E Proxy Proposal and Proxy Contests

Bill Sjostrom —  14 April 2006

As I’ve blogged before (see here), the SEC has recently proposed amendments to the proxy rules to allow issuers and others to furnish proxy materials to shareholders by posting them on the Web and notifying shareholders of their availability (click here for the release). One of the SEC’s justifications for the changes is that “they may have the effect of reducing the cost of engaging in a proxy contest.� Specifically, it won’t cost the insurgent as much in printing and postage expenses. The thinking goes that reducing the cost of proxy contests will increase their frequency, and this is a good thing because proxy contests provide a check on management.

That’s all well and good, but looking at the data from Red Zone’s recent successful proxy contest at Six Flags makes the assertion that the proposed rules may result in more proxy contests laughable. As noted in this post, Red Zone spent $11.6 million on the contest. Of this amount, $36,000 was for the cost of preparing, printing and mailing proxy materials and subsequent communications to stockholders. Obviously, potential savings of a few bucks on a proxy contest expense line item that constitutes less than one half of one percent of the total cost (assuming Red Zone’s expense amounts are typical) will not have any bearing on whether or not someone chooses to lauch a proxy fight. Further, given an insurgent will be battling to overcome rational shareholder apathy, it may not even make strategic sense to go the e proxy route.

To be clear, I do support the E proxy proposal. But, at best, the potential cost savings to an insurgent should have appeared in the release as a footnote, if at all.