Proxy advisory firms provide primarily institutional investors with research and data on management and shareholder proxy proposals. By analysing the proxy statement and additional background information, these institutions can also provide recommendations to investors on how to vote their shares at annual shareholder meetings or more importantly for arbitrageurs, the extraordinary general meeting. These votes are called “proxy votes” because the shareholder usually does not attend the meeting and instead sends instructions for a third party to vote shares (by proxy) in accordance with the instructions given on the voting card.
They have become a critical stop on the road show when management and activists contest these matters, such as over the election of the board of directors. The research and voting recommendations proxy advisory firms provide can have a significant impact on the level of support a shareholder proposal receives.
It is imperative that the merger arbitrageur is aware of their involvement in any given deal and the influence they may have. See our article discussing the role of the Proxy Advisory Firm and Merger Arbitrage for more deatils on how these firms effect merger arbitrage trading.
In the U.S., the two most well known firms in the industry controlling approximately 97% of the market. For the sake of completeness, the three most well-known firms in the U.S. are:
The most recent SEC guidance on the practice of these firms recommends
“Investment advisors will also need to implement policies ensuring clients that their use of proxy advisory firms are justified, and every vote is being cast in the clients’ best interest“.
At the time of writing, the extent of the effect upon trading merger arbitrage remains to be seen. However, judging by the influence these firms currently wield, it would be a brave call to trade against their recommendation.
