In 2023, companies targeted with a proxy campaign estimated a spend far in excess of that of the activist pursuing board changes.

But the change in dynamics introduced by the universal proxy card (UPC) system delivered a far higher proportion of activist victories, raising questions over the effectiveness of expensive defense strategies, even if risk aversion is likely to ensure that the trend continues.

“There’s just no doubt that companies will often spend more on a proxy contest for reasons of brand management or for a desire to control the message,” Bruce Goldfarb, CEO of proxy solicitation and investor response firm, Okapi Partners, told Diligent Market Intelligence (DMI).

Dissident wins
As Illumina fought to protect its board from Carl Icahn, the U.S. gene sequencing group anticipated a proxy cost of $31.5 million – 45 times greater than Icahn’s estimated spend of $700,000. However, the veteran activist was successful in securing one out of the three seats he sought, electing Andrew Teno and ousting Chairman John Thompson. The activist had a 1.4% stake in the company when the campaign kicked off in mid-March.

At $185,000, the cost of Icahn’s unsuccessful animal welfare campaign at McDonald’s last year was also only a fraction of the $6 million spent by the fast-food giant in securing the high-profile defeat. “Carl Icahn ran truly a single-issue campaign focused on the plight of the gestational pig and this battle was relatively inexpensive. He didn’t do very well, but he achieved a decent amount of attention. Part of that notice is because he is Carl Icahn, an iconic Wall Street character,” observed Goldfarb.

Such disparities can soften resistance to an activist advance, especially when compromise appears the less costly option. Legion Partners’ rematch at Primo Water saw the California-based firm eventually settle for two board seats out of the four originally targeted, ending a potential proxy fight that had been estimated by Chris Kiper’s firm to cost $1.5 million, almost three times less than the amount forecast by the Canadian water company.

Disparities in the cost structure
One disparity as a result of the UPC system concerns the company requirement to distribute proxy material to all shareholders, while the activist is required to reach out to 67% of the shareholder base.

“Depending on the composition of the shareholder base, 67% of the shares of a company may be held in the hands of 50, or fewer investors, or 100, or fewer investors, which makes the cost substantially less than thousands of investors,” observed Goldfarb.

Companies, on the other hand, typically have to mail all of their investors. In one retail-heavy proxy fight, New-York based biopharma MindMed estimated a spend of $2.7 million to defend against Freeman Capital Management’s bid for four board seats and emerged victorious securing support for all six of management’s nominees. Scott Freeman’s firm had estimated a spend of $300,000, nine times smaller than that of the target.

Also, with the dissident’s nominees now listed on the company card, the activist has a new voting instrument to alert shareholders to the choice of candidates at no extra cost. “In the fights I was involved in, I was surprised at how many individuals took advantage of that and voted for dissidents on the company card. A pleasant surprise. In time, some companies will have to reconsider what was the traditional spend advantage into a strategy that factors that in,” commented John Ferguson, co-founder of Saratoga Proxy Consulting.

The size of the team of advisors deployed by a company is also cited by industry sources as a key factor impacting the cost structure that companies incur relative to activists. While management tends to hire additional advisory lawyers, an activist deploys a smaller, “more-nimble team” that can often arrive at decisions a lot quicker, as Ferguson explains. “The company wants to win despite the cost. They’ll have additional advisors that the dissident often doesn’t have, usually retaining a defense bank, governance firm, PR firm, proxy firm and sometimes even more than one law firm.”

While the desire to control the messaging around a campaign and protect the company brand has always had a significant influence on cost, regulatory changes could have one silver lining by removing the need to one-up the other side and focus on fewer, more convincing solicitations.

“Prior to UPC, there was often a desire to have investors receive the last card and possibly the first card from the company. In a U.S.-styled campaign, the last signed and dated card was often considered the one that counted,” explained Goldfarb.