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 In May of 2008, Carl Icahn launched a proxy contest in an attempt to replace Yahoo Inc.'s board of directors. If you own shares of stock in a company that's involved with a proxy context, then it's important to understand how that contest can affect the price of that stock.
In this publication, we're going to discuss the strategy behind the initiation of a proxy contest or fight. We'll also discuss the steps involved with a proxy fight including the selection of new board members via the proxy vote. Finally, we'll provide statistics demonstrating the success rate of proxy contests.
What is a Proxy Contest?
By definition, a proxy contest is a strategy that involves using shareholder's proxy votes to replace the existing members of a company's board of directors. By removing existing board members, the person or company launching the proxy contest can establish a new board of directors that is better aligned with their objectives.
The easiest way to explain why a proxy contest would be launched against a company is by supplying an example as the backdrop. Here we'll use the well-publicized takeover attempt involving Microsoft and Yahoo.
Proxy Contest Example - Microsoft and Yahoo
In February of 2008, Microsoft Corporation made an unsolicited offer to buy Yahoo for $31 per share. At that time, this offer represented to shareholders a 62% premium over Yahoo's stock price prior to the announcement. With the potential to realize a large capital gain on their investment, many shareholders would have liked to see the merger with Microsoft become a reality.
Unfortunately, the board of directors at Yahoo felt the offer by Microsoft under-valued their company. Negotiations between the executives at Microsoft and Yahoo eventually stalled and Microsoft withdrew their offer on May 3, 2008.
Less than two weeks later, billionaire Carl Icahn launched an effort aimed at replacing the board of directors at Yahoo via a proxy contest.
Strategy Behind Proxy Fights
In the example above, one company was being acquired by another and the takeover attempt was considered hostile, or unsolicited. The target company desired to remain independent and therefore their board of directors ultimately rejected the acquiring company's bid.
The acquiring company, or a large group of investors, can get frustrated with the management or board of directors of the target company and decide to use a proxy fight as a strategy to force the target company to merge.
Steps Involved in a Proxy Contest
Generally, the steps involved in a proxy contest include:
- The acquiring company and / or a group of major stakeholders - such as large institutional investors - decide to join forces and launch a proxy contest against the target company.
- These investors threaten to use their proxy votes - which is commonly used in large corporations for voting by shareholders - to make the target company comply with their wishes. Proxy voting allows shareholders who have confidence in the judgment of others to "stand-in" and vote for them on corporate governance matters such as the election of board members.
- If successful in gathering enough proxy votes, the acquiring company can then elect new board of directors using proxy ballots.
- These newly installed board members will be much more agreeable to the takeover or merger, and eventually the deal is finalized.
Oftentimes, just the mere threat of a proxy contest is enough for the target company to enter into serious merger talks with the acquiring company.
Proxy Contest Statistics
We're going to finish this topic with some statistics demonstrating the effectiveness of proxy contests. According to SharkRepellent.net, a website that specializes in the tracking of mergers and acquisitions, there were 50 proxy contests or activist campaigns launched in the first quarter of 2008. In that same quarter, these investors were able to gain board seats at 32 companies - a success rate of 64%.
The high rate of success rate for proxy contests really should not come as a surprise to anyone. These struggles for control in a company are usually initiated by large and powerful institutions or investors that have a great deal of money to gain if the merger is successful.
About the Author - Proxy Contest
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