SEC Announces Proposal to Require Universal Proxy Cards in Contested Elections

by Orrick, Herrington & Sutcliffe LLP
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The SEC (by a 2-1 vote) has proposed amendments to the proxy rules that would mandate the use of a system of universal proxy cards in contested director elections. Universal proxy cards would include the names of both company and dissident nominees on one card.

Importantly, the proposed amendments generally will not apply to a company's proxy solicitation unless there is a director election contest—except for the proposed amendments that concern updating the form of proxy and voting standards disclosure which will apply to any proxy materials for any election of directors, whether contested or uncontested.

Background for Universal Proxy Cards in Contested Director Elections

The SEC's main policy motivating the use of universal proxy cards in contested director elections is to replicate as much as possible the general ability of shareholders—when attending a meeting and voting in person—to mix and match their voting preferences among the company and dissident nominees for director. For example, if there are three director seats available, a shareholder voting in person can vote for two company nominees and a dissident nominee. However, under the current system, retail shareholders rarely use in-person voting to take advantage of this flexibility. Rather, retail shareholders use the proxy process and, in doing so, are generally limited to granting proxy authority to the company's proxyholder to vote with respect to the company's nominees or to the dissident's proxyholder to vote with respect to the dissident's nominees—without the ability to mix and match between company and dissident nominees if such shareholder had attended and voted in person because the later dated proxy—whether granted to the company or dissident—controls over an earlier proxy.  

The current proxy rules permit a soliciting party to list the full selection of nominees if all such nominees consent to being named in the proxy card but such consent is rarely granted due to various strategic interests at play. For example, company nominees would very likely not consent to being named on the dissident's proxy card because it may imply the company supports the dissident's nominees. Shareholders therefore almost always receive two sets of proxy cards in a proxy contest with competing slates of candidates. In contrast, shareholders voting in person at a meeting can vote for their preferred combination of nominees from both slates. Universal proxy cards would remedy this inconsistency by allowing shareholders to vote among company and director nominees on the same proxy card.       

Companies and dissident shareholders would continue to distribute their own proxy statements and other proxy materials, including their own proxy cards, to solicit votes. However, under the proposed amendments, each party's proxy card must include the nominees of all other parties, allowing shareholders to vote by proxy for their preferred mix of candidates.

Voting Options on Form of Proxy and Voting Standards Disclosure

Perhaps of more immediate impact to most companies, the SEC also proposed technical proxy rule amendments—which apply in contested and uncontested elections—regarding the form of proxy used in director elections and increased disclosure of voting standards in a proxy statement.

These amendments are generally the product of the shift towards using a majority voting standard in the election of directors where voting "against" a nominee can affect the viability of a nominee's election, as compared to a plurality voting standard where voting "against" a nominee does not affect their election. Under the proposed amendments, the form of proxy must include the voting option of "against" and "abstain" when an "against" vote has legal effect in the election of directors and eliminates the voting option of "withhold" vote when an "against" vote has such legal effect. Further, proxy statements will have to expressly disclose the effect of a "withhold" vote in director elections to the extent applicable.

Effectiveness of Proposed Amendments

The SEC is accepting comments on the proposed amendments until 60 days after publication in the Federal Register, after which time there will be a second SEC vote. We believe it is unlikely that a universal proxy card would be required for the 2017 proxy season given the timing of the proposal and comment period. The SEC has issued a press release and fact sheet for the proposed amendments for universal proxy cards, along with the full text of the proposed rules, on its website.

The Proposed Amendments

Universal Proxy Cards

To facilitate the use of universal proxy cards in contested elections, the SEC has proposed to amend the proxy rules to establish new procedures for the solicitation of proxies, the preparation and use of proxy cards and the dissemination of information about all director nominees in contested elections. The amendments would, among other things, do the following.

  • Mandate the use of universal proxy cards in contested elections – Companies and dissidents would be required to distribute their own proxy materials and universal proxy cards. Universal proxy cards would list all nominees, but may otherwise differ in content, format and presentation, subject to the proposal's requirements.
  • Revise the consent required of a bona fide nominee – The definition of "bona fide nominee" would be changed to mean a person who has consented to being named in any proxy statement relating to the same meeting. The nominee must still intend to serve, if elected, and if a nominee only intends to serve if his or her nominating party's slate is elected, the proxy statement would need to disclose that fact.
  • Eliminate the short slate rule – The use of universal proxy cards would eliminate any need for dissidents who have fewer nominees than seats available to fill out partial slates with the company's nominees because shareholders can select company nominees from the universal proxy card distributed by the dissident. Dissidents may still recommend their preferred management nominees in their proxy materials.
  • Require dissidents to provide companies with notice of intent to solicit proxies in support of nominees other than the company's nominees and the names of those nominees – Dissidents would be required to provide such notice at least 60 days before the anniversary of the prior year's annual meeting. In addition to the SEC deadline, dissidents would still need to comply with any notice requirements under the company's advance notice bylaw, if any, for director nominations.
  • Require companies to provide dissidents with notice of the names of the company's nominees – Companies would be required to provide such notice at least 50 days before the anniversary of the prior year's annual meeting unless the names were already provided in the preliminary or definitive proxy statement.
  • Prescribe a filing deadline for dissidents' definitive proxy statements – Dissidents would need to file their proxy statements by the later of 25 days before the annual meeting date or five days after the company files its proxy statement.
  • Require dissidents to solicit, and state in their proxy materials that they will solicit, the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors – This requirement is intended to prevent dissidents from free-riding on and using the company's solicitation to disseminate a dissident's nominees to shareholders without expending any of their resources to conduct an independent solicitation to distribute its own proxy statement and form of proxy.
  • Prescribe requirements for universal proxy cards – Universal proxy cards would need to meet certain formatting and presentation criteria so that information is presented clearly and fairly.

Companies would not be required to include information about dissident nominees in their proxy statements. Instead, each party's proxy statement would be required to refer shareholders to the other party's proxy statement for information about that party's nominees.

The proposed amendments to require a universal proxy card would not apply to solicitations involving foreign private issuers or companies with reporting obligations only under Section 15(d) of the Exchange Act, registered investment companies and business development companies.

Universal Proxy Cards Would Differ from Proxy Access in Significant Ways

The SEC does not require proxy access, but many companies have adopted proxy access bylaws over the past two years in response to shareholder proposals (a trend that is expected to continue). Proxy access provides qualifying shareholders, who meet certain ownership and holding period thresholds, with the ability to nominate one or more director candidates and have their nominees included in the company's proxy materials without undertaking the expense of a proxy solicitation themselves. Companies that have adopted proxy access are required to include not only the names of the proxy access nominees in their proxy materials, but also disclosure about the nominating shareholder and its nominees and a supporting statement from the nominating shareholder.

Use of universal proxy cards would differ from proxy access in several significant ways. First, there are no ownership or holding period thresholds that must be met to take advantage of universal proxy cards under the proposed amendments; so all shareholders (not just qualifying shareholders) can use universal proxy cards. Second, shareholders taking advantage of universal proxy cards would have to expend their own resources to distribute their own proxy materials and solicit the holders of shares representing at least a majority of the voting power entitled to vote on the election of directors. Companies would be required to include the names of dissident nominees but would not be required to provide any other information about the dissident nominees in their proxy materials. Finally, there are limits on the number of proxy access nominees but shareholders using universal proxy cards would be able to nominate as many candidates as there are board seats to be filled.

What Companies Can Do Now

While the SEC's proposal is pending, companies should consider taking the following actions:

  1. Share your concerns with the SEC during the comment period. The SEC has noted the proposed amendments may have broad and significant impacts on corporate governance. If your company is likely to be adversely impacted under the new rules, submit your concerns to the SEC. The responses the SEC receives could shape the final rules in ways that differ from the proposal.
  2. Review your company's disclosures regarding voting options and standards for the 2017 proxy season. The SEC has been increasingly concerned about ambiguities and inaccuracies in proxy materials and the staff may send you a comment letter if any such issues are not properly addressed, even before any final rules are adopted.
  3. Continue to engage and build trusting relationships with long-term shareholders, which will foster investor support and mitigate the likelihood of proxy fights.
  4. Review your charter and bylaws and, among other things, consider whether any amendments will be needed to implement universal proxy cards if the proposed amendments are ultimately adopted.
  5. Consider as well whether any bylaw amendments are desirable to address the changes in contested director elections that will occur if the proposed amendments are adopted.
  6. Consider what changes need to be made to your proxy instructions to avoid potential voter confusion if the proposed amendments are ultimately adopted.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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