In a win for activist shareholders, on November 17, 2021, the SEC voted to adopt final rules requiring the use in contested director elections of domestic issuers of "universal proxy cards," or proxy cards naming all director nominees presented for election, including those of the company and the dissident shareholder. 1
This change will give shareholders the ability to vote by proxy for their preferred combination of candidates nominated by the company's board of directors and the dissident shareholder in a contested election (also known as a "proxy contest"), which the SEC believes will put companies and investors on an equal playing field, 2 given how few shareholders actually attend a company's annual meeting in person.
Currently, in contested director elections, shareholders can choose from both slates of nominees only if they attend a company's annual meeting in person. If voting by proxy, shareholders are essentially required to choose an entire slate of candidates from either the company side or an entire slate of candidates from the dissident side. 3 Where a dissident has only nominated candidates composing a minority of the board, the dissident may also present for shareholder election a combination including the dissident's candidates (known as a "short slate") plus a set of company candidates chosen by the dissident. 4
A universal proxy card lists all duly-nominated director candidates from all parties on one card, allowing shareholders to vote through the proxy process in the same manner as they could by voting in person. The universal proxy card rules will apply to all non-exempt solicitations for contested elections, 5 other than those involving registered investment companies and business development companies, and will take effect for shareholder meetings held on or after September 1, 2022.
To further facilitate shareholder voting in director elections, the SEC also amended the proxy rules to mandate that in all director elections, contested and uncontested, proxy cards clearly specify the applicable shareholder voting options and that proxy statements disclose the effect of a shareholder's election to withhold their vote. 6 Most companies already provide this disclosure in a Q&A format as a default, so the rule amendments formalize a long-standing practice. A company must also disclose in its annual proxy statement the deadline for shareholders to give timely notice to the company of dissident nominations for inclusion on a universal proxy card in connection with the next annual meeting. 7
The rule amendments also amend Rule 14a-4 to expand the definition of a "bona fide nominee" to include a person who consents to being named in any proxy statement (whether the dissident or the company's) for the next shareholder meeting for the election of directors. As a result, outside of the context of contested elections, an activist shareholder soliciting for another proposal could always choose to include all or some of the company's nominees on its proxy card. Additionally, in a "vote no" campaign, where a dissident shareholder only asks that shareholders withhold their votes for the company's nominees but does not present its own slate, the dissident could provide shareholders with a proxy card listing only the company nominees it supports.
1 The final rule is available here.
2 See the SEC's press release, available here.
3 The reasons for this come from both state and federal law.
• Because there is no requirement for a universal proxy card, a dissident and a company each send a proxy card to shareholders, with the company's proxy card typically listing only the company's nominees and the dissident's proxy card typically listing only the dissident's nominees. Under state law, a later-dated proxy revokes an earlier-dated one, so only one proxy card can be counted.
• Under the "bona fide nominee" requirement of SEC Rules 14a-4(d)(1) and 14a-4(d)(4), in an election contest other than as described in footnote 4 below, one party cannot include the other party's nominees on its proxy card without the other party's nominees' consent, which is rarely given.
4 SEC Rule 14a-4(d)(4) allows dissidents to use a "short slate" proxy card without the consent of the company's nominees, although shareholders voting via the dissident's proxy card cannot elect company nominees other than those selected by the dissident for inclusion on the card.
5 Communications that constitute "solicitations" under Rule 14a-1(l) are subject to the information and filing requirements of the federal proxy rules. However, Rule 14a-2(b)(1) provides an exemption from the SEC's information and filing requirements for "any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another's behalf, the power to act as a proxy for a security holder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization."
6 Changes to the form of proxy and proxy statement disclosure requirements applicable to all director elections, not only contested elections, require:
• All proxy cards to include an "against" voting option in director elections, when there is a legal effect to a vote against a director nominee;
• That the proxy card provide shareholders with the ability to "abstain" in a director election where a majority voting standard applies; and
• That proxy statement disclosure includes an explanation of the effect of a "withhold" vote in an election of directors.
See amended Rule 14a-4(b).
7 New Rule 14a-5(e)(4).
8 This echoes concerns expressed by SEC Commissioner Hester Peirce in her dissent. Peirce was particularly concerned that the final rules will unduly advantage special interests "by serving as a tool for frivolous, as well as serious, activists." In particular, she thought that the solicitation threshold of 67 percent was too "easy to meet or ignore" and would have preferred a higher threshold focused on shareholder accounts rather than voting power because, in her view, "dissidents will often be able to meet the threshold by soliciting a small number of institutional shareholders, while ignoring small shareholders." In addition, she would have preferred that access be conditioned on a "demonstrated commitment" to the company through a minimum ownership threshold and minimum holding period. Her concern was that any "non-shareholder looking to further any cause" could purchase a share and then leverage this in negotiations with the company, which "will distract managers from important company business" and "could result in changes that do not benefit the company."
9 Given this market practice, the new 60-day requirement in the universal proxy card rules is unlikely to act as a deterrent to dissidents.
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