PROXY FIGHTS

1.     INTRODUCTION

2.     FUNCTIONING

3.     PROXY FIGHT OR TAKEOVER

4.     DISCOVERY OR CORPORATE’S INFORMATION

5. CONCLUSION

Introduction

There are some decisions that can be taken just by shareholders. Shareholders’ meetings originally meant personal meetings. The single most important decision of the shareholders is the election of the board of directors. For this election, the default rule is that the members of the board are elected each year. At the annual meeting some or all the directors are so elected.

The dimensions of corporations, especially public shared ones, issued the difficulties of having personal meetings of all the shareholders, which, mostly, are not interested in participating at them. Proxies permits the shareholders to participate to the shareholders’ meetings not in person. There is an interest of a corporation in the use of proxies due to the quorum that must be achieved at the annual meeting. It’s also one of the managers duties to solicit the proxies, so permitting the functioning of the corporation.

A proxy fight consists in a situation in which a group of shareholders joins forces in an attempt to oppose and vote out the current management or board of directors. In other words, a proxy fight is a battle between shareholders and senior management for control of the company. The group tries to persuade the other shareholders to vote their proxies against the way suggested by the board, due to a will of replacing the board.

Functioning

Proxy fights are commonly initiated by dissatisfied shareholders of a company. The shareholders typically pressure the board of directors by voting against them at the annual general meeting.

The issue that may come up is that proxies can be solicited both by managers and shareholders. When the managers are soliciting proxies, they usually send out a request for the proxies, usually preparing their side of what’s going on, to convince shareholders. The board can hire a public relations company to communicate. This happens with corporate funds. The board uses corporate funds to convince the shareholders to give the proxies and vote for them. The conflict of interest of the board is evident, possibly violating both the duty of care and the duty of loyalty.

For the insurgency in a proxy fight it’s difficult to come up with a new board convincing the other shareholders to vote for them. In the large publicly traded corporations, the insurgency needs to give information to the shareholders why to vote it. This kind of information is paid by the insurgency. The general principle to obtain the funds from the corporation is the reasonableness of the expenses sustained by the insurgency.

The requirements to receive from the corporation the necessary funds for the proxy are easily to satisfy.

Proxy fight or takeover

In a proxy fight there is a proposal of a group of shareholders that pretend to lead the corporation in a more profitable way than the actual leading group. In a takeover, the ones who pretend to lead the corporation in a more profitable way want to do that by acquiring the majority of the shares.

In both situations there is someone that is going to elect a new board. In the proxy fights, who will elect the board does not constitute the majority of the capital of the corporation. If someone that is a substantial shareholder may consider the two options in order to reach the same result.

The takeover would request huge amount of capital, but with the proxy fight he will give valuable information away. Moreover, with the takeover he will gain all the profit, while with the proxy fight it will be shared with the other stockholders.

Somebody who is in the takeover business is going to spend a lot of money to find a good transaction, so the successful probabilities of making the investment profitable are always to be analyzed. If the strategy of the group who wins the proxy fight is successful, they are going to share the gain with all the shareholders of course. That is why very often is preferred a takeover, following which the gain from the eventually successful strategy would be enjoyed just by the group.

Disclosure of corporate’s information

The basic principle that the shareholders have access to the corporation’s books was of the past.

Today, the function of inspecting the books is mostly exerted by consulting companies.

Trying to reconcile competing considerations to arrive at a rule, there are reasons to permit the shareholders to inspect the books and reasons not to permit.

Suppose that the shareholders assert that other firms in the business have done a business decision, and their corporation hasn’t, so they want explanation of the business strategy. We’re always looking for wrongdoing of directors and officers in making business decisions.

Actionability certainly matters, it’s a necessary condition, but it’s not the only argument.

In Rockwell v. SCM Corporation[1], a takeover specialist, Crane, did a tender offer to the shareholders, making a bidding commitment if certain conditions were met, like the number of shares tendered. The board wanted to send the tender offer itself to all the shareholders. However, Crane wanted to send the offer himself, so needed the list of shareholders. That because he wanted to communicate directly with the biggest shareholders, in order to convince them to sell him their shares. In doing so, he wouldn’t have had the necessity of negotiating with small shareholders. This testified the fact that he didn’t want to buy all the shares of the corporation, but just the amount that would have permitted him to control it.

To receive the shareholders list is necessary that one need it for a reason related to the business of the corporation, and that was the case. It was the interest of the shareholders, even if not that of management, to have the possibility of adhering at the tender offer.

Proxy fights in corporate law are increasingly common and they still play a pivotal role in the field of corporate governance. To understand deeper their importance we can list some proxy fights that happen to take places in the last years[2] such as:

1)    NextGen Healthcare proxy fight: In 2021, NextGen Healthcare's Founder, Sheldon Razin, launched a proxy battle against the nomination of nine newly proposed directors, advocating for the appointment of his own alternative slate of directors. He thought that his chosen directors would increase NextGen's ability to get better margins, boost profits, and implement more competitive hiring practices. However, Razin was defeated in the proxy fight as shareholders ultimately voted for all nine of the proposed directors.

2)    Disney proxy fight: It took place in early 2023, investor Nelson Peltz started a proxy battle with the objective of securing a position on the board. Peltz dissented over several strategic choices made by Disney in preceding years, such as the 2019 acquisition of Fox and concerns regarding the board's succession planning. The proxy fight was abandoned by Peltz following an announcement by the new CEO, Bob Iger, detailing cost-cutting measures.

3)    Illumina proxy fight: Giving a response to mounting shareholder dissatisfaction coming from  regulatory challenges, activist investor Carl Icahn had the goal to install three alternative directors on the board, leading to the initiation of a proxy battle. In May 2023, shareholders supported one of Icahn's three proposed candidates and ousted the incumbent chairman from the board

4)    Salesforce proxy fight: Initially proposing forth their own list of directors, shareholder Elliott Management later withdrew their nominations and ended the proxy battle. This decision followed Salesforce's announcement of robust profits and a renewed commitment to cost-cutting measures.

These are just some examples of the most importan proxy fights that have taken place in the United States lately. There are some rules that can be helpful to build a better relationship between the corporation and the boards and to avoid proxy fight like engaging with shareholders to understand what a good management means to them, managing executive compensation to make the pay is adequate with the job of the managers and creating transparency to keep shareholders updated on what is going on inside the firm.

[1] Rockwell v. SCM Corp., 496 F. Supp. 1123 (S.D.N.Y. 1980)

[2] Jessica Donohue, “Proxy fight: What is and how to avoid one”, Diligent, 15th August 2023;