On November 17, 2021, the Securities and Exchange Commission (SEC) adopted rules that will require the use of a single "universal" proxy card in connection with most contested elections of directors. These rules, which have been discussed for years, may make it easier for activist investors to gain representation on corporate boards by requiring proxy cards distributed in connection with a contested election to include the names of all director candidates; this will allow shareholders to "mix and match" between candidates nominated by the company and by the activist. The new rules take effect for contested elections of directors after August 31, 2022.
What Are the New Rules?
The new rules require companies (other than registered investment companies and business development companies) and activists to use a universal proxy card in non-exempt solicitations for contested elections. The universal proxy card would include the names of all candidates standing for election to the company's board of directors irrespective of whether they were nominated by the company or the activist. By allowing shareholders an easy way to "mix and match" from candidates proposed by the company and the activist, universal proxy cards are expected to allow shareholders to split their votes more easily among competing director slates. Both the company and the activist will be required to disseminate a universal proxy card with their respective proxy materials.
This new process contrasts with the method used under the current proxy rules, which generally results in shareholders being provided with two different proxy cards: one from the company containing the full slate of nominees proposed by the company, and a different card from the activist containing those nominees proposed by the activist. Because a later-dated proxy card controls over an earlier one, shareholders must choose either the company's or the activist's proxy card and cannot "mix and match" between the competing slates. However, if voting in person at a shareholder meeting, a shareholder generally votes by ballot; that ballot includes the names of all nominees proposed by the company and the activist.
For companies subject to the universal proxy card rules, the SEC has eliminated the short slate rule, which had enabled activists to include management nominees on the activist's proxy card where the activist's nominees would comprise only a minority of the board.
What Are the Key Procedural Requirements?
- The activist must provide the company with the names of the activist'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 company's proxy statement each year. This notice does not need to be filed with the SEC or otherwise made public.
- The activist must still comply with any notice requirements under the company's advance notice bylaw for director nominations.
- The company must provide the activist with the names of the company's intended nominees no later than 50 calendar days prior to the anniversary of the previous year's annual meeting date.
- Both the company and the activist must promptly notify the other of any changes in their respective nominees.
- Information about the activist's nominees would not need to be included in the company'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's website.
- The activist'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 company files its definitive proxy statement.
- The activist must solicit proxies from shareholders representing at least 67 percent of the voting power of shares entitled to vote in the director election.
- An activist who does not comply with these procedures would be prohibited from soliciting proxies for its nominees.
- The SEC has also established presentation and formatting requirements to ensure clear and neutral presentation of nominees on the universal proxy card.
Are There Other Amendments?
The SEC also made technical amendments to require that proxy cards for all director elections (contested or not) include 1) an "against" voting option where there is a legal effect to such a vote under state law; and 2) an "abstain" voting option in a director election governed by a majority (as opposed to a plurality) voting standard. The proxy statement must also disclose the treatment and effect of a "withhold" vote in an election of directors.
What Should Companies Do Now?
The new rules are effective for contested elections of directors after August 31, 2022. In advance of that, and as a matter of good corporate governance, companies and boards should review their advance notice bylaws (and corporate profile more generally) to ensure that they are state-of-the-art and provide the expected level of protection and information. In addition, companies should review their shareholder outreach programs with an eye toward the benefits of proactive communication with shareholders outside of the proxy season.
What Should Companies Expect in the Future?
Although the overall effect of universal proxy cards is likely to vary by proxy contest, companies should expect—at least in the short term—that these rules are likely to lead to more proxy contests and activist campaigns. This is because activists can more easily gain board representation even if the full activist slate is not favored by shareholders. A universal proxy card will also reduce, for an activist, some of the expense of a proxy contest, as the activist will no longer have to make multiple mailings to offer stockholders the opportunity to vote for its slate. As a result, ESG-focused activists (or others with a narrow focus) seeking a small number of board seats may be especially incentivized to run more contests. At the same time, companies could find that with the right strategy a universal proxy card could result in a more favorable outcome than ceding some board seats in a settlement.