An Auspicious Start for Universal Proxy

We discern a definitely interesting and possibly significant impact of the new universal proxy card (UPC) rules on US proxy contests, even though it’s still somewhat early. We see that impact both in how activist investors plan proxy contests, and in the small number of contests that have concluded under UPC.

We heard all manner of predictions about UPC before and since its September 1, 2022 implementation date. In one account, company advisors warn of a “disaster” for BoDs and activist advisors cautioned the inherent high cost of a successful proxy contest would weigh against the initial enthusiasm that might prompt more of them. Shareholders welcomed it.

Observers expected proxy contests to become more personal, proxy advisors to gain influence, and companies to settle contests more eagerly. We echoed some of these predictions, and added a few of our own, mostly favorable to activist investors. We expected more ESG proponents that previously relied on precatory proposals to nominate directors at companies they think moved too slowly to implement successful proposals.

Based on the initial proxy contests since implementation, a number of these predictions appear accurate, although as we noted at the outset, it’s still early. In the one contest that actually voted under UPC, it helped shareholders exactly as the SEC intended.

What have we seen so far? We can think about this question in two ways: how activist investors have planned proxy contests under UPC, and how proxy contests have worked out under UPC.

Proxy Contest Planning

The logic of UPC suggests the shift from binary to continuous voting will change how activists plan and execute a proxy contest. Much of the planning involves whether even to escalate an activist situation to a proxy contest, and then the size and makeup of a BoD slate that an activist nominates.

Based on the first proxy contests for 2023, this year resembles the last few years in some important ways. We see some evidence for more proxy contests, although the size of an activist slate remains unchanged.

We compared 2023 to the previous three years:

We include proxy contests that were announced from January 1 to February 22 of each of the four years, based on data from Insightia. We note that it’s not only early in the life of the new UPC rule, but also early in the 2023 proxy season. Companies have just started to receive nomination notices from activists. In just a month or two we will have more complete data with which we can compare 2023 to earlier years.

The number of contests did increase from 21 in 2022 to 27 in 2023, after declining from 2020 to 2022. The small number of contests in this analysis cautions against attributing that increase only to UPC.

The size of BoD slate did not change significantly. Overall, activists nominate candidates for about one-third of the available seats. For companies with a classified BoD, the seats available is the number of seats in the class, rather than the entire BoD. On this basis, the number of seats sought by activists remained roughly constant from 2020-2023.

Some specific proxy contests illustrate both the predictions and trends well. Earlier this month, Starboard Value announced a proxy contest at Rogers Corporation (ROG). Starboard intends to nominate four candidates for a ten-person BoD. One of the candidates will come from among three Starboard executives, and Starboard will decide later which one. The SEC now allows an activist to submit multiple nominees to a company, and select some or one of them to stand for election. Starboard nominated candidates for 40% of the available BoD seats, slightly above the median for proxy contests in 2023 and earlier years.

The most well-knows proxy contest so far in 2023, Trian’s one at Disney (DIS), also illustrates some of the predictions and trends. Trian nominated a single candidate, CEO Nelson Peltz. It positioned him to run against a specific incumbent, Michael Froman. Earlier we explained the personal nature of this contest, which also expresses one of the central themes of UPC.

Finished Contests

How have proxy contests worked out under UPC? Again, it’s early, so we have only a very small number of examples. One observer analyzed three of them, and we note that shareholders actually voted in only one. That vote illustrates other predictions, namely the increased power of proxy advisors.

Earlier we highlighted that contest, in which hedge fund Land & Buildings nominated two candidates for three available BoD seats at Apartment Investment and Management (AIV). L&B made the contest personal, encouraging shareholders to compare its two challengers directly to two incumbents, and essentially endorsing one incumbent.

Proxy advisors, specifically ISS, had a significant influence on the contest. ISS recommended shareholders split its vote. It advised clients to vote for one of the two L&B nominees and two of the AIV incumbents. Glass Lewis recommended shareholders vote for all three AIV incumbents.

The L&B nominee that received the ISS endorsement, along with two incumbents, won the election by a wide margin. Each of the three received over twice the shareholder votes as the two others, the other L&B nominee and one AIV incumbent.

In this situation, UPC had exactly the impact that the SEC intended when it promulgated the new rule. It allowed AIV shareholders to split votes between incumbents and challengers easily, as if they attended the shareholder meeting in person. Before UPC, a shareholder that wished to follow ISS advice completely would have two choices. They could go to the trouble and expense of obtaining a legal proxy or travel in person to the annual shareholder meeting to vote. Alternatively, the shareholder could have voted only for some of the AIV nominees on its proxy card, or some of the L&B nominees on its proxy card, and not voted completely in the election.

What’s Next?

We expect some lively proxy contests, based on what we’ve already seen so far in 2023, and relative to the number of contests in earlier years. In 2020-2022, we saw 50-60 proxy contests announced each year, based on Insightia data. Thus, as company nomination windows open and close in the next several weeks, we should see at least as many proxy contests announced as we have already seen so far in 2023.

Among the contests announced so far in 2023, about one-third have concluded, all with a settlement or with the activist withdrawing its nominations. At this time in 2022, with somewhat fewer contests, about half had concluded through settlement or by the activist withdrawing its nominations. Again, with this small number of contests, we can’t say with confidence whether the smaller number of contests in 2023 concluding before a shareholder vote reflects UPC.

One factor remains unclear: whether ESG proponents will nominate directors to escalate their projects at portfolio companies. All 27 proxy contests so far in 2023 originate with financial investors, and none from ESG proponents. We should know in a few short weeks whether ESG proponents have begun to explore UPC, or whether they will wait longer to see how early contests go.