On October 26, 2016, the Securities and Exchange Commission (SEC) proposed amendments (1) to the proxy rules that would require the use of universal proxy cards that include the names of all board of director nominees in contested elections and (2) relating to director election voting options and standards in all solicitations subject to the proxy rules.[1] According to the SEC, the proposal “would allow a shareholder voting by proxy to choose among director nominees in an election contest in a manner that reflects as closely as possible the choice that could be made by voting in person at a shareholder meeting.” 

Use of Universal Proxies

The proposed amendments would require both registrants and dissidents to use separate universal proxies in all non-exempt solicitations in connection with elections where a person or group of persons is soliciting proxies in support of director nominees other than the registrant’s nominees.[2] This will allow shareholders voting by proxy to select the combination of directors of their choice, regardless of whether the director was nominated by the registrant or a dissident person or group.

  •  In order to allow for the use of such universal proxy cards, proposed Rule 14a-4(d)(1)(i) would amend the consent requirement for a “bona fide nominee” to require only consent to being named in “a proxy statement” relating to the registrant’s next meeting of shareholders at which directors are to be elected (rather than “the proxy statement,” as currently provided in Rule 14a-4(d)(4)). The amendment would allow parties in a contested election to include all director nominees on their proxy cards, rather than only those nominees who have consented to being named on that particular party’s proxy card. Without the amendment, complying with the universal proxy card requirement in proposed Rule 14a-19, discussed below, would often require violating the current bona fide nomine consent requirement because registrant nominees rarely consent to being named on a dissident’s proxy card and vice versa.
  • The proposed amendments to Rule14a-4(d) would also eliminate the “short slate rule”, which would no longer be necessary if the proposed amendment to the bona fide nominee consent requirement were adopted.[3]
  •  Proposed Rule 14a-19(e) would require that proxy cards used in a non-exempt solicitation[4] in connection with a contested election include the names of all duly nominated candidates for election to the board.[5]
  • Proposed Rule 14a-19(c) would impose deadlines by which the dissident must notify the registrant of its intended nominees (for example, at least 60 calendar days prior to the anniversary of the previous year’s annual meeting date, assuming the registrant held an annual meeting during the previous year and the meeting date has not changed by more than 30 days from the previous year).[6] The dissident would then have to promptly notify the registrant of any changes to its nominees or its intent to comply with Rule 14a- 19 for purposes of its solicitation. Such notice requirements would be in addition to those provided in the registrant’s governing documents.
  • Similarly, proposed Rule 14a-19(d) would then require the registrant to provide the dissident with the names of its nominees at least 50 calendar days prior to the anniversary of the previous year’s annual meeting date, assuming the registrant held an annual meeting during the previous year and the meeting date has not changed by more than 30 days from the previous year. The registrant would likewise be required to notify the dissident of any changes to its proposed nominees. Additionally, the proposed Rules would require a registrant’s proxy statement to advise its shareholders on how it will treat votes in favor of the dissident’s nominees if the dissident ultimately abandons its solicitation or fails to comply with the requirements of proposed Rule 14a-19.[7]
  •  While the current proxy rules do not require a dissident to solicit any particular number or percentage of shareholders, proposed Rule 14a-19 would require the dissident to solicit holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors, and to state as much in both its notice to the registrant and its proxy materials.
  •  The dissident in a contested election would be required to file its definitive proxy statement with the Commission by the later of 25 calendar days prior to the meeting date or five calendar days after the registrant files its definitive proxy statement.
  • Where the dissident fails to comply with proposed Rule 14a-19, the proposed rules would not permit the dissident to continue with its solicitation under Regulation 14A. If a registrant discovers after disseminating materials including a universal proxy card that the dissident failed to comply with Rule 14a-19, the registrant could elect to disseminate a new, non-universal proxy card including only the names of the registrant’s nominees.
  •  Proposed new Item 7(h) of Schedule 14A would require that each party in a contested election refer shareholders to the other party’s proxy statement for information about the other party’s nominees and explain that shareholders can access the other party’s proxy statement for free on the SEC’s website.
  • Proposed amendments to the definition of “participant” in Instruction 3 to Items 4 and 5 of Schedule 14A would provide that a party’s nominees would only be “participants” in that particular party’s solicitation rather than in both parties’ solicitations.
  •  Although the registrant and dissident would be required to provide separate universal proxy cards, proposed Rule 14a-19(e) would impose certain presentation and formatting requirements to all such cards, to ensure such cards, among other things:
  • Clearly distinguish between registrant nominees, dissident nominees, and any proxy access nominees;
  • Use the same font type, style and size to present all nominees on a proxy card;
  • Prominently disclose the maximum number of nominees for which authority to vote can be granted;
  • Prominently disclose the treatment and effect of a proxy executed in a manner that grants authority to vote for more or fewer nominees than the number of directors being elected, or in a manner that does not grant authority to vote with respect to any nominees.

These proposed amendments related to the use of universal proxy cards (including the proposed amendment to the bona fide nominee consent requirement and elimination of the “short slate rule”) would not apply to investment companies registered under Section 8 of the Investment Company Act of 1940 (Funds) or business development companies as defined by Section 2(a)(48) of the Investment Company Act of 1940 (BDCs). The amendments to disclosure requirements regarding voting options and standards in director elections, noted below, however, would apply to such Funds and BDCs.

Director Election Voting Standards Disclosure and Voting Options

The proposed amendments to Rule 14a-4(b) would (1) mandate the inclusion of an “against” voting option and the removal of any “withhold” option on the form of proxy for the election of directors where there is a legal effect to an “against” vote and (2) provide shareholders that neither support nor oppose a director nominee an opportunity to “abstain” rather than “withhold” in a director election governed by a majority voting standard. Additionally, the SEC proposes amending Item 21(b) of Schedule 14A to expressly require the disclosure of the effect of a “withhold” vote.

Next Steps

The proposed amendments will be open to public comment for 60 days following publication of the proposing release in the Federal Register.

Registrants may want to consider making comments to the proposed amendments, especially if they expect that the proposed amendments may unduly interfere with their corporate governance procedures. On the other hand, investors may want to consider making comments if they believe the proposed amendments would impose any undue burdens on the ability to trigger a universal proxy card requirement.

The current timeline for adoption of the proposed amendments above is unclear, however, given that the current House-passed SEC funding bill provides: “None of the funds made available by this Act may be used by the Securities and Exchange Commission to propose, issue, implement, administer, or enforce any requirement that a solicitation of a proxy, consent, or authorization to vote a security of an issuer in an election of members of the board of directors of the issuer be made using a single ballot or card that lists both individuals nominated by (or on behalf of) the issuer and individuals nominated by (or on behalf of) other proponents and permits the person granting the proxy, consent, or authorization to select from among individuals in both groups.”[8] (Emphasis added). As such, registrants likely will not be required to comply with any of the proposed changes until the 2018 proxy season, at the earliest.