08 June 2023 • Articles
Insightia
IN-DEPTH: Universal proxy empowers activists in votes and settlements
Since September 1, activists seeking board seats at U.S.-based companies have been able to list their nominees on an issuer's proxy statement. Early indications suggest it is helping them displace sitting directors, and not just through rancorous votes.
"It seems to me that the impact of the universal proxy is being felt," said Jim Rossman, global head of shareholder advisory at Barclays. "It's incentivizing companies to settle and making it easier for activists to gain board seats. I think that's pretty clear now."
Seven proxy contests have gone to a vote since a Securities and Exchange Commission (SEC) rule went into effect last year, according to Insightia's records, and activists have won seats in four of them. That compares to seven in 23 from September 2021 to the end of the 2022 proxy season in July last year. And with almost a dozen proxy contests ongoing, there is every chance that activists could add to their tally as the 2023 proxy season comes to a climax.
What's the harm?
Issuers and their advisors expressed concern that the introduction of the universal proxy would make it easier for activists to win board seats than the previous system, which required most shareholders not physically attending the annual meeting to choose between two cards that only listed one side's candidates. Under the new system, investors can choose any number of candidates from each of the two slates, up to the maximum number of seats available.
"The universal proxy just makes it so much easier to mix-and-match," MacKenzie Partners' President Bob Marese told Insightia. "That is a large part of why we're seeing these increases in support for activists, and whether we're just in the honeymoon phase and success returns to past levels in future proxy seasons, it's clearly the case that universal proxy has made it easier to pick your preferred slate."
Proxy voting advisors Institutional Shareholder Services (ISS) and Glass Lewis said before the season started that they would not lower their standard for recommendations on how to vote in proxy fights, easing concerns that investors would adopt a "what's the harm" strategy and elect one or two activists in most contests. However, Marese argues that without the unintended consequence of potentially electing more activist nominees than you are voting for, it remains easier for institutional investors to split their vote.
Unintended benefits
If investors are not benefiting from the unintended consequences of investors voting on the "change" slate, they are benefiting from companies shying away from a fight.
"I think the adoption of the universal proxy resulted in more quick and early settlements than in the past," said Kai Liekefett, co-chair of law firm Sidley Austin's shareholder activism and corporate defense practice. "If you had asked me back in December, I would have said I expected a proxy season for the record books. It's been a fairly calm proxy season because a very large number of situations settled in December, January, February."
Data tracked by Insightia's Activism module show 46 settlements between January 1 and May 31, compared to 45 throughout the same period in 2022 and behind prior years. But the number of board seats won in those same settlements rose from 77 in the first five months of 2022 to 87 in 2023.
"There certainly seem to be a lot of quiet resolutions and maybe that's the leverage of the universal proxy that activists are using," said Marese.
"Proxy fights lead to tonnes of disclosure and encourage activists to frame criticism in a very harsh light," said Rossman. "It's a distraction and creates a negative atmosphere around the company. If you combine that trend with the UPC [universal proxy card] making it easier for an activist to get a seat, it tips the cost-benefit analysis" [in favor of a settlement].
Other factors
While the universal proxy has undoubtedly put proxy fights on uncertain terrain this year, some advisors are at pains to stress that other factors may be behind the upswell in activist support. Several stressed that many companies' stock prices were down in the 12 months leading up to this season, in contrast to the last several years.
"While the [universal proxy card] makes it easier for holders to split their vote, at the end of the day the decision still comes down to a story of two campaigns," said Michael Verrechia, managing director in proxy solicitor Morrow Sodali's activism and M&A practice. "In some campaigns where the retail shareholders had incurred significant losses, there was a tremendous level of support for the dissident. In others, retail was still management friendly."
Ele Klein, who advises activists for law firm Schulte Roth & Zabel, emphasized the point and added that not all campaigns went as far as a vote. "Stronger campaigns have a higher chance of success – it's an obvious point," he said in an interview. "This year, you have companies adopting the recommendations of an activist and that's a pretty good way to end a proxy contest. But not many companies do that."
Indeed, future proxy seasons could bring another wave of fights. Some advisors still predict non-profits could utilize the universal proxy card to wage fights in support of ESG issues, although none has done so yet.
Liekefett feels that the next 18 months could be busier still as volatile markets in the first part of the year made activists hesitate. "Many activists were reluctant to launch a fight when we looked like we might be sliding into a near-term recession," he said. "That may have passed but so have the nomination deadlines."
"I think we'll see a fair number of off-season fights. We already have a half-dozen clients with off-cycle meetings that are in discussions with activists."