Proxy Fight: Its Definition and Its Causes


Key Takeaway:

  • Proxy fights are battles between company shareholders and activist investors seeking to gain control over a company's board of directors. Such fights aim to effect changes to the company's management, business strategy or operations.
  • The causes of proxy fights can be related to under-performance by the company, lack of trust in the management, pressures from influential shareholders, strategic differences, among others.
  • The process of a proxy fight includes nominating a proxy, soliciting proxy votes from other shareholders, and voting in the proxy fight. The outcomes of a proxy fight can lead to significant changes in the company's governance structure, management team or strategic direction.
  • A well-known example of a proxy fight is the battle between Procter & Gamble and Trian Fund Management in 2017, where the activist investor sought to gain board seats and influence changes at the consumer goods giant. P&G eventually won the proxy battle, but made some concessions in governance and strategy to appease shareholders.

Struggling to know what a proxy fight is? You're not alone! Learn all about the causes, what happens and a real-life example of a proxy fight in this article. With this knowledge, you can easily understand how to respond to a proxy fight situation.

Definition of Proxy Fight

A proxy fight is a corporate battle among shareholders to control the company's management and board. The proxy fight takes place when a group or individual tries to replace the existing board members with a new group that will be more favorable to its interests. In this struggle, the parties seek the support of other shareholders by soliciting their proxies. These can be used to vote on resolutions, elect new directors, and make other decisions at annual meetings. The outcome of the proxy fight determines who controls the company and its direction.

In a proxy fight, two or more parties compete to gain control of the company's board. This can happen when a shareholder believes that the current management is not maximizing shareholder value or is making strategic mistakes. Proxy fights are often expensive and time-consuming, and they can weaken the company's operations and affect its stock price. They can also expose company weaknesses to the public and create ethical concerns.

Proxy fights are not common, but when they happen, they can have a significant impact on the company and its stakeholders. For example, in 2020, hedge fund Elliot Management launched a proxy fight against Twitter, seeking to oust CEO Jack Dorsey. The fight ended with a compromise that allowed Dorsey to remain in his position but put in place measures to boost shareholder value.

According to Forbes, "proxy contests have become a more common form of shareholder activism in recent years." Shareholders are becoming more proactive and assertive, and they are using their power to ensure that companies serve their interests better.

Causes of Proxy Fight

Proxy fights are often triggered by a disagreement between management and shareholders over company decisions and strategies. The underlying cause of proxy fights can vary, ranging from financial performance to executive compensation. Dissatisfied shareholders often feel that their interests are not being served, leading to conflicts and the initiation of proxy battles. In such situations, the dissident shareholders may seek support from other shareholders to push for changes in the company s management or to nominate new board members. Proxy fights can also be caused by activist shareholders seeking to influence corporate decisions. Such activism has increased over the years, with more shareholders seeking to exercise their rights and influence companies' direction.

While Proxy fights can be expensive and time-consuming, they are often the only way for shareholders to effect change within a company. Proxy battles can lead to fundamental changes such as selling off of assets, divesting divisions, or changes in capital allocation policies. In some instances, proxy fights can be used constructively to bring about dialogue between the board and shareholders, leading to mutually agreeable outcomes.

Proxy fights can become contentious if both sides fail to agree to a compromise, leading to heightened tension between shareholders, management, and board members. Companies with the majority of shares owned by a particular group have a higher likelihood of resisting proxy battles. Proxy battles can negatively impact the company's performance and result in reputational damage, leading to a decline in shareholder value. According to Harvard Business Review, a report suggests that the average cost of a proxy contest is $10 million.

According to a report by Nasdaq, "The number of activist investors that called for board refreshment via director nominations in their campaign increased from 24% in 2018 to 32% in 2020." These numbers indicate that proxy battles could become more frequent in the future.

Process of Proxy Fight

In the article 'Proxy Fight: Definition, Causes, What Happens, and Example', we'll look at the process of a proxy fight. And its subsections - Nominating a Proxy, Soliciting Proxy Votes, and Voting in the Proxy Fight. These subsections will explain how companies use proxy fights to control their management and decision-making.

Nominating a Proxy

When identifying a person to act as a stand-in, select a qualified and knowledgeable individual. This person will represent one's views and interests in the decision-making process. Consider the potential proxy's reputation and area of expertise while making nominations.

The nominating process involves finding someone who is capable of ensuring that your voice is heard during critical corporate decisions. A nominee must have relevant knowledge and the skills to understand the discussions taking place, to present your views effectively, and to fend off any election-related challenges or objections.

It's essential to remember that nominating an eligible proxy is only part of the battle. Additionally, it is critical to conduct comprehensive research on the company, the board members, and governance rules so that any challenges can be addressed with forethought.

Pro Tip: Before submitting any nominations or engaging in additional activities with potential proxies, ensure that all individuals have agreed to participate in writing and sign Nominee Indemnification Agreements.

Why bother canvassing for political votes when you can just solicit proxy votes from your lazy friends and colleagues?

Soliciting Proxy Votes

The method of obtaining proxy votes is vital in the proxy fight process. It involves seeking the support of shareholders by convincing them to grant their voting rights to a person or group. This person or group can then vote on behalf of the shareholder at a shareholders' meeting.

To solicit proxy votes, companies generally use methods such as direct mail campaigns, phone calls, websites, and social media platforms. The method of solicitation can depend on various factors such as the number of shareholders, cost implications, and security concerns.

One popular method used to solicit proxy votes is to persuade Institutional Shareholders Services (ISS) or Glass-Lewis & Co., LLC, who provide research and recommendations to institutional investors, to recommend voting for a particular candidate or proposal.

Historically in 2014, activist investor Carl Icahn launched a high-profile proxy fight against eBay s board directors regarding its corporate structure with PayPal Holdings Inc. He argued that given PayPal's enormous potential it could benefit from being spun off from eBay into its public company. However, eBay's board disagreed with his proposition and fought him every step of the way but ultimately settled with him before going to a ballot vote which earned him two seats on eBay's board of directors while Paypal became its separate entity under his leadership.

Get ready to exercise your right to vote, because this proxy fight is about to turn democratic into dramatic.

Voting in the Proxy Fight

When it comes to Proxy Fight, the voting process plays a crucial role in determining the outcome of the dispute. Shareholders are asked to vote either for or against the proposals made by the dissident shareholders. The number of votes determines whether or not the proposals are accepted.

The shareholders can vote through various methods like online voting, mail, phones, or in-person meetings. The company's board advises and encourages shareholders to vote against dissidents' plans, but every shareholder has an independent right to vote. There are cases where proxy advisers may sway some crucial votes.

It's important to participate in the voting process as your shareholding can lead to significant decisions for the company's future. Make sure you follow up with any news meetings that information on upcoming voting opportunities.

Voting intelligently and critically is necessary when it comes to Proxy Fight since there is a lot at stake. Encourage fellow shareholders to do so too through education on these matters or sharing materials that can help gain clarity about proxy fights and proposals.

The preparation of informative materials on possible outcomes is also paramount, encouraging transparency and providing all parties involved with facts rather than speculation. It helps significantly reduce confusion among shareholders who may tamper with these processes' validity without understanding its potential dire consequences both individually and collectively.

Looks like this proxy fight is less House of Cards and more like a game of musical chairs - who will be left standing on the board?

Example of Proxy Fight

Get a better understanding of a proxy fight by taking a look at the Procter & Gamble and Trian Fund Management case study. Examine the strategies and tactics used by both sides. This way, you can grasp the causes and outcomes of a proxy fight.

Case Study - Procter & Gamble vs. Trian Fund Management

A detailed analysis of the high-profile battle between Procter & Gamble and Trian Fund Management, wherein Trian sought to join the board of P&G to implement their proposed changes.

Event/ActivityProcter & GambleTrian Fund Management Agenda ProposalN/AReconstituting the Board with Trian nominees. Stated Stake in companyN/A37 million shares or 1.5% of outstanding stock. Nomination of DirectorsP&G nominated 11 directors.Trian nominated its CEO Nelson Peltz as an independent director. Outcome/Result:
Election of directors at AGM?
Mutual Agreement?
Action from either party post AGM?Contact Us\t

Book a Free Demo\tIncrease your business efficiency with advanced AI built for humans._e( 'Learn More' )

While both parties avoided a proxy contest through an agreement reached six months after the initial nomination, Peltz was subsequently added to the board.

It made headline that P&G had lost the biggest proxy contest ever.

Some Facts About Proxy Fights:

  • ✅ A proxy fight is a battle for control of a company between its management and shareholders. (Source: Investopedia)
  • ✅ Proxy fights are typically triggered when shareholders are dissatisfied with the direction or performance of the company. (Source: Forbes)
  • ✅ Proxy fights can be costly and time-consuming, with both sides spending significant resources on soliciting proxy votes. (Source: The Balance)
  • ✅ Proxy fights can have a significant impact on a company's stock price, especially if the outcome is perceived as a major change in corporate strategy or leadership. (Source: CNBC)
  • ✅ One recent example of a high-profile proxy fight is the battle between activist investor Bill Ackman and Automatic Data Processing in 2017. (Source: Reuters)

FAQs about Proxy Fight: Definition, Causes, What Happens, And Example

What is a Proxy Fight?

A Proxy Fight is a corporate battle in which two or more groups compete for control of a company's executive board or shareholders' votes. The process involves soliciting proxies or votes from stakeholders to support their agenda.

What are the Causes of a Proxy Fight?

The causes of a Proxy Fight are often linked to disagreements over a company's direction, management style, corporate governance, board composition, executive compensation, or strategic plans. Shareholders may also initiate a Proxy Fight if they feel that their interests are not being represented or if they have lost confidence in the company's leadership.

What Happens During a Proxy Fight?

During a Proxy Fight, the competing groups will try to garner support from shareholders by presenting their views, issuing voting materials, and launching campaigns. The outcome of a Proxy Fight is determined by the number of votes or proxies obtained by each group, with the winner gaining control of the company's executive board or agenda.

Can a Company Prevent a Proxy Fight?

Companies can take steps to prevent a Proxy Fight by actively engaging with shareholders, addressing their concerns, and fostering transparent communication. However, if shareholders are dissatisfied with the company's efforts and feel that their voices are still not being heard, they may initiate a Proxy Fight regardless.

What is an Example of a Proxy Fight?

One example of a Proxy Fight is the 2017 fight between Procter & Gamble (P&G) and activist investor Nelson Peltz. Peltz launched a campaign to join the P&G board, citing the company's underperformance and lack of innovation. The Proxy Fight lasted several months, with Peltz ultimately gaining a seat on the board.