The Securities and Exchange Commission ("SEC") recently proposed amendments to the federal proxy rules that would impose mandatory use of a universal proxy card in election contests.1 The proposed amendments would require each proxy card to include the names of all nominees named in any proxy statement. Thus, the registrant proxy card would include its own nominees and the nominees of any dissident shareholder, and vice versa. The proposed amendments are intended to enable shareholders who vote by proxy to be able to express their preference nominee by nominee, among all nominees, to replicate the voting rights a shareholder would have if the shareholder voted in person by ballot at a shareholder meeting.
The proposed amendments would also add new procedural and disclosure requirements to effect the use of a universal proxy. Furthermore, they would require additional disclosure and clarity on proxy cards with respect to voting options.
The Voting by Proxy Process
Regulating the proxy process remains a prime concern for the SEC, since today most shareholders of companies registered under the Exchange Act vote not in person but rather through the proxy system.2 Over the years, various proposals, reports, and comments have devoted serious time and attention to shareholders' ability to exercise their rights through the proxy process.3 Despite past efforts to make the proxy process align with inperson voting at shareholder meetings, the current proxy rules differ in important ways from in-person voting. For example, shareholders who vote at a shareholder's meeting have the option of selecting from among all duly nominated candidates. In contrast, shareholders who vote by proxy are provided the opportunity to vote for the slate of candidates listed on the proxy card provided to them by the party soliciting their vote.
Rule 14a-4(d)(1), otherwise known as the "bona fide nominee rule," imposes certain restrictions on the nominees who can be named on a proxy card.4 The SEC defines a bona fide nominee as a nominee who has "consented to being named in the proxy statement and to serve if elected."5 In an election contest, a party is only permitted to include on its proxy card the nominees named in its own proxy statement. In order to include the other party's nominees, the other party's nominees would have to consent to be named.6 The SEC notes that this rarely, if ever, happens.7 Since state law provides that the most recently delivered valid proxy card controls, shareholders must attend meetings in person and vote by ballot if they desire to vote for a mix of both registrant and dissident nominees.8
The Short Slate Rule
In 1992, the SEC adopted Rule 14a-4(d)(4), referred to as the "short slate rule." Since only one proxy card can control a shareholder vote, the rule was enacted to allow dissidents who put forth a partial slate of nominees to also solicit proxy authority to elect some of the registrant nominees in order to elect a complete slate using the dissident proxy card.9
While the short slate rule does enable shareholders to vote for all seats up for election in a contested election, the rule is limited in its scope. The rule applies only where a dissident is seeking election of a minority of the board. Furthermore, the dissident--not the shareholder--is authorized to select by proxy the specific registrant nominees to vote for under the short slate rule.
II. Permitted Use of Universal Proxy Card
In an attempt to make the proxy process align more closely with in-person voting, the SEC has proposed revisions to Rules 14a-4(d)(1) and 14a-4(d)(4) to permit the use of a universal proxy card. Under the amended Rule 14a-4(d)(1), a bona fide nominee would be defined as "a person who has consented to being named in a proxy statement relating to the registrant's next meeting of shareholders at which directors are to be elected" [emphasis added].10 In other words, the nominee must consent to being named in any proxy statement, rather than, as the rule currently provides, only the proxy statement of the soliciting party. This change would permit, but not require, a registrant or dissident to include the other nominees on its proxy card if it so desired, without specific consent from the other nominees.
In the proposing release, the SEC discusses several potential issues that have been raised regarding implementing this voluntary use of a universal proxy card. One major concern raised by registrants over use of a universal proxy card is that by naming the dissident's nominees on the registrant's proxy card, voters might be misled into thinking that the registrant supports these nominees.11 The SEC noted, therefore, that the voluntary use of a universal proxy card is unlikely to benefit shareholders in most cases, because the registrant and dissident will unlikely cede to the other any advantage a universal proxy card might be perceived to have. In an attempt to remedy the concerns that have been raised over voluntary use of a universal proxy card and to ensure shareholders can benefit from a universal proxy card, the SEC is proposing a mandatory system for universal proxies in election contests.12
III. Proposed Rule 14a-19 Mandatory Universal Proxy Card
The crux of the SEC's proposal is the adoption of proposed Rule 14a-19. Rule 14a-19 would provide that a soliciting party could not solicit proxies in favor of director nominees other than the registrant's nominees unless the party meets the rule's requirements. Specifically, the dissident must provide to the registrant, no later than 60 calendar days prior to the anniversary of the previous year's meeting, the names of all nominees for whom the dissident intends to solicit proxies. In turn, no later than 50 calendar days prior to the anniversary of the previous year's meeting, the registrant must provide the dissident with a list of names of all nominees for whom the registrant intends to solicit proxies. The proxy cards of the registrant and the dissident must list all of the nominees: the registrant must list all dissident nominees on its proxy card, and the dissident must list all registrant nominees in its proxy card. This would ensure that a shareholder voting by proxy can elect the nominees it desires among both slates, up to the maximum number of director seats being filled in that election, just as it would be able to do if the shareholder voted in person.
In order for a dissident to solicit proxies under proposed Rule 14a-19, the dissident shareholder must certify that it intends to solicit proxies from at least a majority of the shareholders entitled to vote. The SEC explained that "without a minimum solicitation requirement, mandatory universal proxy could enable dissidents to capitalize on the registrant's solicitation efforts and relieve dissidents of the time and expense necessary to solicit sufficient support for its nominees to win a seat on the board of directors." 13
Furthermore, proposed Rule 14a-19 would require the dissident shareholder to file its proxy statement 25 days before the shareholder meeting or five days after the registrant files its proxy statement, whichever is later. The SEC has proposed this requirement to provide shareholders with sufficient time to access information about all nominees.
In addition to the procedural requirements discussed above, proposed Rule 14a-19 specifies certain technical requirements that soliciting parties must follow. For example, in order to avoid shareholder confusion, under the proposed Rule proxy cards must clearly identify the registrant nominees and the dissident nominees; they must list all of the nominees on the card in the same font type, style, and size; and they must list each group of nominees in alphabetical order by last name.14
IV. Short Slate Rule Eliminated
The proposing release would eliminate the short slate rule. Because a mandatory universal proxy card would be required under proposed Rule 14a-19, a dissident proposing a minority slate would no longer need proxy authority to vote for any of the registrant nominees to fill the other open seats. Shareholders would be able to do this directly on the face of the universal proxy card.
V. Other Voting Options Amendments
The SEC also proposed amendments to clarify voting options that would apply to all director elections. The overall purpose of these amendments is to enable shareholders to more clearly understand the consequences that "withhold" votes have on an election's outcome.15 These proposals include:
- amending Rule 14a-4(b) (1) to require an "against" voting option rather than a "withhold authority to vote" option on the proxy card for director elections where there is a legal effect to votes cast against a director nominee and (2) to allow shareholders to "abstain" in a director election governed by a majority voting standard if such shareholders are neutral toward a director nominee; and
- amending Item 21(b) of Schedule 14A to mandate the disclosure of a "withhold" vote's effects.