A proxy fight or proxy battle is an expression often used to describe a situation when one or multiple shareholders of a company try to impose changes to the governance. Decisions at a corporate level are made by shareholders. Sometimes there might be a conflict between the management team, the board and its shareholders. In order to change the governance or a particular aspect of the company. Shareholders engage in a proxy fight, trying to convince other shareholders to vote in favor of a board change.
It is widely common when activist investors try to change some aspects of the company. Sometimes they end up colliding with the management or the board of directors. In order to implement changes, they need other shareholders to back them, in order to replace board members that might oppose the proposed changes. Activist investors will then select their own board members to represent their interests in board meetings.
How proxy fights work?
Proxy fights are different from company to company, but overall the process tends to be similar. There is usually an activist investor, either an individual or a company. The activist investor acquires a large stake in the company. Behind the investment decision, the activist investor usually believes that there is shareholder value to be unlocked if the company makes adequate changes.
In order to create value for themselves and the remaining shareholder, the activist investor will try to persuade the shareholders to vote against the annual general meeting (AGM). The main goal is to push the management and board of directors to make adequate changes.
Although proxy fights are common, they are not always successful. This is because today there is increasingly more wealth in index funds, that tend to be passive towards proxy fights. Another reason why proxy fights are not so successful is that the management and the board have a few ways of fighting back.
Reasons why proxy fights happen
There are several reasons why proxy fights happen. In essence, they are driven by unhappy shareholders that want to impose changes.
When activist investors try to enact changes in a company, they might not be so well received by management and the board. In order to impose those changes, that in their view are beneficial to the company and its shareholders. Activist investors might have to resort to a proxy fight. A change in corporate governance has usually to do with the business not performing as it should.
Mergers and acquisitions
Proxy fights are especially common among hostile takeovers. The acquired company will often refuse the terms proposed. Some shareholders might think that the decision goes against their best interest.
Management and the board are not aligned with shareholders
As a shareholder in a company, you want to make sure that the board and the management have the same objectives as you do. Creating value for their shareholders should be the reason behind every decision the board and the management make. When the shareholder’s interests are disregarded they might use a proxy fight as a way to implement changes.
Electing new directors
The activist investor might have to use a proxy fight in order to change the board of directors. Oftentimes, to elect a new director they will need to initiate a proxy contest.
Sale of a subsidiary or spinoff
Sometimes the valuation of the company, through a sum-of-the-parts (SOTP) might indicate that a sale or spinoff of one of its subsidiaries could unlock shareholder value. This is a very common situation, and it can be extremely rewarding for shareholders.
Sale of assets
It is often common for the shareholders to pressure the management and the board, for the company to sell certain assets. This is another reason that can lead to a proxy fight.
Dissolving the company
In case of dissolution, the shareholders might have to resort to a proxy fight. When all the intervenients in the process have opposite views, a proxy fight might be the only way for activist investors to implement the changes they want.
What can the board do to stop a proxy fight?
At the end of the day, the shareholders are the owners of the company. They elect the board members to represent their interests. Despite that, there can be conflicts between certain shareholders and the board members. However, board members have certain ways of dealing with proxy fights. This is the reason why not all proxy fights work.
Refuse proxy access
In order to stop a proxy fight, the board might refuse proxy access. Although this is not common, it is one of the ways the board and its members have to deal with activist investors.
A staggered board limits the shareholder’s ability to elect new directors. Staggered boards have different rules from company to company. It might prevent shareholders from electing a new director in a particular year, or from changing the majority of the board members.
Change the rules
Every company has its own internal rules, in a sense like specific legislation. Board members that are pressured by proxy fights, might change the bylaws of the company. This can have a great impact on the outcome of a proxy fight.
A golden parachute is a termination clause that management agrees to, in order to prevent acquisitions or mergers. The termination clause usually includes a large sum to be paid to the employee, if he has to leave the company. This is another way that management and the board might protect their interests. Shareholders might not be tempted to engage in a proxy fight, if the outcome means that the company will have to pay a large sum to let go of the management.
A proxy fight is nothing more than one or a group of shareholders trying to change the course of the company. The goal behind it is to create more shareholder value and deliver the best returns for the company’s owners. Although over the years, proxy fights have been a reason for controversy. They have a purpose in the corporate world. It can make a great difference in how a company is managed, and the returns it delivers to its shareholders.
Being able to embrace change is a very important ability for most corporations. It is easy for the management and the board to become complacent.
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