Proxy Fight Definition
A proxy fight (also known as a “proxy contest”, “proxy battle”, or “proxy war”) is an effort by the shareholder or group of shareholders of a corporation to convince other shareholders to cast their corporate votes (by granting a representative or proxy the authority to vote those shares) the way the urging shareholders prefer.
The objective of the shareholders initiating the proxy contest is to secure the number of shareholder votes required to achieve the desired result (such as electing specific directors or approving a specific corporate action).
A Little More on What is a Proxy Contest
Common shareholders (and some preferred shareholders) of a corporation have the right to vote for or against major actions affecting the corporation – such as:
- changing of the corporate governance documents,
- major mergers or acquisitions,
- dissolution of the company,
- sale of substantially all of a company’s assets, or
- the election of directors.
Shareholders generally vote their shares by indicating their voting preference and assigning their voting rights to a representative, known as a “proxy”. The representative will show up to the shareholders’ meeting and vote in accordance with the shareholder’s instructions.
As defined above, a proxy contest is when a shareholder or group of shareholders undertake an effort to convince other shareholders to grant their proxy vote in favor of a specific action. The most common form of proxy contest concerns the election of specific directors (members of the board of directors).
In a corporation, the existing board members nominate individuals to fill vacant positions on the board of directors. The names of these individuals appear on the proxy ballots that are sent out to shareholders. This nominating function grants a significant advantage to the individuals nominated by the board. It is nearly a 100% certainty that these individuals will be elected, unless the shareholders are presented with other options and a reason to support those options.
In a proxy contest for the election of directors, the group of shareholders initiating the proxy contest will either seek to include their nominees on the proxy ballot or contact shareholders directly with information and a request to write in the name of a specific candidate for the director position on the proxy ballot.
If the shareholders initiating the proxy challenge are successful, they will elect their desired members to the board of directors. If successful in electing a majority of desired directors, the activist shareholder has effectively achieved control over the corporation. The new members will have the power to set corporate strategy, appoint new executive officers, elect a new chairman of the board, etc.
Existing boards of directors fight hard to fend off activist investors seeking to initiate a proxy contest. They employ any number of anti-takeover tactics, such as:
- Denying Proxy Access
- Staggered Boards
- Restricting Funding
- Limiting Provisions in the Bylaws.
Proxy Contests in Hostile Takeovers
Proxy contests are often employed as part of a hostile takeover attempt. In such situations, another company seeks to purchase a target company. If the board of directors of the company is resistant to being taken over (as these directors will likely lose their positions after the acquisition), they reject the takeover proposal.
The acquiring company then sends an offer for acquisition (along with relevant company financial and operational documents) on Schedule 14A to the shareholders of the target company. The acquiring company will generally employ the services of a proxy advisory firm to assist in the process of compiling the list of shareholders, contacting them, and presenting the acquiring firms proposal.
As part of the proposal, the acquiring firm requests the right to vote as a proxy for the shareholders of the company. If the proxy contest is successful, the acquiring firm will be able to elect a majority of the company’s directors. Once elected, these directors will approve the acquiring company’s offer to acquire the target company.
Academic Research on Proxy Fight
- Corporate governance through the proxy contest: Evidence and implications, Ikenberry, D., & Lakonishok, J. (1993). Journal of Business, 405-435. This journal examines the long term performance of firms after take-over in Proxy Battles.
- Proxy Contest Expenses and Shareholder Democracy, Latcham, F. C., & Emerson, F. D. (1952). W. Res. L. Rev., 4, 5. This paper examines the democracy of shareholder voting with analogies to a real democracy.
- Further Insight into More Effective Stockholder Participation: The Sparks-Withington Proxy Contest, Emerson, F. D., & Latcham, F. C. (1951). Yale LJ, 60, 429.
- Corporate operating performance around the proxy contest, Mukherjee, T. K., & Varela, O. (1993). Journal of Business Finance & Accounting, 20(3), 417-425. This paper examines the effect of a Proxy Fight on the operational and financial performance of a target firm.
- The efficient monitoring role of proxy contests: an empirical analysis of post-contest control changes and firm performance, Borstadt, L. F., & Zwirlein, T. J. (1992). Financial Management, 22-34. This paper examines empirical data from 142 firms that were acquired after a Proxy Battle and analyses their performance post the hostile take-over.
- The impact of financial factors on proxy contest outcomes, Hancock, G. D., & Mougoue, M. (1991). Journal of Business Finance & Accounting, 18(4), 541-551. This review discusses the influence of the financial performance of a target firm on the outcome of a Proxy Battle.
- Proxy contest, board reelection, and managerial turnover—yes, the proxy contest outcome matters, Yen, G., & Chen, C. L. (2005). Managerial and decision economics, 26(1), 15-23. This paper sheds light on the importance of Proxy Contests, discusses why they matter by analysing empirical data from firms that have undergone board overhauls to emerge as more successful companies. When the dissidents have their say, the company performance improves over time.
- The Work of the Inspectors of Election in the Montgomery Ward Proxy Contest, SPROWL, C. R. (1955). The Business Lawyer, 98-109.
- Capital structure and outcome of proxy contest targets: An empirical study, Gao, N., & Everett Brooks, J. (2010). Managerial Finance, 36(4), 294-321. This paper studies the impact of capital structure changes in firms that were targets of unsuccessful Proxy Battles.
- Corporate Behavior After the Proxy Contest for Control: The Short, Intermediate and Long Term, Mukherjee, T. K., & Varela, O. (1992). Managerial Finance, 18(7/8), 77-94. This paper takes a look at the post Proxy Contest behavior of corporates in the immediate aftermath, the short term, and the long term. It concludes that successful Proxy Battles lead to improved performance while unsuccessful attempts further deteriorate the firm’s performance.
- Hostile takeovers as corporate governance: A legal analysis of tender offer and proxy contest in China and Malaysia, Ali, H. M. (2014). Corporate Ownership and Control, 11(4 Continued 6), 558-566. This article takes a look at the Proxy Battles in Chinese and Malaysian firms with a deep analysis of the process, tenders issued, solicitation firms, and other techniques employed.