A policy change by proxy voting service Broadridge helped one company escape a stalemate and may influence spending in future solicitations at smaller companies with large retail shareholdings, according to two experts.

“For companies with large retail shareholder bases, the change we achieved in the MindMed proxy contest will reduce the cost of the solicitation in future contests for companies and will cause activists to think hard about mailing to the full shareholder base and not just only the two-thirds required threshold, which could increase the cost of a contest,” said Christopher Drewry, global co-chair of shareholder activism and takeover defense at Latham & Watkins, the law firm that advised management in the fight.

Invalid on a technicality

New York-based psychedelic drugmaker MindMed had a bad trip this proxy season when Freeman Capital Management launched a proxy contest for four of its six board seats, citing a “high cash burn rate, unnecessary and highly dilutive recent financing and other issuances of securities, and long-term underperformance.”

Despite winning the backing of proxy advisors Institutional Shareholder Services (ISS) and Glass Lewis, MindMed announced that it was unable to confirm the results of its annual meeting on the scheduled date of June 14.

This was in part because Broadridge, the financial technology company which records votes for many U.S. companies, had removed all discretionary voting in response to the newly implemented universal proxy rules, including from the portion of the shareholder base that the dissident did not solicit.

Discretionary voting by brokers without instructions from their clients is allowed by regulators on routine matters such as auditor ratification. While those votes wouldn’t have counted toward the proxy contest, they would have counted toward the quorum needed for the meeting – thought to be at least one-third of the outstanding shares.

MindMed adjourned the vote for a week, while advisors to the company worked with Broadridge and regulators to update Broadridge’s policy and count discretionary votes from participating brokers that had received only the management card. On June 21, MindMed resumed the meeting and disclosed it had achieved quorum with over a 40% turnout.

A new playing field

Not all companies will face the same problem as MindMed, which had an unusual shareholder base. Relatively few institutional investors appear in Insightia’s ownership data for the company, suggesting that retail investors and small holders own much of the outstanding stock. Those constituencies vote less frequently than big asset managers who have the resources and economic incentives to devote time to voting, as well as a fiduciary duty to their clients.

“For companies with significant institutional ownership, having a quorum to conduct business at the meeting is often not in question,” said Michael Verrechia, managing director at proxy solicitor Morrow Sodali, which also advised MindMed. “Companies with significant retail holdings can struggle to reach 50% of the outstanding shares to achieve a quorum, and as a result some have lowered their quorum thresholds. Not benefiting from discretionary voting can be harmful to high retail companies and their shareholders alike because of the significant spend to get over the quorum threshold.”

Yet the rules matter because, while issuers have to solicit every vote, activist investors can choose to mail to only larger holders to minimize their expenses. Under the new universal proxy rules, activists must solicit two-thirds of the outstanding shares but since all shareholders now receive the full set of management and dissident candidates, some proxy solicitors have suspected smaller activists will send the minimum number of mailings and hope to win votes on the management card.

Whether Freeman’s strategy in soliciting less than the full shareholder base at MindMed was a deliberate attempt to piggyback on the management card or even to prevent the company from reaching quorum in a bid to force the board to the negotiating table, or just an attempt at cost-management, Broadridge’s policy change meant that MindMed was able to close out the fight.

Verrechia points to three key lessons from the contest. First, companies should retain experienced advisors that understand the voting landscape; doing so might save them from unnecessary overspending. Second, soliciting institutional and retail shareholders requires different approaches. And third, activists should think hard about cutting corners.