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What's a "Proxy Battle"?Just what was Microsoft threatening to do to Yahoo?

By Alex Joseph
Posted Wednesday, April 9, 2008, at 7:05 PM ET
Carl Icahn. Click image to expand.

Microsoft threatened last weekend to launch a hostile bid for Yahoo if its current board won't reconsider the software giant's Jan. 31 offer of $44.6 billion in cash and stock. The threatened move, known as a "proxy battle," is similar to one that investor Carl Icahn just dropped against Motorola Inc. in exchange for the company's support of two of his nominees for the board of directors. What's a proxy battle?

An attempt to win over so many of a company's shareholders that you can oust some or all of its board of directors. The most straightforward way for Microsoft to complete a hostile takeover would be to buy a majority voting share of Yahoo's stock, thus giving Microsoft executives the ability to elect a new board of directors. But Yahoo has a so-called "poison-pill provision" that explicitly prevents that from happening—investors are allowed to buy more shares if any outside company snaps up more than 15 percent of the stock. That means Microsoft can wrest control of the company only by lobbying other shareholders to vote out the current board in favor of one more friendly to the takeover. Since not all of these shareholders are expected to show up for the big board meeting, they cast their votes by proxy, and the arduous process of winning the proxies over is known as a "proxy battle."

Shareholders elect a board of directors to govern a company and maximize its value. In most cases, these elections require a simple majority of investors, although some companies require a supermajority on contentious votes such as those to replace board members. In many cases, however, a vote from a large minority of shareholders is sufficient to send a message to board members. That's what happened in 2004 when Michael Eisner was ousted as Disney's chairman of the board after receiving a 45 percent vote of no confidence.

Once a company decides to launch a proxy battle, it usually hires "proxy solicitors" to aid in lobbying shareholders. These firms tend to focus their attention on institutional shareholders who hold larger percentages of stock and whose votes have more clout in the final tally. These heavyweights often include the directors of large mutual funds, since anyone who buys into such funds turns over his or her voting rights to the fund manager.

In practice, you have to complete a fair amount of paperwork before you can start to pursue shareholder votes. The Securities Exchange Act of 1934 requires the solicitor to submit all lobbying materials to the government in advance of sending them out. The solicitor must also reveal which organization is responsible for the materials and exactly which votes they are attempting to influence.

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Alex Joseph is a Slate intern.
Photograph of Carl Icahn by Michael Nagle/Getty Images.
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