A proxy fight is when a group of shareholders join forces and gather enough shareholder proxies to win a corporate vote. This is also referred to as a proxy battle. Used mainly in the context of takeovers, this term implies that an acquirer will persuade existing shareholders to vote out company management so that the company will be easier to take over.
When shareholders are dissatisfied with a specific aspect of a company's management, they may attempt to change it. This may result in resistance from the company’s board of directors (BOD). The dissatisfied shareholders may persuade other shareholders to let them use their proxy votes for proposed changes to the company's board members. The shareholders may try to remove the board members who oppose their desired changes and install their own candidates. The new board members are typically more receptive to shareholders' proposed changes making them easier to implement. In this way, the company can move in a new direction, as decided by the BOD and shareholders.
The acquirer and the target company use solicitation methods to influence shareholder votes for BOD members. Shareholders are sent a Schedule 14A with financial and other information on the target company. If the proxy fight concerns the selling of the company, the schedule also includes the terms of the proposed acquisition.
The acquiring company hires a proxy solicitation firm that contacts shareholders. The proxy solicitor compiles a list of shareholders and contacts them to state the acquirer's case. If shares are registered in the names of stock brokerage firms, the firms consult with the shareholders regarding their voting positions.
Individual shareholders or stock brokerages submit their votes to the designated entity aggregating the information, such as a stock transfer agent or brokerage. The results are forwarded to the corporate secretary of the target company before the shareholders' meeting. Proxy solicitors may scrutinize and challenge the votes if they are unclear, if shareholders voted multiple times or if the votes are not signed. Directors are approved based on the votes received.
Because most shareholders are uninterested in reviewing options for directors, gaining shareholders' attention is difficult. Shareholders typically agree to the recommendations mailed to them without examining the potential director's qualifications or the takeover's underlying issues.
The same level of disinterest often applies to acquisition votes. However, a proxy fight may be favorable for the acquirer if the target company is experiencing poor financial results that may cause dissatisfied shareholders to take action. A proxy fight is particularly useful if the acquirer has a strong proposal for making the company profitable or shifting more cash to shareholders. For example, the acquirer may plan to sell the business or its assets or increase stock dividends.
According to Money-zine, in February 2008, Microsoft Corporation made an unsolicited offer to buy Yahoo for $31 per share. The board of directors at Yahoo felt the offer by Microsoft under-valued the company, and negotiations between the executives at Microsoft and Yahoo stalled. Microsoft withdrew their offer on May 3, 2008 and, less than two weeks later, billionaire Carl Icahn launched an effort aimed at replacing the board of directors at Yahoo through a proxy contest.