On Wednesday, November 17, 2021, the SEC adopted final rules regarding the use of universal proxy cards and proposed amendments to its rules governing proxy voting advice. These rules put an unprecedented number of public company boards at risk of proxy fights. While these rules do not take effect until after August 31, 2022 (which is mostly after the 2022 proxy season), well-advised public companies will be carefully considering enhancements to their bylaws and corporate governance policies in order to ensure they maintain leverage should they find themselves in board contests once this universal proxy card mandate is in full effect.
As background, the use of universal proxy cards is something that has been on the SEC’s potential agenda for at least three decades. In recent times, in 2013, the SEC’s Investor Advisory Committee made the recommendation that the Commission consider whether to adopt a universal proxy card rule, and in 2014, the Council of Institutional Investors submitted a rulemaking petition to the Commission requesting that the SEC adopt a universal proxy card rule. And then between 2014 and 2016, over 350 proxy access shareholder proposals were submitted to companies, and those proposals coupled with market trends resulted in the vast majority of S&P 500 companies and many companies in the Russell 3000 adopting proxy access. As a reminder, proxy access generally provides that shareholders that meet certain requirements may nominate directors to a company’s board and include those nominees in the company’s proxy materials without going through a typical, and costly, proxy contest – making proxy access a sort of end run around the lack of universal proxy card rules (however, the complex requirements and high ownership thresholds that generally apply in the context of proxy access make it, ironically, less accessible to most investors). The proposed rules that the SEC just acted on were originally proposed back in 2016, and, after the prior Commission failed to act on the proposal, the current Commission under then-acting SEC Chair Allison Lee reopened the comment period for the proposed rules in May of 2021.
That brings us to the present with the Commission’s adoption of the final universal proxy card rules. The SEC adopted the rules substantially as proposed with the exception of an increase in the minimum solicitation requirement and other minor changes. In summary:
- The universal proxy rule, Rule 14a-19, requires the use of a universal proxy card by all participants in a non-exempt director election contest – that is a proxy card including the names of both the company’s nominees and the activist’s nominees (although with any nominees included as a result of proxy access).
- Dissident investors are required to provide the company 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.1 Dissent investors are also required to indicate their intent to comply with the minimum solicitation threshold by including in their notice to the company a statement that they intend to solicit the holders of shares representing at least 67% of the voting power of shares entitled to vote on the election of directors.2
- Companies are required to notify any dissident investor, no later than 50 calendar days prior to the anniversary of the previous year’s annual meeting date, of the names of the company’s nominees unless the names have already been provided in a preliminary or definitive proxy statement filed by the company.3
- The Commission had originally proposed that dissident investors be required to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors. As discussed in more detail in the SEC’s adopting release, the purpose of the minimum solicitation requirement is to prevent dissident investors from being able to capitalize on the company’s solicitation efforts while relieving the dissident from the time commitment and expense necessary to undertaking meaningful solicitation efforts. In the final rule, the Commission has increased the minimum solicitation requirement to at least 67% of the voting power of shares entitled to vote on the election of directors.
- Dissident investors are required to file their definitive proxy statement with the Commission by the later of 25 calendar days prior to the meeting date or five calendar days after the company files its definitive proxy statement, regardless of the proxy delivery method.
The Commission also made certain additions and amendments to the proxy information rules. In summary:
- The Commission adopted new Item 7(h) of Schedule 14A to require that the company and the dissident investor refer shareholders to each other’s proxy statement for information about the other party’s nominees and explain that shareholders can access the other party’s proxy statement without cost on the SEC’s website.
- Rule 14a-5(c) has been revised to permit parties to refer to information that would be furnished in a filing of the other party to satisfy their disclosure obligations.
- The definition of “participant” in Instruction 3 to Items 4 and 5 of Schedule 14A to ensure that, even though all nominees would be included on the universal proxy card, only the party’s own nominees would be considered “participants” in that party’s solicitation.
The Commission also adopted formatting and presentation requirements for universal proxy cards. Each side will disseminate its own proxy card and is free to choose the design of its card, subject to the following requirements:
- The proxy card must set forth the names of all duly nominated director candidates;
- The proxy card must provide a means for shareholders to grant authority to vote for the nominees set forth;
- The proxy card must clearly distinguish among company nominees, dissident nominees, and any proxy access nominees;4
- Within each group of nominees, the nominees must be listed in alphabetical order by last name on the proxy card;
- The same font type, style and size must be used to present all nominees on the proxy card;
- The proxy card must prominently disclose the maximum number of nominees for which authority to vote can be granted; and
- The proxy card must prominently disclose the treatment and effect of a proxy executed in a manner that grants authority to vote for more nominees than the number of directors being elected, in a manner that grants authority to vote for 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.
Finally, the Commission adopted amendments to the form of proxy and disclosure requirements with respect to voting options and voting standards that apply to all director elections, eliminated the “short slate rule” (Rule 14a-4(d)) for operating companies that are subject to the final universal proxy card rules, and modified the consent requirement for a bona fide nominee in Rule 14a-4(d)(1)(ii). To avoid disruption to the upcoming proxy season, the rule changes adopted by the SEC become effective for any shareholder meeting featuring an election contest held after August 31, 2022.