Proxy Contests and Shareholder Engagement

Proxy contests, also referred to as proxy fights or proxy battles, have become an increasingly common part of the U.S. corporate landscape. A proxy contest occurs when an activist shareholder solicits the votes of other shareholders in order to support a matter in opposition to the company’s management and board of director. Proxy fights often involve an activist shareholder’s disapproval of some aspect of the company’s business strategy, leadership direction, or corporate governance.

Most commonly, proxy fights concern the election of directors. An activist shareholder will attempt to replace board members by proposing its own slate of directors for election by other shareholders. The activist investor may nominate a full slate of new directors to replace the current board or just a partial slate of directors. The nomination of a full slate of new directors may be linked to a hostile takeover bid of the company. Activist investors may propose a partial slate, also called a short slate, as a way to influence the board to implement changes when the goal is simply to improve company performance. They also may not be confident that they have the ability to gather the amount of support needed to replace the entire board.

Proxy fights are often instigated by hedge funds. A number of hedge funds specialize in activist investment strategies and waging proxy battles. Notable examples of activist hedge funds include Elliot Management, Starboard Value, Icahn Enterprises, ValueAct Capital, Trian Partners, and Pershing Square Capital Management. Notable activist hedge fund managers include Carl Icahn, Nelson Peltz, and Bill Ackman.

Under normal circumstances, a shareholder will submit a shareholder proposal in accordance with Rule 14a-8 of the Securities Exchange Act of 1934 for inclusion in a company’s annual proxy statement. In a proxy fight, the dissident shareholder will typically file its own separate proxy statement.

While large activist hedge funds have the resources to launch a full-fledged proxy contest, many smaller activist funds and shareholder groups may be unable to invest in a proxy contest. Instead, they may rely on proxy access. Proxy access refers to the ability to place alternative board candidates on a company’s proxy card that is circulated ahead of the company’s annual shareholder meeting.

The new universal proxy rules are expected to benefit activist shareholders. The result of the universal proxy card is that both dissident and company nominees appear on the same proxy card. Pursuant to new Rule 14a-19, the universal proxy card must include all director nominees presented by management and shareholders for election at the company’s annual shareholder meeting. This in effect empowers shareholders to mix and match dissident and management nominees.

A recent high-profile example of a proxy fight involves Disney and Nelson Peltz. Peltz and his firm, Trian Partners, have asked shareholders vote to add Peltz and former Disney Chief Financial Officer Jay Rasulo to the company’s board of directors. In a major snub to Disney, the influential proxy advisory firm Institutional Shareholder Services (ISS) urged shareholders to vote in favor of adding Peltz to Disney’s board.

ISS argued that dissident nominee Peltz could help Disney with CEO succession planning, noting that “there are lingering questions about the board’s ability to properly oversee the next CEO transition, whether it happens in 2026 or in later years.” Disney CEO Bob Iger stepped down from the top job at Disney in 2020, only to return to being CEO again in 2022.

ISS commented in a 34-page report that: “Dissident nominee Peltz, as a significant shareholder, could be additive to the succession process, providing assurance to other investors that the board is properly engaged this time around. He could also help evaluate future capital allocation decisions.”

Proxy contests can be highly distracting to a company’s management team and may also cause the company reputational harm. Some companies may come to a successful settlement with an activist shareholder, although getting an activist shareholder to agree to withdraw a dissident slate of directors could also result in the company making significant concessions in return. In some situations, a company may be able to convince the dissident shareholder to agree to a “standstill provision” that forbids them from purchasing additional shares of the company’s stock for a period of time or prohibits them from initiating another proxy contest.

This fact highlights the importance of a company maintaining regular engagement and communication with its shareholders. Effective shareholder engagement can prevent high-profile proxy fights from culminating and strengthen transparency between the company and its shareholders. While companies should be sensitive to shareholder demands, they must also stay focused on the company’s long-term value creation and performance.