Winning the Battle For the Boardroom: Navigating the Do's and Don'ts of Proxy Fights

A proxy fight—also known as a proxy contest or proxy battle—is a situation in which a group of shareholders in a company joins forces to oppose and vote out the current management or board of directors. Put simply, it’s a battle between shareholders and senior management for majority control of the company. It's also a strategy often seen in hostile takeovers.

For Michael Verrechia—Managing Director of the M&A and Activism Advisory Group at Morrow Sodali—providing strategic shareholder activism counsel in contested director elections, mergers and acquisitions, corporate governance, and proxy solicitation is his specialty. 

For over 20 years, Mike has helped his clients develop the skills and tools they need to defend their board seats. And now, he’s sharing those insights and recommendations with you. Based on his experience—shared with our team—this article breaks down what activist preparedness looks like in a public company, how companies can strategically navigate an activist situation, and the general do’s and don'ts of proxy fights. 

How should IR teams leverage stock surveillance?

It's critical for IR teams to be vigilant in their surveillance, as spotting activist investors before they're able to launch a campaign is a significant factor in whether or not they're successful. Oftentimes activist investors will build positions slowly and in ways that don't require them to report their holdings. For reference, in the United States, shareholders must report their holdings when they hold at least 5% of a company’s shares. In Canada, the threshold is higher at 10%. 

In addition to monitoring shareholders for potential activism, companies often get a sense that an activist is looming on the horizon by monitoring their website traffic to see who has been reviewing company documentation and attending virtual events such as earnings calls. 

Head to getirwin.com/irwin-iq to learn more about how Irwin IQ can add another intelligence layer to your investor CRM and identify prospective investors visiting your IR website.

From the moment an activist investor reaches out—whether they plan to move forward with a proxy fight or not—every communication becomes part of the record. This is why it’s imperative to create a watchlist of known activists and monitor their positions closely while simultaneously preparing your first line of defense and communicating properly. 

What should IR teams do if they think an activist is in their stock?

If an activist has bought into your stock, the first step should be to convene your team—both internal leadership and key external advisors. At this time, you should be aiming to learn everything you can about the activist investor to help predict their actions, based on how they've behaved in similar situations in the past. 

Next, you should brief your board and ensure the company speaks in one voice. Recognize that activist investors are well prepared and conduct extensive research ahead of time. If the activist investor presents a proposal, listen and be open to new solutions. It’s essential not to be defensive or give the activist potential sound bites that can be used against you in a proxy contest.

One of the most important factors to keep in mind is that your message needs to be clear and well-understood by other shareholders, stock analysts, the general public, and financial media. Communicate the company's strategy and future goals so that shareholders can understand the company's vision for growth, capital allocation, and future value drivers. Remember—your shareholders will be more inclined to support you in the face of a proxy fight if your company message is credible, consistent, and transparent.

Is it advisable to proactively reach out to activists?

Every situation is unique—the key is to proactively prepare. 

When you realize that there’s an activist shareholder in your company, it's advised to obtain and understand a comprehensive history of who they are and what they do. This includes a full assessment of their holdings and what the potential consequences may be. 

However, this doesn’t mean you should reach out and call said activist immediately. Remember—not every activist shareholder will run a campaign where they own stock. Sometimes, they do move on. 

Having a strategic surveillance program and sufficient background knowledge on said activist will make IR teams smarter if and when that person does surface. And when they do, you'll have a plan in place for how to engage with them properly.

Senior management should have all the answers to the following:

• What has the history with this shareholder and the company been like? 
• What campaigns have they done in the past? 
• What concerns have they had at other companies? 
• What do their older campaigns look like? 

Does having an activist preparedness plan deter activists?

An activist preparedness plan can't fully mitigate a company from the risk of an activist shareholder or a proxy fight. Still, it can position the company and its board for a better outcome.

Most activists have already done their homework on your business and firmly believe there's a way to unlock shareholder value. A response plan isn't intended to guide the entirety of an activist campaign defense. Still, it can provide structure in the rapidly evolving environment that follows the first outreach by an activist. So when an activist emerges, the company must have a well-developed response plan and strategy to quickly engage and evaluate the activist's claims. 

What should an activist preparedness strategy include?

An activist preparedness plan should:

• Include details about the defense team, management, and external advisors. 
• Outline the process for activating the defense team and escalation guidelines depending on the details of the situation. 
• Reiterate each advisor group's roles and responsibilities, including key management and board members. 
• Have rules of engagement establishing who will be the primary point of contact with the activist.
• Detail the process for redirecting any outreach to any other member of management or the board back to that primary point of contact.

The plan should also include a comprehensive look at said activist's profile. It can be challenging to work backwards from when an activist surfaces, so doing the necessary research and surveillance ahead of time will put you in a better position. This information can include the ebb and flow of stock movement, stock loans, index funds, and more. 

How can IROs build a better activist preparedness strategy?

IROs should focus on building a robust engagement strategy across all shareholder constituencies. You don’t want to communicate with your shareholders for the first time when they're faced with the decision to vote for either yourself or an activist nominee. 

It's essential to build rapport with shareholders over time and truly understand what's important to them, the issues they're facing, and how you can address them promptly. Vulnerabilities are not always obvious, and examining them through the lens of a company's shareholders will allow you to better understand how to improve your strategy. 

For more in-depth information, tune in to our podcast—Winning IR. In Michael Verrechia's episode, he shares his perspective on how he's helped clients develop the skills and tools they need to defend their board seats. Listen to the episode or read the transcript here. 

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