January 24, 2020

Game On! Xerox Launches a Proxy Fight for Control of HP Board

I’ve previously blogged about Xerox’s efforts to corral HP into a deal.  While Xerox has been understandably reluctant to make a hostile tender offer for HP, yesterday it ratcheted up the pressure on HP by launching a proxy fight for control of the company’s board. According to Xerox’s press release, it notified HP that it intended to nominate a full slate of 11 director nominees to HP’s board.  That notice was necessary to comply with HP’s advance notice bylaw (the deadline for submitting nominees under that bylaw is today).

Proxy fights are a common tactic among activist shareholders, who aren’t shy about seeking control of the board. According to this Sullivan & Cromwell piece published over on the Harvard Governance Blog, nearly 70% of proxy contests waged by activists in 2018 involved control slates.

When it comes to a potential strategic buyer though, this WSJ article points out that a proxy fight for control of the target’s board is a very unusual tactic – only 5 have been launched since 2013.  The most recent such fight was engaged in by Broadcom as part of its effort to acquire Qualcomm, but President Trump drove a stake through that deal’s heart on national security grounds before the shareholder vote.

Proxy fights are disruptive and expensive to wage, but the biggest reason that many strategic bidders don’t adopt this as a tactic may be the one noted by Profs. Bebchuk & Hart – they’re really hard for them to win:

The difficulty with a proxy contest, we argue, is that of persuading shareholders that a rival’s victory would be beneficial for them. Because control provides private benefits, the fact that a rival is interested in replacing the incumbent does not imply that the rival would manage the company better. Consequently, if shareholders do not observe the quality of rivals, but know that the average quality of potential rivals is worse than the incumbent’s, the rational strategy of shareholders will be to vote for the incumbent.

While this quote comes from an article written more than 15 years ago, it nicely describes the dilemma that now faces HP’s shareholders. Neither company has exactly blown the doors off in terms of results in recent years. But given Xerox’s particularly bumpy ride & the fact that its proposed deal would involve the proverbial “guppy swallowing the whale,” you couldn’t blame HP’s shareholders for being skeptical about handing the keys to Xerox.

Of course, that doesn’t mean this isn’t going to be fun to watch.  After all, Carl Icahn’s sitting on the Xerox side of the ledger, and he’s been known to break some furniture on occasion.

John Jenkins