What is a Proxy Fight?

A proxy fight (also known as a “proxy contest”, “proxy battle”, or “proxy war”) is an effort by the shareholder or group of shareholders of a corporation to convince other shareholders to cast their corporate votes (by granting a representative or proxy the authority to vote those shares) the way the urging shareholders prefer. The objective of the shareholders initiating the proxy contest is to secure the number of shareholder votes required to achieve the desired result (such as electing specific directors or approving a specific corporate action). 

How Does a Proxy Contest Work?

Common shareholders (and some preferred shareholders) of a corporation have the right to vote for or against major actions affecting the corporation – such as:

• changing of the corporate governance documents, 
• major mergers or acquisitions, 
• dissolution of the company, 
• sale of substantially all of a company’s assets, or 
• the election of directors. 

Shareholders generally vote their shares by indicating their voting preference and assigning their voting rights to a representative, known as a “proxy”. The representative will show up to the shareholders’ meeting and vote in accordance with the shareholder’s instructions.  As defined above, a proxy contest is when a shareholder or group of shareholders undertake an effort to convince other shareholders to grant their proxy vote in favor of a specific action. The most common form of proxy contest concerns the election of specific directors (members of the board of directors). In a corporation, the existing board members nominate individuals to fill vacant positions on the board of directors. The names of these individuals appear on the proxy ballots that are sent out to shareholders. This nominating function grants a significant advantage to the individuals nominated by the board. It is nearly a 100% certainty that these individuals will be elected, unless the shareholders are presented with other options and a reason to support those options. In a proxy contest for the election of directors, the group of shareholders initiating the proxy contest will either seek to include their nominees on the proxy ballot or contact shareholders directly with information and a request to write in the name of a specific candidate for the director position on the proxy ballot. If the shareholders initiating the proxy challenge are successful, they will elect their desired members to the board of directors. If successful in electing a majority of desired directors, the activist shareholder has effectively achieved control over the corporation. The new members will have the power to set corporate strategy, appoint new executive officers, elect a new chairman of the board, etc. Existing boards of directors fight hard to fend off activist investors seeking to initiate a proxy contest. They employ any number of anti-takeover tactics, such as:

• Denying Proxy Access
• Staggered Boards
• Restricting Funding
• Limiting Provisions in the Bylaws.

Proxy Contests in Hostile Takeovers

Proxy contests are often employed as part of a hostile takeover attempt. In such situations, another company seeks to purchase a target company. If the board of directors of the company is resistant to being taken over (as these directors will likely lose their positions after the acquisition), they reject the takeover proposal.  The acquiring company then sends an offer for acquisition (along with relevant company financial and operational documents) on Schedule 14A to the shareholders of the target company. The acquiring company will generally employ the services of a proxy advisory firm to assist in the process of compiling the list of shareholders, contacting them, and presenting the acquiring firms proposal.  As part of the proposal, the acquiring firm requests the right to vote as a proxy for the shareholders of the company. If the proxy contest is successful, the acquiring firm will be able to elect a majority of the company’s directors. Once elected, these directors will approve the acquiring company’s offer to acquire the target company.