On October 26, 2016, the SEC proposed amendments to the proxy rules that would require the use of universal proxies in all non-exempt solicitations in contested elections of directors. The focus of the SEC proposal is to require the inclusion of the names of both registrant and dissident nominees on a universal proxy card in order to more closely resemble how shareholders can vote in person to elect directors at shareholder meetings. The SEC also proposed amendments to proxy card and proxy statement disclosure requirements to more clearly specify applicable voting options and standards in all director elections.
Rationale for the Proposal
A shareholder voting in person at a shareholder meeting may select among all of the duly nominated director candidates, including director candidates nominated by shareholders, and vote for any combination of candidates. Shareholders voting by proxy, however, are currently limited to choosing among candidates nominated by the person soliciting the proxy. The SEC is proposing changes that would allow a shareholder voting by proxy to select among director nominees in a contested election in the same way that the choice could be made by personally attending the meeting at which directors are to be elected. The SEC release mentions that in some close elections proxy solicitors and parties to the contest have made arrangements enabling large shareholders to split their votes by providing in-person representatives at the meeting or other means.
Current State of Play
A shareholder that attends a shareholder meeting in person can typically cast a ballot that includes the names of all duly nominated directors. In a contested election process, the registrant’s director nominees and the dissident’s full or short slate are typically presented on two different proxy cards. The bona fide nominee rule, Rule 14a-4(d)(1), prohibits a proxy from including any person who has not consented to be named in the related proxy statement and to serve if elected. For a variety of reasons, registrant and dissident nominees usually do not consent to be named in the other party’s proxy statement, which means that the options for a shareholder voting by proxy differ from those available to a shareholder attending the meeting in person. Submitting two separate proxy cards is no solution because they cannot both be valid under state law as the later filed proxy card controls.
Rule 14a-4(d), the short slate rule, currently mitigates this issue to a limited extent. The rule permits a dissident to indicate on its proxy card that it will use its proxy authority to vote for registrant nominees other than those named on the card. The shareholder has an opportunity to write in names of other registrant nominees for whom it withholds voting authority. However, this rule is available only for contests in which the dissident seeks to elect a minority of the board.
Summary of Proposed Changes
To align the in person and by proxy options for investors in contested elections, the SEC is proposing the following changes:
Mandatory Universal Proxy Cards. The proposal would require the use of universal proxy cards in non-exempt solicitations for contested elections. The proxy card would be required to include the names of all duly nominated candidates for election to the board. Use of a universal proxy card would not be mandatory when a proponent is not nominating its own candidates, such as in a “vote no” campaign or solicitation of votes for a governance proposal. However, the change to the consent required of a bona fide nominee, referred to below, would allow such a proponent to include the names of some or all of the registrant nominees on the proponent’s proxy card.
Dissident Advance Notice to Registrant. The proposal would require dissidents to provide notice of intent to solicit proxies in support of alternate nominees and the names of those nominees to the registrant no later than 60 calendar days prior to the anniversary of the previous year’s annual meeting date.
Registrant Advance Notice to Dissident. The proposal would require registrants to provide dissidents with notice of the names of registrant nominees no later than 50 calendar days prior to the anniversary of the previous year’s annual meeting date.
Minimum Solicitation by Dissidents. The proposal would require dissidents to solicit holders of shares representing at least of a majority of the voting power of shares entitled to vote in the election of directors. This feature attempts to address concerns that the universal proxy card requirement would allow dissidents to “free ride” on the company’s solicitation efforts without expending any of their own resources to solicit proxies for their nominees.
Filing Deadline for Dissidents. The proposed rules would require the dissident to file its definitive proxy statement by the later of 25 calendar days prior to the meeting or five calendar days after the registrant files its definitive proxy statement. The rule is designed to ensure that shareholders who receive a universal proxy card will have access to information about all nominees sufficiently in advance of the meeting. If a dissident fails to comply with the rule, it would not be permitted to continue with its solicitation. Because the registrant may disseminate the universal proxy card before it knows that a dissident is not proceeding with its solicitation, it would be required to disclose how it intends to treat proxy authority granted in favor of dissident nominees in the event the solicitation is abandoned.
Omnibus Consent of Nominees. Rule 14a-4(d)(1) would be amended to provide that consent to being named in any proxy statement relating to a meeting of shareholders would make a director a bona fide nominee, rather than requiring consent to inclusion in a particular proxy statement.
Elimination of Short Slate Rule. The proposal would eliminate the short slate rule in light of the new amendments.
Requirements for Universal Proxy Cards. Among other things, the universal proxy card would be required to indicate, in bold face type whether it is solicited on behalf of the registrant’s board of directors or a third party, and must clearly distinguish between registrant nominees, dissident nominees and, if applicable, proxy access nominees.
In February 2016 at the SEC Speaks PLI Conference, Michele Anderson of the SEC Staff described a review of proxy statements in which the Staff found a variety of problems. These included proxy cards allowing a shareholder to vote “against” instead of “withhold” with a plurality voting standard and proxies describing a “plurality plus resignation” policy as “majority voting.” The proposed rules address these concerns that proxy cards in director elections may not appropriately reflect the voting standards under applicable state law and company bylaws. The proposed rules would mandate the inclusion of an “against” voting option on the form of proxy used in elections where such a vote would be given legal effect. In addition, the proxy statement would be required to expressly include disclosure about the treatment and effect of a “withhold” vote. The proposal also solicits comment about whether the “withhold” option should be replaced with an “abstain” option in the case of a plurality voting standard so that shareholders understand their withhold vote has no impact on the outcome of the election.
The proposal attempts to take a balanced approach with the goal of providing shareholders who vote by proxy the same options as shareholders who vote in person at a meeting in non-exempt contested elections of directors. Companies should evaluate whether they think the proposals would create undue confusion or provide an unfair advantage to dissidents by including their nominees on registrant proxy cards. These concerns should be balanced against features in the proposals that require dissidents to comply with new requirements, including notice, minimum solicitation and proxy deadline requirements. Companies should also consider whether the ability of other proponents (e.g., shareholder proponents not engaged in contesting the election of directors) to include some or all of the registrant’s nominees on their proxy cards creates any similar concerns. Lastly, companies should review their approach to characterizing voting options in proxy statements and proxy cards to determine if it is consistent with the proposed changes.