When a group of shareholders band together to sway a corporate vote, it can trigger a proxy fight. While proxy fights aren’t always hostile, they indicate an unresolved disagreement between shareholders and management.
Part of avoiding a proxy fight requires understanding what a proxy fight is and the conditions that can contribute to unrest among shareholders.
What is a proxy fight?
A proxy fight happens when a shareholder or group of shareholders attempts to influence the outcome of a corporate vote. This typically occurs when shareholders want to “take over” a corporation by replacing upper management or the board of directors.
Proxy fights are most common during a merger or acquisition. Still, they can occur anytime shareholders are unhappy with management’s decisions and feel the board of directors didn’t do enough to resolve their concerns.
Proxy fight vs. hostile takeover
In a hostile takeover, one company acquires another without the approval of that company’s board of directors. Because the company doesn’t support the acquisition, it’s considered “hostile” in nature.
A proxy fight is not a hostile takeover; hostile takeovers can invoke a proxy fight to acquire a target company. Shareholders might use a proxy fight to replace any board members opposed to the takeover.
Why might a proxy fight occur?
A proxy fight occurs when shareholders are unhappy with the company’s direction. If they disapprove of some aspect of corporate governance and no longer trust the board to act in their favour, shareholders might initiate a proxy fight to right those wrongs — perceived or otherwise.
Proxy fights arise when the business changes its strategic direction, whether it follows a merger or acquisition, another business conflict, or dissatisfaction from an activist shareholder.
Proxy fight in business
One of the most common reasons for a proxy fight in business is appointing a new director (or directors) to the board. If shareholders disagree with the appointment, come time to vote, they may rally fellow shareholders to write in the name of a different candidate.
Proxy fights can also occur when:
- The company’s earnings remain low: Shareholders may want to vote out management if financial performance consistently falls short of their expectations.
- Governance is weak: If shareholders don’t trust management or the board of directors, they may take action to replace them.
- Management doesn’t act in the interest of shareholders: Sometimes, what’s best for the company isn’t equally beneficial for shareholder returns. Shareholders may attempt to vote out management if this occurs.
Proxy fight in mergers and acquisitions
Mergers and acquisitions are another common reason why proxy fights occur. Following a merger or acquisition, acquiring and targeting companies may seek to retain or appoint their board members. If this happens, the companies can work with third-party proxy solicitors to influence shareholders to vote in their favour — which may also be against the wishes of the current board of directors.
Activist shareholder proxy fight
An activist shareholder is a shareholder who seeks to influence change for or within the company. Whether they have a financial motivation — cutting costs, for example — or a non-financial motivation — like reducing emissions — activist shareholders often use proxy fights to realize their vision for the corporation.
How do proxy fights work?
In a proxy fight, a shareholder or group of shareholders will lead a campaign to gain the support of their fellow shareholders. Upon receiving the proxy statement, these shareholders initiate a proxy fight by arranging a meeting before the annual or special meeting and agreeing to direct their proxies to vote against the board of directors in some capacity.
Proxy fights typically work by majority, meaning that whichever position — the shareholders’ or the corporation’s — receives the most proxy votes is the one that will move forward. Sometimes, the corporation may negotiate settlement terms rather than bring the dispute to a vote.
What is an example of a proxy fight?
There are many examples of proxy fights, mainly because they’re increasingly common. While landmark proxy fights like the Canadian Pacific Railway are all but public knowledge, others fly under the radar. In fact, 50 board seat proxy fights were announced in the first three months of 2023 alone, even though you may not have gotten wind of any of them.
Some better-known examples of proxy fights are:
- NextGen Healthcare proxy fight: In 2021, NextGen Healthcare Founder Sheldon Razin initiated a proxy fight to oppose nine newly proposed directors and instead appoint his alternate slate of directors. He felt his slate would better position NextGen to increase its margins and profits and implement more competitive hiring practices. Razin ultimately lost the proxy fight when shareholders approved all nine proposed directors.
- Disney proxy fight: In early 2023, investor Nelson Peltz initiated a proxy fight to gain a seat on the board. Peltz disagreed with many of Disney’s strategic decisions in recent years, including the 2019 acquisition of Fox and the board’s succession planning. He dropped the proxy fight after new CEO Bob Iger announced cost-cutting measures.
- Illumina proxy fight: Activist investor Carl Icahn sought to appoint three alternate directors to the board following growing shareholder frustration with regulatory challenges, triggering a proxy fight. In May 2023, shareholders approved one of Icahn’s three candidates and voted the existing chairman off the board.
- Salesforce proxy fight: Shareholder Elliott Management proposed its own slate of directors. However, they later withdrew their nominations and dropped the proxy fight after Salesforce announced substantial profits and renewed cost-cutting measures.
Why are proxy fights unsuccessful?
Proxy fights are often unsuccessful because governance practices are usually stacked against them. Policies like staggered boards — in which only a few seats on the board are up for renewal at a time — and restrictive bylaws often prevent shareholders from taking decisive action against the board of directors or management.
Corporations are also more willing to settle proxy fights. While settlements aren’t necessarily “unsuccessful,” the agreement may not fully capture the shareholder’s intended impact.
How to avoid a proxy fight
In some instances, a proxy fight may be unavoidable. Many shareholders are spurred to action when company performance subsides —something that isn’t always within management’s control.
At the same time, there are many practices boards and senior leadership can implement to avoid proxy fights and create a more constructive relationship between the corporation and its shareholders. These are:
- Engage with shareholders: Knowing who your shareholders are is not enough. Why did they invest in your company? What does good performance mean to them? What are they motivated by? Understanding how they view governance and their investments will help boards and management speak their shareholders’ language — a fundamental way to show shareholders they don’t need to initiate a proxy fight to create change.
- Be proactive: Shareholder discontent usually brews under the surface for a long time. Reacting once they’ve expressed their view may be a little too late. Instead, actively communicate with shareholders and seek their feedback about critical decisions. This is the best way to catch — and resolve — their frustrations before they evolve into a proxy fight.
- Manage executive compensation: How much you pay your executives isn’t just an issue of public image. It can be the impetus for a proxy fight. Closely assess the relationship between pay and performance, make sure the pay is commensurate with the job description, and disclose all data to your shareholders. Executive compensation tools can automate much of this process.
- Have clear succession plans: It’s uncommon for shareholders to be always content with all board members. Implementing clear governance practices around board succession will reassure shareholders about the company’s long-term strategy and how it aligns with its investment goals.
- Create transparency: Shareholders want to be kept in the loop. This helps them cast informed votes at annual meetings and assures them that their investment is in good hands. Proxy fights can happen when shareholders are unclear about the company’s strategy or management’s decision-making. Leverage secure and collaborative governance tools to offer shareholders the transparency they need.
Create the visibility your shareholders expect
Proxy fights are symptoms of a more significant problem within a corporation. They can occur when shareholders lack confidence in the corporation or its leadership and feel a proxy challenge is the only way to right the course. Companies can get ahead of that.
Glass Lewis Proxy Insights helps companies spot any proxy fights before the annual meeting. With Proxy Paper reports featuring independent ESG analysis, boards can see how shareholders and activists view their leadership and corporation and take action before a proxy fight ensues.
Learn more about the exclusive proxy insights that come with Diligent’s Board & Executive Benchmarking platform.
