Sometimes referred to as a proxy fight, a proxy contest is an approach that may be used to gain control of the board of directors of a particular corporation. The strategy involves securing the proxy votes of a sufficient number of shareholders to successfully appoint new members to the board, as well as influence the hiring of new management. This approach can be used to gain control of a business without actually buying it, or as the groundwork for executing a takeover attempt at a later date.
One of the more common examples of utilizing a proxy contest is for two entities to work in tandem to secure a majority of the shareholder votes needed to determine who is and is not seated on the board of directors. This is accomplished by each entity systematically contacting current shareholders and making arrangements to vote their shares for them. The effort to secure proxies continues until the two entities control a majority of the shares that have been issued to the shareholders. Once the proxies are secured, the two entities then choose to vote as a bloc, making it very difficult for anyone to oppose the wishes of the two entities.
There are several reasons why a proxy contest may take place. One has to do with gaining control of a company without actually having to buy it. In business settings, this strategy may be used to effectively assume control of a supplier or other type of business that is key to the continuing success of the entities that control the majority of the proxy votes. Using the leverage that is gained in this situation, it is possible to place individuals on the board that are more sympathetic to the needs of the controlling interests, as well as influence the selection of managers and even company policies and procedures.
A proxy contest may also be part of the preparation for a hostile takeover attempt. In this scenario, the raiders secure a controlling number of proxy votes that allow them to effectively restructure the board of directors with elected and appointed members who are favorable to the takeover. Once those changes are made, the takeover can proceed at an accelerated rate. The proxy contest approach can also help keep the costs of the takeover somewhat lower, a factor that only serves to increase the return realized by the raiders once they have full control of the company. This is true whether the raiders choose to dismantle the company by selling off its assets, or continue to maintain the business with relatively few changes.
