Tue, Jan 20, 2015
There are few situations a public corporate entity may face more daunting than a proxy contest, and no industry, geography or level of success makes a company immune to such a challenge. The increasingly sophisticated and complex manner in which these contests arise requires management’s dedicated focus and, of course, money to defend against these attacks. Make no mistake the defense of proxy contests is expensive. A recent report indicates that the average cost of a proxy contest through the first half of 2014 was $4.8 million.1 Add to that figure the cost of losing a board seat, which can be devastating to an incumbent’s future board opportunities. Research shows that the mere threat of removal in a proxy contest is connected to losing between $1.3 and 2.9 million in income until retirement for the median incumbent director2, as well as resulting in the loss of an additional board seat over the following three years.3
While every situation is different, and the right response to an unsolicited advance unique, experience shows that management and the board of directors need to be prepared well before an opening salvo in a contest for corporate control. Advanced planning, solid research and assuming a proactive position are keys to prevailing in these battles. Preparation includes the ability to preemptively identify shareholder rumblings and effectively address an unsolicited advance in a timely, knowledgeable and cohesive manner. An organization’s management and board of directors should consider the following in order to most effectively prepare for a contest for corporate control.
Assemble a proxy response team
Every public company should establish a “proxy response team” to assist with navigating through the proxy contest playing field. The team should be comprised of the most knowledgeable internal resources, including the chief financial officer, general counsel and additional senior personnel from the finance, investor relations and cor¬porate communications departments.
In addition to internal resources, external resources should be added to the team. External advisors should include outside counsel, a proxy solicitation firm, public relations experts and investigators to assist with information collection and analysis.
A cadence should be devised for communicating with all team members on a regular basis to encourage continual engagement and ensure that the base knowledge of the team is level and consistent.
Pre-contest preparation
Once the team is brought together, the company should begin to plan for an imminent contest. This preparation should include:
There are fewer higher stakes business conflicts than an attack on an organization’s board of directors. These contests are expensive, distract from the day-to-day mission of management and the board, and often get personal. A loss can be devastating to the company, and individual board members can see opportunities for seats on future boards dwindle. A key element of the response is having timely, accurate and unimpeachable information at the board’s disposal and a plan to use it effectively. The degree to which a board of directors and a public company successfully defend against an unsolicited and unwanted approach is dependent upon the extent to which the company prepares in advance. While there are no guarantees that a company will prevail, the best chances for success reside in careful planning, preparation and good information.
Sources:
1 Activism Monthly Lite, September 2014, page 5. http://www.activistinsight.com/research/Activism%20Monthly%20Lite%20September%202014.pdf.
2 “Shareholder Democracy in Play: Career Consequences of Proxy Contests,” Vyacheslav Fos and Margarita Tsoutsoura, Journal of Financial Economics, Volume 114, Issue 2, November 2014, Pages 316-340.
3 Id at 324.
By David Holley, former Senior Managing Director and head of Kroll's Boston Office.
The Kroll Investigations, Diligence and Compliance team are experts in forensic investigations and intelligence, delivering actionable data and insights that help clients worldwide make critical decisions and mitigate risk.
When organizations worldwide need intelligence, insight and clarity to take decisive action, they rely on Kroll.