Corporate Transformations: The New Role of Proxy Contests
Miller, Alan N., Review of Business
The proxy contest is back in vogue. Although proxy contests (also called proxy battles, fights, and wars) were infrequently used as a means of gaining control of publicly traded corporations or of influencing management policy decisions during the 1980s, recent changes in the United States business environment -- the limited availability of financing for corporate takeovers, the collapse of the junk bond market, the passage of anti-takeover statutes in 40 states and proliferation of anti-takeover defense tactics, and the active role institutional investors are now taking in the governance of American corporations -- the proxy contest has now become a very important and leading tool in battles for corporate influence and control. Indeed, many knowledgeable business leaders and observers agree that proxy contests are as serious a threat to the security of directors and corporate officers as were mergers and acquisitions during the previous decade (Skewered Shareholders, 1990). Recently published research by DeAngelo and DeAngelo (1989) supports this contention. Their analysis of proxy contests for seats on the boards of directors of 60 New York and American Stock Exchanges listed corporations found that the contests were often followed by senior management resignations, and by the sale of assets or liquidation of the firm, even when the dissidents were unsuccessful in gaining a majority of board seats. Less than 20 percent of the companies in their sample remained independent, publicly held firms, run by the same senior managers three years after the contest.
For the 30 year period ending in 1986, there were an average of only 25 proxy fights per year in American corporations which are subject to the Securities and Exchange Commission's (SEC) proxy rules. By 1990, that number had increased dramatically to 100 (Shareholder Activism, 1991). The firms which have recently had a proxy contest are both large and small, including Avon Products, Del Webb Corporation, General Motors, Honeywell, Irving Bank, K-Mart, Lockheed, NCR Corporation, Pic 'N Save, Texaco, UAL Corporation, and USX. These firms represent a cross section of American industry.
Even if proxy contests are not successful in accomplishing all their objectives, they typically result in giving dissidents some representation on the board and thus somewhat greater influence on corporate policy decisions (Shareholder Activism, 1991). For example, although their entire slate of candidates was not elected, dissidents gained representation on the boards of Armstrong World Industries, Avon Products, Del Webb Corporation, Lockheed, and NCR. At Lockheed, management agreed to dissident demands to use institutional shareholder input to select future candidates for its board of directors. The managements of American General Corporation, Dataproducts Corporation, Norton Company, Pic 'N Save, and UAL Corporation all consented to dissident demands that their companies be put up for sale. A proxy fight at Honeywell forced management to restructure the company (Fromson, 1990). Dissidents have also used their influence to restrict the use of poison pills (and other management entrenching devices) and to increase the use of confidential voting. In 1990, for example, dissident proposals to limit poison pills received majority support at Avon, Champion International Corporation, K-Mart, and Lockheed. Proposals regarding confidential voting were approved by the stockholders at Avon and Lockheed (Hanson, 1990). An important lesson from all these proxy contests is that successful use of the proxy mechanism for transforming corporations does not depend entirely on attaining more than 50 percent of the proxies voted.
Factors Which Have Increased The Use of Proxy Contests
With the collapse of the junk bond market and the limited availability of financing, corporate raiders of the 1980s have found it very difficult to mount hostile takeovers today. Thus, yesterday's raiders have increasingly turned to the proxy contest to elect their candidates to a majority of seats on a company's board. …