in cases where there are perceived shortcomings or breaches of trust within a corporation.

Researched and Authored by Hongmo Liu | LinkedIn

Reviewed and edited by Parul Gupta | LinkedIn

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