The U.S. Securities and Exchange Commission, in a 2-1 vote1, proposed amendments on October 26, 2016 to the proxy rules that would require public companies to include director candidates nominated by a dissident shareholder on the same ballot as the directors nominated by the company’s management.2

Highlights

  • Proposed amendments would require public companies to include dissident nominees on same proxy card as management nominees in contested elections—a universal proxy card

  • Amendments would reduce disparity between choices shareholders can make in person at a shareholder meeting and choices currently available under proxy rules

  • Dissident nominees would only qualify for inclusion on universal proxy card if dissident solicits votes from holders of at least a majority of the company’s voting shares

  • Because dissidents would be required to incur solicitation expenses to qualify to use universal proxy, the proposed amendments are not likely to replace or have much impact on proxy access, which does not require solicitation

  • Proxy cards would be required to include an “against” option when there would be a legal effect to that vote and to provide shareholders with the ability to “abstain” in a director election governed by a majority voting standard

  • Proposed amendments generally would not apply to registered investment companies, business development companies or foreign private issuers

  • Although uncertain, it is not likely that the proposed amendments would apply to the 2017 spring proxy season

  • The practical impact is uncertain, with no consensus among prognosticators as to whether adoption would increase the likelihood of proxy fights or affect their outcome

 

Background

In a contest to elect directors of a public company, it typically is not possible for a shareholder voting by proxy to easily pick and choose candidates from among the directors nominated by management and those nominated by a dissident investor. Instead, such shareholders receive separate proxy cards from the company and the dissident and are forced to vote for either all the candidates nominated by company management or all the candidates nominated by the dissident.3 Although shareholders can avoid this “all or nothing” result by voting in person at the shareholder meeting, very few shareholders do so. In addition, a dissident that is proposing a “short slate” of directors can solicit proxy authority to vote for some management nominees to fill out its slate, but the process is cumbersome and does not provide shareholders with the opportunity to choose from among all management nominees. As a result, shareholders voting by proxy are often precluded from voting for all of the individuals whom they believe are the most qualified to do the job, and this may have ramifications on the outcome of elections generally.4

Proposed Amendments

In response to this dilemma, the SEC has now proposed amendments to the proxy rules for public companies that would require the inclusion of all director candidates on both the company’s proxy card and any dissident’s proxy card in non-exempt5 solicitations. The goal is to give shareholders essentially the same choice voting remotely via a universal proxy card as they would have if they attended the shareholder meeting and voted in person, where the ballot provided to shareholders under state law permits vote splitting between management and dissident nominees. Highlighted below are important proposed changes:

  • The proposed amendments would require the dissident investor to solicit shareholders representing at least a majority of the voting power of shares entitled to vote on the election of directors. The practical effect of this requirement would be that universal proxy cards would only be available to a dissident willing to spend more than a nominal amount in its campaign. By contrast, very targeted or nuisance campaigns launched by investors who do not engage in widespread solicitation would not have the benefit of inclusion on management’s proxy card.

  • The proposed amendments would require the dissident to provide the company with the names of its nominees at least 60 days prior to the anniversary of the last annual meeting. This requirement would be in addition to any applicable advance notice provision in the company’s charter or bylaws. The company would be required to identify its slate to the dissident at least 50 days prior to the anniversary of the last annual meeting.

  • The proposed amendments would require dissidents to file their definitive proxy statements by the later of 25 days before the meeting and five days after the company files its definitive proxy statement. In addition, each party would be required to refer shareholders to the other party’s proxy statement on the SEC’s website for information about the rival’s nominees.

  • The proposed amendments would eliminate the short slate rule because it would be unnecessary, in light of the other amendments, for purposes of providing the dissident the ability to allow shareholders to vote for all board seats up for election.

  • The proposed amendments would specify presentation and formatting requirements for proxy cards to ensure that information is clearly and fairly presented. For example, the proxy card would be required to identify which individuals are company nominees and which are dissident nominees, but all nominees would be required to be presented with equal prominence.

  • Except as noted below, the proposed amendments would not apply to solicitations involving registered investment companies, business development companies, foreign private issuers or companies with reporting obligations only under Section 15(d) of the Securities Exchange Act of 1934. Therefore, the short slate rule would continue to apply to registered investment companies and business development companies.

The SEC release acknowledges concerns that inclusion of one party’s nominees on the other party’s proxy card could cause confusion or imply that the soliciting party supports the other’s nominees or one party’s nominees support the other party, but contends that changes to proxy card presentation and disclosure mitigate these concerns. The release also notes the arguments that facilitating the election of dissidents may create more divisive and less effective boards, and may trigger change-in-control clauses in company agreements. On these points, the SEC solicits data pointing to the likely effects of the proposed amendments and suggests that companies are free to disclose their view of any possible ill effects from electing a dissident’s nominees.6

The proposed amendments are distinct from the “proxy access” regime, whereby companies allow long-term shareholders to nominate a small number of directors using the company’s proxy card at no expense to the nominating shareholder. With its significant solicitation requirement and the attendant expense, universal proxy as proposed does not offer the same opportunity typically offered by proxy access for a shareholder to include its nominees in the company's proxy materials without incurring any meaningful expense. As a result, it is not likely to replace proxy access.

On the other hand, universal proxy might aid “vote no” campaigns where a dissident does not run its own slate but seeks to thwart the election of management’s nominees. Under the proposed amendments, a dissident in such case could make a solicitation that seeks authority to vote against certain management nominees and vote for other nominees, instead of relying on management’s proxy card. Similarly, an investor who wishes to solicit votes in favor of a proposal unrelated to director elections would be able to disseminate a proxy card that covers that proposal and lists all of management’s nominees for election.

The SEC also proposed amendments to the proxy rules to require that proxy cards include the applicable shareholder voting options in director elections. These proposed amendments would apply to registered investment companies and business development companies. In particular, proxy cards would be required to include an “against” option when there would be a legal effect to that vote and to provide shareholders with the ability to “abstain” in a director election governed by a majority voting standard. The proposed amendments also would eliminate the current ability to provide a “withhold” option when an “against” option has a legal effect. In addition, proxy statements would be required to adequately disclose the effect of a shareholder’s “withhold” vote.

Conclusion

It is not clear whether the proposed amendments will favor companies or dissidents, and the answer will likely depend on the specific requirements of any final amendments that are adopted and the particular facts and circumstances of the applicable proxy contest. However, public companies may want to begin evaluating how the proposed amendments could affect future shareholder meetings and proxy contests, as well as whether any conforming changes will be needed in their organic documents or their electronic voting and other solicitation mechanics. Public companies also may consider submitting comments on the proposed amendments to the SEC. The SEC is required to collect comments for 60 days following publication of the proposed amendments in the federal register. The final requirements and effective date of any proposed amendments are uncertain. In particular, it is not clear whether any of the proposed amendments would become effective prior to the 2017 spring proxy season. In addition, the U.S. House of Representatives passed legislation in July of 2016 that would prohibit the SEC from using funds to propose or implement these amendments, so further political action could impact the proposed amendments. Nevertheless, given the strong policy argument to level the playing field between shareholders who vote in person and shareholders who vote by proxy, we believe the SEC’s proposal will be adopted, likely along the major lines proposed.