Shareholder activism continued unabated in 2022 and we see very little to suggest that will change in 2023. Overall, the number of activist campaigns were up 36% in 2022.[1] However, activists continue to struggle to consistently win board representation when proxy contests have gone all the way to a shareholder vote; of the 70 proxy contests that went to a shareholder vote in 2022, only 34 saw the activist shareholder win board representation.[2] Indeed, several large and prominent activists lost shareholder votes in 2022. For example, Starboard Value’s campaigns for board representation at both Box, Inc. and Huntsman Corporation, and Ancora Advisors’ campaign for board representation at Blucora, Inc., all failed, with the management slates being elected in full.[3]

Against this backdrop, the amendments to the proxy rules adopted by the U.S. Securities and Exchange Commission (the SEC) requiring the use of a “universal proxy card” have become effective.[4] We examine below the potential impacts of the universal proxy card and provide practical advice on how companies can prepare.

The SEC’s Universal Proxy Card Requirements

In November 2021, the SEC adopted amendments to the proxy rules to require the use of a universal proxy card in proxy contests for most SEC registrants. The universal proxy rules do not apply to registered investment companies, business development companies, and foreign private issuers.[5] The amended rules apply to shareholder meetings held after August 31, 2022.[6]

In general, the universal proxy rules:

• mandate the use of a universal proxy card in contested elections that includes the names of both company and dissident nominees, as well as certain other shareholder nominees resulting from proxy access;
• require dissidents to notify companies of their intent to solicit proxies and the names of their nominees no later than 60 calendar days before the anniversary of the previous year’s annual meeting;
• require companies to notify dissidents of the names of their nominees no later than 50 calendar days before the anniversary of the previous year’s annual meeting;
• require each side in a proxy contest to refer shareholders to the other party’s proxy statement for information about the other party’s nominees;
• require dissidents to solicit the holders of at least 67% of the voting power of the shares entitled to vote at the meeting;
• specify formatting and presentation requirements for universal proxy cards (for further details, see Appendix A below); and
• require that proxy cards (i) include an “against” voting option for director nominees where such options have legal effect, (ii) include an “abstain” option for director elections where a majority voting standard applies, and (iii) require disclosure about the effect of a withhold vote in director elections.

Background

Historically, the company and a dissident shareholder distributed separate proxy cards. Since shareholders could only submit one effective proxy card, shareholders voting by proxy in a contested election were generally unable to vote for a combination of director nominees from competing slates (i.e., they couldn’t “mix-and-match” some nominees from the company’s slate and some from the dissident’s slate), while shareholders attending the meeting and voting in person could vote for any combination of nominees. Going forward under the universal proxy card regime, each side will need to provide a proxy card that includes the names of both company and dissident nominees and requires each side to refer shareholders to the other party’s proxy statement for information about the other party’s nominees.

Potential Impacts of the New Rules

While we are early in the proxy season and the full impact of the rule change remains to be seen, there are likely to be important consequences which public companies should consider:

• With shareholders able to cherry-pick nominees from competing slates, it seems more likely that dissidents will win minority representation. Shareholders previously reticent to use all their votes on a short slate of director nominees can now make use of all their votes, using some for the dissident’s short slate and some for company nominees. It is also possible that dissidents will be more likely to nominate short slates rather than full slates and continue the trend of nominating industry experts with extensive qualifications instead of the activist’s employees or affiliates. On the other hand, the shareholders’ ability to pick and choose from both proxy cards may make it less likely for dissidents to succeed in electing a majority of the board unless shareholders perceive the need for radical change or the dissident is proposing an acquisition favored by the shareholders.
• Although the universal proxy card may not materially affect an established activist investor’s willingness to commence a proxy contest, the enhanced ability to elect a minority slate might be attractive to smaller, newer, or “occasional” activists who might have otherwise shied away from the expense and resource requirements of a proxy contest, given the uncertain outcome.[7]
• The shareholders’ ability to choose individual director nominees instead of entire slates will likely result in a greater focus on individual nominees’ skills and credentials, not only in relation to one another but also in terms of the board’s overall composition. Shareholders will expect clear communication and detailed disclosure of the nominee’s qualifications and experience. It is possible that companies and dissidents will both resort to more personal attacks on the opposition’s nominees in heated proxy contests. In addition to raising the stakes for the director nominees themselves, this could make proxy contests even more hostile and contentious.
• The influence of proxy advisory firms such as ISS and Glass Lewis could increase further, as some shareholders may search for additional guidance and expertise in making their voting decisions from among a broad array of choices rather than the previous binary decision between the company slate or the dissident slate. There is also an enhanced risk of inconsistent recommendations from the proxy advisory firms.
• The considerations noted above could affect the dynamics of, and relative leverage in, settlement negotiations between a dissident and the company.

Board Composition and Selection

With proxy contests likely to entail more focus on the background, qualifications, history, and performance of individual director nominees, as well as their place in the overall composition and qualifications of the board, the need has never been greater for boards to carefully review their slate of directors—individually and as a collective whole—to root out any unknown vulnerabilities. Companies (and nominees) should assume that any potential ammunition provided by a nominee’s past will be uncovered and exploited by a dissident shareholder. (Indeed, activists should also anticipate a similar deep dive into their own nominees.)

In any event, companies should reexamine their proxy materials and related disclosures and processes, including director biographies and skills matrices. Directors’ biographies are an opportunity to highlight particularly relevant or valuable characteristics or qualifications, and the director skills matrix allows companies to explain what they believe are the skills most critical to the business and how their board composition addresses those critical needs. Companies may also consider a review of their standard director nominee questionnaire in light of these considerations.

Bylaw Amendments

To ensure that dissident shareholders adhere to the requirements of the new rules, public companies may choose to amend their bylaws to build in these requirements. It is best to implement these changes on a “clear day” before any activist campaign is initiated. These amendments could include, among others, provisions that:

• require dissidents to comply with the proxy rules and provide reasonable evidence of compliance;
• require dissidents to solicit the holders of at least 67% of the voting power of the shares entitled to vote at the meeting;
• require dissidents to notify the company within a specified period if they no longer intend to solicit proxies in accordance with the proxy rules;
• prohibit dissidents from using a white proxy card, which is reserved exclusively for use by the company; and
• provide that, if a dissident fails to comply with the new rules, any proxies or votes solicited will be disregarded.

Companies may also use the occasion of universal proxy-related amendments to reevaluate and enhance their advance notice bylaws more generally. A regular periodic and holistic review of the company’s corporate governance and defensive measures, including its bylaws, to ensure they remain appropriately balanced and protective of shareholder interests is a prudent approach.

On the other hand, any changes should be reasonable and not overly aggressive. Overly aggressive advance notice bylaws may be challenged by activist investors, proxy advisory firms, and/or shareholders at large.  For example, in a recent lawsuit brought by an activist investor against Masimo Corporation, the activist challenged Masimo’s very aggressive advance notice bylaws, which required a dissident shareholder to identify (among other things) the names of the activist’s passive limited partners and their families’ investment holdings in the company’s competitors or litigation counterparties, any plans the dissident has to nominate directors to other public company boards in the next twelve (12) months, and the names of any shareholders who have already expressed any support for the dissident’s nominations.[8]

Appendix A – Universal Proxy Card Requirements

The SEC amended the formatting and presentation requirements for universal proxy cards to require the conditions below, among others:

• 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 in the proxy card;
• The proxy card must clearly distinguish among company nominees, dissident nominees, and proxy access nominees, with nominees being listed in alphabetical order within each group;
• The proxy card must present all nominees in the same font type, style, and size;
• 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.

[1] FactSet.

[2] Id.

[3] Id.

[4] Release No. 34-93596, Universal Proxy (Nov. 17, 2021), (the “Adopting Release”).

[5] While foreign private issuers (FPIs) were not specifically excluded from the universal proxy card requirements like registered investment companies and business development companies, FPIs are exempt from the proxy rules altogether under Rule 3a12-3(b).

[6] See U.S. SEC Adopts Universal Proxy Card Rules (Dec. 15, 2021).

[7] We note that only a small minority (approximately 15–25%) of activist campaigns are launched by dedicated activists. “Occasional activists,” including individual shareholders such as founders and current or former officers and directors, have become significantly more common in recent years. Prominent examples in 2022 include Aerojet Rocketdyne and AIM ImmunoTech.

[8] Politan Capital Management LP, 2022 WL 14813970 (Del. Ch.).

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