How Continuous Voting with UPC Will Change Proxy Contests

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

Most thinking and writing about the new universal proxy card (UPC) rule tends to consider basic compliancenew notices, the 67% requirement, or proxy contest costs. Some looks a little further, like how to navigate multiple activists at a company.

Yet, UPC opens up completely new opportunities to influence a portfolio company through BoD elections. The entire strategy around how to structure and solicit votes for an activist slate will change significantly. We’ve thought hard about that strategy under UPC, and explain here how that will work.

In short, shareholders will have much more influence over BoD composition. A shrewd activist investor anticipates this. Rather than an activist deciding how much incremental change to request in a BoD, an activist can position a proxy contest so that shareholders decide how much change they want. Activists can model a proxy contest using expected shareholder support to create the needed strategy, and plan a slate accordingly.

Contest Strategy

UPC changes the strategy, literally, in a proxy contest. This entails how many candidates an activist nominates for a BoD, whom to nominate, when to nominate them, and how to communicate these nominees to other shareholders.

One of the abiding frustrations of a proxy contest is how an activist needs to work really hard to win a substantial share of shareholder votes just to gain one or two seats on the BoD. UPC responds to this. Activist BoD representation can now reflect with more precision the extent of support it receives from shareholders.

Overall, with a sound UPC strategy, instead of settling for a couple or even just one seat, an activist can aim higher. Or, an activist that does win a meaningful number of votes, but falls short of a plurality, will still win BoD representation. The remainder of this post explains the thinking.

Binary or continuous

For decades, proxy contests amounted to a binary, either/or proposition. Shareholders choose between a company’s or an activist’s plan for the company, as reflected in their respective director slates. Based on its analysis of these competing plans, a shareholder votes for one or the other slate.

A really unhappy shareholder that seeks even more change than the activist proposes must accept only what the activist proposes. That shareholder would vote for anything and anyone the activist submits, and even more than that.

A mildly unhappy shareholder that wants a just little change has a harder decision. It could accept the company’s plan as expressed through incumbent directors and promises to improve. Or, it could gamble the activist’s thesis will work, and reluctantly vote for its nominees.

Sure, that mildly unhappy shareholder does have limited ways to support some company and some activist candidates, but it’s a significant hassle. The shareholder could go to the expense of preparing a custom, legal proxy that provides for specific, divided voting instructions. It could also vote for only some of the activist candidates using the activist proxy card, and not exercise all of its available votes.

The usual outcome of this binary vote is, an activist will hustle to persuade a plurality of shareholders about the virtues of its plan for the company. Yet, they win or settle for modest representation on the BoD. Further, an activist that wins a decent number of votes, but falls short of a plurality, gets nothing.

UPC makes proxy voting continuous:

  • The shareholder that agrees exactly with an activist about how to improve a company will contentedly vote for the activist’s nominees;
  • The really unhappy shareholder that demands extensive change will support all of an activist’s nominees, and wish the activist sought more; and
  • most important, the mildly unhappy shareholder that wants just a little change can easily and directly support only some of the activist’s candidates, commensurate with its desired change at the company.

With UPC, a shareholder votes for as much (or as little) change as it desires. UPC calibrates activist representation on the BoD to reflect the votes it receives from shareholders.

How should an activist work within this new reality?

Model a slate based on expected shareholder support

We created a proprietary model that incorporates expected shareholder support into the strategic decisions necessary to plan and execute a proxy contest. The model solves for the number of candidates an activist should nominate. We illustrate the model with a simplified example.

Let’s assume a portfolio company has ten BoD seats. The company nominates candidates for all ten. And, suppose shareholders support change at the company such that 40% of the shares voted will support the activist slate, less than a plurality.

Without UPC and with that expected 40% support, the activist might nominate one or two candidates. It would then seek to persuade shareholders that level of change is an acceptable outcome for the proxy contest. Maybe shareholders will exceed expectations, and the activist will indeed win a plurality. On average, with only 40% of the votes, the activist wins no seats.

With UPC and that 40% level of shareholder support at the company, the model indicates the activist will win 40% of the BoD. In the example, this means electing four activist nominees for the ten available seats. If the activist nominates only two candidates, it leaves votes on the table. If the activist nominates six candidates, the model indicates shareholders will divide support among all six, and on average none will prevail over the company’s ten nominees.

The critical input to the model is the expected level of shareholder support. An activist can assess this based on past director votes, past votes on other shareholder and company proposals, and input from current investors. The output is the precise number of activist nominees needed to capture and express this support.

Control contests and classified BoDs

Two factors complicate how to think about strategy under UPC.

Some shareholders, many regulators, and of course almost all companies especially fear proxy contests in which an activist seeks control of the BoD. Control can mean the activist having a majority of the seats on BoD or even all the seats. Opponents argue that a control contest grants control to the activist without the activist paying for that right. These opponents contend the activist acquires the company without paying a “control premium”. In these situations, a majority or more of the BoD seats could serve as a constraint on the number of seats to seek.

In our example above, if an activist thinks control will concern enough investors, they would limit the slate to five nominees, just short of a majority. Alternatively, if control concerns these investors, we expect shareholder support at 50% and no more. This 50% input to the strategy model yields the same five nominees.

Note control and control premiums are not settled issues. Some companies underperform so badly and need enough change that shareholders will happily grant a majority or more seats to an activist without worrying about a control premium.

classified BoD allows an activist to seek to elect a full slate at a shareholder meeting, without seeking control of the BoD. Of course, the point of a classified BoD is to prevent an activist from winning a majority of BoD seats in a single election. An activist that runs a proxy contest at such a company can seek all available BoD seats in that election without prompting concerns about control.

In our example above, suppose the company has ten BoD seats in three classes, say with three or four seats in each class, and four available in the subject election. The activist can then use UPC to seek all four seats, rather than a smaller number, without prompting control concerns. Based on the assumed 40% expected shareholder support, the activist would win all four.

Nominate people, not a slate

Strategy under UPC goes beyond the size of an activist slate. Shareholders can compare individual nominees explicitly, between company incumbents and activist candidates. A resourceful activist will make this comparison easy for other shareholders.

Of course, in some proxy contests an activist already does target specific company incumbents. Before UPC, an activist could nominate a “short slate” of a few candidates. It would then identify which incumbents it wants to replace with its few nominees. Shareholders would still support either the few activist candidates, or the entire company slate.

Under UPC, shareholders can act directly on these individual choices. An activist should make clear to other shareholders the advantages of its specific nominees compared to each incumbent, and urge votes following these distinctions. Even better, an activist will need to connect its nominees directly to its thesis for the company, and demonstrate how individual candidates will carry out its plans.

Working backwards, the experience and expertise of individual nominees compared to that of individual incumbents becomes much more important than before. Activists can no longer scramble to recruit whatever willing nominees it can scrounge at the deadline to notify companies.

Changes for proxy solicitors and advisors, too

Proxy solicitors will have more to do. They provide critical advice on the shareholder support input to the proxy contest strategy model. They understand the investor community and have ready access to data on past proxy contest and shareholder proposal votes.

They also have a new challenge, to help shareholders compare individual activist candidates to company incumbents. Beyond promoting the activist thesis for the company, proxy solicitors will also explain how each activist candidate improves on company nominees.

Similarly, proxy solicitors have a new tactic in promoting an activist slate. They can offer shareholders the option of supporting limited change at a company. Rather than telling shareholders, “vote for the activist”, they can say, “vote for whatever change you want.” For shareholders that are reluctant to vote for an activist’s entire slate, a proxy solicitor can offer more options beyond the binary either/or proposition available today.

Proxy advisors will have more power. They frequently advise shareholders vote for only some of an activist’s slate. Now, these recommendations will have more impact. Proxy advisors that handle proxies for investor clients can implement directly the advice to support only a few specific activist candidates.

Start early!

Strategy extends to the timing of the steps in a proxy contest. Overall, UPC means an activist should begin thinking about and planning for a proxy contest earlier than it has before.

Communicating with shareholders in a proxy contest will become trickier. While clumsy, telling a shareholder which color proxy card to vote is rather simple. Now, activists will need to communicate detail about individual nominees, compare those nominees to incumbents, and connect those nominees to the activist’s thesis for the company. All of this takes time. Other shareholders may not want to focus on a contest too far before a shareholder meeting, but that doesn’t mean an activist should avoid early, substantive messaging.

Multiple activists can complicate a proxy contest. The first activist will have an advantage in recruiting BoD candidates and communicating with other shareholders.


UPC offers a significant opportunity for an activist to improve proxy contest outcomes. It will do so only with proper planning for the size of a slate, qualifications of specific nominees, and communicating the value of those nominees to shareholders.

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