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How to Spend $5,300 on a Proxy Contest with the Universal Proxy Card
By now we've heard all about the universal proxy card (UPC), and how it makes life easier for activist investors and harder for companies. We set forth the highlights earlier.
Many observers note UPC will lower the cost of proxy contests, and thus encourage more of them. Here, we dig into exactly how that could work.
We don't know if you actually can hit the $5,300 cost the SEC estimates, or if you even want to. Still, a resourceful activist can now run a proxy contest at a much lower cost than before.
We note a critical aspect of the new rule: an activist must now intend to solicit enough shareholders to reach votes of 67% of the outstanding shares. Our earlier explanation suggests that an activist might not need to in fact solicit to that level (not legal advice!). Also, as we show here, an activist can solicit a surprisingly small number of shareholders to satisfy this requirement.
Also, pursuant to longstanding regulatory practice, the SEC estimates the impact of a rule on many affected parties: issuers, dissident shareholders (here called companies and activists), others shareholders, and directors. Below, we look mostly at the cost for activists, and a little for companies.
Finally, estimating the incremental impact of any regulation is at best difficult under any circumstances. Estimating the impact of this unprecedented one is even trickier. We haven't seen any independent analysis of UPC compliance costs, so we rely on the SEC's data and models. Our work below refers to page numbers and footnotes in the final rule.
Proxy contest costs today: $750,000
The SEC presents costs relative to a baseline. For the median proxy contest from 2017-2020, it estimates the activist spent a total of $750,000, while the company spent $1.7 million (Table 1).
Table 1
Based on SEC analysis of EDGAR filings 2017-2020 (p. 88, fn 228), figures in $ millions
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Costs vary considerably. The sample had a high of $60 million, likely for the Trian proxy contest at PG, with Trian spending $25 million of that. That contest and a few others skew the average considerably.
Proxy solicitation accounts for a relatively small share of the total cost. Activists spent $100,000 on solicitation, as companies spent $300,000. Trian's fortunate proxy solicitor at PG collected $2.5 million. Activists and companies spend far more on attorneys, bankers, public relations, consultants, and other advisors.
Within the $100,000 proxy solicitation cost, the SEC estimates the basic cost of solicitation at a paltry $14,000 (p. 110, fn 266). This represents the cost needed to use the notice-and-access method of proxy solicitation, and do so for the minimum number of shareholders required to hit the 67% requirement. The remaining costs entail mailing of full materials, additional contact with shareholders, such as mailed letters, phone calls, and online communication, and completing the solicitation (sending, tracking, collecting, and tabulating proxy cards).
Notice-and-access means an activist can notify shareholders of the availability of proxy materials online. The SEC allows an activist to do this instead of producing and mailing proxy materials to shareholders - the formal proxy statement, additional materials like presentations and letters, and a proxy card. This permits an activist to economize on proxy solicitation, and confine shareholder communication to online methods. An activist can notify shareholders using a simple postcard.
Added cost under UPC: $5,400
The SEC estimates the new UPC rules will increase an activist's proxy contest cost by an average of $5,400 (p. 107, fn 262). This pertains to the added cost of meeting the new requirement to solicit 67% of the votes.
In almost all proxy contests activist investors already solicit shareholders representing at least 67% of the votes (p. 107, fn 263). In those situations, there is no added cost.
In the small number of situations where activists do not already solicit to the 67% level, the SEC assumes an activist solicits only the additional needed shareholders to get to 67%, and do so through notice-and-access. The SEC reasons an activist would not otherwise seek those votes. Thus, an activist will merely comply with the new 67% requirement at the lowest possible cost. The minimal cost of that method, combined with the marginal additional accounts needed to hit the 67% level, means the total additional cost averages $5,400.
Nominal solicitation under UPC: $5,300-9,800
The rule contemplates a novel proxy solicitation method, a "nominal" solicitation. In a nominal solicitation, an activist expends only the absolute minimum effort and cost needed to nominate one or more director candidates and solicit proxies. The rule describes (p.88) a nominal solicitation as one in which an activist would incur
... little more than the basic required costs to pursue a contest. In particular, [an activist would] bear the cost of drafting a proxy statement and undergoing the staff review and comment process for that filing. However, [an activist] ... would not expend resources on substantial solicitation, such as to disseminate its proxy materials through full set delivery to a substantial percentage of shareholders versus only to select shareholders, to hire the services of a proxy solicitor, or to engage in other broad outreach efforts, as would be the case in a typical proxy contest.
The SEC estimates the cost of a nominal solicitation at around $5,000-10,000, depending on the size of company (Table 2).
Table 2
Based on SEC analysis of data from a proxy services provider (p. 112, fn 273)
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A nominal solicitation relies critically on notice-and-access. The assumed cost of the notice uses the standard fees for sending proxy materials set forth in NYSE Rule 451. The SEC applies these fees to the estimated number of accounts needed to hit the 67% level (p. 107, fn 263).
Interestingly, some of the cost depends both a minimum allowed cost and on the number of nominees (brokers, custodians) that an activist must work through to solicit accounts. This represents a form of fixed cost that is spread among a larger number of accounts. In this way the per-account cost decreases as the number of accounts increases.
The SEC also estimates the cost to a company of an activist's nominal solicitation at $65,000 (p. 115, fn 276). It posits that a nominal solicitation requires relatively little effort from the company, mainly the ink and bytes needed to add an activist's nominees to the company proxy card. Lacking any other data, the SEC uses the minimum of the range of total costs reported by companies in proxy contests (Table 1). Of course, companies can and usually will spend much more, especially since they spend company (and thus investor) funds, not the directors' and executives' personal funds.
Of course, an activist also might want to spend more than the minimal cost. Depending on how, how much, and how well an activist wishes to reach other shareholders, it might spend more on solicitation and public relations.
Still, with some ingenuity an activist can spend relatively little:
- prepare and file materials with the SEC with only basic legal input
- use notice-and-access, and rely on EDGAR for hosting proxy materials
- rely on low-cost or free social media to promote nominees.
As we set forth earlier, an activist might even consider using only the company's proxy card, and not even tracking and collecting its own proxy card (also not legal advice!). This way, it won't need to hire a proxy solicitor, either.
This analysis suggests how an activist might start to strategize for its next proxy contest. How about starting with the baseline cost, and deciding how much more to spend depending on needed visibility?
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For further information, or to discuss a specific turnaround situation, please contact:
Michael R. Levin
847.830.1479
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