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Key Takeaways from the 2023 Proxy Season
The recently concluded 2023 proxy season provided valuable insights into the state of shareholder activism and the impact of universal proxy rules. In this blog post, we consolidate the key points from Kirkland M&A and Harvard Law, shedding light on the evolving dynamics between activists and companies. Let's explore the significant shifts and trends that emerged during this period.
Activism Levels and Proxy Fights
Despite expectations of increased activism due to universal proxy, the number of campaigns remained consistent with previous years. Activists initiated over 300 "high impact" campaigns, showcasing sustained levels of activism. However, the number of campaigns escalating into proxy fights decreased by nearly 20%, while publicly disclosed settlements increased by almost 20%. This shift can be attributed to various factors, such as heightened risk perceived by individual directors under the new universal proxy rules and uncertainty about voting dynamics and the challenging macroeconomic environment. These factors have led to a greater inclination toward avoiding prolonged fights and opting for quick settlements.
Targeting Companies and Proxy Fights
The majority of proxy fights historically occur at smaller companies, and the 2023 proxy season further emphasized this trend. Around 84% of proxy fights took place at sub-$2 billion market cap companies. Smaller companies often have fewer resources to evaluate vulnerabilities and address activist demands, making settlements less likely and proxy fights more prevalent. Furthermore, newer activist funds tend to focus on smaller companies, as they have less capital to deploy and are more willing to go all the way to a vote to enhance their reputation and fundraising prospects.
Number of Nominees and Leverage
Contrary to expectations, the introduction of universal proxy did not lead to an increase in the number of activist nominees per slate. Activists have refrained from over-nominating during private discussions under the new rules to maintain credibility and avoid backlash from boards. The average number of activist nominees per slate remained around three.
Proxy Fight Costs and Bare-Bones Campaigns
While universal proxy was expected to lower the cost of entry for activists, bare-bones campaigns did not become widespread. Activists continued to incur significant costs, with the average estimated cost of conducting a proxy fight increasing from $1.2 million in 2022 to $2.7 million in 2023. Running a bare-bones campaign was more appealing to smaller, less-resourced hedge funds or groups focused on non-economic causes seeking publicity rather than electoral success.
Proxy Advisors and Director Qualifications
Proxy advisors like ISS and Glass Lewis maintained their evaluation framework, requiring activists to make a case for change before supporting any nominees. The ability to mix and match candidates under universal proxy did not lead to a significant shift in their approach. However, both proxy advisors emphasized individual director qualifications more than before, occasionally providing quasi-endorsements for activist nominees. During the 2023 season, ISS supported activists less often (44% compared to 57% in 2022), while Glass Lewis supported them more frequently (53% compared to 40% in 2022).
Litigious Proxy Season and Challenges to Activist Nominations
Companies challenged the validity of activist nominations at unprecedented levels during the 2023 proxy season. The number of challenges and lawsuits increased, indicating a growing focus on compliance with advance notification and proxy access requirements. This heightened litigation environment created additional hurdles for activists, increasing their costs and potentially delaying the progress of their campaigns. Companies have become more vigilant in scrutinizing activist nominations, leveraging technicalities and procedural loopholes to challenge their validity.
The Rise of ESG Activism
The 2023 proxy season witnessed a significant rise in environmental, social, and governance (ESG) activism. Shareholders increasingly focused on issues such as climate change, diversity and inclusion, executive compensation, and human rights. Activists leveraged ESG concerns to advocate for change and push companies to adopt more sustainable and responsible practices. This trend reflects the growing influence of ESG factors in investment decisions and the increasing expectation for companies to address societal and environmental challenges.
Institutional Investor Influence
Institutional investors continued to play a crucial role in shaping the outcomes of proxy fights. They evaluated campaigns on a case-by-case basis, considering the potential for value creation, corporate governance practices, and alignment with long-term shareholder interests. While some institutional investors supported activists in their campaigns, others remained cautious and sought to engage with both activists and management to find common ground. Their influence remains a significant factor in determining the success or failure of activist initiatives.
The Future of Activism
As we reflect on the 2023 proxy season, it is evident that universal proxy has introduced notable changes to the dynamics between activists and companies. The decrease in proxy fights and the increase in settlements suggest that the new rules have influenced negotiation strategies and prompted quicker resolutions. However, challenges to activist nominations and the litigious environment highlight the need for activists to navigate complex compliance requirements and procedural obstacles.
ESG activism will likely continue to gain momentum as investors increasingly prioritize sustainability and responsible corporate practices. Activists are expected to leverage ESG issues to drive change and hold companies accountable for their environmental and social impact.
Looking ahead, the evolving landscape of shareholder activism will depend on various factors, including regulatory developments, market conditions, and the continued engagement of institutional investors. Activists will need to adapt their tactics, refine their messaging, and demonstrate the value they bring to companies and their shareholders. Companies, on the other hand, must proactively address stakeholder concerns, enhance their corporate governance practices, and embrace ESG principles to mitigate the risk of activist campaigns.
Navigating the Changing Landscape
The 2023 proxy season showcased the ongoing evolution of shareholder activism, highlighting the impact of universal proxy rules, the rise of ESG activism, and the influence of institutional investors. While some anticipated a radical transformation in the proxy landscape, the changes observed were more nuanced. The season reinforced the importance of strategic engagement, effective communication, and adaptability for both activists and companies.
Shareholder activism can potentially influence corporate decision-making. Understanding the complexities of shareholder activism is also essential for investors. DEF 14 provides insights into proxy contests and activist campaigns and simplifies the process of deciphering shareholder activism. Explore DEF 14 and utilize our advanced tools to navigate the landscape of shareholder activism effectively and adapt to the shifting dynamics today.
Stay informed, engage with the issues that matter to you, and join the conversation on shareholder activism!