So far, it appears that 2006 will be a record year for proxy fights. According to FactSet Research Systems' SharkRepellent.net Web site, there were 80 proxy fights during the first six months of the year. That exceeds the 54 fights in all of 2005, the 40 contests in 2004, and 74 contests in 2003. (SharkRepellent counts a proxy contest once an investor files a notice of an intent to submit proxy materials, so its numbers are higher than other firms that track only fights where actual materials are filed.) In addition to proxy fights, there have been 122 other activist campaigns this year where shareholders have advocated for stock buybacks, increased dividends, sale of the company, or other change, according to SharkRepellent.
Another factor that has led to more proxy fights has been the gradual erosion of poison pill plans, classified boards, and other takeover defenses. Fifty-four percent of S&P 500 companies don't have poison pills, while a majority of S&P 500 directors likely will be subject to annual elections by the end of 2006, according to ISS data.
This season, hedge funds have been successful in many of their dissident campaigns. According to investment bank Morgan Joseph, hedge funds have won board representation in 35 percent of their campaigns.
While the Heinz proxy fight generated significant attention from investors, many proxy fights have settled before going to a vote. By mid-August, 31 proxy fights tracked by ISS had culminated in a settlement. So far this year, 21 proxy contests have gone to a vote, as compared with 18 in all of 2005, according to ISS data.
The most notable company to settle a proxy fight this year was Time Warner, which reached an accord with Carl Icahn in February. Icahn, joined by Franklin Mutual Advisors, SAC Capital Advisors, and JANA Partners, raised concerns about the company's strategy to release value for shareholders. In early February, Icahn and his allies presented a report that called for Time Warner to be split into four publicly traded companies and to buy back at least $20 billion of stock. A week later, Icahn and the company announced a settlement, under which Icahn agreed not to run a minority slate, while management committed to increase the size of a share buyback, slash additional costs, and appoint two new directors. The Time Warner case is a prominent example of a recent trend of hedge funds banding together to advocate for governance, strategic, or financial change.
Other recent settlements include Acxiom's settlement with ValueAct Capital, the agreement by Pep Boys to nominate four directors proposed by Barrington Capital Group, and the settlement that Topps reached with Pembridge Capital Management and Crescendo Partners.
Settlements between issuers and activist shareholders are typical of the compromise a target company will "choose" when it becomes clear that it will lose a proxy fight. With a settlement, the issuer may be able to extract some concessions from the dissidents (usually a board seat or two) that it was unlikely to have obtained if the original slates had gone to a vote. Moreover, the company is able to save face by not officially "losing" the contest. At the same time, the dissidents often can get everything they asked for and appear reasonable, which can only enhance their options in future negotiations.
In addition to Heinz and Time Warner, other noteworthy proxy fights included:
BASF's Hostile Tender Offer for Engelhard: German chemical giant BASF launched a proxy contest for five seats on Engelhard's classified board along with a hostile tender offer. Engelhard, a New Jersey-based firm that makes pollution control equipment, countered by offering a recapitalization plan that called for a $45 per share cash self-tender for up to 20 percent of its shares. BASF originally offered $37 per share and then raised its bid to $39. On May 30, three days prior to the scheduled meeting, Engelhard announced a merger agreement with BASF and recommended that investors accept the German firm's $5 billion offer. Shareholders subsequently tendered more than 90 percent of the shares.
Massey Energy's Proxy Fight With Third Point: Massey Energy operates coal mines in West Virginia, Kentucky, and Virginia. Third Point nominated two directors, arguing that the board needed a "new voice." Third Point claimed that the company has "massively" underperformed industry benchmarks and had "lavished" compensation on its CEO. Management argued that its strategic plan has contributed to a significant increase in shareholder value in the past five years and that the board had been responsive to shareholder concerns. After a dispute over vote results, the company agreed in July to allow the dissident nominees to join the board and to reimburse some of their legal fees.
InfoUSA's Proxy Fight With Dolphin: Dolphin LP sought the election of three nominees to infoUSA's board. The dissidents faced an uphill challenge because CEO and Chairman Vinod Gupta and his family owned 43.6 percent of the Nebraska-based mailing list company. Dolphin argued that the company has performed poorly since 2001 and has traded at multiples that are below those of its public peers. Management countered that it delivered 4 percent organic revenue growth in the first quarter of 2006 and was implementing a strategic plan to position the company for continued growth. The incumbent directors narrowly survived, winning at least 50.7 percent approval in May. Dolphin reported that investors not affiliated with management supported the dissident slate by a 13 to 1 margin.