3 Senseless Steps in A Proxy Contest

Proxy contests are expensive and time consuming partially because they are littered with inane technicalities. Technicalities that seem to exist solely to exasperate the shareholder. In this post, we evaluate a few to illustrate the absurd steps an entrenched board takes - using your money as a shareholder.

The Shareholder List

In a proxy contest, the dissident investor contacts shareholders using a list provided by the target company (under state law or federal proxy rules). Typically the list is sold to the investor at an outrageously high price. There are the obvious costs of assembling it, but why must investors spend up to tens of thousands of dollars to receive the list? There is no valid reason I have heard that merits the high cost for a list that is really just an electronic file. It is a completely senseless charge and one that I believe is exploited by companies as a nuisance to dissident shareholders.

The investor is left with a Hobson's choice - he can pay the company its fee or hire a lawyer to challenge the excessive cost. This is a game companies can play since the cost of pursuing such a lawsuit would be far in excess of the inflated cost that it has demanded.

The Use of Shareholder Funds

When an investor announces an intention to seek representation on a target company's board, the directors (who are meant to be fiduciaries protecting the shareholders' assets) use shareholders' money to mount a "defense." The amount spent by target companies to prevent a shareholder from being elected to a board is often staggering - some in the tens of millions of dollars.

A company can engage multiple law firms, investment bankers, proxy solicitation firms, printing companies, public relations experts and others. Who pays for all this? The shareholders. An apt analogy would be a situation where a store manager raids the cash register and uses those funds to hire security guards to prevent the store's owner from entering the store to make suggestions on how the store is run.

The Monopolization of Professionals

Often, the investor running the proxy contest must hire the same types of campaign professionals that the target company employs. The difference, of course, is that the individual investor is responsible for funding those services.

The hiring process becomes a competition - an investor must engage the top professionals before the target company. In some cases the competition has been so fierce that although the target company decided against hiring a certain professional, they warn that if they conduct business with the investor they risk losing the company's future business. This influence peddling is not restricted to professional services. Often, a company will attempt to incorporate local or national politicians in their attempt to thwart the investor's campaign.

Why is this allowed? Shareholders must rise up and fight these atrocities that prevent investors from having a say in issues affecting companies they own.

Comments

[John Ewing]

Let me get this straight - the shareholder pays for his representation, and the company's representation? Isn't that like funding the war for both army's? Insane!

America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company!

[Bruce Lewin]

Hi Carl, it sounds like you've got the bit between your teeth - excellent stuff!

[Deepak Sethi]

I don't blame them for charging a fee for the list, they don't want it to be too accessible. And in a way, they can argue that that is added revenue, albeit a drop in a tremendously large bucket.

I agree that the tactic of monopolizing professionals is a horrible tactic. In fact, you can see how large companies can pressure key professionals into siding with them. I feel like that may have happened in your battle with Yahoo.

What I don't understand is point #2. How would you suggest they mount a defense if they don't use the funds available to them?

[J. George Pikas]

Carl,
When you have a chance, could you please give us more detail on a board's fiduciary responsibility? Specifically, I'm interested in what law, regulation, rule, or case law defines that fiduciary duty and how it makes a distinction, if any, between such duty to share owners verses the legal corporate entity. It seems I've read that case law has used the business judgement rule to establish that a board's fiduciary duty is to the legal corporate entity and not to shareowners.

Thank you.

[Balu]

Dear Carl,

The issues highlighted below by you are condemned by any shareholder with common sense. Why does the SEC or Federal Government allow these foul plays by the so called BOD or company?

How can this be stopped? What is being done by the SEC or what can be done by common investors to stop this practice?

I know you are waging a war on this, which is appreciated. But everyone is waiting for results to show up.

Thanks
My2Cents
Balu

[K_B]

Mr. Icahn - Rock on!

[Marc Allan Feldman MD MHS]

How can you fight management if all you have is an idea? I own a significant investment in HAUP. I bought it because they make excellent products, and I thought it had a bright future. Management, however, has shown little imagination and the stock is floundering. For the sake of argument, suppose that two weeks ago Genius hit me on the back of the head and I had an idea for a product that could be worth $100 million to a company like GOOG or MSFT or NFlX or BBI. Suppose I incorporated and secured provisional patents with an IP lawfirm.
How could I develop or sell the idea without losing complete control or involvement? The whole system seems tilted against the individual.

[Kunihiko Okazaki]

Besides being a front-line monetary activist, Carl Icahn is an excellent philosopher and educator in financial matters. Reading his report no only teaches me the depth and stability of the US capitalistic market but also basic rules of economics in clear and refined language. I am finding myself learning standard business English from Icahn’s writings. Thank you very much.

[FullyFunded1]

Man, you've gotta love that these companies charge tens of thousands for the shareholder list! Great tactic to bankrupt legitimate owner concerns! Same for the "mounting of a defense". Since when should the entrenched (enriched) management launch a defense play anyway? If a shareholder - an OWNER has a concern, it should be heard. If management is failing, they NEED new blood. The analogy of the shopkeeper using the funds in the till to barricade himself against the shopowner is great. What's happened to integrity in American board rooms? Look around, the streets are littered with the bodies of the recent dead due to mismanagement, malfeasence, etc. Look at Lehman and Lynch! And that's just last week! Yet boards will do anything, anything to prevent owners from maxing value... New regulation is what is needed. The big boyz could give two cents for current regulation; bet Cox didn't even know about BofA until he turned on the tv... I think it's great that you're writing this blog and in laymans language - let America wake up to what their trusted managers are really doing. Keep it up :)

[PKD]

If you look at the FED rate moves, it is just crazy to go up so much only to back down in short time. If they did not aggressively increase the rates in 2005 the economy would not have suffered as the home owners would have less problems paying the interests.

If you walk on left side of the road, there is a small chance that you will meet with an accident. If you walk on right side of the road there is a small chance that you will meet with an accident. BUT IF YOU ARE JUST STUPID TO GO FROM RIGHT TO LEFT AND LEFT TO RIGHT THERE IS GREAT CHANCE THAT YOU WILL CERTAINLY BE RUN OVER BY A TRUCK.