On October 26, 2016, the Securities and Exchange Commission (SEC) proposed amendments to the proxy rules (the “Proposal”) that would mandate the use of universal proxy cards in non-exempt proxy solicitations for contested director elections. These universal proxy cards would include all registrant, dissident and proxy access nominees, thus allowing shareholders to pick and choose nominees as if voting in person at an actual meeting rather than limiting shareholders to selecting one slate or another. The Proposal also includes amendments designed to clarify the applicable voting options and standards in all director elections.
The Proposal was adopted by a two-to-one vote, with Commissioner Piwowar dissenting. Given the recent election results and the upcoming administration transition, prospects for adoption of the proposed universal proxy system in the near term appear to be limited. However, influential shareholder groups such as the Council of Institutional Investors are likely to continue to support and advocate for a universal proxy system, so we expect that it will remain on the agenda, in one form or another, into the future.
The Proposal, which includes amendments to the current proxy rules and a new Rule 14a-19, can be found at https://www.sec.gov/rules/proposed/2016/34-79164.pdf.
Overview of the Proposed Universal Proxy System
Under the current system, in a contested director election, shareholders generally must choose between returning the registrant’s proxy card or the dissident’s proxy card. Because of nominee consent requirements and other limitations in the proxy rules, as well as various other factors, neither the registrant’s nor dissident’s proxy card typically includes all director nominees. Therefore shareholders, unless voting in person at the annual meeting, are effectively limited to voting for either the registrant’s slate or the dissident’s slate of nominees. The proposed universal proxy system would enable shareholders to vote for any combination of nominees from among competing slates.
The key features of the proposed universal proxy system are as follows:
- The use of a universal proxy card would be mandated in all non-exempt proxy solicitations for contested director elections. The universal proxy card would not be a single uniform proxy card. Rather, the concept simply refers to a requirement that each proxy card include all director nominees, whether from the registrant, from any dissident, or included in the registrant’s proxy materials through a proxy access bylaw provision. Both the registrant and dissident would still create their own proxy cards and solicit shareholders using those cards. The universal proxy card would have to comply with requirements designed to ensure that each category of nominees was clearly identified and fairly presented.
- Dissidents would be required to provide notice to the registrant of intent to solicit proxies and the names of their nominees at least 60 days in advance of the anniversary of the previous year’s annual meeting (or, if the meeting date was changed by more than 30 days, by the later of 60 days in advance of the meeting date and 10 days after public announcement of the meeting date). Dissident shareholders would still need to comply with any earlier deadline under a registrant’s advance notice bylaw provisions.
- Unless already included in a preliminary or definitive proxy statement filed with the SEC, registrants would be required to provide notice to the dissident of the registrant’s nominees at least 50 days in advance of the anniversary of the previous year’s annual meeting (or, if the meeting date was changed by more than 30 days, by 50 days in advance of the meeting date).
- Dissidents would be required to solicit shareholders representing at least a majority of the voting power in the election of directors, and would be required to file a definitive proxy statement by the later of 25 days prior to the meeting date and five days after the registrant filed its definitive proxy statement.
The requirements of proposed Rule 14a-19 would not apply to exempt solicitations under Rule 14a-2(b). Examples of these exempt solicitations include those in which a person does not seek authority to act as a proxy and those in which no more than 10 shareholders are solicited. The proposed requirements would also not apply to consent solicitations.
The proposed requirements would not apply to registered investment companies or business development companies.
Proxy Access Considerations
The proposing release explains the SEC’s view that a universal proxy system should not be viewed as a substitute for proxy access bylaw provisions. A typical proxy access bylaw provision provides for access not only to the registrant’s proxy card, but to the proxy statement as well. Under these types of bylaws, the registrant’s proxy statement would include required information about “proxy access nominees” and a supporting statement from the nominating shareholder. In such situations, the nominating shareholder would not be required to conduct any actual solicitation or comply with the proxy rules in connection therewith. The Proposal would not impose any additional requirements on a shareholder seeking to nominate a director only through a proxy access bylaw provision and not through its own proxy solicitation.
However, in a contested election in which a shareholder was soliciting proxies in support of any director nominee other than the registrant’s nominees, the universal proxy system would apply. The soliciting shareholder would, in effect, get access only to the registrant’s proxy card, but also would become obligated to comply with the timing requirements described above, prepare and file its own proxy statement, and solicit at least a majority of the voting power.
Although there are clear differences between a proxy access bylaw and the proposed universal proxy system, registrants that have adopted or are considering adopting proxy access bylaw provisions should follow the development of this rulemaking. Despite the prevalence of proxy access bylaw adoption in recent years, there is very little, if any, experience actually applying those bylaw provisions in practice. The adoption of any new universal proxy system, whether as proposed or as revised in response to comments, could warrant revisiting some aspects of customary proxy access bylaw provisions and considering the interaction of those provisions with universal proxy system requirements.
Proposed Amendments Regarding Voting Options and Effects in All Director Elections
The Proposal also includes amendments designed to clarify voting options and effects in all director elections. Rule 14a-4(b) would be amended to require “against” and “abstain” (in lieu of “withhold”) voting options on proxy cards when applicable state law gives effect to those votes (i.e., when a majority vote standard applies). The proxy statement disclosure requirements would also be amended to require disclosure with respect to the effect of a “withhold” vote when available (i.e., when a plurality vote standard applies). The SEC notes that the staff has observed ambiguities and inaccuracies with respect to some of the disclosures in this area, so registrants should review their disclosures notwithstanding that the proposed amendments are not yet effective.
Takeaways and Next Steps
As noted above, there are significant uncertainties as to the prospects of this proposal, particularly in the near term. However, if a universal proxy system were adopted, it could have significant impacts on contested director elections. It would impose additional structure on the way the proxy contests are conducted and create some affirmative obligations for dissident shareholders. In addition, by providing shareholders with the ability to choose from among all director nominees, it could affect the results of proxy contests and potentially lead to more “mixed” boards composed of both registrant and dissident nominees. How such a system would affect the prevalence of contested elections and board effectiveness is uncertain.
Comments on the Proposal are due within 60 days after its publication in the Federal Register.