In a win for activist shareholders, on November 17, 2021, the SEC voted to adopt final rules requiring the use in contested director elections of domestic issuers of "universal proxy cards," or proxy cards naming all director nominees presented for election, including those of the company and the dissident shareholder.1
This change will give shareholders the ability to vote by proxy for their preferred combination of candidates nominated by the company's board of directors and the dissident shareholder in a contested election (also known as a "proxy contest"), which the SEC believes will put companies and investors on an equal playing field,2 given how few shareholders actually attend a company's annual meeting in person.
The Pre-Universal Proxy Card State of Play
Currently, in contested director elections, shareholders can choose from both slates of nominees only if they attend a company's annual meeting in person. If voting by proxy, shareholders are essentially required to choose an entire slate of candidates from either the company side or an entire slate of candidates from the dissident side.3 Where a dissident has only nominated candidates composing a minority of the board, the dissident may also present for shareholder election a combination including the dissident's candidates (known as a "short slate") plus a set of company candidates chosen by the dissident.4
What Will Change with the Universal Proxy Card Rules
A universal proxy card lists all duly-nominated director candidates from all parties on one card, allowing shareholders to vote through the proxy process in the same manner as they could by voting in person. The universal proxy card rules will apply to all non-exempt solicitations for contested elections,5 other than those involving registered investment companies and business development companies, and will take effect for shareholder meetings held on or after September 1, 2022.
1. Universal Proxy
New Rule 14a-19:
- Requires the use of a universal proxy card by all participants in a director election contest not exempt from the SEC's proxy rules. The universal proxy card must include the names of both company and dissident nominees, along with any other shareholder nominees included as a result of proxy access bylaws to the extent applicable.
- Requires dissidents to:
- Provide companies with notice of their intent to solicit proxies and the names of their nominees at most 60 calendar days before the anniversary of the previous year's annual meeting;
- 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; and
- Solicit shareholders of the company representing at least 67 percent of the voting power of the shares entitled to vote at the meeting.
- Requires companies to notify dissidents of the names of the companies' nominees at most 50 calendar days before the anniversary of the previous year's annual meeting.
- Requires each side in a proxy contest to mail (or provide through the "notice and access" method of mailing a notice of Internet availability and posting the proxy materials on a website) the proxy card and their respective proxy statement, and to refer shareholders to the other party's proxy statement for information about the other party's nominees and to the SEC's website for access to the other side's proxy statement free of charge.
- Establishes presentation and formatting requirements for universal proxy cards, which ensure that each party's nominees are presented in a clear, neutral manner.
2. Changes to the Form of Proxy and Proxy Statement Disclosure Requirements
To further facilitate shareholder voting in director elections, the SEC also amended the proxy rules to mandate that in all director elections, contested and uncontested, proxy cards clearly specify the applicable shareholder voting options and that proxy statements disclose the effect of a shareholder's election to withhold their vote.6 Most companies already provide this disclosure in a Q&A format as a default, so the rule amendments formalize a long-standing practice. A company must also disclose in its annual proxy statement the deadline for shareholders to give timely notice to the company of dissident nominations for inclusion on a universal proxy card in connection with the next annual meeting.7
3. Changes to the "Bona Fide Nominee" Rule
The rule amendments also amend Rule 14a-4 to expand the definition of a "bona fide nominee" to include a person who consents to being named in any proxy statement (whether the dissident or the company's) for the next shareholder meeting for the election of directors. As a result, outside of the context of contested elections, an activist shareholder soliciting for another proposal could always choose to include all or some of the company's nominees on its proxy card. Additionally, in a "vote no" campaign, where a dissident shareholder only asks that shareholders withhold their votes for the company's nominees but does not present its own slate, the dissident could provide shareholders with a proxy card listing only the company nominees it supports.
What this Means for Companies and Shareholders
- Potential Increase in Number of Contested Elections Due to Decreased Cost and Low Barriers to Entry. The use of a universal proxy card makes a dissident's campaign less costly by eliminating the need for a dissident to re-mail proxy cards each time the company does so, as there will no longer be the risk of a shareholder effectively switching slates by using the latest card it receives from the company. Additionally, the requirement to solicit 67 percent of all shareholders may not be a deterrent to launching a contest except at companies with a significant retail shareholder base, because for many companies, 67 percent of their shares are represented by institutional investors. While dissidents will thus most likely still need to create and mail their own proxy statements, the cost to solicit is unlikely to be prohibitive to dissidents and could potentially increase the number of contests in which dissidents are willing to engage.8 Unlike proxy access rules voluntarily adopted by some companies, these amendments also do not provide barriers to entry in the form of minimum amounts or durations for stock ownership, and they do not seem to provide obvious consequences for shareholders who initiate a proxy contest but do not intend to follow through with the contest. It is important for companies to take stock of their shareholder activist preparedness and defenses in order to be prepared for potential increased shareholder activism in upcoming proxy seasons.
- Possible Use of Proxy Campaigns to Further a Broader Set of Issues, Including ESG-Related Issues. Considering the market's focus on ESG issues, the decreased cost and low barriers to entry in the universal proxy card rules may result in activists using proxy campaigns to further a broader set of issues, particularly ESG-related changes. Moreover, this could potentially lead to more successful proxy contests, like those that took place at ExxonMobil's 2021 annual meeting, where a dissident pressuring the company to set a "climate transition" plan won three seats on the company's 12-member board. In that contest, BlackRock supported three of the dissident nominees and Vanguard supported two, indicating the potential for institutional support for such dissident candidates.
- Further Leverage for Dissidents Outside of Contested Elections. The ease of putting forward their own candidates (for the reasons specified above) will likely provide dissidents with leverage for negotiating with boards, which may ultimately allow them to place more dissident candidates on boards using negotiations, in addition to proxy contests. Universal proxy cards may also arm dissidents with an additional tool in their arsenal when conducting "vote no" campaigns. While the universal proxy card requirement does not apply to "vote no" campaigns, the changes to the "bona fide nominee" rule will permit a dissident using a proxy card in such campaigns to include the names of, and solicit votes for, company nominees and then encourage shareholders to vote "withhold" or "against," which may promote the use of dissident proxy cards in such campaigns (which is currently very unusual).
- Increased Importance of Advance Notice Bylaws. Advance notice bylaws are bylaw provisions, allowed in Delaware and other states, that require dissident shareholders wishing to nominate directors before a company's annual meeting to meet specific timing requirements and provide specific information about dissident candidates. The SEC's universal proxy card rules only apply to solicitations permitted under the laws of a company's jurisdiction of organization. With the new universal proxy card rules, advance notice bylaws may become more important as an non-federal-law means of ensuring that companies can obtain information to properly evaluate and respond to potential director candidates sufficiently in advance of elections. Typically, advance notice bylaws require notice by dissident shareholders at least 90 days before the anniversary of the prior year's annual meeting, thus giving the company additional time to evaluate and prepare a response to any dissident candidates.9 Companies should be sure to review their advance notice bylaws to ensure they are leveraging their advance notice bylaws sufficiently. It is also not clear whether companies may try to add more barriers to entry in their advance notice bylaws to curb proxy contests, and whether state courts where companies are organized will uphold these additional requirements.
- Additional Form Check Items in Proxy Statements. Companies should ensure that all of the required disclosure under the new and/or amended rules is present and accurate, including the date for submission of dissident nominations and the explanation of a "withhold" vote in an election of directors, as well as the inclusion of "against" and "abstain" options in director election proposals on proxy cards, where applicable. It will be especially important for companies facing a contested director election to conform their disclosure and solicitation process to these new and/or amended rules, as the SEC will likely be paying close attention.
- Potential Increase in Use of "Notice and Access" by Dissidents. Given that the new rules do not mandate a specific method of furnishing the proxy materials, we may also see an increase in the use of the less costly e-proxy delivery method (i.e., the "notice and access" method of mailing a notice of Internet availability and posting the proxy materials on a website). While dissidents rarely use notice and access in proxy contests currently, there may be some noticeable increase in their use of this, now that they do not have to send out their own proxy cards to every shareholder (insofar as their nominees are already listed on the company's card). Dissidents could also choose to use more cost-effective means to provide further information on nominees (such as social media), combined with a stratified mailing strategy to further increase efficiency.
- Potential Benefit for Companies in Particularly Difficult Contested Elections. When a dissident seeks control of the board, such as in a hostile takeover context, a universal proxy card will let shareholders choose a mix of company and dissident candidates, rather than forcing shareholders to have to choose between the company's slate and the dissident's majority control slate. The universal proxy card may also make it easier for proxy advisory firms to recommend voting for a combination of company and dissident candidates in a contest for control.
1 The final rule is available here.
2 See the SEC's press release, available here.
3 The reasons for this come from both state and federal law.
• Because there is no requirement for a universal proxy card, a dissident and a company each send a proxy card to shareholders, with the company's proxy card typically listing only the company's nominees and the dissident's proxy card typically listing only the dissident's nominees. Under state law, a later-dated proxy revokes an earlier-dated one, so only one proxy card can be counted.
• Under the "bona fide nominee" requirement of SEC Rules 14a-4(d)(1) and 14a-4(d)(4), in an election contest other than as described in footnote 4 below, one party cannot include the other party's nominees on its proxy card without the other party's nominees' consent, which is rarely given.
4 SEC Rule 14a-4(d)(4) allows dissidents to use a "short slate" proxy card without the consent of the company's nominees, although shareholders voting via the dissident's proxy card cannot elect company nominees other than those selected by the dissident for inclusion on the card.
5 Communications that constitute "solicitations" under Rule 14a-1(l) are subject to the information and filing requirements of the federal proxy rules. However, Rule 14a-2(b)(1) provides an exemption from the SEC's information and filing requirements for "any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another's behalf, the power to act as a proxy for a security holder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization."
6 Changes to the form of proxy and proxy statement disclosure requirements applicable to all director elections, not only contested elections, require:
• All proxy cards to include an "against" voting option in director elections, when there is a legal effect to a vote against a director nominee;
• That the proxy card provide shareholders with the ability to "abstain" in a director election where a majority voting standard applies; and
• That proxy statement disclosure includes an explanation of the effect of a "withhold" vote in an election of directors.
See amended Rule 14a-4(b).
7 New Rule 14a-5(e)(4).
8 This echoes concerns expressed by SEC Commissioner Hester Peirce in her dissent. 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 thought that the solicitation threshold of 67 percent was too "easy to meet or ignore" and would have preferred a higher threshold 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" could purchase a share and then leverage this in negotiations with the company, which "will distract managers from important company business" and "could result in changes that do not benefit the company."
9 Given this market practice, the new 60-day requirement in the universal proxy card rules is unlikely to act as a deterrent to dissidents.