The Cost of Proxy Contests

Michael R. Levin is founder and editor of The Activist Investor. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

By now we’ve heard a lot about the universal proxy card (UPC), and how it makes life easier for activist investors and harder for companies. We set forth the highlights earlier. Many observers note UPC will lower the cost of proxy contests, and thus encourage more of them. Here, we dig into exactly how that could work.

We don’t know if an activist investor can hit the $5,300 cost the SEC estimates an activist investor can spend on a proxy contest using UPC, or if it even wants to. Still, if a resourceful activist chooses to pursue a “nominal” solicitation, it can run a proxy contest at a potentially much lower cost than before.

Notes on regulatory practice

Pursuant to longstanding regulatory practice, the SEC assesses the impact of a rule on many affected parties: issuers or registrants, dissident shareholders (here called companies and activists), other shareholders, and directors. The SEC also assesses impact as “potential economic effects of the final amendments, including the likely benefits and costs, as well as the likely effects on efficiency, competition, and capital formation.” For our purposes here, we look at the direct cost for activists and companies to comply with the rule.

Estimating the incremental cost of any regulation is at best difficult under any circumstances. Estimating the impact of this unprecedented one is even trickier. We haven’t seen any independent analysis of UPC compliance costs, so we rely on the SEC’s data and models. Our work below refers to page numbers and footnotes in the final rule.

We note a critical aspect of the new rule: an activist must now intend to solicit enough shareholders to reach votes of 67% of the outstanding shares. This new requirement represents the principal new compliance obligation for activist investors. Our earlier explanation suggests that an activist might not need to in fact solicit to that level (please understand we are not attorneys, and this is not legal advice). Also, as we show here with the SEC data, an activist can solicit a surprisingly small number of shareholders to satisfy this requirement.

Proxy contest costs today

The SEC presents costs relative to a baseline. For the median proxy contest from 2017-2020, it estimates the company spent $1.7 million and the activist spent $750,000 (Table 1).

Table 1

Based on SEC analysis of EDGAR filings 2017-2020 (p. 88, fn 228), figures in $ millions

Average Low Median High
Total cost
Company 3.9 0.06 1.7 35
Activist 1.8 0.02 0.8 25
Proxy solicitation cost
Company 0.5 0.01 0.3 3.5
Activist 0.3 0.01 0.1 2.5

Costs vary considerably. The sample had a high of $60 million, likely for the Trian proxy contest at PG, with PG and Trian spending $35 million and $25 million of that, respectively. That contest and a few others skew the average considerably.

Proxy solicitation accounts for a relatively small share of the total cost. At the median proxy contest, companies spent $300,000 and activists spent $100,000 on solicitation, or under 20% of the total cost. Fortunate proxy solicitors in the Trian-PG contest collected $6 million, which was only a tenth of the total proxy contest expenditure. Companies and activists spend far more on attorneys, bankers, public relations, consultants, and other advisors.

Within the $100,000 proxy solicitation cost for an activist investor, the SEC estimates the “basic” cost of solicitation at a paltry $14,000 (p. 110, fn 266). This represents the printing and mailing cost to use the notice-and-access method of proxy solicitation and do so for the minimum number of shareholders required to hit the 67% requirement. The additional costs entail mailing of full materials, additional contact with shareholders, such as mailed letters, phone calls, and online communication, and completing the solicitation (sending, tracking, collecting, and tabulating proxy cards).

Notice-and-access means an activist can notify shareholders of the availability of proxy materials online. The SEC allows an activist to do this instead of producing and mailing proxy materials to shareholders—the formal proxy statement, additional materials like presentations and letters, and a proxy card. This permits an activist to economize on proxy solicitation, and confine shareholder communication to online methods. An activist can notify shareholders using a simple postcard.

The SEC analyzes two impacts relative to the baseline: the added cost to comply with the UPC rule for typical proxy contests, and the cost of new proxy contests that result from UPC.

Added cost under UPC: $5,400 or zero

The SEC estimates the new UPC rules will increase costs only for the activist investor, and not for the company. Consistent with regulatory practice, the SEC seeks to understand the marginal impact of the rule on the parties. In this case, we look at the additional cost to comply with the UPC rule on activists and companies. The SEC puts it somewhat pointedly:

The final amendments may directly impose minor costs on registrants (fn 255) and dissidents that engage in proxy contests, relative to the current costs that these parties bear in proxy contests. (fn 256)

fn 255: Note that costs on registrants are borne by the registrants’ investors.

For the activist investor, it estimates cost will increase by an average of $5,400 (p. 107, fn 262). This pertains to the added cost of meeting the new requirement to solicit 67% of the votes.

In almost all proxy contests activist investors already solicit shareholders representing at least 67% of the votes (p. 107, fn 263). In those situations, there is no added cost.

In the small number of situations where activists do not already solicit to the 67% level, the SEC assumes an activist solicits only the additional needed shareholders to get to 67% and do so through notice-and-access. The SEC reasons an activist would not otherwise seek those votes. Thus, an activist will merely comply with the new 67% requirement at the lowest possible cost. The minimal cost of that method, combined with the marginal additional accounts needed to hit the 67% level, means the total additional cost averages $5,400.

For companies, the SEC refrains from estimating specifically the additional cost to comply with the UPC. It posits that a UPC solicitation requires relatively little effort from the company, mainly the ink and bytes needed to add an activist’s nominees to the company proxy card.

Nominal solicitation under UPC: $5,300-9,800 or $65,000

The rule contemplates a novel proxy solicitation method, a “nominal” solicitation. In a nominal solicitation, an activist expends only the absolute minimum effort and cost needed to nominate one or more director candidates and solicit proxies. The rule describes a nominal solicitation as one in which an activist would incur

… little more than the basic required costs to pursue a contest. In particular, [an activist would] bear the cost of drafting a proxy statement and undergoing the staff review and comment process for that filing. However, [an activist] … would not expend resources on substantial solicitation, such as to disseminate its proxy materials through full set delivery to a substantial percentage of shareholders versus only to select shareholders, to hire the services of a proxy solicitor, or to engage in other broad outreach efforts, as would be the case in a typical proxy contest. (p. 88)

Why even consider nominal solicitation? The SEC had a problem: how to describe, understand, and analyze how an activist might use the new UPC as another means of influencing a company. Hence, the nominal contest concept:

We are unaware of any nominal contest that has resulted in the dissident gaining seats for their nominees. Dissidents may nevertheless choose to initiate nominal contests to pursue goals other than changes in board composition, such as to publicize a particular issue or to encourage management to engage with the dissident. (p. 90)

The SEC needed to figure out how (if at all) the UPC encourages activists to undertake new proxy contests where they would not have otherwise done so. The nominal solicitation becomes a way to assess the impact of such new proxy contests on companies and activists. Then, the SEC estimates costs of a nominal solicitation for both the company and an activist investor.

For an activist investor, the SEC estimates the cost of a nominal solicitation at around $5,000-10,000, depending on the size of company (Table 2).

Table 2

Based on SEC analysis of data from a proxy services provider (p. 112, fn 273)

Market cap No. of shareholders To reach 67% Average cost per account
Percent of accounts No. of accounts No. of nominees Cost
under $300 million 3,900 1.0% 46 12 $5,300 $115
$300 million – $2 billion 11,000 n/a 88 n/a $5,800 $66
$2-10 billion 28,300 n/a 147 n/a $6,300 $43
over $10 billion 279,000 0.2% 529 176 $9,800 $19

A nominal solicitation relies critically on notice-and-access. The assumed cost of the notice uses the standard fees for sending proxy materials set forth in NYSE Rule 451. The SEC applies these fees to the estimated number of accounts needed to hit the 67% level (p. 107, fn 263).

Interestingly, some of the cost depends both on a minimum allowed cost and on the number of nominees (brokers, custodians) that an activist must work through to solicit accounts. This represents a form of fixed cost that is spread among a larger number of accounts. In this way the per-account cost decreases as the number of accounts increases.

For a company, the SEC estimates the cost of an activist’s nominal solicitation at $65,000 (p. 115, fn 276). Lacking any other data, the SEC uses the minimum of the range of total costs reported by companies in proxy contests (Table 1).

Of course, companies can and usually will spend much more, especially since they spend company (and thus investor) funds, not the directors’ and executives’ personal funds, as the SEC noted in its pointed footnote. An activist also might want to spend more than the minimal cost. Depending on how, how much, and how well an activist wishes to reach other shareholders, it might spend more on solicitation and public relations.

Still, with some ingenuity an activist can spend relatively little:

  • prepare and file materials with the SEC with only basic legal input
  • use notice-and-access, and rely on EDGAR for hosting proxy materials
  • rely on low-cost or free social media to promote nominees.

As we have explained separately, an activist might even consider using only the company’s proxy card, and not even tracking and collecting its own proxy card (again, we are not attorneys, and this is not legal advice). This way, it won’t need to hire a proxy solicitor, either.

This analysis suggests how an activist might start to strategize for its next proxy contest. How about starting with the baseline cost, and deciding how much more to spend depending on needed visibility?

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