Proxy Voting and Shareholder Activism Can Effect Change
If you own shares in one or more publicly traded companies, you have likely come across proxy voting. As a shareholder, you are entitled to cast your vote on certain matters presented at a company’s shareholder meeting.
At a minimum, public companies must solicit votes from their shareholders at least once a year to vote on matters at their annual meeting. The issues typically up for consideration at annual meetings include the election of directors, CEO compensation, and auditor reports.
Companies can also host special meetings to invite shareholders to vote on major issues that occur between annual meetings. The board of directors or others granted authority may call special meetings. The board might call a special meeting to vote on a merger proposal. I could also want to elect new directors to fill vacancies, or to dismiss a current director.
As the meeting date approaches, eligible shareholders may receive shareholder voting instructions and proxy materials. The peak season is in the spring of each year, starting around mid-March and ending in June.
The proxy materials sent to shareholders consist of the a ballot and statement. The proxy statement is a supplemental booklet. It contains important information about the meeting. Items inclujde shareholder proposals yo for a vote, executive compensation, and management of the company. Nowadays companies distribute these materials electronically, and proxy generally occurs online.
The proxy ballot or card, typically contains four voting options — “For”, “Against”, “Abstain”, and “Not Voted”.
A third-party solicitation firm typically manages the shareholder voting process. Some of the most frequently used proxy solicitation firms include Broadridge, Computershare, Morrow Sodali, and D.F. King. These firms will actually cast the shareholders’ votes as filled in by the shareholders on their proxy cards.
Qualified shareholders can submit proposals for inclusion on the proxy ballot. In order to get their proposal on the ballot, shareholders must follow certain procedures and meet certain eligibility requirements.
Under Section 14a-8 of the Securities Exchange Act of 1934, shareholder proposals, also known as shareholder resolutions, may be introduced to the company’s management to be voted on at the next annual meeting. A shareholder is eligible to file a resolution if the shareholder: (i) has owned at least $25,000 of the company’s shares for at least one year, (ii) has owned at least $15,000 of the company’s shares for at least two years, or (ii) has owned at least $2,000 of the company’s shares for at least three years.
Shareholder proposals can be on a range of topics, but there are certain limitations. Under Section 14a-8, the company may exclude shareholder proposals that are a violation of law or that merely voice personal grievances. In addition, proposals that are not significantly related to the company’s business or activities that account for less than 5% of net earnings can be excluded from the proxy ballot. A shareholder’s proposal exceed 500 words.
Recently, shareholder proposals addressing environmental, social and corporate governance policies have been gaining traction. Also known as ESG topics, shareholders have been pushing for issues ranging from climate change to board diversity to appear on proxy ballots.
SEC Rules Governing Proxy Voting Process
The Securities and Exchange Commission (SEC) has a number of rules in place to regulate the proxy process. Regulation 14A of the Securities Exchange Act of 1934 lays out the rules for proxy solicitations while Schedule 14A sets forth the proxy statement rules.
The company is required to file a Form DEF 14A, also known as the Definitive Proxy Statement, with the SEC in advance of the annual meeting. A Form PRE 14A, also known as a Preliminary Proxy Statement, is filed at least 10 days prior to the filing of the Definitive Proxy Statement.
The Proxy Contest
A proxy contest involves groups of shareholders banding together to influence company policy or challenge existing management. Behind the scenes these shareholders have typically acquired significant ownership stakes.
Shareholder activism has increased in recent years, with the goal of implementing changes to boost company performance or advocate for a cause. Some activist investors deploy an aggressive style while others attempt to be constructive and cooperative with management. Activist investors taking an aggressive approach may even wage a publicity campaign to draw public attention to a perceived problem in the company.
Hedge fund manager Carl Icahn has gained a reputation for the numerous proxy fights he has launched against large corporations. For example, in 2019, he waged a proxy battle against Occidental Petroleum to win control of four board seats. Icahn blasted Occidental’s management, claiming that they did not give shareholders adequate say on Occidental’s proposed $38 billion merger with Anadarko Petroleum. Icahn made a public filing with the SEC that included his four proposed board candidates. Occidental responded by publicly stating that Icahn’s requests were not in the best interests of shareholders.