On Nov. 17, 2021, the U.S. Securities and Exchange Commission (SEC) announced the adoption of final rules, including a new Rule 14a-19 and amendments to existing rules under the Securities Exchange Act of 1934. The new rules require the use of universal proxy cards that provide the names of all director nominees in non-exempt contested director elections, including the names of both registrant and dissident nominees, as well as any proxy access nominees.
The new rule and amendments will be effective 60 days after publication in the Federal Register, and will apply to any shareholder meeting held after Aug. 31, 2022.
Currently, a party in a contested election is not permitted to include the names of the other party’s nominees on a proxy card without the other party’s nominees’ consent, which is rarely, if ever, provided. Consequently, in a contested election, a shareholder is not able to use a proxy card to vote for a combination of director candidates nominated by the issuer and a dissident shareholder. If the shareholder wishes to vote for a combination of all the director nominees, the shareholder can only do so by voting in person at the shareholder meeting.
Once the new rules go into effect, the use of a universal proxy card will be required in all non-exempt elections in which a dissident shareholder solicits votes for its own director nominees. Contested elections of registered investment companies and business development companies are exempt from the requirement to use a universal proxy card.
Further, under the new rules, a dissident shareholder who solicits proxies in favor of a proposal or engages in a “vote no” campaign, but who does not present its own slate of competing nominees, will be permitted to include all, or only some, of the company’s nominees on its proxy card. The SEC recommends, however, that the dissident disclose the fact that it is not listing all such nominees, in order to avoid potential liability under Rule 14a-9 for omission of material facts.
Notice and Timing Requirements
The final rules include certain notice and filing requirements on both dissident shareholders and companies.
Dissidents must provide issuers with notice of their intent to solicit proxies and provide the names of their nominees no later than 60 calendar days before the anniversary of the previous year’s annual meeting. However, if an issuer includes an earlier notice deadline in its governing documents, the dissident shareholder must comply with that earlier deadline. The new rules also set a deadline by which dissident shareholders must file a proxy statement – the later of 25 calendar days before the annual meeting and five calendar days after the company has filed its definitive proxy statement.
Issuers must notify dissidents of the names of the issuer’s nominees no later than 50 calendar days before the anniversary of the previous year’s annual meeting unless the issuer already provided the names in a preliminary or definitive proxy statement. The company must also disclose in its proxy statement how it intends to treat proxy authority granted in favor of a dissident’s nominees in the event the dissident abandons its solicitation or fails to comply with Regulation 14A, including the deadline for filing a definitive proxy statement.
The SEC also notes in the final rule release that if, after a company disseminates its universal proxy card, the dissident fails to meet the filing deadline, the company can elect to disseminate a new, non-universal proxy card including only the names of the company’s nominees.
Minimum Solicitation Requirement for Dissidents
The amendments also require that a dissident include in its proxy statement or on its proxy card a statement of its intention to solicit the holders of shares representing at least 67 percent of the voting power of the shares entitled to vote at the meeting. Prior to these rule changes, dissidents were not required to solicit any minimum number of shareholders in an election contest.
The purpose of the new minimum solicitation requirement is to prevent dissidents from capitalizing on the registrant’s solicitation efforts without undertaking their own meaningful solicitation efforts, which the SEC acknowledged could potentially expose registrants to frivolous proxy contests. The SEC did not, however, adopt a special mechanism for ensuring compliance with the minimum solicitation requirement.
Access to Information About All Nominees
Although a party is not required to include information about the other party’s nominees in its proxy statement, the amendments require that each party in a contested election direct shareholders to the other party’s proxy statement for information about that other party’s nominees and inform shareholders that they can access the other party’s proxy statement without charge on the SEC’s website.
Formatting and Presentation of the Universal Proxy Card
While issuers and dissidents will still be able to exercise a certain amount of flexibility as to the design of proxy cards, the amended rules include certain requirements related to presentation and formatting of the universal proxy card for consistency and ease of use. The new rules will require that universal proxy cards:
- Set forth the names of all duly nominated director candidates.
- Clearly distinguish among company nominees, dissident nominees and proxy access nominees, if any.
- Within each group of nominees, list the nominees in alphabetical order by last name.
- Use the same font type, style and size for all nominees.
- 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.
- Prominently disclose the treatment and effect of a proxy card that is executed to (i) grant authority to more nominees than there are open seats, (ii) grant authority to fewer nominees than there are open seats, and (iii) grant authority to no nominees.
New Required Voting Options Applicable to All Director Elections (Contested and Uncontested)
In all director elections, issuers will be required to make certain changes to the voting options on their form of proxy for director nominees. The form of proxy will need to include an “against” voting option instead of a “withhold” option for each director candidate when there is a legal effect to such a vote under state law. Also, in elections governed by a majority (as opposed to plurality) vote standard, all proxy cards will need to provide shareholders with an option to “abstain” from voting for each director nominee (instead of “withhold”). Issuers will also be required to describe in their proxy statements the treatment and effect of a shareholder withholding authority to vote for a nominee, to the extent applicable.
Issuers should start preparing for these new rules now by reviewing their organizational documents to ensure that they contain sufficient advance notice provisions. While the new rules add certain advance notice requirements for shareholders nominating their own director candidates, such rules are only default requirements, and issuers can include more stringent notice requirements in their organizational documents (within the limits of the state laws where the issuer is incorporated).
Though the new disclosure requirements are not applicable for meetings held before August 31, 2022, issuers should begin considering the impact of the rule changes on their current disclosures. It is also recommended that issuers carefully review the voting standards and voting options disclosures in their proxy statements to ensure that such disclosures are sufficiently clear to the average shareholder, even before the rules go into effect.
Lastly, issuers should continue to engage with their shareholders throughout the year. While there is a potential for increased dissident nominations as a result of the mandated universal proxy card and ease for dissident shareholders to reach wider audiences, some shareholders may be amenable to discussions with an issuer’s board of directors or officers about their concerns, with the possible result of avoiding a contested election. It is also possible that increased costs associated with the new minimum solicitation requirement and other procedural requirements could result in fewer dissident nominations and influence shareholders to pursue other forms of activism.