In the world of activist investing, battles for company control can play out not in the boardroom but in the hands of its shareholders. These often take place in the form of proxy fights. But, what is a proxy fight in business? And, how do investors use this strategy to challenge existing leadership and steer a company in a new direction?
What is a Proxy Fight in Business?
A proxy fight, also called a proxy battle, is a corporate power play when a group of shareholders attempt to gain control of a company by persuading fellow shareholders to cast votes in their favor during an Annual General Meeting (AGM) or special meeting.
The challenging group, or dissident shareholders, wants to replace existing management or board members with their hand-picked candidates. The dissidents must convince other shareholders to give them their proxy, which conveys non-dissident shareholder authority to the challenging shareholders to vote on their behalf.
By reading What is a proxy fight in business? you will gain a deeper understanding of how shareholders can influence or change the direction of a company, which is crucial for anyone interested in corporate governance, and activist investing. And isn’t becoming more knowledgeable to make more informed decisions our goal? Here are the key proxy fight facts:
Motivation – What motivates the dissident shareholders is their belief in a different vision and direction for the company or they harbor the feeling that current management has not, and does not, act in the best interest of the shareholders.
Proxy Solicitation – The challenging shareholder group and current management solicit proxies from existing shareholders. Targeted letters, emails, and public campaigns are usually the employed forms of proxy vote request and persuasion.
Outcome – If the dissident group obtains enough proxies, they can oust existing management, elect new board members take control of the company, and effectively influence numerous key decisions.
Proxy fights are contentious, expensive, and can significantly impact the firm’s direction and profitability while containing the ever-present risk of failure.
What is the Main Goal of a Proxy Fight?
The main goal of a proxy fight is to gain influence or control over the company by changing its existing management, board members, or specific policies. The dissident shareholders have one or a combination of the following aims:
Management or Board Replacement – The first order of business is to replace management or the board with selected candidates who are more aligned with the challenging group’s vision for the firm.
Increase Shareholder Value – The dissatisfied shareholder group often believes current management is not maximizing shareholder value. They feel their proposed changes will lead to a high stock price through improved financial performance. Large activist investors, such as Carl Icahn, aggressively push management to either improve or vacate in an activist effort to increase his substantial company ownership stake and the holdings of all shareholders.
Change Corporate Strategy – The challenging group wants to change the company’s strategic direction, which can manifest into restructuring operations, altering business plans, or pursuing or blocking proposed mergers and acquisitions.
Block Unwanted Transactions – Proxy fights are often initiated to prevent significant ill-advised transactions, such as a non-synergistic merger or acquisition or the buying back of an activist’s shares at an outrageous premium. Opposing shareholders do not believe the capital spend is in the best interest of existing shareholders.
Governance Reform – Corporate governance issues can be the impetus for a proxy fight. A call for enhanced transparency, improving board accountability, increased fiduciary and duty of care responsibilities, or the revamping of executive compensation can all be proxy battle catalysts.
What is a proxy fight in business? defines a proxy fight’s details and its main goal, but who starts these corporate battles?
Who Can Start a Proxy Fight?
A proxy fight can be initiated by any existing shareholder or group of shareholders who hold a sufficient stake in the company, believes major changes are needed, and are willing to fight for those changes. Here are the main proxy fight contenders:
Dissident Shareholders – Substantial individual investors, institutional investors, hedge funds, pension funds, and small investor groups who adamantly disagree with current management, the board, and the company’s direction can push for change.
Activist Investors – The most common proxy fight agitators and instigators are activist investors. Hedge funds and private equity firms who acquire a large stake in a firm with the overt intent to affect change to increase the value of their holdings. If successful, the positive externality is that all company shareholders will benefit from activist-induced capital appreciation. Activist investors can be substantial individual investors besides Mr. Icahn:
- Bill Ackman – Founder and CEO, Pershing Capital Management
- Nelson Peltz – Founding Partner, Tiran Fund Management
- Daniel Loeb – Founder and CEO, Third Point, LLC.
- Paul Singer – Founder, Elliott Management Corporation
- David Einhorn, Founder and President, Greenlight Capital
Large Individual Investors – Founders, founding family member groups, or other investors owning a large stake in the company may ignite a proxy battle.
Former Management and Board Members – Occasionally, ousted management and former board members who are juxtaposed to the managerial change and the deviated company direction may launch a proxy fight to regain company control.
What is a proxy fight in business? highlights the primary goal of a proxy fight which is to gain enough support from other shareholders to implement the challengers' desired changes within the company.
In general, while any shareholder can theoretically start a proxy fight, it typically requires a significant investment of time, resources, and money to effectively challenge the current management or board, so it is more commonly initiated by well-funded and motivated groups or individuals.
