On October 26, 2016, the Securities and Exchange Commission (SEC), by a 2-1 vote, proposed amendments to the federal proxy rules that would require participants in a proxy contest to use universal proxy cards that include the names of all duly nominated director candidates. Universal proxy cards would allow shareholders voting by proxy to vote for their preferred combination of registrant and dissident nominees in a contested election of directors, as they would be able to do by attending the shareholder meeting and voting in person. The proposed rules set forth certain notice, filing, minimum solicitation and formatting requirements that would apply to universal proxy cards. The SEC also proposed amendments to the federal proxy rules that would require public companies to more clearly specify the applicable voting options and standards in all director elections. The SEC's proposing release is available here. The SEC will seek comment on the proposed rules for 60 days following their publication in the Federal Register. Despite the fact that the proposed rules seem to be generally supported by activists and opposed by issuers, the practical implications of a universal proxy card for proxy contests and shareholder activism are unclear. Some commentators believe that it will make it harder for an activist to elect all of its candidates; others feel that it will make it easier for an activist to elect at least one of its candidates. As a related matter, would a universal proxy card lead ISS and Glass Lewis to more frequently recommend some, as opposed to all or none, of the activist's candidates? Given the recent trend toward settling proxy contests rather than taking them all of the way to a vote, the adoption of a mandatory universal proxy card is perhaps less consequential now than it would have been a few years ago. On the other hand, it is possible that it could reverse the trend toward settlements and lead to more contests taken to a vote. We will reflect more on these practical implications in the next issue of Sidley Perspectives on M&A and Corporate Governance.
Mandatory Use of Universal Proxy Cards in Contested Elections
Currently in a proxy contest, a shareholder voting by proxy is generally limited to voting for either the registrant slate or the dissident slate of director nominees. Under the current proxy rules, shareholders wishing to "split their vote" and vote for their preferred mix of registrant and dissident nominees must generally attend the meeting and vote in person. The proposed rules to mandate the use of universal proxy cards are intended to
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better replicate for shareholders who vote by proxy the voting choices available to shareholders who vote in person at the shareholder meeting.
In 2013, the SEC's Investor Advisory Committee suggested that the SEC consider revising its proxy rules to provide dissidents with the option of using a universal proxy card in connection with short slate director nominations. In January 2014, the Council for Institutional Investors petitioned the SEC to amend its rules to require the use of universal proxy cards in contested elections. The SEC began reviewing its proxy rules and hosted a roundtable to discuss universal proxy cards in February 2015. In June 2015, SEC Chair Mary Jo White directed the SEC Staff to prepare rulemaking recommendations on the subject. In July 2016, the House of Representatives approved a rider to a spending bill aimed at preventing SEC rulemaking on universal proxy cards. The bill remains pending in the Senate.
Amendment to the "Bona Fide Nominee" Definition
As a result of the "bona fide nominee rule," currently a party to a contested election may not include the opposing party's nominees on its proxy card unless such nominees consent. Because most proxy contests are contentious, that consent is rarely provided, meaning that a shareholder voting by proxy is generally limited to voting for the director nominees proposed by the party soliciting its proxy.
Exchange Act Rule 14a-4(d)(1) provides that no proxy shall confer authority to vote for a person to any office for which a "bona fide nominee is not named in the proxy statement." "Bona fide nominee" is defined as a nominee who has "consented to being named in the proxy statement and to serve if elected."
The SEC proposes to amend the definition of a "bona fide nominee" to include a person who agrees to be named in "a" rather than "the" proxy statement relating to a company's next shareholder meeting at which directors are to be elected. This change would allow parties in a contested election to include all director nominees on their proxy cards, including the opposing party's nominees.1
Elimination of "Short Slate Rule"
In a contested election where a dissident is seeking election of a minority of the board, the "short slate rule" in Rule 14a-4(d)(4) permits the dissident to "round out its slate" and allow shareholders to vote for a full slate of director candidates. The current rules accomplish this by allowing the dissident to identify in its proxy card those registrant nominees that the dissident will not vote for. The SEC proposes to eliminate the "short slate rule" because under a universal proxy system a dissident would not need to supplement its partial slate with registrant nominees.
Mandatory Use of Universal Proxy Cards
Proposed Rule 14a-19(e) would require each soliciting party in a contested election to distribute its own proxy card that includes the names of both parties' director nominees and designates its own representatives as proxy holders to exercise the vote pursuant to the proxy. Because the universal proxy cards would include the names of both registrant and dissident nominees, in a contested election every shareholder would be able to vote by proxy for its preferred combination of director nominees.
1 The SEC's proposing release suggests that the proposed amendment to the "bona fide nominee" definition would also permit, but not require, a proponent conducting a solicitation without a competing slate of board nominees (e.g., a proponent running a "vote no" campaign or soliciting votes for a proposal unrelated to director elections) to include the names of some or all registrant nominees on the proponent's proxy card.
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Notice and Filing Requirements
SEC rules currently do not require a dissident in a proxy contest to provide notice to the registrant of its intention to solicit votes for dissident nominees. Under the proposed rules, proxy contestants would be required to notify each other of their respective director nominees. Specifically, the proposed amendments would require that a dissident provide a registrant with the names of the nominees for whom it intends to solicit proxies no later than 60 calendar days before the anniversary of the previous year's annual meeting date, and that a registrant provide the dissident with the names of its nominees no later than 50 calendar days before that anniversary date.
The notification deadlines would serve as definitive dates by which the parties in a contested election will know whether mandatory use of universal proxy cards has been triggered, and allow sufficient time to include the names of the opposing party's nominees on their respective proxy cards. The notification deadline applicable to dissidents would also effectively prevent a dissident from launching a proxy contest less than 60 days before a meeting. To make shareholders aware of this deadline, proposed Rule 14a-5(e)(4) would require registrants to disclose in their proxy statements the deadline for providing such notice for the registrant's next annual meeting. Under the proposed rules, a registrant would not be required to notify the dissident of the names of the registrant's nominees if they were previously disclosed in a proxy statement filed by the registrant with the SEC.
To ensure that shareholders will have timely access to information about all nominees listed on a universal proxy card, proposed Rule 14a-19 would require a dissident to file its definitive proxy statement with the SEC by the later of 25 calendar days prior to the meeting or five calendar days after the registrant files its definitive proxy statement. Proposed new Item 7(h) of Schedule 14A would also require each party in a contested election to refer shareholders to the opposing party's proxy statement for information about that party's nominees and explain that shareholders can access such proxy statement free of charge on the SEC's website.
Minimum Solicitation Requirements
Currently a dissident in a proxy contest is not required to solicit proxies from any specified number or percentage of shareholders. Proposed Rule 14a-19 would require dissidents to solicit proxies from shareholders representing at least a majority of the voting power of shares entitled to vote on the election of directors. The requirement is intended to prevent a dissident from triggering mandatory use of universal proxy cards for both parties unless it undertakes its own meaningful solicitation efforts. The proposed rule would require a dissident to state its intention to comply with this minimum solicitation requirement in its notice to the registrant and in the dissident's proxy materials.
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Timeline of Universal Proxy Solicitation Process
The SEC's proposing release includes a helpful chart highlighting the timing of the process for soliciting universal proxy cards. We have copied the timeline below for your reference.
Due Date No later than 60 calendar days before the anniversary of the previous year's annual meeting date or, if the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, by the later of 60 calendar days prior to the date of the annual meeting or the tenth calendar day following the day on which public announcement of the date of the annual meeting is first made by the registrant. [proposed Rule 14a-19(b)(1)] No later than 50 calendar days before the anniversary of the previous year's annual meeting date or, if the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, no later than 50 calendar days prior to the date of the annual meeting. [proposed Rule 14a-19(d)] No later than 20 business days before the record date for the meeting. [current Rule 14a-13]
By the later of 25 calendar days before the meeting date or five calendar days after the registrant files its definitive proxy statement. [proposed Rule 14a-19(a)(2)]
Action Required Dissident must provide notice to the registrant of its intent to solicit the holders of at least a majority of the voting power of shares entitled to vote on the election of directors in support of director nominees other than the registrant's nominees and include the names of those nominees. Registrant must notify the dissident of the names of the registrant's nominees.
Registrant must conduct broker searches to determine the number of copies of proxy materials necessary to supply such material to beneficial owners. Dissident must file its definitive proxy statement with the Commission.
Form of Universal Proxy Cards
The proposed amendments would require a specific format for universal proxy cards to ensure that each party's nominees are presented in a clear and impartial manner. Specifically, a universal proxy card must:
Clearly distinguish between registrant nominees, dissident nominees and proxy access nominees, if any, such as by listing each slate of nominees in a separate column;
List nominees in alphabetical order by last name within each slate of nominees; Use the same font type, style and size for all nominees; Prominently disclose the maximum number of nominees for whom a shareholder can grant authority to
vote; and Prominently disclose the treatment and effect of any proxy card executed in a manner that indicates a
vote for a greater or lesser number of nominees than the number of directors up for election. Where both the registrant and the dissident have proposed a full slate of director nominees and there are no proxy access nominees up for election, the SEC proposes that the universal proxy cards may provide shareholders with the option to vote for all of the registrant's or dissident's nominees as a group.
The proposed formatting requirements would not prohibit the customary practice of registrants and dissidents using different colors to distinguish their respective proxy cards.
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Universal Proxy Versus Proxy Access
A universal proxy system would not provide dissidents with access to a registrant's proxy materials to the same extent provided by proxy access bylaws. Key differences between the systems are summarized below.
Registrant must include the names of the dissident nominees on its proxy card in a manner that clearly distinguishes them from the registrant's nominees
Registrant's proxy materials need not include information about the dissident or its nominees other than a statement directing shareholders to the dissident's proxy statement for information about the dissident's nominees
Dissident would be responsible for filing its own proxy materials with the SEC and bearing the costs of distributing them to shareholders
Dissident would be required to solicit proxies from the holders of at least a majority of the voting power of shares entitled to vote in director elections
Dissident may have change of control intent
No limit as to number of dissident nominees
Customary Proxy Access Provisions Registrant must include the names of the nominating shareholder's nominees on the registrant's proxy card
Registrant must include in its proxy statement the names of the nominating shareholder's nominees, disclosure about the nominating shareholder and its nominees and a statement by the nominating shareholder in support of its nominees' election
Nominating shareholders are not required to file or distribute their own proxy statements
Nominating shareholders are not required to solicit proxies from any shareholders
Proxy access bylaws typically require that the nominating shareholder be a passive investor Proxy access bylaws generally limit the number of proxy access nominees to 20 or 25% of the board
Applicability The proposed rules mandating the use of universal proxy cards would apply to parties soliciting proxy authority to vote Exchange Act-registered securities, except that they would not apply to:
exempt solicitations (e.g., solicitations in which ten or fewer persons are being solicited); solicitations involving foreign private issuers or companies with reporting obligations only under Section
15(d) of the Exchange Act, which are not subject to the federal proxy rules; and solicitations involving registered investment companies or business development companies.
Description of Voting Options and Standards in All Director Elections
In addition to mandating the use of universal proxy cards in contested elections, the SEC proposes amendments to the federal proxy rules that would require public companies to more clearly describe the applicable voting options and standards in all director elections. These amendments follow the SEC's receipt of two rulemaking petitions in 2015 raising concerns about the quality of proxy statement disclosure regarding voting standards. The SEC Staff's subsequent review of proxy materials revealed the following deficiencies:
Companies with a majority voting standard failing to include an "against" voting option on the proxy card;
Companies with a plurality voting standard including an "against" voting option on the proxy card rather than a "withhold" voting option; and
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Companies incorrectly disclosing that "withhold" votes are counted in determining the outcome of a director election.
Proposed amendments to Rule 14a-4(b) would require proxy cards in all director elections to:
Include an "against" voting option (rather than a "withhold" option) for the election of directors if applicable state law gives legal effect to a vote cast against a nominee (i.e., where a majority voting standard applies); and
Provide shareholders with the option to "abstain" (rather than "withhold") in a director election governed by a majority voting standard.
Finally, proposed amendments to Item 21(b) of Schedule 14A would expressly require a public company to disclose in its proxy statement the treatment and effect of "withhold" votes under applicable state law and the company's charter and bylaws.
The proposed rules relating to voting options and standards would apply to all solicitations subject to the federal proxy rules.
The proposed amendments would significantly change the federal proxy rules in the context of contested elections. We encourage you to discuss the proposed rules mandating the use of universal proxy cards in contested elections with your company's nominating committee and full board. We also suggest that you review your company's proxy card and proxy statement disclosure regarding voting options and standards to confirm their accuracy in light of the proposed amendments and the deficiencies noted by the SEC. Companies may also consider submitting comments on the proposed rules as requested by the SEC.
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