Proxy Contests

AuthorChristopher Nicholls
Pages373-413
373
CHA PTER 9
PROXY CONTESTS
A. INTRODUC TION
Most of this book has dealt with ways by which ownership of a busi-
ness changes ha nds. 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 t he hearts, the minds,
and — most importantly — the votes of the majority of the corporation’s
shareholders so that the dissidents’ slate of directors will be elected
to the board instead of the candidates nominated by the corporation’s
incumbent managers.
This method of seeking control of a corporation’s board of directors
is called a proxy contest because most shareholders of public corpora-
tions cannot conveniently attend shareholders’ meetings in person and
so choose to cast their votes for the election of directors at sha rehold-
ers’ meetings by proxy rather than in person. Accordingly, competing
campaigns seek to convince shareholders to exercise their votes in a
particular way by requesting shareholders to complete and sign a form
of proxy (a document appointing a representative to attend the meeting
on behalf of the shareholder) in which the signing sha reholder directs
their proxyholder on how to cast the shareholder’s vote on matters that
are to come before the meeting.
MERGERS AND ACQUISITIONS374
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 connection with hostile tender offers
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 sust ain a poison pill has been
considerably more robust in certain US juri sdictions, notably Delaware,
than in Can ada. And, indeed, it is sometimes suggested that American
(especially Delaware) courts’ strong emphasis on shareholder elections,
as opposed to direct shareholder voice in corporate decision making,
goes some way to explaining US hostile takeover jurisprudence.2
1 For a discuss ion of the use of a proxy contest for this pur pose, see Lucian Ayre
Bebchuk, John C Coate s IV, & Guhan Subrama nian, “The Powerful Antita keover
Force of Staggered Bo ards: Theory, Evidence and Policy” (2002) 54 Stanford Law
Review 887. To prevent hostile bidders from u sing a proxy contest in this wa y,
many US companie s introduced staggered or cl assified boards. The memb ers
of a board of direct ors would be divided into differ ent classes, with di fferent
terms of offic e specified for the members of e ach class. Thus, even if a hostile
bidder were to wage a succes sful proxy battle in connect ion with the target’s
annual meeti ng, it would not be possible to replace all of th e board’s directors
at that meeting s ince the terms of one or more clas ses of directors would not
expire unti l a subsequent annual meeti ng. This technique generally c annot be
used in Can ada. Although staggered ter ms for directors are often per mitted
under Canad ian corporate law (see, for example, Cana da Business Corpora-
tions Act, s 106(4) [CBCA]), there is typic ally an overriding po wer in Canadian
corporate stat utes that permits sha reholders, by ordinary re solution, to remove
the directors at a ny time. (See, for example, CBCA, s 109(1).) In Delaware, i f
a corporation ha s a classified board , directors may only be removed for cau se,
unless the ce rtificate of incorporat ion provides otherwi se; see General Corpora-
tion Law (Delawa re), Delaware Code, Title 8, Ch apter 1, s 141(k)(1). The use of
the staggere d board as a hostile takeover d efence is discussed in C hapter 7.
2 See, for example, L eo E Strine, Jr, “The Professorial B ear Hug: The ESB Proposal
as a Conscious Ef fort to Make the Delaware Cou rts Confront the Basic ‘Ju st Say
No’ Question” (2002) 55 Stanford Law Review 863 at 876:
One of the reason s that the Delaware cour ts approved the use of the poison
pill was th at the director election proces s provided an ultimate esc ape from
the pill . . . . This proxy out provided an eleg ant way for courts in later case s
to avoid finding t hat a board’s deployment of a poison pill wa s preclusive
. . . . The defenders [of elections] prefer elections not becaus e they enable
boards to defe at worthy offers, but because elect ions are seen as permitt ing
stockholders to exe rcise an undistorted choice on t he worthiness of a bid,
divorced from a concern t hat a failure to tender wil l relegate a stockholder to
the uncerta in fate of a back-end merger.
See also the c omments of former Chancellor Ch andler of the Delaware Cour t of
Chancery i n Air Products and Chemicals, Inc v Airgas, Inc, 16 A3d 4 8 (Del Ch 2011),
reproduced in Chapte r 7 at note 286.
Proxy Co ntests 375
In Canada, even prior to the import ant take-over bid rule changes
in 2016 discussed in Chapter 7, poison pills could not as a practical
matter be kept in place indefinitely, and so the strategy of coupling a
hostile bid with a proxy battle ha s been of somewhat less importance.
Until recently, proxy contests at Canadian public corporations were, in
fact, quite unusual, but have become more significa nt in the past sev-
eral years as Ca nada, in common with many other jur isdictions, has
experienced a sign ificant rise in shareholder activism.3 In it s 2019 Proxy
Review, Kingsdale Advisors reported a significant increase in the num-
ber of proxy contexts in Canada beginning around 2006, when there
were thirteen such contests, a nd culminating in a historical ly high num-
ber of such contests fifty-five in 2015. Though no year since 2015
has witnes sed as many proxy contests in Canada, t he numbers have still
been consistently high, w ith some thirty-three contest s in 2016, thirty-
two in 2017, forty-four in 2018, and twenty-five in 2019 (as of August
15).4 Further, in the ca se of certain regulated industries, where legis-
lation restricts t he percentage of shares that may be owned by any single
shareholder, a proxy contest may be the only expedient way for anyone,
including a major corporate shareholder, to acquire managerial control
over the corporation. It might also be noted that a proxy contest in C an-
ada has the potential to be a more robust form of shareholder activism
than in the key US corporate law jurisdiction, Delaware, bec ause of the
usual Canadian corporate law requirement (that can be varied under
Delaware law in the ca se of classified boards) empowering sharehold-
ers to remove directors of a corporation at any time by simple majority
vote.5 As the Ontario Securities Commi ssion stated in a 2011 decision:
“A proxy solicitation in connection with a merger or acquisition trans-
action raises the sa me investor protection issues as a take-over bid.”6
An understanding of ba sic Canadian proxy rule s is also important
in the context of negotiated merger transactions. These transactions
may be structured a s long form amalgamations or, more frequently, as
statutory plans of ar rangement (both of which are discussed in Ch apter
4) and so require shareholder approval. It is not unheard of in Canada for
larger shareholders — especially in stitutional investors such as pension
plans — to undertake a proxy context in order to persuade other share-
holders to vote against such planned transactions. The purpose of such
a campaign is primarily to pressure t he parties who have negotiated
3 S ee Christopher C Nicholls, Secur ities Law 2d ed (Toronto: Irwin, 2018) at 483.
4 K ingsdale Advisor s, Proxy Seasons Review 2019 at 3, online:
www.kings daleadvi sors.com
5 Se e, for example, CBCA, s 109. For a discussion of th e Delaware approach in the
case of cla ssified or staggered boa rds, see Chapter 7, note 57.
6 Re VenGrowth Funds (2011), 34 OSCB 6755 [VenG rowt h].

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT