Document Type

Article

Publication Date

Winter 2026

Abstract

The era of the hostile takeover has clearly given way to the era of the proxy contest led by an activist hedge fund. Today, a record number of such contests are underway, and they have changed the board composition at many U.S. companies and caused a record number of CEO resignations. But there is a mystery here: when activist funds negotiate for changes with target managements, they often obtain meaningful changes in the board of directors and corporate policies. However, when activists attempt a proxy contest, they have generally been unsuccessful, winning only a small number of seats in a clear minority of the cases.

What explains this disparity? The primary explanation has to be the strong skepticism of such proxy contests by the major index funds and asset managers. Although the Big Three do not coordinate their voting policies, they seldom support such challenges (Vanguard estimates that it has voted for an activist nominee in only about 20 percent of the cases between 2022 and 2024, and, even in these cases, it may vote for only one of several activist nominees.) Given that institutional investors now hold 73.7 percent of the stock in the U.S. public corporations and that indexed investors account for roughly 33.5 percent of the ownership of U.S. corporations, their reluctance to support activist campaigns appears to be the major barrier to the success of such campaigns. This article examines institutional motivations and concludes that activist funds will likely continue to prefer private negotiations with target managements to public proxy contests. In comparison to the earlier era of hostile takeovers, which were largely halted by judicial acceptance of the poison pill, the resistance of indexed investors represents an analogous, but substantially weaker, limitation on the ability of the proxy contest to change the character and attitudes of public corporations. Activists can win proxy contests, but probably only if one or more of the Big Three can be convinced to support the activist insurgent.

What is the impact of the tacit resistance of the index funds? A little noticed impact may have special importance. A significant proportion of recent activist challenges have been brought by a strong proponent of shareholder primacy (such as Elliott Investment Management, which is by far the largest of the activist funds and has brought the most such challenges). Much like a weaker version of the poison pill, index fund resistance to activist proxy solicitations protects and shelters non-shareholder constituencies (e.g., employees, creditors, and local communities) from the prospect of adverse actions by activists seeking to maximize shareholder value. This may not be the intent, but it is the effect.

Recently, the Trump Administration has begun to consider measures to curb the influence of proxy advisers and the major index-fund managers, and it may soon adopt Executive Orders banning certain voting recommendations by proxy advisors and possibly restricting shareholder voting by the major index-fund managers. Against this backdrop, this article examines the behavior of the major index-fund managers and finds them to be the most significant constraining force on activist hedge funds. But it does not find them subject to serious conflicts of interest or motivated to act collusively.

Disciplines

Banking and Finance Law | Business Organizations Law | Law | Securities Law

Comments

©2026 by the American Bar Association. Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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