Proxy Fight Definition
Proxy Fight is a situation when shareholders group together to vote out the current management, and it usually happens when shareholders are not happy with the current management of the company.
Suppose shareholders are not happy with the capital structure of the company. It may happen that the company is taking too many debts, which are jeopardizing the ownership of equity shareholdersEquity ShareholdersShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period.. So to prevent this from happening, shareholders can group together and start fighting for a common cause.
So as they are fighting against the management, they will have to replace few or all members of the board. For this to take place, shareholders do have to group together and fight for a common cause and vote against the board of directors.
How Does Proxy Fight Work?
When a company goes public, the management acts as an employee for the shareholders. So basically, management is being hired by shareholders to run the company on behalf of shareholders. The problem starts when management stops working for the shareholders and starts to think of short term strategies to increase its remuneration. This situation is very critical for the company.
Say that shareholders are not happy with management’s dividend policy and other policies, and they want to change the management. So first of all, shareholders will have to make a group, who all are ready to vote against the management. Sometimes the ownership of stocks is not with the shareholders but with the brokers as they lie in the Broker’s account. So once all of them have cast their votes or have given the power to someone to proxy vote, then the results are submitted to the company’s Stock Transfer Agents.
The transfer Agent submits the result to the company’s corporate secretary before the shareholder’s meeting. If shareholders have the majority and there is no such policy in place to safeguard the board, then the management will be replaced.
Example of Proxy Battle
Guyana Goldfield, a Canadian company, shocked everyone when they announced at their Aurora mine in Guyana the production declined by almost 1.7 million ounces, compared to estimates a year ago. Shareholders were not satisfied with the result and went for a proxy fight to change the management.
After a long battle, the dispute was settled, and the company’s CEO lost his job. As part of the agreement, the mining company appointed two independent directors and two other long-serving directors stepped down.
Reasons for a Proxy fight
There could be several reasons for a proxy fight. Few are mentioned below:
- The company is yielding low earning for several quarters. The most important parameter to Measure Company’s performance in Earnings per ShareEarnings Per ShareEarnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.. If it is seen that management is not being able to run the company properly and EPS is falling, then shareholders may decide to change the management by Proxy VotingProxy VotingProxy Vote refers to a vote that a Company or individual casts on behalf of the shareholder, after obtaining the required permission, due to the latter’s inability or disinterest to vote for any valid reason.
- The principal-agent problem is a situation when the Agent that is the management of the company doesn’t work for the interest of the principal that is the shareholders. This is a typical situation in most of the public companies. Management starts to think that they are the owner of the company and starts making decisions that will favor the wealth generation of the management. For safeguarding shareholders interest in this scenario, proxy voting is opted to change the management
- Corporate Governance issue is also an important factor for the performance of a public company. Good corporate governance leads to proper disclosure of information from management to shareholders. As management leads the company, so there is always an information asymmetry between shareholders and management. If the corporate governanceCorporate GovernanceCorporate governance is a set of rules or practices through which an entity is directed and controlled to increase shareholders wealth by increasing the economic value and is concerned about its relations with various entity stakeholders. is not strong, then it becomes difficult for shareholders to trust the management and they vote out the management through proxy voting
- The takeover is a situation when one company is the acquirer’s target to buy another company. There are several ways for takeover. One of the ways is a proxy battle.
Say a company ABC wants to buy company XYZ. ABC tried to negotiate the deal with company XYZ’s management, and they are not ready to sell the company. If ABC can convince the shareholders of XYZ that ABC’s management will be able to manage the company better than the existing management, then XYZ’s shareholders can go for Proxy Fight and replace the board with new members supporting the takeover.
Strategy for Proxy Fights
The strategy for proxy fight is always to arrange maximum support from shareholders. Mutual funds and Hedge funds hold a large number of shares of any company. So it becomes really vital to convince the fund managers to participate in a proxy fight.
They have the largest share base as they club investors’ money and invest on behalf of them. They have the right to vote on behalf of investors, so they have a large proxy base.
How to Avoid a Proxy Fight?
There are several measures being taken by management to safeguard themselves in case of the proxy fight:
- #1 – Staggered Board – This prevents the shareholders from changing the entire board at a time in case of a proxy fight. Say that the board consists of 9 members, and in the staggered boardThe Staggered BoardStaggered Board, popularly known as Classified Board, refers to the particular set-up of the members of the board such that it contains directors that are stratified into different classes. clause, it is mentioned that in one year, only 3 members can be replaced. So if shareholders want to replace the board, then they will have to wait for 2 years and by that time management can come up with some new strategy
- #2 – Golden ParachuteGolden ParachuteGolden parachute refers to the clause in the employment contract whereby the top-level executives entitled to receive significant benefits if the company faces a merger or takeover. Such benefits comprise liberal severance pay, cash bonus, retirement packages, stock options, etc. – This is a kind of defense mechanism that the management does to safeguard itself in case of a takeover. If the company becomes a takeover target, then management will have to be paid a huge sum of money before he is asked to leave the company.
Proxy Fight is an important tool that is in the hands of shareholders. It protects them from removing the management if the latter is not performing for the benefit of shareholders. Principal Agent issue is very common in most public listed companies. If management works for the best interest of shareholders, then there will never be a need for proxy Fight as shareholders know that their money is in safe hands.
This has been a guide to Proxy Fight and its definition. Here we discuss how does proxy fights work along with the strategies and examples. We also discuss how to avoid a proxy fight. You may also have a look at the following articles –