On November 17, 2021, the U.S. Securities and Exchange Commission adopted rules requiring the use of universal proxy cards in contested director elections as discussed in Release No. 34-93596 (the Adopting Release). Universal proxy cards list all nominees of both the company and the dissident stockholder, and allow the voting stockholder to allocate his or her votes for the seats being contested freely among all the nominees. The rules as adopted are generally consistent with those that the SEC proposed in 2016 in Release No. 34-79164, and for which the SEC reopened the long-expired comment period in May 2021. The new rules, which will become effective for any stockholder meeting featuring a contested election of directors occurring after August 31, 2022, also include two specific voting standard disclosure and voting option provisions.
At annual stockholder meetings, companies invariably nominate individuals to fill all the seats on the board of directors that are up for election at such meeting. In a contested election, a dissident stockholder proposes its own slate of nominees for some, a majority, or all the seats that are up for election. A stockholder who attends the annual meeting and votes in person by ballot at the meeting can pick and choose among the company’s and the dissident’s nominees to fill all of the seats being voted upon.
However, the vast majority of votes at stockholder meetings are not those cast by stockholders attending in person. Rather, they are cast by proxy holders upon whom stockholders confer the authority to vote their shares at the annual meeting. These stockholders direct their proxy holders how to vote their shares on the matters before the meeting, including the election of directors. However, due to technicalities in the federal proxy statement rules, stockholders who vote by proxy do not have the same level of discretion in voting in contested elections as stockholders voting in person.
In contested director elections, both the company and the dissident provide stockholders with its own competing proxy card that allows stockholders to vote for their slate of nominees (and other provisions submitted to stockholders at the meeting). Rule 14a-4(d)(4) of the federal proxy rules, also known as the “bona fide nominee” rule, effectively provides that a proxy card may include a nominee only if that nominee agrees to being named on that card.
In practice, company nominees have not consented to being named on the dissident’s card, in part due to potential unwillingness to serve on a board if they do not know who their fellow directors will be. Similarly, companies have seldom sought to include dissident nominees on their proxy cards. In addition, state laws typically provide that the last received proxy card will replace and invalidate any previously received proxy card. Consequently, stockholders have been presented with the binary alternatives of voting for the nominees named in the company’s proxy card or for those named in the dissident’s card, but not the alternative to pick and choose between the two slates.
New Universal Proxy Rules
The new rules will require the use of universal proxy cards in essentially all contested elections of directors. Accordingly, the proxy cards provided by the company and the dissident stockholder must include all the duly nominated director candidates (i.e., the nominees of the company and the dissident) and allow the stockholder to choose among them when giving the proxy. This will allow stockholders voting by proxy to vote for their desired contingent of company and dissident nominees, including of course voting for all of the company’s or all of the dissident’s candidates – as well as the ability to choose some mix.
The use of universal proxy cards is permitted by revising the definition of “bona fide nominee,” to mean a person who has agreed to be named as a nominee in any proxy statement related to the company’s director election.
The new rules also impose timing requirements for contested elections:
- Dissidents must provide the company with notice of their intention to solicit proxies, and the names of their nominees, no later than 60 days before the anniversary of the prior year’s annual meeting, unless the information has been included in a preliminary or definitive proxy statement filed by the dissident (with alternative deadlines if the meeting is delayed more than 30 days from the anniversary);
- The company must notify dissidents of its nominees no later than 50 days before the anniversary of the prior year’s annual meeting; and
- Dissidents must file their definitive proxy statements by the later of 25 days before the stockholder meeting or five days after the company files its definitive proxy statement for the meeting.
The Adopting Release notes that companies may already have advance notice bylaw provisions that require notice further in advance than the new rules, and these provisions will continue to govern the required timing for the presentation of matters at a stockholder meeting.
Minimum Solicitation Requirements
The new rules do not contain any requirement that the dissident hold a minimum number of shares or have held shares for a minimum period of time. Such thresholds are, of course, required for stockholder proposals to be included in the company’s proxy statement under Rule 14a-8. As a modest counterweight to this flexibility afforded dissident stockholders, the new rules require that the dissident solicit the holders of at least 67% of the voting power of the shares entitled to vote at the meeting. The SEC regards this requirement as imposing a meaningful burden on dissidents and thus likely to limit the use of the new rules to those dissidents willing to undertake this meaningful commitment.
The new rules require that each side refer in its proxy statement to the other party’s proxy statement for information about the other party’s nominees, and also refer readers to the SEC’s website to access the other side’s proxy materials free of charge.
Further, the new rules establish presentation and formatting requirements for universal proxy cards that ensure that each party’s nominees are presented in each card in a clear, neutral manner. These include requirements that:
- The proxy card set forth the names of all duly nominated director candidates;
- The proxy card provide a means for stockholders to grant authority to vote for the nominees set forth;
- The proxy card clearly distinguish among registrant nominees, dissident nominees and any proxy access nominees;
- Within each group of nominees, the nominees be listed in alphabetical order by last name on the proxy card;
- The same font type, style and size be used to present all nominees on the proxy card;
- The proxy card prominently disclose the maximum number of nominees for which authority to vote can be granted; and
- The proxy card 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.
The new rules also permit (but do not require) the universal proxy card to allow a stockholder to grant authority to vote for all of the nominees of either the company or the dissident as a group, subject to certain other requirements for this group voting option.
The new rules do not apply to investment companies registered under Section 8 of the Investment Company Act of 1940 or business development companies as defined under that Act.
Elimination of the Short Slate Rule
In 1992, the SEC adopted the so-called “short slate” rule, which allowed a dissident to solicit votes for some of the registrant’s nominees on the dissident’s card if the dissident was proposing a slate of fewer than all of the seats to be filled. The SEC deemed this option to be obsolete by the new universal proxy rules, and, accordingly, the short slate rule has been rescinded.
The new rules require the inclusion of an “against” vote in lieu of a “withhold authority to vote” option on the form of proxy for the election of directors where there is legal authority for such a vote. Further, the new rules prohibit the inclusion on a proxy card of the option to vote “against” a nominee if such a vote would have no legal effect.
Many companies have already adopted majority voting provisions in their charter documents requiring that nominees receive more “for” than “against” votes, which provisions already mandate a vote “against” option. The requirement to allow an “against” vote would not be applicable to contested elections, as in such elections, nominees securing the plurality of votes cast are elected. The new rules also require that stockholders have the ability to “abstain” rather than “withhold authority to vote” in an election governed by a majority voting standard.
It seems quite likely that these new rules will further encourage activist stockholders to run their own slates of directors, as stockholders will now be able to vote for dissident nominees on the company’s proxy card.
Further, the mere existence of the tool embedded in the new rules could create greater negotiating leverage for activists seeking to cause certain changes in the operations or governance of the company. Certainly, the failure to include any minimum ownership thresholds will make it easy for activists of any stripe to avail themselves of this powerful new tool, regardless of the level of their commitment to, or investment in, the company.
The lone dissenting SEC Commissioner Hester Peirce expressed her concern that the new rules may facilitate changes to the company that advance special interests rather than enhancing corporate value by serving as a tool for frivolous, as well as serious, activists. To address this risk, more companies may explore adoption of stockholder eligibility requirements in their bylaws governing the validity of director nominations.
Given these concerns, the new rules will make it even more important for companies to engage as effectively as possible with their stockholders to best position themselves for future election contests.