The rules regarding a company’s ability to use discretionary authority to vote proxies at a stockholders meeting are probably some of the most complex proxy rules to understand, but it is critical to understand them, especially in a contested election.

In its simplest form, a proxy card lists each separate proposal to be acted on and provides the ability to vote for or against or to abstain from voting on the proposal. If the proxy card is properly signed and the boxes are appropriately marked, the proxy holder will vote the shares represented by the proxy card in accordance with the stockholder’s instructions. If the stockholder does not sign the proxy card, no proxy is granted. Discretionary authority fills in the gap and applies if (1) the stockholder signs the card and doesn’t check any boxes indicating how to vote or (2) a proposal is properly brought before the meeting but was not listed on the proxy card.

The first situation is covered by Rule 14a-4(b)(1), which provides that if a proposal is included on the proxy card and a shareholder returns a signed proxy card without indicating how to vote on the matter, the proxy holder may vote the shares in accordance with its own recommendation.

The second situation is governed by Rule 14a-4(c) and encompasses non 14a-8 proposals. It could arise if the company does not have an advance notice bylaw provision and a stockholder makes a proposal from the floor of the meeting. This situation more typically arises, however, in a contested election when the stockholder presents proposals in addition to a competing director slate and is soliciting its own proxies. To better understand how discretionary authority works in this situation, it is helpful to understand how the proxy card is formatted.

Rule 14a-4(a) governs the form of proxy and provides that unless discretionary authority is conferred on a proposal under Rule 14a-4(c), each proposal must be included impartially on the proxy card and the shareholder must be able to vote for or against or abstain with respect to each proposal. Stated differently, a proxy card does not confer authority to a proxy holder to vote on proposal unless the proposal is specifically listed on a proxy card or the proxy holder has discretionary authority to vote on the proposal under Rule 14a-4(c).

Under Rule 14a-4(c)(1), if the company did not have timely notice of the proposal, the proxy card may confer discretionary authority to vote on the proposal if a specific statement is made to that effect in the proxy materials. This is the discussion in all proxy statements that says something like, “The Board is not aware of any other matter to be acted upon at the meeting. If any other proposal is properly brought before the meeting, it is intended that the proxies will be voted on any such matters in accordance with the judgment of the persons voting such proxies.” In short, if the company did not have timely notice of the proposal, the proposal need not be discussed specifically in the company’s proxy statement, it may be excluded from the proxy card, and the company’s proxy committee may vote in its discretion on the matter, which usually means against the shareholder proposal. This is a great position to be if you are the company.

The proposal proponent’s strategy, however, is to force a company to include the proponent’s proposal in the company’s proxy materials. Thus, as a threshold matter, if the proponent of a proposal wants to shut off the company’s discretionary authority, it needs to timely submit the proposal.

14a-4(c)(2) provides that if the company receives timely notice of the proposal, it can still obtain discretionary authority to vote on the proposal if it includes, in its proxy statement, advice on the nature of the matter and how the company intends to exercise its discretion to vote on the proposal. The proposal proponent, however, may still eliminate the company’s discretionary authority if the proponent (1) notifies the company that it intends to solicit sufficient proxies to carry the proposal under applicable law, (2) included that same statement in its proxy materials, and (3) certifies to the company that it has delivered its proxy materials to a sufficient number of stockholders to carry the proposal. Once the proponent completes these steps, the company must include the proposal in its proxy materials if it wants to obtain authority to vote on the proposal. (The company would still have the first type of discretionary authority, i.e., to vote on the matter if the proposal is specifically listed on the registrant’s proxy card and a stockholder returns a signed but unvoted proxy card.)