Contests Under Universal Proxy Rules Have Produced Mixed Results

There have been 12 proxy contests that have gone to a vote under the SEC’s universal proxy rules, which became effective on September 1, 2022. A review of these contests reveals several themes.

Overall Results: Activists obtained a board seat at companies in six of 12 contests. In four of those contests, the activist gained fewer seats than it sought. These results show that a company may still want to take a proxy contest all the way to a vote in the universal proxy era rather than settle, if they believe they have winning arguments to defeat the activist at the ballot box.

ISS Influence: 29 of the 32 directors recommended by ISS were elected. This is a staggering number, especially considering the number of split-ticket recommendations where ISS recommended the election of some but not all the activists’ nominees. Two companies overcame a negative ISS recommendation to get a nominee elected: WisdomTree, Inc. and Alkermes Plc. Companies faced with a proxy contest may wish to review and deploy the legal, public relations, shareholder engagement, and solicitation strategies used in these two proxy contests to overcome a negative ISS recommendation.

Split-Ticket Recommendations and Voting: As anticipated upon the implementation of the universal proxy rules, ISS issued a significant number of split-ticket recommendations where it recommended some but not all the activists’ nominees. Based on voting outcomes, it appears that institutional investors often voted for a subset of activist nominees, which was made much easier by the adoption of universal proxy.

Campaign Expenses: Based on publicly disclosed data from proxy contests that went to a vote, company campaign expenses ranged from $150,000 to $31,500,000. Activist campaign expenses for such contests ranged from $50,000 to $4,500,000. Note that while this post focuses on proxy contests that went to a vote, Trian disclosed in its subsequently withdrawn proxy contest at The Walt Disney Company that its estimated proxy contest expenses were $25,000,000 while the company expected to spend $40,000,000. Proxy contest expenses were largely consistent with previous years.

Increased Focus on Individual Directors: The proxy advisory firms as well as institutional investors were focused on the skills of individual director candidates and how those skills contributed to the overall composition of the board. While N-PX data disclosing how institutional investors voted will not be available until August, based on our review of ISS and Glass Lewis reports and public disclosure of how certain institutional investors voted, we believe that the data will reflect several split-ticket votes by large institutional investors.

Increase in Settlements: With only 12 contests having gone to a vote since September 1, 2022, under the universal proxy regime, there has been an increase in the number of settlements at companies subject to the U.S. proxy rules as compared with settlements in previous years. This increase is likely due to both the difficulty of predicting favorable outcomes for a company under the universal proxy regime and the belief that it is difficult under the regime to prevent an activist from obtaining one or two seats on the board, especially when a company has vulnerable directors.

What Companies Should Do Now: With the majority of proxy contests for the 2023 proxy season in the rearview mirror, companies should assess the results of this proxy season and the themes set forth in this post to develop an activism defense strategy. In addition, we continue to encourage companies as part of their ongoing activism preparedness efforts to:

  • Review their articles of incorporation, bylaws, and other governing documents to assess structural vulnerabilities;
  • Consider whether to make any proactive corporate governance enhancements that improve corporate governance but do not create any additional activism vulnerability;
  • Prepare or update a shareholder activism day-one public communications plan;
  • Consider the preparation of a poison pill to be placed on the “shelf” so that it can be implemented quickly if needed;
  • Initiate or enhance stock surveillance procedures to understand what investors are buying or selling the stock;
  • Assess financial, operational, and stock price vulnerability;
  • Establish an activism response team (legal, financial, and public relations professionals and proxy solicitor); and
  • Assess board composition with a view to ensuring that the board has the right mix of skills to create shareholder value, and prominently disclose this information.

The following chart provides a summary of the data on the 12 proxy contests discussed in this post.

Company Stock Symbol Name of Activist Seats Obtained/Sought by Activist # of Activist Nominees Recommended for by ISS # of Activist Nominees Recommended for by Glass Lewis Company Expenses Activist Expenses
AIV Land & Buildings 1 of 2 1 of 2 0 of 2 $5,300,000 $1,000,000
ZVRA Daniel J. Mangless 3 of 3 2 of 3 0 of 3 $600,000 $250,000
PFBX Joseph Stilwell 0 of 1 0 of 1 0 of 1 $300,000 $350,000
PBI Hestia Capital 4 of 5 4 of 5 3 of 5 $5,500,000 $1,750,000
BLFY Lawrence Seidman 0 of 2 0 of 2 0 of 2 $150,000 $50,000
BWEN WM Argyle 0 of 3 0 of 3 0 of 3 $1,622,000 $375,000
ILMN Carl Icahn 1 of 3 1 of 3 2 of 3 $31,500,000 $700,000
WT ETFS Capital 1 of 3 2 of 3 1 of 3 $6,000,000 $1,750,000
MNMD FCM MM Holdings 0 of 4 0 of 4 0 of 4 $2,750,000 $950,000
MASI Politan Capital 2 of 2 2 of 2 2 of 2 $1,500,000 $4,500,000
FFWM Driver Management 0 of 1 0 of 1 0 of 1 $1,500,000 $1,000,000
ALKS Sarissa Capital 0 of 3 1 of 3 0 of 3 Undisclosed $1,250,000

This post comes to us from Sean Donahue, Eduardo Gallardo, and Sahand Moarefy at the law firm of Paul Hastings LLP.