October 30, 2018

Proxy Fights: Universal Proxy Tilts Field in Management’s Favor?

It appears that the universal proxy many activists have longed for may actually tip the scales in favor of management in a proxy fight. In a presentation at Schulte Roth’s annual activist investing conference, Starboard Value’s CEO Jeff Smith illustrated this potential outcome using a hypothetical scenario in which an activist nominates 5 candidates to a board comprised of 8 seats. This excerpt from a recent “Activist Insight” newsletter walks through that scenario:

In a traditional proxy contest using two cards, votes will be weighted to the dissidents if shareholders feel strongly about the need for change but the three management nominees running unopposed would almost certainly be elected. A proxy contest using a universal ballot might mean investors are a bit pickier, with the result that fewer of the dissident nominees are elected – hence why companies have been keener to use a universal ballot in situations like SandRidge Energy, which faced having its entire board replaced.

A universal ballot, however, could also lead to freakish results. In a fight involving a short slate against a full one, there are enough possible outcomes for every single candidate to receive over 50% of the shares. The side running the full slate – let’s assume it’s the company – could promote different candidates to different shareholders and split the vote, romping to victory.

Here’s Starboard’s slide deck illustrating the possible outcomes of this hypothetical. As a solution, Smith suggests dividing the universal proxy into 2 sections. One of these would feature an equal number of candidates for contested seats, while the other would contain the uncontested nominees. While this would “make the proxy fight a simple first-past-the-post race,” the newsletter points out that it also would limit the degree of shareholder choice afforded by the universal ballot.

Starboard isn’t the first to point out that a universal proxy might have the unexpected effect of favoring management. As we blogged shortly after the SEC issued its universal proxy proposal, a study reviewing recent proxy fights suggested that the rule would’ve modestly favored management had it been in place at the time.

John Jenkins