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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
In proxy contests, both registrants and dissidents incur direct costs of solicitation.225 These costs may include, for example, fees paid to proxy solicitors, expenditures for attorneys and public relations advisors, and printing and mailing costs. We understand that for registrants, the costs
of solicitation in proxy contests generally exceed the solicitation costs associated with a shareholder meeting without a contested election. Both dissidents and registrants are required to provide estimates of the costs of solicitation in their proxy statements.226
As shown in Table 3 below, based on a
review of proxy contests initiated in years 20172020, the median reported estimated total costs were approximately $1,650,000 for registrants and approximately $750,000 for dissidents.227

TABLE 3REPORTED ESTIMATES OF SOLICITATION EXPENSES IN ELECTION CONTESTS INITIATED IN 20172020 228
Mean
lotter on DSK11XQN23PROD with RULES2

Estimated Total Costs:
Registrant
Dissident
Estimated Fees Paid to Proxy Solicitor:
Registrant
Dissident

Median
Minimum
Maximum
$3,891,886
1,812,938

$1,650,000
750,000

$65,000
20,000

$35,000,000
25,000,000

540,486
278,614

300,000
125,000

10,000
12,500

3,500,000
2,500,000

Beyond these estimated solicitation expenses, proxy contests may be associated with other indirect costs, such as the cost of management or dissident time spent in the process of conducting the contest and expenses associated with any discussions held between management and the dissidents or other participants who could influence the outcome e.g., large investors and proxy advisor firms. We do not have data on these indirect costs.
One study that considers the cost of earlier as well as later stages of engagement between management and activist hedge fund dissidents, which eventually culminate in a proxy contest, estimates that a campaign ending in a proxy contest has a total direct and indirect average cost to the dissident of approximately $10 million over the full period of engagement.229
In addition to the typical proxy contests 230 discussed above, on rare occasions, there have also been nominal contests, in which the dissidents incur little more than the basic required costs to pursue a contest.
In particular, a dissident engaging in a nominal proxy contest would have to bear the cost of drafting a proxy
statement and undergoing the staff review and comment process for that filing. However, a dissident in a nominal contest 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. Based on staff experience in administering the proxy rules, nominal contests are very rare, and the staff is unaware of any nominal contest that has resulted in the dissident gaining seats for its nominees. We do not have data that is well-suited for empirically identifying nominal contests, in part because a contest is sometimes settled or withdrawn before the dissident has filed its definitive proxy statement and no estimates are included in the preliminary proxy statement.
A proxy contest may result in several possible outcomes. Our staffs review of 101 proxy contests initiated in 2017

2020 found that approximately 53% 54
cases did not make it to a vote. In these cases, registrants may have settled by agreeing to nominate or appoint some number of the dissidents candidates to the board of directors or by making other concessions, the dissident may have chosen to withdraw in the absence of any concessions, or other events may have precluded a vote.231 Among the approximately 47% 47 cases of proxy contests initiated in 20172020 that proceeded to a vote, dissidents were at least partially successful i.e., achieved some board representation in about 38% 18 cases of these contests.232 In six voted contests where dissidents achieved board representation, only some of the nominees on the dissidents slate were elected to the board, which represents a split-ticket outcome in around 13% of the contests that went to a vote. In 17 of the voted contests where dissidents achieved board representation, the end result was a mixed board with directors elected from both slates, whereas the dissidents nominees were elected to fill all positions of the board in one contest.
Between settlements and voted contests, dissidents achieved at least some board
225 In some cases, dissidents may seek reimbursement of their expenses from registrants.
Such potential reimbursement is governed by state law and is more likely in the case of a successful proxy contest. The proxy rules require dissidents to disclose whether reimbursement will be sought from the registrant, and, if so, whether the question of such reimbursement will be submitted to a vote of shareholders. See 17 CFR 240.14a101, Item 4b5.
226 Registrants may, but do not have to, exclude from the total estimated solicitation costs the amount normally expended for a solicitation for an election of directors in the absence of a contest, and costs represented by salaries and wages of regular employees and officers, provided a statement to that effect is included in the proxy statement. It is our understanding that most registrants exclude such costs from their estimated total costs.

227 This represents a substantial increase in median and average reported solicitation expenses for both registrants and dissidents compared to earlier years, as reported in the Proposing Release see Section IV.B.2.b of the Proposing Release for data on estimated solicitation expenses in earlier years.
228 Based on data from Factsets SharkRepellent database and staff analysis of EDGAR filings in calendar years 20172020.
229 See Nickolay Gantchev, The Costs of Shareholder Activism: Evidence from a Sequential Decision Model, 107 J. Fin. Econ. 610, 624 2013.
230 For ease of reference, we use typical proxy contests to refer to contested elections of directors other than the nominal contests described below.
231 This percentage of director election contests not proceeding to a vote is higher than the 33% that we found in the Proposing Release for a sample of 72 contests initiated in 2014 and 2015. However, it
is in line with what has been reported in previous research for contests prior to 2014. See, e.g., Vyacheslav Fos, The Disciplinary Effects of Proxy Contests, 63 Manag. Sci. 655 2017 Fos study finding that, for proxy contests including contested elections as well as a much smaller number of issue contests from 1994 to 2012, about 53% did not make it to a vote, where 25% were settled, 15%
were withdrawn, 6% ended with a delisting or a takeover, and 7% did not make it to a vote for other reasons.
232 The estimated percentage of voted director election contests that lead to dissident board representation is somewhat less than what has been found for contest samples from earlier years, where dissidents won board representation in about half of the cases that went to a vote at the annual meeting. See Section IV.B.2.c of the Proposing Release.

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