- Last Updated: Monday, 26 October 2020
Anyone owning shares of stock in a company that’s involved with a proxy contest needs to understand how that contest can affect the price of their securities. Over the last ten years, there have been notable examples of proxy contests such as Carl Icahn’s attempt to replace Yahoo Inc.’s board of directors.
In this article, we’re going to discuss the strategy behind the initiation of a proxy contest or fight. We’ll also discuss the steps involved with a proxy fight, including the selection of new board members through the proxy vote. Finally, we’ll provide statistics demonstrating the success rate of proxy contests.
Proxy Contests and Fights
By definition, a proxy contest is a strategy that involves using shareholders’ proxy votes to replace the existing members of a company’s board of directors. By removing existing board members, the person or company launching the proxy contest can establish a new board of directors that is better aligned with their objectives.
The easiest way to explain why a proxy contest would be launched against a company is by supplying an illustration as the backdrop. In this example, we’ll use the well-publicized takeover attempt involving Microsoft and Yahoo.
Proxy Contest Example
In February of 2008, Microsoft Corporation made an unsolicited offer to buy Yahoo for $31 per share. At that time, this offer represented a 62% premium to Yahoo’s stock price. With the potential to realize a large capital gain on their investment, many shareholders would have liked to see the merger with Microsoft become a reality.
Unfortunately, the board of directors at Yahoo felt the offer by Microsoft under-valued the company. Negotiations between the executives at Microsoft and Yahoo eventually stalled, and Microsoft withdrew their offer on May 3, 2008.
Less than two weeks later, billionaire Carl Icahn launched an effort aimed at replacing the board of directors at Yahoo via a proxy contest.
Strategy Behind Proxy Fights
In the above example, one company was being acquired by another and the takeover attempt was considered hostile, or unsolicited. The target company desired to remain independent, and their board of directors ultimately rejected the acquiring company’s bid.
The acquiring company, or a large group of investors, can get frustrated with the management or board of directors of the target company, and decide to use a proxy fight as a strategy to force the target company to merge.
Steps Involved in a Proxy Contest
Generally, there are four steps involved in a proxy contest, including:
- The acquiring company and / or a group of major stakeholders, such as large institutional investors, decide to join forces and launch a proxy contest against the target company.
- These investors threaten to use their proxy votes, which are commonly used in large corporations for voting by shareholders, to make the target company comply with their wishes. Proxy voting allows shareholders who have confidence in the judgment of others to “stand-in” and vote for them on corporate governance matters such as the election of board members.
- If successful in gathering enough proxy votes, the acquiring company can then elect new board of directors using proxy ballots.
- These newly-installed board members will be much more agreeable to the takeover or merger, and eventually the deal is finalized.
Oftentimes, just the mere threat of a proxy contest is enough for the target company to enter into serious merger talks with the acquiring company.
We’re going to finish this topic with some statistics demonstrating the effectiveness of proxy contests. According to SharkRepellent.net, a website that specializes in the tracking of mergers and acquisitions, there were 250 proxy contests or activist campaigns launched in 2019. These investors are typically able to gain a board seat, with a historical success rate that approaches 70%.
The high rate of success for these contests should not come as a surprise to anyone. The struggle for control in a company is usually initiated by large and powerful institutions, or investors, that have a great deal of money to gain if the merger is successful.
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