Universal proxy was expected to make it cheaper and easier for activists to launch campaigns for board seats. However, the proxy statements issued since the measure was introduced in September show that contested elections remain multimillion-dollar affairs for activists and issuers alike.
Indeed, rising costs related to uncertainty about the mechanics of the universal proxy and increasingly stringent qualification standards set by issuers, have contributed to a slowdown in proxy fights being launched, according to industry insiders.
“There have been quite a few potential clients looking at companies that have been dissuaded from moving forward with the nomination once they understand what goes into it and what the cost would actually look like,” said Ryan Nebel, vice chair of Olshan Frome Wolosky’s shareholder activism practice.
As of March 17, there have only been nine definitive proxy statements filed as part of contested elections in the U.S. since universal proxy became mandatory in September 2022, versus 30 during the same period a year earlier.
According to those proxy statements, issuers estimated their total proxy costs were $8.2 million on average, more than double the $3.89 million for the period between September 1, 2021 to Aug 31, 2022. The jump in costs was more striking for activists, who anticipated spending $3.79 million on average, versus $1.0 million in 2022.
Some of the bigger activists are used to spending such large sums. Trian Partners said it was going to spend $25 million at Disney before it withdrew its demands in February, an outlay on par with its fight at Procter & Gamble in 2017.
But the increased in costs for smaller activists, who usually lack relevant in-house legal and communications resources, is clearer.
Hestia Capital Management anticipates it will spend $1.75 million on its campaign at Pitney Bowes, a substantial expenditure given its 8% stake is worth around $52 million. Likewise, Sarissa Capital Management estimated it would spend $1.25 million on its campaign at small-cap biopharmaceutical company Amarin, where its stake is only worth around $41 million. By comparison, it spent just $750,000 on its 2017 fight against small-cap biotech company Innoviva.
Stilwell Partners, meanwhile, anticipates spending $350,000 this year on its proxy fight for one board seat at Peoples Financial, a 40% increase from the amount it claims to have spent when it nominated the same single candidate for a failed campaign at the bank in 2022.
The rise in costs appears to have less to do with traditional proxy solicitation costs involved with outreach to shareholders and more to do with legal wrangling. On average, activists said they planned to spend $335,857 on proxy solicitors since universal proxy was introduced, down 4.4% from $351,458 in the prior 12 months. For its run at Disney, Trian agreed to pay proxy solicitor Okapi Partners $1.6 million – less than the $2 million it said it was paying the same firm for its Procter & Gamble campaign. Stillwell’s proxy solicitor outlay for its latest campaign at Peoples Financial was similarly unchanged from 2022.
Kai Liekefett, co-chair of Sidley Austin’s activism and corporate defense practice, believes much of the cost increases are due to the lack of understanding of the new system even by the Securities and Exchange Commission (SEC) and Broadridge, which manages the distribution of proxy statements.
“It is shocking to learn that after talking about universal proxy for a year, it appears that Broadridge and the SEC are still figuring out numerous nuances of how the universal proxy is used,” he said. “We have lengthy discussions with Broadridge, the SEC and opposing counsel on highly technical issues, and that of course drives up the cost for everybody as well.”
In a recent posting on the Harvard Law School Forum on Corporate Governance, Broadridge itself highlighted topics that have required further review. They include whether a universal proxy card is valid if the shareholder votes for too many candidates, a practice known as overvoting, or too few. And if so, who gets the votes? How should a proxy card look if management decides to support multiple dissident candidates, and the proper use of voting instruction forms.
Nebel, who typically represents activists, says part of the cost increase is due to companies amending their bylaws to make it harder, and more expensive, for dissidents to nominate and run campaigns.
“The cost of the nomination notice has skyrocketed over the past several years as companies continue to amend and revamp their nomination bylaws,” noted Nebel. “It seems like every company has questionnaires that are quite frankly ridiculous in terms of some of the information that they’re seeking, which can turn into two- or three-hundred-page documents.”
All those pages need writing and reviewing by a lawyer. The hourly rate for a top securities lawyer in New York city is close to $1,200, according to the 2022 Real Rate Report by Wolters Kluwer ELM Solutions, while lawyers specializing in Delaware law, where most public companies are domiciled, are only marginally cheaper.
Litigation also seems to be on the rise, adding another costly layer to the process.
On March 17, Driver Management filed a lawsuit in Delaware’s Court of Chancery against First Foundation arguing its board members violated their fiduciary duty to shareholders by rejecting, and allegedly harassing, its director nominees. It is now threatening legal action against AmeriServ Financial after the board of the Pennsylvania-based lender invalidated the activist’s three director nominees, citing deficiencies in the nomination notice.
But as Politian Capital Management is learning from its fight with Masimo, such litigation can take months of expensive legal wrangling to resolve. The activist first went to court in October 2022 to protest changes to bylaws preventing the activist from nominating. While Masimo later repealed some of those changes, litigation over executive compensation and other governance issues continues, leaving the activist’s proxy campaign in limbo.