Corporate Governance

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.