In early January 2015, hedge fund activist Trian launched a closely followed proxy fight against DuPont, claiming that the company had underperformed and that it should, among other things, be broken up into three parts. DuPont responded that, through implementation of its own strategic plan, it had delivered total shareholder return and cumulative capital return in excess of its proxy peers and the S&P 500. Rejecting DuPont’s offer of a single board seat, Trian nominated a short slate of four directors and commenced an election contest. Fast forward to February, when Trian submitted to the DuPont board a request that DuPont allow the use of a “universal proxy,” thus allowing shareholders to vote for their preferred combination of DuPont and Trian nominees using a single proxy card. Trian argued that it would provide shareholders with “maximum freedom of choice” and represent “best-in-class corporate governance.” After consulting “with a range of proxy and governance experts” and evaluating the DuPont shareholder base, DuPont rejected that request, contending that there was “insufficient infrastructure” to support the use of a universal proxy card and that the process could “undermine voting access” for DuPont’s huge contingent of retail shareholders. In particular, DuPont was concerned that “the use of a universal proxy card would limit voting options for our ‘Street-name’ holders, as well as deprive holders of the ability to simply sign and return voting forms without marking a preference.” At the annual meeting, Trian lost its bid, and DuPont’s full slate of nominees was elected. But the DuPont story ultimately ended favorably for Trian, notwithstanding its loss in the proxy contest. After the election contest, Trian reignited its battle to break up the company and, after the company failed to hit targeted earnings, the CEO resigned. DuPont ultimately entered into an agreement to be acquired. A new rulemaking from the SEC to mandate the use of universal proxy, adopted last week by a vote of four to one, would likely have affected the course of that campaign and perhaps its outcome.
The new rules, discussed in this adopting release, amend the federal proxy rules to mandate the use of “universal proxies” in all non-exempt solicitations in connection with contested elections of directors of operating companies. The SEC also amended the proxy rules to enhance disclosure about voting options and voting standards in all director elections. According to SEC Chair Gary Gensler, the 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….Today’s amendments will put these candidates on the same ballot. They will put investors voting in person and by proxy on equal footing. This is an important aspect of shareholder democracy.” The Council of Institutional Investors, which had petitioned the SEC in 2014 to adopt universal proxy, hailed the rule: “Imagine if, in a political election, you could vote only for Democrats or only for Republicans….That has been the dilemma facing most investors voting in a proxy contest at U.S. companies.”
Currently, in contested director elections, shareholders can choose to vote for candidates from both slates of nominees only if they attend the shareholder meeting in person. Otherwise, for the most part, they are required to choose an entire slate from one side or the other. (Dissidents’ “short slates” allow shareholders to select company nominees to round out the short slates, but again, shareholders are then forced to choose between the two entire slates.) Because a later-dated proxy revokes an earlier-dated one under state law, it is not practicable to split votes between slates. By mandating the use of universal proxies—proxy cards that, when used in a contested election, include a complete list of all candidates for director duly nominated by both management and dissidents—the SEC’s new rules will allow a shareholder voting by proxy to choose among director nominees in an election contest in a manner that closely mirrors in-person voting.
The SEC has dangled the possibility of imposing mandatory universal proxy in front of us for a long time. Apparently, the SEC considered requiring universal proxies back in 1992 and, in 2014, CII filed a rulemaking petition asking the SEC to reform the proxy rules to facilitate the use of universal proxies in proxy contests. Then, in 2016, the SEC proposed amendments to the proxy rules that would have mandated the use of universal proxy cards in contested elections. (See this PubCo post.) But it went no further. With the change of administrations in the White House, followed by the change of administrations at the SEC, the proposal for universal proxy fell off the SEC’s near-term radar and was relegated to the long-term agenda, with no action taken. (See this PubCo post.) Then, the proposal suddenly appeared on the SEC’s Spring 2020 RegFlex Agenda, identified as being at the final rule stage, with October 2020 given as the date for final action. (See this PubCo post.) But again, no action was taken…until this past April, when the SEC reopened the public comment period on the 2016 proposal to take into account subsequent market developments—for example, the increased incidence of adoption of proxy access bylaws and the proliferation of virtual shareholder meetings.
The SEC notes in the release that, as result of COVID-19, many companies have recently held virtual rather than in-person shareholder meetings. However, the proxy solicitations were usually conducted in the same manner as for in-person meetings, and, the SEC conluded, most shareholders are likely to continue to vote by proxy rather than attend and vote at the virtual shareholder meeting. During 2020, “the vast majority of shareholders who attended virtual shareholder meetings did not vote at the meetings. Instead, to the extent they voted, they did so in advance by proxy or via voting instruction forms submitted in advance of the meetings.” According to data cited by the SEC, “[b]ased on 1,957 virtual meetings hosted by one proxy services provider in 2020, the average number of shareholders voting at virtual meetings (rather than voting in advance by proxy) was 13 shareholders for meetings with shareholder proposals (218 cases) and 2 shareholders for meetings without shareholder proposals.” As a result, the SEC does not expect the use of virtual shareholder meetings to “obviate the need for the final rules regarding universal proxy cards.”
Universal proxy may sound anodyne, but it’s still been quite a hot potato, and strongly held opinions have been voiced about it, both pro and con. Back in 2015, then-SEC Chair Mary Jo White identified one hotly debated issue as whether universal proxies “would increase or decrease shareholder activism or otherwise impact the outcome of election contests. Some believed that it would embolden activists to run more contests. Others posited that it could stimulate increased cooperation and settlements between issuers and activists, thereby decreasing contests. No one specifically called into question the fundamental concept that our proxy system should allow shareholders to do through the use of a proxy ballot what they can do in person at a shareholders’ meeting.”
The historic view has been that dissidents—hedge fund activists and otherwise—tend to favor universal proxies, while companies have more often opposed them. However, it became apparent at a 2018 meeting of the SEC’s Investor Advisory Committee (see this PubCo post), that something of a consensus had by then developed on the potential value of universal proxy cards in proxy contests, as some issuers had apparently recognized that universal proxy could, in some cases, help the management slate. For example, a proxy advisory firm might recommend in favor of only two of the dissident candidates; however, shareholders would have difficulty following that recommendation because, in the absence of universal proxy, they would be compelled to either vote for only the two recommended directors or to choose one full slate or the other—and that could end up being the dissident slate.
At the SEC’s 2018 Proxy Process Roundtable, the participants debated some of the issues related to universal proxies. One issue that remained on the table was the percentage of shareholders that dissidents would need to solicit, with a hedge fund representative arguing for a low percentage, while others maintained that, to be fair, there should be parity with the solicitation requirements applicable to companies. A representative of the Society for Corporate Governance expressed concern about the possible permutations in the outcomes of the director vote—for example, what if there were no director who could be the audit committee chair? What would happen if the dissident violated the rules? What does the layout of the proxy card look like? Meetings involving proxy contests represented such a small sliver of the total number of meetings, she said, there was really no reason to distract attention from other larger issues. However, another panelist observed that the SEC’s 2016 universal proxy proposal was in pretty good shape and would not end up being a major distraction.
Many have argued about whether mandatory universal proxy will necessarily benefit management or dissidents. Some suggest that, in some circumstances, it may help companies if shareholders are so dissatisfied with the company that they don’t vote on any measures on the company’s proxy card, allowing even otherwise neutral measures to go down to defeat. Some suggest that, because universal proxy will make it easier to run election contests, it will necessarily benefit dissidents and encourage more election contests. In 2016, the WSJ reported on an academic study from Harvard Law School showing that, for the years 2008 through 2015, the current rules could have resulted in the wrong candidates being elected in as many as 22% of all votes. In the study, the author attempted to assess how shareholders would vote if they had access to universal proxy. To that end, he looked at “withhold” votes for one or more of the candidates identified on a card, which he interpreted as a protest vote. He found that, in 17 elections out of 77, “the number of shares withheld from a winning candidate could have put the losing candidate onto the board if shareholders had been allowed to vote on both cards. That amounted to 44 candidates who might have been elected in a universal ballot. Further, he found that there wasn’t a significant benefit to one side or the other: Eight times a dissident was elected that may not have been under a universal ballot, and six times the current rules benefited a management-nominee.”
FINAL RULES FOR UNIVERSAL PROXY
Under the final rules, the amendments to the proxy rules:
- Require the use of universal proxy cards in all non-exempt solicitations in connection with contested elections, including the names of both company and dissident nominees, along with certain proxy access nominees;
- Require dissidents to provide companies with notice of intent to solicit proxies in support of nominees (other than the company’s nominees) and the names of those nominees no later than 60 days before the anniversary of the previous year’s annual meeting;
- Require a company to provide dissidents with notice of the names of the company’s nominees no later than 50 days before the anniversary of the previous year’s annual meeting;
- Require dissidents to file their definitive proxy statements by the later of 25 days before the shareholder meeting or five days after the company files its definitive proxy statement;
- Require each side to refer shareholders to the other party’s proxy statement for information about the other party’s nominees and to the SEC’s website to access the other side’s proxy statement free of charge;
- Require dissidents to solicit the holders of shares representing at least a 67% of the voting power of shares entitled to vote on the election of directors;
- Prescribe presentation and formatting requirements for universal proxy cards designed to ensure that each party’s nominees are presented in a clear, neutral manner;
- Expand the concept of a “bona fide nominee” to include a person who consents to being named in any proxy statement for the next shareholder meeting to elect directors; and
- Eliminate the short slate rule.
In addition, the amendments require changes to the form of proxy and proxy statement disclosure requirements regarding voting options and voting standards applicable in all director elections, as discussed below.
The new rules become effective 60 days after publication in the Federal Register and will apply to shareholder meetings after August 31, 2022.
Mandatory use of universal proxy
New Rule 14a-19 will require that proxy cards used in a non-exempt solicitation in connection with a contested election include the names of all duly nominated candidates for election to the board presented for election by any party and for whom proxies are solicited, including any proxy access nominees that have satisfied applicable requirements.
The SEC decided not to make universal proxies optional to better protect the shareholder voting franchise, avoid their being used as tactical tools and minimize potential shareholder confusion. According to the SEC, the amendments “are intended to improve the mechanics of the proxy voting process, not influence its outcome,” and it is unclear whether the rule changes “will increase or decrease the number of proxy contests [or] increase the influence, directly or indirectly, of dissidents, including short-term activist investors.” The SEC was not persuaded that mandatory universal proxy “will lead to distraction for registrants, hamstring directors, and lead to greater ‘balkanization’ of boards”; when shareholders vote, they will have the same ability to evaluate boardroom dynamics as before. Even if universal proxy leads to greater incidence of “split” boards, the SEC was not persuaded that “split boards” will “necessarily lead to detrimental changes in board dynamics” or rather simply provide for diverse views, which some consider a positive development.
The economic analysis contained in the adopting release suggests that, in addition to permitting shareholders greater choice when voting by proxy in contested director elections, the amendments may also have a broader impact on corporate governance and the relationship between shareholders and management—and that impact could be significant: “For example, enabling split-ticket voting could lead to a greater number of boards that are composed of a mix of registrant-nominated and dissident-nominated directors, which may affect the effectiveness of boards, either positively or negatively. Additionally, mandating the use of universal proxies by registrants as well as dissidents—which, in practice, would likely result in the names of dissident nominees being disseminated via registrant proxy cards to all shareholders—may provide potential dissidents with a new means of generating publicity for alternative nominees or for the broader concerns behind a contest at a relatively low cost, which could change the nature of interactions between potential dissidents and management.” SEC staff review of 101 proxy contests initiated in 2017 to 2020 found that approximately 47% proceeded to a vote. In those cases, dissidents achieved some board representation in about 38% of these contests. “In six voted contests where dissidents achieved board representation, only some of the nominees on the dissident’s slate were elected to the board, which represents a ‘split-ticket’ outcome in around 13% of the contests that went to a vote. In 17 of the voted contests where dissidents achieved board representation, the end result was a ‘mixed board’ with directors elected from both slates.” The dissident’s nominees filled all the board seats in only one contest. Of course, with universal proxy, those results could easily change.
Contrary to the views of two of the SEC Commissioners, the SEC concluded that “a universal proxy requirement should not be dependent on the size of a dissident’s equity stake in a registrant or the period of time it has maintained its equity position” because it would be contrary to the purpose of universal proxy to replicate the ability of shareholders to vote through in-person attendance at a meeting.
Commissioner Hester Peirce was particularly concerned that the final rules will unduly advantage special interests “by serving as a tool for frivolous, as well as serious, activists.” In particular, she took issue with the “price of entry onto the company’s proxy card.” That is, she thought that the solicitation threshold of 67% was too “easy to meet or ignore”; she would have preferred a higher threshold and one that focused on shareholder accounts rather than voting power because, in her view, “dissidents will often be able to meet the threshold by soliciting a small number of institutional shareholders, while ignoring small shareholders.” In addition, she would have preferred that access be conditioned on a “demonstrated commitment” to the company through a minimum ownership threshold and minimum holding period. Her concern was that any “non-shareholder looking to further any cause” can just buy a share—or just raise the specter of doing so—which the activist can then leverage into negotiations with the company to further the cause. In her view, that type of activity “will distract managers from important company business but could result in changes that do not benefit the company.” She noted that the rule also lacks a clear enforcement mechanism with regard to the solicitation threshold.
Like Peirce, Commissioner Elad Roisman would have preferred inclusion of eligibility criteria, such as thresholds of ownership or holding periods for the company’s stock, although, unlike Peirce, he believed that, on balance the benefits of the new rule outweighed the problematic provisions and voted in favor of the new rule. While the 67% solicitation threshold may accomplish some of the same purpose, he wasn’t convinced that it was the “right percentage [or] whether it will operate as a proper substitute for an ownership and duration threshold.”
Given that a dissident must still persuade shareholders that its agenda is best and that all directors are still subject to state law fiduciary duties, the SEC did not believe that universal proxy would promote the interests of special interest groups.
Notice. The final amendments also require companies and dissidents to provide each other with notice of the names of their nominees by definitive dates so that the parties can file their proxy statements and universal proxy cards: a dissident will be required to provide a company with the names of its nominees no later than 60 calendar days prior to the anniversary date of the previous year’s annual meeting, and the company will be required to provide the dissident with the names of its nominees no later than 50 calendar days prior to that anniversary date. If no annual meeting was held during the previous year, or if the date of the meeting changes by more than 30 calendar days from the previous year, the dissident will need to provide notice 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 the company first makes a public announcement of the date of the annual meeting. A dissident’s notice would not be required if the dissident has already provided the information in a proxy statement filed with the SEC.
In addition, a dissident will need to indicate in its notice its intent to comply with the minimum solicitation threshold, as discussed below. This required statement will also have the effect of distinguishing the notice under Rule 14a-19 from “advance notice” under the company’s governing documents. Because the Rule 14a-19 notice will be in addition to any advance notice requirements, and because the 60-day deadline is 30 days later than the deadline the SEC found in most advance notice bylaws (typically, no earlier than 120 days and no later than 90 days prior to the meeting anniversary), the SEC believes that the deadline will not impose a significant additional burden.
If there are changes to the names of the nominees, the nominating party must provide prompt notice to the other party. If there is a change after dissemination of the universal proxy card, the other party has the option of disseminating a new universal proxy. If the dissident changes its intent to comply with the minimum solicitation requirement, it must provide prompt notice to the company. In addition, the company must advise in its proxy statement how it would treat proxy authority granted in favor of the dissident’s nominees in the event the dissident abandons its solicitation or fails to comply with Reg 14A.
Minimum solicitation requirement for dissidents. The universal proxy requirement will come into play only if the dissidents, in addition to the company, also conduct a meaningful solicitation. Under the final rules, dissidents will be required to solicit that number of shareholders holding in the aggregate at least 67% of the voting power of shares entitled to vote on the election of directors, an increase (from the proposed majority requirement) that was advocated by most commenters to deter potential dissident “freeriders” on the company’s proxy card. In the absence of a minimum requirement, dissidents would be able to simply capitalize on the company’s solicitation efforts without any expense of their own. Industry data noted in the release showed that, in a sample of 31 proxy contests for annual meetings held between July 1, 2018 and June 30, 2019, all dissidents solicited a number of shareholders that exceeded the 67% threshold. A dissident will also be required to include in its proxy materials a statement that it intends to solicit the holders of shares representing at least 67% of the voting power. If a dissident failed to meet the 67% minimum solicitation threshold, that failure would constitute a violation of Rule 14a-19 as well as a possible material misstatement in violation of Rule 14a-9, and the dissident would face the same liability as if it had violated any other proxy rules.
Proxy materials. To ensure that shareholders have timely access to information, dissidents will be required to file their definitive proxy statements by the later of 25 calendar days prior to the meeting date or five calendar days after the company files its definitive proxy statement (i.e., if the company files its definitive proxy statement fewer than 30 calendar days prior to the meeting date.) No deadline is provided for companies given that they generally have independent incentives to file proxy materials on a timely basis to conduct their own solicitations. The deadline may mean that some dissidents will need to prepare their proxy statements earlier than they might have otherwise; however, the SEC observes that “dissidents filed their definitive proxy statement 25 or more calendar days prior to the shareholder meeting date in 82% of the contests initiated in 2017 through 2020.” If a dissident fails to timely file its proxy statement, the company could elect to distribute a new, non-universal proxy card. If the dissident fails to comply with Rule 14a-19, the dissident will not be permitted under the rules to continue its solicitation.
As is the case today, each party will be required to provide the information required by Schedule 14A for its nominees in its proxy materials. New Item 7(h) of Schedule 14A will require each party to refer shareholders to the other party’s proxy statement for information about the other party’s nominees and explain that shareholders can access the other party’s proxy statement free of charge on the SEC’s website. Because the company likely sends its proxy materials to all shareholders, even those shareholders that do not receive the dissident’s proxy materials will be advised how to access information about the dissident’s nominees. In addition, Rule 14a-5(c) is being amended to permit one soliciting party to refer to information that will be contained in the other party’s proxy statement to satisfy its own disclosure obligations under Schedule 14A. Further, companies will need to indicate in their proxy statements the deadline for providing notice of a solicitation of proxies in support of dissident nominees under Rule 14a-19 for the next annual meeting.
Form of the universal proxy. The new rules also prescribe new formatting and presentation requirements for universal proxy cards. In particular, each universal proxy card must:
- Include the names of all duly nominated candidates for director;
- Clearly distinguish among company nominees, dissident nominees and any proxy access nominees, for example, by listing each party’s nominees in separate columns;
- Within each group of nominees, list the nominees in alphabetical order by last name;
- Use the same font type, style and size to present all nominees on the proxy card;
- Prominently disclose the maximum number of nominees for which authority to vote can be granted;
- Provide a means for shareholders to grant authority to vote “for” the nominees set forth on the card; and
- 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, or “overvotes”;
- grants authority to vote for fewer nominees than the number of directors being elected, or “undervotes”; or
- does not grant authority to vote with respect to any nominees.
To maintain design flexibility, the final rules do not prescribe any other aspects of the design beyond the requirements in the rules. Existing Rule 14a-4(a) already requires that the proxy card prominently identify whether the card is sent by the company or a dissident. The proxy card may also provide the ability to “vote for all” dissident nominees as a group and all company nominees as a group so long as there are no proxy access nominees and, unless the number of nominees of the company or the dissident is less than the number of directors being elected, the card also provides a similar ability to withhold authority to vote for the entire group (or “against all” where state law gives legal effect to against votes).
The universal proxy requirements will apply only to operating companies, not to registered investment companies, business development companies, foreign private issuers or companies with reporting obligations only under Section 15(d) of the Exchange Act.
Other changes designed to facilitate the use of universal proxies
Under current proxy rules, the so-called “bona fide nominee” rule prevents a party from including a nominee on its proxy card without the express authorization of that nominee—i.e., the nominee must have “consented to being named in the proxy statement and to serve if elected”—which, in proxy contests, is rarely provided to the opposing party. As a result, in a contested election, companies and dissidents each distribute proxy cards that name only their own nominees. The “short slate” rule addresses the bona fide nominee issue in part by allowing a dissident seeking to elect a minority of the board to solicit authority to vote for some of the company’s nominees, so long as the dissident represents that it will vote for all management nominees other than those specified.
The final rules change the concept of “bona fide nominee” to include persons who have consented to being named in any proxy statement relating to that annual meeting (and consented to serve), thus permitting parties in a contested election to include all director nominees on their proxy cards. The final rules also eliminate the short slate rule as no longer necessary (although the rule will be retained for funds in contested elections).
VOTING OPTIONS AND VOTING STANDARDS DISCLOSURE
The new amendments also include changes related to voting options and voting standards that will apply to all director elections, not just those of operating companies. The amendments were originally proposed in 2016 as a consequence of a staff review of proxy statements, which found a number of inaccurate or ambiguous references, such as the mistaken use of an “against” option instead of a “withhold” option in the context of a plurality voting standard, the mistaken use of a “withhold” option instead of an “against” option in the context of a majority voting standard, and incorrect statements that “withhold” votes are counted in determining the outcome of the vote. The amendments to Rule 14a-4(b) will:
- mandate the inclusion of an option to vote “against” in lieu of an option to “withhold authority to vote” where there is a legal effect to “against” votes and prohibit including an “against” option where “against” votes have no legal effect; and
- allow shareholders the option to “abstain” (rather than “withhold authority to vote”) where there is a majority vote standard.
The final rules also amend Item 21(b) of Schedule 14A to expressly require the disclosure of the effect of a “withhold” vote. For example, where a plurality vote standard applies, a “withhold” vote has no real impact because a director nominee in an uncontested election needs only a single vote to be elected.