What Are Proxy Contests? A Beginner's Guide
January 22, 2025 (Investorideas.com Newswire) When a company is made up of several shareholders, decision making is a hectic and complex process. So, how are decisions or changes implemented in such a company? What happens if one or more shareholders do not agree with some policies, governance, or operations in such a company? The answer to both these questions is proxy contests. These are complex processes involving a sequence of strategic steps that are taken by investors/shareholders to challenge the operations/management of a company.
The definition of a proxy contest?
Proxy contests, also known as proxy fights or battles, is a mechanism through which shareholders can influence or initiate changes in corporate governance of the companies that they are associated with. These contests can stem from shareholders wanting substantial changes in the operations of a company.
In simpler and more practical terms, a proxy battle is a corporate government dispute where activist shareholders or investors attempt to make corporate changes. They do so by replacing existing board members with their own nominees, in hopes that they will serve the company's better interests and even enhance the company's shareholder value.
Through a proxy battle, shareholders can ensure that the management of a company remains accountable to its owners (the shareholders).
Participants in a proxy battle
- Activist investors or shareholders - The parties that initiate the contest in order to advocate for changes within a company
- Board members - The parties that are targeted by the activist investors to defend the changes that are needed and address the concerns presented by the shareholders. There are two factions when it comes to board members; incumbent and activist factions.
- Institutional investors - Those that hold the power to vote on the outcome of the contest. They can choose to side with the incumbent board members or the side of the activists.
- Independent advisors - Entities that provide objective insight and strategic advice to the activist and incumbent board members. Their role is to help the board members assess the implications of the proposals at hand.
Instances that warrant proxy fights
Several factors can trigger proxy fights. They include:
- Mismanagement of a company
- Poor financial performance
- Strategic disagreements between shareholders and a company's management
- Need for value maximization
Benefits of proxy contests
- They increase accountability for company management
- They enhance shareholder engagement
- These contests help promote shifts in the power or management of a company
- They help implement important changes that can affect the performance of a company
Proxy fights can influence
Steps involved in a proxy contest
Step 1: Identification of issues by a group of activist shareholders. These are the issues that target the proxy fight/contest
Step 2: Development of a proposal and nomination of new board members that will serve the interests of the activist shareholders.
Step 3: Campaigning and soliciting votes from other shareholders. Here, the dissident shareholders also have to file a proposal with the Securities and Exchange Commission, providing detailed information about the proposal and contest. This is a legal requirement.
Step 4: Voting, which is done by shareholders with voting rights. The votes can be cast using universal proxy cards. Universal proxy cards in the U.S. enable shareholders to vote on proposals and nominees from both management and dissidents without attending the AGM, aiming to provide a more comprehensive and flexible voting process.
Step 5: The process ends with an annual general meeting. During this meeting, the votes are compiled, counted and the outcome of the contest is determined.
Conclusion
In a proxy contest, there is usually an issue of contention between the shareholders/investors and the management of a company. The two parties use proxies, who are incumbent and activist board members to challenge each other with opposing proposals. The process culminates in votes being cast and a decision being made that will impact the fate or direction of a company. It is worth mentioning that this is a legal process that has to be handled with care and all the steps have to be fulfilled in order for the outcome to be legitimate. The entire process also involves some costs like legal fees, communication charges, and even consultation fees.
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