• February 1, 2023

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The Elon Musk-Twitter
TWTR
saga has had so many twists and turns that what happens next is anybody’s guess.

But let’s imagine, for the sake of this article, that if the court proceedings don’t go his way, Musk decides to launch an explosive proxy fight to replace some Twitter board members with a director slate more to his liking. I’m taking some artistic liberty here, but it’s worth considering even though most investors with good advisors would never pursue it. (That said, Musk did launch an unusual takeover bid with apparently little-to-no due diligence and now appears to want out.)

Given the heated public exchanges to-date from both sides, such a proxy campaign would almost certainly be a bruising, lengthy, and highly-personal battle.

A major change in the SEC’s proxy rules, coming this Fall, could make such battles even more personal – and harder to win for both public companies and activists. The new rules require public companies and activists to use a universal proxy card when soliciting shareholders in any director election contest after August 31, 2022. Such a proxy card must include both the company’s and the activist’s nominees.

This seemingly technical change in the proxy plumbing is destined to alter forever the traditional dynamic between companies and activists. Previously, a company’s board of directors and its activist shareholders would issue separate cards (in different colors) with competing slates of director candidates. Each side would then send communications to shareholders urging them to vote, for example, the white or blue proxy card. This process generally impeded investors from selecting candidates from both sides. The universal proxy, by presenting all director nominees on one card, will allow shareholders to “mix and match” candidates from the competing slates.

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Putting More “Fight” into Proxy Fights

Some proxy voting professionals believe that the universal ballot will put companies and boards at a disadvantage, making it easier for activists to solicit votes and perhaps win one or two board seats. The reality is more complex.

It is a near-certainty that future proxy campaigns are going to focus more on the personal attributes of the individual candidates. Each side will need to make a strong case for the qualifications of each person nominated for a board seat. This process may lead to each side publicly “dissing” the capabilities, experience, and perhaps even the integrity of the other side’s nominees.

In addition to a barrage of direct shareholder letters, press releases, and social media posts, I predict that both sides will need to present their candidates in front of institutional shareholders and influential proxy advisers such as ISS and Glass Lewis. To prepare for these sessions, candidates need to be coached on their messages, talking points, delivery and demeanor – giving the proxy campaign more of a flavor of a political campaign. (Think Robert Redford in The Candidate.)

Considerable good may come of this change. The heightened scrutiny of nominees may produce more highly qualified candidates on both the company and activist sides. The threat of a future “down and dirty” activist campaign may lead companies to proactively reconstitute their boards, adding directors whose resumes are more relevant to changing economic and business conditions, and hopefully creating a diverse and knowledgeable board. Public companies also are likely to amp up investor relations, increasing the visibility and engagement of the board, in an effort to solidify relationships with shareholders well in advance of any proxy contest.

Winning a proxy fight under the new universal proxy rules is hardly a “slam dunk” for either activists or companies. What we do know is that the process will require more strategic, intensive and frequent communications from both sides and their nominees. Truly the chum will be in the water starting in September and the sharks are circling. Remember the tagline from the 1987 movie Jaws: The Revenge, “This Time It’s Personal.”

Side note: My friend, Michael Levin of The Activist Investor runs a fantastic website that covers all the details worth knowing about universal proxy card issues. Here it is: www.theactivistinvestor.com.

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