July 13, 2017 Bruce Goldfarb in Agenda on Retail Shareholders in a Proxy Fight

Calling ‘Mom and Pop’ in a Proxy Fight

Article published on June 12, 2017
By Lindsay Frost

A heated battle at Arconic last month ended in a successful settlement for activist investment firm Elliott Management, partially due to its unique approach to winning over retail voters, who make up about 30% of outstanding stock: sending them individual video players with pre-loaded messages about the changes Elliott said needed to be made. Dissident director nominees from a shareholder group at Senomyx also took time during a proxy contest last month to be available via phone to answer questions and argue their case and qualifications to retail voters.

Meanwhile, retail voters at DuPont ultimately led the company to victory during a close and heated proxy contest with Trian Partners in 2015 — the first notable instance where retail investors decided the outcome of a proxy fight, sources say.

Ultimately, retail investors are more frequently putting their mouths where their money is, and activist investors and incumbent directors alike are reaching out to these investors to sway their vote in proxy campaigns. Boards involved in a proxy contest should be aware of this activist tactic and consider whether phone calls, videos and other media messaging to these investors are worth the cost, particularly during close contests at companies with a large retail base.

“In recent fights, we are seeing there are larger companies who have a significant ownership held by individual investors, hence these investors have become important to swaying the outcome of the campaign,” says Bruce Goldfarb, president and CEO at proxy solicitor Okapi Partners. “With that in mind, investors and companies are reaching out to their retail shareholders using tried-and-true methods like mailing and phone calls, but also bringing in modern technology to get the attention of investors who are frequently apathetic, even in the face of a contest.”

Making the Case to the Retail Investor

Although institutional investors hold the majority of shares in the U.S., about 58% according to Broadridge’s 2017 Proxy Pulse report, retail investors can make up to 30% or 40% of the base of larger companies. According to the report, retail ownership overall has increased by 3% from late 2015, to 42%. The percentage of retail investors who voted in late 2016 annual meetings was 28%, roughly in line with figures from the first half of last year.

“The DuPont fight was a real wake-up call for activists that the retail vote really can make the difference in the end,” says Doug Chia, executive director of the Conference Board’s Governance Center. “So, if an activist or the company thinks it’s going to be a close one, they will be looking at the retail vote and spending the money for them.”

It’s important that companies study their shareholder base when considering whether to reach out during an activist campaign. Retail voters often have a low turnout rate and may not make a big difference in a proxy contest, says Kai Liekefett, head of law firm Vinson & Elkins’s shareholder activism response team. But close votes have been carried by them in the past.

“[Proxy solicitors] are reaching out to retail investors on situations where the ownership by individuals may not be as large, but they can have impactful decisions and a fulcrum-tilting way of changing the outcome in a close vote,” Goldfarb says.

Retail investors tend to side with management on most issues they vote on, sources say, which gives companies a leg up. Steve Balet, managing director and activism expert in the strategic communications practice at FTI Consulting, says companies have always reached out to their retail base far more than activists have, and they have the funds available to continually contact them with mailings. However, he says companies can’t wait until the last minute to determine that retail votes are needed in a proxy contest.

“There are certain situations when the company decides to settle out with an activist [where] it might have been a close vote, so you need to commit the retail votes earlier,” Balet says.

Also, Goldfarb says, boards need to make sure the message is carefully crafted when contacting a retail investor.

“A company should understand that it is on alert when reaching out to individuals,” Goldfarb says. “[Companies] should not only go on the defensive but also on the offensive with the appropriate message. You should also demonstrate your affinity for the holders before a proxy fight so you have their support ahead of time.”

However, retail investors are generally accepting of activism. According to a 2015 Brunswick Group survey of 801 U.S. retail investors, 74% say activism adds value for companies. They also want to hear from both companies (88%) and activists (84%) during a proxy campaign. From 2014 to 2015, 44% of respondents took action as a result of an activist investor.

Liekefett says that often when retail investors do turn out to vote in a proxy contest, they are driven by anger about company performance, which motivates them to side with an activist. For example, Immunomedics lost control of its board after a proxy fight earlier this year due to overwhelming support from biotech investment fund venBio’s nominees. Retail investors reportedly took to Immunomedic’s online message board to complain about the loss of shareholder value driven by its CEO and drum up support for venBio’s nominees.

“Retail investors are organizing themselves, which can matter in a select few campaigns,” Liekefett says. “Retail investors can have a very anti-establishment and anti-board mind-set when they turn out to vote.”

Messaging Mediums

Although traditional mailing of proxies and letters, as well as phone calls from companies and activists, tends to be the most common way to solicit retail votes, advancements in technology have led to unique ways of proxy soliciting, sources say.

“There are more avenues to reach out than there used to be,” Balet says. “Activists were the early adopters of video and the use of digital and social media, but companies are catching up. Because of [the activists’] greater sophistication in the digital world, they are much better at directly targeting those shareholders.”

Sources compare phone calls and mail from proxy solicitors to telemarketing and junk mail that tends to be ignored and thrown out. So, activists and sometimes companies are more heavily relying on other means of communication, including online advertising and video presentations through websites and social media such as LinkedIn, YouTube and Facebook.

For example, the Conference Board’s Chia says that a Google search on a company involved in a proxy contest yielded a banner ad from an activist about their campaign.

“It’s difficult to measure the effectiveness of any particular methodology relative to another, but we’ve seen an increased response by using a combination of all of these things, certainly in recent campaigns,” Goldfarb says.

Liekefett says in the Elliott/Arconic case, experts in the proxy fight field are currently weighing the impact of the video player tactic. He says for investors with a short attention span who might just throw away an envelope from a proxy solicitor, a three-minute video “might do the trick.”

Balet adds that both sides of proxy fights are using videos more frequently to put a face to the argument. “In these times, a lot of activists and CEOs are recognizable to the retail shareholder base where that wasn’t the case 10 to 15 years ago,” he says.

These tactics also tend to be more expensive, but when activists are spending the money, the company should also consider spending it, Chia says.

“If you know an activist is going that far, it’s natural you will do the same because you might be kicking yourselves after if you don’t,” he says. “Companies should not be trying to manage costs in an activist campaign — hire every consultant that might help and use every tactic, as there’s no real budget for fending off an activist.”

The SEC’s proposed universal proxy ballot may also make it easier for retail investors to vote for director nominees, allowing them to see them all on one proxy card. However, sources say it has a slim chance of becoming a rule under the new commission.

Ultimately, boards and management should consider every vote and every medium of communication during heated proxy battles, experts say.

“Boards need to be receptive to looking at all avenues to reach out to investors, even including some level of communication by board members that they may not have done in the past,” Goldfarb says. “It’s using a set of skills in a different way for an important outcome.”

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