On November 17, 2021, the Securities and Exchange Commission (the SEC or Commission) voted to adopt final rules requiring parties in a contested election to use universal proxy cards that include all director nominees presented for election at a shareholder meeting.1 The new rule will require companies to include all director nominees on a single proxy card in a contested election, which will allow shareholders voting by proxy to “mix and match” nominees. Although business development companies (BDCs) and registered investment companies are not covered under the new rules, the SEC is considering whether apply those rules to some or all funds in the future.
Historically, federal proxy rules have not allowed shareholders voting by proxy in a contested election to replicate the vote they could cast if they voted in person. Specifically, shareholders voting in person at a meeting may select among all of the duly nominated director candidates. However, the “Bona Fide Nominee Rule” generally prohibited shareholders voting by proxy from using a single proxy card to choose between company-nominated and third-party-nominated director nominees in a contested election. Under the Bona Fide Nominee Rule, a director nominee had to receive their opponent’s consent (which was rarely given) before appearing on their opponent’s proxy card. As a result, shareholders voting by proxy generally had to choose between voting for the entire slate of nominees included on the company’s proxy card, or the entire slate of nominees included on the third-party’s proxy card. There was no ability to “mix and match” among company-nominated and third-party-nominated director nominees.
In 2016, the SEC proposed amendments to the proxy rules that would require companies to use universal proxy cards in contested director elections. Universal proxy cards, which are required to include all director nominees on a single proxy card, are intended to allow shareholders voting by proxy to have the same voting flexibility as shareholders that attend shareholder meetings in person. Commentators who support universal proxies argued that doing so was an important part of shareholder democracy, while commentators who are against universal proxies have argued that they will make it easier for activist shareholders to win proxy contest, which will result in split boards, and ultimately will harm shareholders.
After several years of consideration, the SEC adopted final rules require companies to use a universal proxy card in all non-exempt solicitations involving director election contests. The final rule also establishes certain notice, minimum solicitation, filing, formatting and presentation requirements, disclosure requirements relating to voting standards, and voting options for all director elections. Notably, the final rule does not apply to certain companies, including BDCs and registered investment companies.
Universal proxy final Rule
Under the new Rule 14a-19, companies must use a universal proxy card that includes all nominees presented by management and third-parties for election at the upcoming shareholder meeting. According to SEC Chair Gary Gensler, “[t]hese amendments address concerns that shareholders voting by proxy cannot vote for a mix of dissident and registrant nominees in an election contest, as they could if voted in person… [t]his is an important aspect of shareholder democracy.”
Key aspects of the adopted final rule include the following:
- Mandatory universal proxy: All participants in a non-exempt director election contest, except those involving certain excluded companies, must use a universal proxy card. The universal proxy card must include the names of both company and third-party nominees, along with certain other shareholder nominees included as a result of proxy access.
- Nominee consent: The rule expands the determination of a “bona fide nominee” to include a person who consents to being named in any proxy statement for a company’s next shareholder meeting for the election of directors.
- Notice: Third-parties seeking to nominate directors must provide companies with notice of their intent to solicit proxies and to provide the names of their nominees no later than 60 calendar days before the anniversary of the previous year’s annual meeting. Companies must notify the third-parties of the names of the company’s nominees no later than 50 calendar days before the anniversary of the previous year’s annual meeting.
- Timing: Third-parties must file their definitive proxy statement by the later of 25 calendar days before the shareholder meeting or five calendar days after the company files its definitive proxy statement.
- Nominee information: Each party in a proxy contest is required to refer shareholders to the other party’s proxy statement for information about the other party’s nominees and refer shareholders to the Commission’s website to access the other side’s proxy statement free of charge.
- Solicitation: Third-parties putting forth a nominee must solicit the holders of shares representing at least 67% of the voting power of the shares entitled to vote at the meeting.
- Universal proxy cards formatting: The presentation and formatting for universal proxy cards must ensure that each party’s nominees are presented in a clear, neutral manner.
In addition, these amendments require proxy cards to include an “against” voting option in director elections when there is a legal effect to a vote against a director nominee and the option to “abstain” in a director election where a majority voting standard applies. The rules also require a proxy statement disclosure about the effect of a “withhold” vote in an election of directors.
Companies not covered under the Rule
The new Rule 14a-19 does not apply to certain excluded companies, including BDCs, registered investment companies, foreign private issuers, and companies with reporting obligations under Section 15(d) of the Exchange Act whose securities are not subject to the federal proxy rules. In addition, the rule does not apply to consent solicitations. Note, however, that SEC did not permanently exclude BDCs and registered investment companies from the new rules. Instead, the SEC is considering whether or to what extent funds should be subject to the universal proxy mandate.
The final rule amendments regarding universal proxy will apply to all shareholder meetings involving contested director elections held after August 31, 2022. The rule amendments regarding voting options will be applicable to all shareholder meetings involving director elections held after August 31, 2022. The final rules will be effective on January 31, 2022.
The SEC’s mandate for universal proxies in contested elections will give shareholders voting by proxy the ability to “mix and match” nominees to the same extent that they would be able to do so if they voted in person. The SEC has noted that the rules are important for shareholder democracy, but also acknowledged that universal proxy may lead to “split” boards. While BDCs and registered investment companies are not yet subject to mandated universal proxy rules, the SEC is considering, and may in the future, apply the same or similar rules to regulated funds.