In Practice Proxy Fights

In the section on annual meetings, we pointed out that many investors who are unable to come to annual meetings also fail to return their proxies, thus implicitly giving incumbent managers their votes. In a proxy fight, activist investors who want to challenge incumbent managers approach individual stockholders in the company and solicit their proxies, which they then can use in votes against the management slate.

In one very public and expensive proxy fight in 2002, David Hewlett, who was sitting on the board of Hewlett Packard (HP) at the time, tried to stop HP from buying Compaq by soliciting proxies from HP stockholders. After eight months of acrimony, HP finally won the fight with the bare minimum 51% of the votes. How did Hewlett come so close to stopping the deal? One advantage he had was that the Hewlett and Packard families owned a combined 18% of the total number of shares outstanding. The other was that Hewlett's position on the board and his access to internal information gave him a great deal of credibility when it came to fighting for the votes of institutional investors. The fact that he failed, even with these advantages, shows how difficult it is to win at a proxy fight. Even a failed proxy fight, though, often has the salutary effect of awakening incumbent managers to the need to at least consider what shareholders want.

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