SEC Proposes Universal Proxies in Proxy Contests

Wilson Sonsini Goodrich & Rosati
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On October 26, 2016, the Securities and Exchange Commission (SEC) released proposed rules that would require the use of “universal” proxies in connection with contested elections of directors. If adopted, these rules would provide shareholders with the ability to “mix and match” director nominees from the slates proposed by the registrant and the dissident in a proxy contest. Presently, the only widely available way to “mix and match” nominees in this manner is to attend the shareholder meeting and vote by ballot.

What Are the Proposed Rules?

The SEC proposed that registrants (other than registered investment companies and business development companies) and dissidents each be required to use a universal proxy in non-exempt solicitations for contested elections. The universal proxy would include the names of all candidates standing for election to the registrant’s board of directors irrespective of whether they were nominated by the registrant or the dissident. This would allow shareholders voting by proxy in a contested election to “mix and match” candidates proposed by the registrant and the dissident in order to select the combination of nominees that they believe best aligns with their interests. Both the registrant and the dissident would be required to disseminate a universal proxy with their respective proxy materials.

This is in contrast to the process under the current proxy rules, which generally results in shareholders being provided with two different proxy cards: one from the registrant containing the full slate of nominees proposed by the registrant, and one from the dissident containing those nominees proposed by the dissident. Because a later-dated proxy card controls over an earlier one, shareholders must choose either the registrant’s or the dissident’s proxy card. However, if voting in person at a shareholder meeting, a shareholder generally votes by ballot that includes the names of all nominees proposed by the registrant and the dissident. This allows shareholders to choose the nominees that they prefer, up to the number of board seats up for election.

What Are the Key Procedural Requirements?

  • A dissident must provide the registrant with the names of the dissident’s intended nominees no later than 60 calendar days prior to the anniversary of the previous year’s annual meeting date. Similar to Rule 14a-8, this deadline must appear in the registrant’s proxy statement each year. Dissidents who do not comply with this deadline would be prohibited from soliciting proxies for their nominees. Other than for any required submission under a registrant’s advance notice bylaws, dissidents do not presently have any notification obligation.
  • The dissident must still comply with any notice requirements under the registrant’s advance notice bylaw for director nominations.
  • The registrant must provide the dissident with the names of the registrant’s intended nominees no later than 50 calendar days prior to the anniversary of the previous year’s annual meeting date.
  • The dissident must send proxy statements to shareholders representing at least a majority of the voting power of shares entitled to vote in the director election. There is not presently such a requirement applicable to dissidents, although most already send proxy statements to at least this percentage.
  • Information about the dissident nominees would not need to be included in the registrant’s proxy statement and vice versa. However, 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 and state that the other party’s proxy statement may be obtained without charge on the SEC website.
  • The dissident’s definitive proxy statement must be filed with the SEC by the later of 25 calendar days prior to the meeting date or five calendar days after the registrant files its definitive proxy statement. There is not presently such a requirement applicable to dissidents.
  • When applicable, the proxy statement would need to disclose how the registrant or the dissident, as applicable, intends to treat proxy authority granted in favor of the other party’s nominees if the other party abandons its solicitation or fails to comply with the universal proxy rule.

What Are Some of the Implications of Universal Proxies?

The precise impacts of a universal proxy are likely to vary by proxy contest. Commentators have in the past expressed concern about the use of universal proxies. For example, a universal proxy is likely to lead to more invalid votes—particularly among retail investors—due to shareholders voting for more nominees than there are available seats. Universal proxies might also make it easier for dissident nominees to be elected, which could result in more proxy contests.

What Happens Now?

The proposed rules are subject to a 60-day comment period and a second SEC vote, making it unlikely that they will go into effect before a new administration takes office in January 2017.

The concept of a universal proxy is controversial, and the House of Representatives voted earlier this year to add language to a spending bill that would have prevented the SEC from adopting universal proxy rules. The bill did not pass in the Senate. It remains to be seen whether Congress will make further attempts to prevent the implementation of universal proxies.

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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