There’s a slight spring in your step as you saunter to the door after a grueling, but productive 3.5-hour AGM. For the time being, your reality is a harmonious world in which your company’s board of directors and shareholders are in sync and the mystic rivers of communication are flowing openly. This world is built upon a foundation of trust - trust that shareholders’ give to their board of directors, because they hope that the board is doing what they can to protect their financial interests. Despite a universal standard of trust, every once in a while, a breach may cause a shareholder (or two) to go rogue. Rogue, activist shareholders may attempt to use their influence to bring change for or within the company.
“Shareholders are organizing and mobilizing on new social media platforms like Twitter. This changes the dynamics of shareholder proxy contests to favor small shareholders over management. Disruptive technology may bring about a shareholder revolution, which may not be in all shareholders’ best interests, at least from the perspective of shareholder wealth maximization, and it also has powerful implications for the future of corporate social responsibility.” Seth Oranberg, How Twitter is Disrupting Shareholder Activism
All publicly-traded companies face the risk of a proxy fight with one or more of its current shareholders. In a nutshell, a proxy fight is a situation where two corporate factions (typically the Board/Executive Team vs. an activist shareholder or a group of company shareholders) fight for votes from remaining shareholders in order to effect change in a particular area of governance in the company.
This issue often occurs when a new slate of board members is proposed to replace a group of existing board members by an activist shareholder or group. The new slate of board members are generally individuals who are receptive to the activist shareholder’s views on how to change the company while the existing board members are often resistant to the activist shareholder’s views. Common areas of disagreement that can lead to a proxy fight include: future company strategy, executive compensation, company performance or whether a sale of the company or continuing as a stand-alone company is in the best interest of shareholders.