A Proxy Fight, sometimes referred to as a “Proxy Contest“, “Proxy Battle” or even “Proxy War” occurs when a shareholder (or group of shareholders) forces change in the membership of the company’s board of directors. This is achieved by convincing fellow stockholders to vote in accordance with the initiating shareholder wishes. In the context of a hostile bid approach, where the acquirer fails to convince the target to agree to the offer, the acquirer may seek control, or influence on the Board of Directors, to bring about a change of attitude towards the buyout offer.
The group of shareholders initiating the proxy contest may seek to include their own nominees on the proxy ballot (proxy statement) for election to the board. This is a common tactic of activist investors which has led to a series of responses from management as they learn to defend against such hostilities. These responses have limited the success in recent times of proxy fights but often still manage to change the course, or structure of the firm as a result. Issues such as capital structure are discussed in the 2010 academic paper “Capital structure and outcome of proxy contest targets: An empirical study” by Gao, N., & Everett Brooks.
Proxy Fight in Use
A Proxy Fight turns the traditional corporate strategy towards a more political one as votes are sought for the election of the incumbent(s). This may involve the use of a Public Relations firms in order to stir up interest in the shareholders base. It is well known that there is often a low level interest amongst shareholders in the election or reelection of directors.
Shareholders may be contacted directly using a Schedule 14A containing details of the voting proposition. If the shareholder has the means, this is often done with the assistance of a proxy advisory firm. These firms have taken over the responsibility of researching the benefits of many corporate actions enabling themselves to sell this research to large institutional clients. Therefore, these firms have become a powerful weapon in hostile negotiations especially in mergers and acquisitions. This in turn has a huge effect on the merger arbitrage event driven investment strategy. See our article Hostile Takeovers and Merger Arbitrage – What All Traders Should Know for a discussion on hostile takeover tactics.
