Proxy Contests

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, University of Western Ontario
• Pages: 331-359

331

CHA PTER 9

PROXY CONTESTS

A. INT RODUC TION

Most of this book has dealt w ith ways by which ownership of a busi-

ness changes hands. But there is another way in which a person or

company can effectively acquire man agerial control of a business with-

out acquiring an ownership intere st. When the business is operated by

a corporation, those seeking control can mount a proxy contest (also

known as a “proxy f‌ight,” “proxy battle,” or even “proxy war”). A proxy

contest is something like a political election campaign. A dissident or

insurgent group of shareholders attempts to win the hearts, the minds,

and—most of all—the votes of the majority of the corporation’s share-

holders, so that the dissidents’ slate of directors will be elected to the

board instead of the ca ndidates nominated by the corporation’s incum-

bent managers.

This method of seeking control of a corporation’s board of dir-

ectors is called a proxy contest becaus e most shareholders of public

corporations choose to cast t heir votes for the election of directors at

shareholders’ meetings by proxy rather tha n in person. Accordingly,

competing campaigns seek to convince shareholders to cast their votes

in a particula r way by requesting shareholders to f‌ill out a proxy form

(a document appointing a representative to attend the meeting on be-

half of the shareholder) in which the signing shareholder directs his or

her proxyholder to vote for or against the resolutions th at are to come

before the meeting.

MERGERS AND ACQUISITIONS332

A basic knowledge of proxy contests is importa nt to a broader under-

standing of mergers and acquisitions. In the United States, proxy con-

tests have often been launched in connect ion with hostile takeover bids

as hostile bidders sought to gain control of a target board of directors i n

order to dismantle a particular form of takeover defence—the “poison

pill,”1 since the ability of directors to sustain a poison pill has been con-

siderably more robust in certain U.S. jurisdictions, notably Delaware,

than in Can ada. And indeed it is sometimes suggested t hat American

(especially Delaware) courts’ strong emphasis on sha reholder elections,

as opposed to direct shareholder voice in corporate decision-mak ing,

goes some way to explaining U.S. hostile takeover jurisprudence.2

In Canada where poison pill s cannot as a practical matter be kept

in place indef‌initely, the strategy of coupling a hostile bid with a proxy

battle is of somewhat less importance (see Chapter 7). Proxy contests

at Canadian public corporations a re in fact unusual, but they are not

unheard of. In the case of certain regulated industries, however, where

1 For a discuss ion of the use of a proxy contest for this pur pose, see Lucian Ayre

Bebchuk, John C. Co ates IV, & Guhan Subram anian, “The Powerful Antit akeover

Force of Staggered Bo ards: Theory, Evidence and Policy” (2002) 54 Stan. L. R ev.

887. To prevent hostile bidders from using a prox y contest in this way, many U.S.

companies int roduced staggered or clas sif‌ied boards. The members of bo ard

of directors wou ld be divided into differe nt classes, with di fferent terms of off‌ice

specif‌ied for the me mbers of each class. Thus, eve n if a hostile bidder were to

wage a successfu l proxy battle in connection wit h the target’s annual meeti ng, it

would not be possible to replace al l of the board’s directors at that meet ing since

the term s of one or more classes of direc tors would not expire until a subs equent

annual meeti ng. This technique general ly cannot be used in Can ada. Although

staggered ter ms for directors are often pe rmitted under Canadi an corporate law

(see, for example, Canada Bu siness Corporations Act, s. 106(4) [CBCA]), there

is typica lly an overriding power i n Canadian corpor ate statutes that p ermits

shareholders, by ord inary resolution, to remove t he directors at any time. (See,

for example, CBCA , s. 109(1).)

2 See, for example, Leo E . Strine, Jr., “The Professorial Bea r Hug: The ESB Propos-

al as a Consciou s Effort to Make the Delaware C ourts Confront the Basic ‘Ju st

Say No’ Question” (2002) 55 Stan. L. Rev. 863 at 876: “One of the reason s that

the Delaware c ourts approved the use of the pois on pill was that the dire ctor

election proces s provided an ultimate esc ape from the pill . . . This proxy out

provided an elega nt way for courts in later case s to avoid f‌inding that a board’s

deployment of a poison pi ll was preclusive . . . . The defenders [of elections] pre-

fer elections not bec ause they enable boards to de feat worthy offers, but because

elections are se en as permitting stoc kholders to exercise an undi storted choice

on the worthine ss of a bid, divorced from a concern th at a failure to tender

will relegate a st ockholder to the uncertai n fate of a back-end merger.” See also

the recent comment s of former Chancellor Chandle r of the Delaware Court of

Chancery i n Air Products and Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch.

2011), reproduced in Chapter 7 at note 270.