Proxy Fight

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.

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 shareholders 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 directors.

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 remuneration. This situation is very critical for the company.

Say shareholders are unhappy with management's dividend policy and other policies and want to change the management. So first of all, shareholders will have to make a group who are ready to vote against the management. Sometimes the ownership of stocks is not with the shareholders but with the brokers, as they lie in the Broker's account. So once all of them have cast their votes or given someone the power to proxy vote, the results are submitted to the company's Stock Transfer Agents.

The transfer Agent submits the result to the company's corporate secretary before the shareholder's meeting. If shareholders have the majority and there is no such policy to safeguard the board, then the management will be replaced.

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 directors and two other long-serving directors stepped down.

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 Share. 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 Voting.
• 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 governance 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.

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.

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 board 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 Parachute - 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.

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.