Proxy Fights And Activists
What Every Public Company Needs To Know—And Do—If Activists “Reach Out” To Them…With A Cudgel
The OPTIMIZER’s editor has been involved in well over 100 proxy fights in his long career; including eight knockdown drag-out fights this year alone.
So it occurred to us that we should share the information we typically impart to public company officers who reach out to us when a proxy fight is looming, since most such folks have never contemplated such an experience... and because timely action—and being totally well-prepared—are of the essence, if one wants to win.
First and foremost, as we emphasize to the targets while we are still “neutrals” — “They call them proxy fights for a reason: Don’t think of them as ‘proxy contests’—which might imply a sort of fair event, where ‘the best man wins’: They always turn out to be FIGHTS.”
Rule-2—And never forget it; the main rule of the road, and the main thing to expect, and to prepare for, is that “All’s fair in love and war”…And this will be a war, for sure. So expect each side to hide its hand, to feint and bluff and yes, to use every trick in the book, including dirty-ones if necessary, to fool the other side, and ideally to lull them into a false sense of security– and eventually to ATTACK…with passion…in order to WIN.
Rule-3—Never, ever, get lulled into a false sense of security: Every single launcher of a proxy fight expects to win—and has a plan and a theoretical pathway to victory that likely you know nothing about…like, for example, a “secret ally”—or allies—or a lethal “piece of dirt” to throw out at just the right moment; Otherwise, they would not spend all the time and money it takes to launch a proxy fight. This year, one courtly CEO who called us to be the Inspector, assured us up front that they had “a hard core of third and fourth generation investors” who’d be with him to the end. “Please don’t be so sure” we warned: “Third and fourth generation investors often have investing objectives of their own—that are not their father’s and grandfather’s objectives—and are probably not like yours” we told him. And sure enough, and very sadly we thought, the lovely old gentleman was sent packing by a first generation investor—egged on by her thoroughly modern grandkids.
Rule-4—a corollary to Rules 1 through 3: Be prepared for the fight to get down and dirty: Insurgents usually have a passel of ad-hominem arguments and some juicy gossip, or better yet, actual dirt to dredge up to support their plan to oust one or more directors, which is usually goal-one in a proxy fight. Mudslinging simply goes with the territory, and is often the key to victory.
Rule-5—is often the rule that dooms so many incumbents: “Winning” may mean something entirely different to your opponent than it does to you: They may say they want to replace some of your board members, or require annual elections of directors, or majority voting provisions—but often their real goal is to simply put your company in play, then quickly take their profits—and maybe get your company to pay their expenses for the proxy fight—then laugh all the way to the bank.
Rule-6—Another rule that dooms many proxy fighters is that “Rules Count”: And the “rules of proxy” please note well, revolve mostly around previous proxy cases and related court decisions and mostly involve a lot of highly technical and sometimes totally counterintuitive minutia. (Take our little proxy-quiz below, to see how you’d do on your own.)
Rule-7, also a corollary of Rules 1-4 and 6, is this: Be sure to get totally independent EXPERTS to serve as your Independent Inspector(s) of Election. Every single proxy will be scrutinized by the “other side” in an effort to throw it out on technical grounds. The Inspectors—who will have taken an oath to be completely impartial—will have to rule on every such item—so they’d better know the “rules of proxy” inside and out.
Rule-8 is to be sure that Inspectors have documented the “rules of the road” that apply in your state of incorporation, and have done so with care: We are amazed at how few Inspectors do this—AND at how unfamiliar with these requirements some supposedly expert proxy solicitors turn out to be.
Rule-9 is to hire a TOTALLY DIFFERENT EXPERT to serve as your proxy solicitor than the people you have hired to count the votes and to “inspect”: Appointing a “proxy fox” (which IS exactly what you want to have on your team) to decide how the ‘chickens’ have voted, and to tally the vote, will never stand up to scrutiny, and will often turn your reported “win” into a big loss. (See our 3rd Q 2012 issue for an example or go to www.optimizeronline.com/ The_Basics.aspx for “Are your proxy chasers following smart and ethical principles?”)
Rule-10—and perhaps the most important rule of all—is that if one side in a proxy contest has an expert proxy solicitor and the other does not, the side with the expert will almost always win. Fighting a proxy fight is NOT a “do it yourself project”—nor is it a project that can be successfully managed by your in-house and outside legal teams…if you want to win, that is.