Proxy Fight Definition Example How Does It Work

Proxy Fight Definition

A proxy Fight is when shareholders group together to vote out the current management, and it usually happens when shareholders are unhappy with the company’s current management.

Explanation

Suppose shareholders are not happy with the capital structure of the company. For example, it may happen that the company is taking too many debts, jeopardizing the 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.read more ownership. So to prevent this from happening, shareholders can group and start fighting for a common cause.

So as they are fighting against the management, they will have to replace a few or all board members. For this to occur, shareholders have to unite, fight for a common cause, and vote against the board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more.

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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 thinks of short-term strategies to increase its remunerationRemunerationRemuneration refers to overall monetary and non-monetary compensation that employees or independent contractors receive for providing services to an organization or company.read more. This situation is very critical for the company.

The transfer Agent submits the result to the company’s corporate secretary before the shareholder’s meeting. If shareholders have the majorityShareholders Have The MajorityA majority shareholder or controlling shareholder is an individual or a corporation that owns the majority of the company’s stock (more than 50%) and therefore enjoys more voting power than other shareholders. These shareholders are in a position to influence the company’s decisions.read more and there is no such policy to safeguard the board, then the management will be replaced.

Example of Proxy Battle

Guyana Goldfield, a Canadian company, shocked everyone when they announced that the production declined by almost 1.7 million ounces at their Aurora mine in Guyana compared to estimates a year ago. Shareholders were unsatisfied 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 directorsIndependent DirectorsThe term “independent director” refers to a member of the board who is not associated with the organization and who provides a neutral opinion because he or she is not tied to the current management.read more 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 has been yielding low earnings for several quarters. The most important parameter to Measure Company’s performance is 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.read more. 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. read more.The principal-agent problem is when the company’s management agent doesn’t work for the interest of the principal, that is, the shareholders. This is a typical situation in most public companies. Management starts to think that they are the company’s owner 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 is also an important factor in a public company’s performance. Good corporate governance leads to proper disclosure of information from management to shareholders. As management leads the company, 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.read more is not strong, it becomes difficult for shareholders to trust the management, and they vote out the management through proxy voting.A takeover is when one company is the acquirer’s target to buy another company. There are several ways to take over. One of the ways is a proxy battle.

Say a company ABC wants to buy XYZ. ABC tried negotiating the deal with XYZ’s management, but they are not ready to sell the company. Suppose ABC can convince the shareholders of XYZ that ABC’s management will be able to manage the company better than the existing management. In that case, 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 fights is always to arrange maximum support from shareholders. Mutual funds and Hedge funds hold many shares of any company. So it becomes 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 their behalf. In addition, they have the right to vote on behalf of investors, so they have a large proxy base.

How to Avoid a Proxy Fight?

Several measures are 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. read more clause, it is mentioned that only three members can be replaced in one year. So if shareholders want to replace the board, they will have to wait for two years, and by that time, management can develop a 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.read more – 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, management will have to be paid a huge sum of money before being asked to leave the company.

Conclusion

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 fights as shareholders know that their money is in safe hands.