What Is a Proxy Fight?

A proxy fight is the action of a group of shareholders joining forces in a bid to gather enough shareholder proxies to win a corporate vote. Sometimes referred to as a "proxy battle,” this action is mainly used in corporate takeovers, where outside acquirers attempt to convince existing shareholders to vote out some or all of a company’s senior management, to make it easier to seize control over the organization.

How Proxy Fights Work: The Process for Hostile Takeover

Shareholders may appeal to a company’s board of directors if they’re dissatisfied with a specific management decision. But if board members refuse to listen, disgruntled shareholders may persuade others shareholders to let them use their proxy votes in a campaign to replace unyielding board members with candidates more receptive to implementing the shareholders' proposed changes.

The acquirer and the target company use various solicitation methods to influence shareholder votes for replacement board members. Shareholders are typically sent a Schedule 14A, containing financial information and other data on the target company. If the proxy fight involves the sale of the company, the schedule includes the granular terms of the proposed acquisition. And on the PR front, acquirers may issue opening salvos, to stir up public awareness.

The acquiring company usually contacts shareholders through a third-party proxy solicitor, who compiles a list of stakeholders and reaches out to each one individually, to state the acquirer's case. If shares are registered in the names of stock brokerage firms, proxy solicitors consult with shareholders of that firm, to influence their voting positions.

In either case, individual shareholders or stock brokerages then submit their votes to a designated entity, such as a stock transfer agent, who aggregates the information. The acquiring company then forwards the results to the target company's corporate secretary before the shareholders' meeting.

But in most cases, proxy solicitors may scrutinize or challenge unclear votes, and they may flag situations where shareholders voted multiple times or neglected to sign their votes. At last, prospective board members are approved or rejected based on the final vote count.

Key Takeaways

  • A proxy fight is the action of a group of shareholders joining forces, in a bid to gather enough shareholder proxies to win a corporate vote.
  • These voting bids could include replacing corporate management or the board of directors.
  • Proxy fights also emerge over corporate takeovers and mergers, most notably with hostile takeovers.

Shareholders' Involvement in a Proxy Fight

Because most shareholders are uninterested in reviewing options for directors, it can be difficult to arouse their interest in these matters. Shareholders often absently go along with the recommendations mailed to them, without examining the potential director's qualifications or the takeover's key underlying issues.

While the same level of disinterest often applies to acquisition votes, a proxy fight may favor the acquirer, if the target company’s poor financial results negatively impact shareholders—especially if the acquirer has strong ideas for making the company profitable to shareholders. For example, the acquirer may propose selling off some of the business’ underperforming assets or increasing stock dividends.

In 2015, the U.S. Securities and Exchange Commission radically narrowed the scope of rule 14a-8(i)(9), which allows companies to block shareholder proposals from coming to a vote. This action empowered activist investors to step their fight in corporate governance battles.

More than 80% of activist targets have market caps below $1 billion.

Real-World Example of a Proxy Fight

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 believed the offer by Microsoft under-valued the company, consequently stalling negotiations between Microsoft and Yahoo executives.

On May 3, 2008, Microsoft withdrew its offer, and less than two weeks later, billionaire Carl Icahn launched an effort to replace Yahoo’s board of directors through a proxy contest.