On October 26, the Securities and Exchange Commission voted to propose amendments to the proxy rules that would require the use of universal proxy cards in contested elections (i.e., in a contested election, shareholders would be provided with a proxy card that contains the names of both the management nominees and one or more dissident shareholder nominees for the board of directors).
Background. Currently, in a contested election, shareholders voting by proxy typically receive one proxy card with management’s slate of nominees and a separate proxy card with the dissident’s full or partial slate, and they must submit their votes on either the company’s or the dissident’s proxy card, but not both. Accordingly, a shareholder cannot pick and choose among the candidates on the two slates and, if dissidents have not proposed a full slate, will not be able to vote for all of the open slots if the shareholder wishes to vote for the dissident candidate(s). By contrast, shareholders who attend a meeting in person generally are able to cast a written ballot at the meeting that includes all duly nominated candidates for the board of directors (i.e., both management and dissident director nominees).
Proposed Amendments. The proposed amendments attempt to replicate the process by which shareholders can vote at in-person meetings for shareholders voting by proxy in a contested election. The proposed amendments would:
- Require proxy contestants (i.e., both management and dissidents) to provide shareholders with a universal proxy card that includes the names of both management and dissident nominees (which would allow shareholders to vote by proxy for the combination of nominees of their choice).
- Amend the definition of “bona fide nominee” in Rule 14a-4(d) of the Securities and Exchange Act of 1934 (the “Act”) to include a person who agrees to be named in any proxy statement relating to a company’s next meeting of shareholders at which directors are elected. Under the current Rule 14a-4(d), one party’s director nominee may not be included on the opposing party’s proxy card unless the nominee gives his or her consent to the opposing party (i.e., without such consent, there must be two proxy cards).
- Eliminate the “short slate rule” (i.e., Rule 14a-4(d)(4) of the Act). The short slate rule permits a dissident to (1) propose a slate of dissident nominees that would constitute only a minority of the board; and (2) “round out” the proxy card (in the dissident’s discretion) by identifying management nominees that the dissident would not vote for (which results in the shareholder’s votes being cast for the unnamed management nominees). Universal proxy cards would make any such rounding out unnecessary.
- Require proxy contestants to notify each other of their respective director candidates. A dissident would be required to provide the company with the names of the nominees for whom it intends to solicit proxies no later than 60 days prior to the anniversary of the previous year’s annual meeting. The company would then be required to provide any such dissident the names of the nominees for whom it intends to solicit proxies no later than 50 days prior to the anniversary of the previous year’s annual meeting.
- Require dissidents to solicit shareholders representing at least a majority of the voting power of shares entitled to vote on the election of directors (in order to trigger the use of the mandatory universal proxy card).
- Require proxy contestants to refer shareholders to the other party’s proxy statement information about that party’s nominee, and inform shareholders that they can access the other party’s proxy statement for free on the SEC’s website.
- Subject universal proxy cards to presentation and formatting requirements to help ensure that universal proxy cards clearly and fairly present information.
Proposed Amendments in All Director Elections. In addition to the proposed amendments regarding contested elections, the SEC has proposed the following amendments relating to voting options and standards that would apply in all director elections:
- Amend Rule 14a-4(b) of the Act to provide that proxy cards would be required to (1) include an “against” voting option for the election of directors when there is a legal effect to a vote against a nominee (as is the case where the registrant has a majority voting standard); and (2) provide shareholders the ability to “abstain” in a director election governed by a majority voting standard.
- Amend Item 21(b) of Schedule 14A (pursuant to Section 14(a) of the Act) to require that a company that applies plurality voting standards for director elections to disclose in its proxy statement the treatment and effect of a “withhold” vote in the election (i.e., that a “withhold” vote has no legal effect).
Proxy Access. The proposed amendments regarding a universal ballot would have a significantly different impact than the “proxy access” bylaws that many companies have adopted over the past two years (which permit shareholders to nominate candidates for inclusion in the proxy materials distributed by a company – typically those shareholders who have held at least 3% of the company’s shares for at least three years). For example, unlike proxy access bylaws, using a universal proxy card would require shareholders to prepare and file their own proxy materials, disseminate those materials, and solicit other shareholders.
The SEC will seek public comment on the proposed amendments for 60 days following the publication of the comment request in the Federal Register. The complete release of the proposed amendments and rules is available here.