On November 17, 2021, the Securities and Exchange Commission (SEC) adopted final rules requiring the use of a universal proxy card by all parties in contested elections for directors at shareholder meetings. The rules require registrants and dissidents to provide shareholders with a proxy card listing all the registrant and dissident director nominees presented for election. Shareholders will no longer have to choose between submitting their votes on either the registrant’s proxy card or the dissident’s. Putting all candidates on the same ballot will make proxy voting more closely resemble voting in person at a meeting, as shareholders will be able to select their preferred combination of candidates to serve on the board.
Key Takeaways
- The new rules allow shareholders to vote by proxy in a contested election of directors in the same manner as if they attended the shareholder meeting in person—they may select a combination of registrant and dissident candidates. This will make it easier for shareholders to cast votes on dissident nominees and could open the door to more board seats being filled by activist investors, who can use the access to the board to advance other objectives, including environmental, social and governance (ESG) goals and changes to management.
- Dissidents must give notice of their intent to solicit proxies and their nominees’ names to the registrant 60 days before the annual meeting. The registrant must respond with their nominees within 10 days of receiving notice from the dissident.
- Dissidents must solicit holders of shares representing at least 67 percent of the voting power of shares entitled to vote at the election of directors.
- The short slate rule, which allowed dissidents to hand-select the registrant nominees they wanted to round out their slate, has been eliminated, although dissidents are still able to nominate less than a full slate under the rule.
- The new rules are expected to lead to additional shareholder activism in the form of director campaigns and a clearer path for dissident directors to gain seats on public company boards.
The Rules
- Mandatory use of Universal Proxy Cards. The final rules require mandatory use of universal proxy cards by public companies in all non-exempt director election contests. All proxy cards, whether delivered by the company or a dissident, must include the full slate of director nominees for shareholders to vote on. The mandatory use of universal proxy cards seeks to allow shareholders to elect their preferred candidates through the proxy process in an efficient and effective manner.
The rules permit a universal proxy card to allow a shareholder to grant authority to vote for all nominees of either the dissident or registrant nominees as a group. This may be done as long as the card also provides a similar means by which a shareholder can withhold authority to vote for a group. The number of nominees of the registrant or dissident must be less than the number of directors being elected. Where state law gives effect to votes cast against a nominee, the card must give a “for-all,” “against-all” and “withhold-all” option.
- Notice from Dissident to Registrant. The dissident must provide the registrant with the names of nominees it intends to solicit proxies for no later than 60 calendar days before the anniversary of the previous year’s annual meeting. If the registrant had no annual meeting the previous year, or if the date of the annual meeting has changed by more than 30 calendar days, the dissident must provide the notice by the later of (i) 60 calendar days prior to the date of the annual meeting or (ii) the 10th calendar day following the day on which the registrant makes a public announcement of when the annual meeting is to be held. The dissident must include in its notice a statement that it intends to solicit the holders of shares representing at least 67 percent of the voting power of shares entitled to the election of directors. However, the rules do not require the dissident to provide the notice if the information was already provided in a preliminary or definitive proxy statement filed by the dissident before the deadline.
- Notice from Registrant to Dissident. The registrant must notify the dissident of the names of its nominees, unless such names were already provided in a preliminary or definitive proxy statement filed by the registrant, no later than 50 calendar days prior to the anniversary of the prior year’s annual meeting. This deadline gives the registrant 10 days after the dissident’s notice to respond and is intended to provide sufficient time for the registrant to consider the dissident’s notice, finalize its own nominees, and respond.
- Solicitation Requirement. The rules require dissidents to solicit holders of shares representing 67 percent of the voting power of shares entitled to vote on the election of directors. A dissident additionally must include a statement of its intent to solicit the requisite holders, and it could be subject to liability under rules prohibiting material misstatements in proxy solicitation materials if such statement is false.
- Deadline. A dissident in a contested director election must file its definitive proxy statement with the SEC by the later of (i) 25 calendar days prior to the meeting or (ii) 5 calendar days after the registrant files its definitive proxy statement.
- Proxy Statement Cross References. Each party in a contested election will be required to refer shareholders to the other party’s proxy statement for information about the other party’s nominees. The parties should also explain that the other party’s proxy statements can be accessed at no cost on the SEC website. Parties are permitted to refer to information that would be furnished in the other party’s filings to satisfy their disclosure obligation. The new rules also changed the definition of “participant” so that only a party’s own nominees will be considered “participants” in that party’s solicitation.
- Presentation and Formatting Requirements. In order to comply with the new rules, the proxy cards must: (i) set forth the names of all duly nominated director candidates; (ii) provide a means for shareholders to grant authority to vote for the nominees set forth; (iii) clearly distinguish between registrant, dissident and proxy access nominees; (iv) list nominees within each group in alphabetical order by last name; (v) use the same type, style and size to present all the nominees; (vi) prominently disclose the maximum number of nominees for which authority to vote can be granted; and (vii) prominently disclose the treatment and effect of a proxy executed in a manner that grants authority to vote for more or fewer nominees than the number of directors being elected or in a manner that does not grant authority to vote for any nominees.
- Short Slate Rule. The short slate rule is eliminated for companies that will be subject to the final rules mandating the use of universal proxy cards. The short slate rule allowed dissidents soliciting in support of a partial slate of nominees making up only a minority of the board to seek authority to vote for some of registrant’s nominees. This rule has been replaced by the universal proxy. An amended short slate rule will still be available for funds in contested elections as they are not subject to the universal proxy rule at this time.
- Bona Fide Nominee. The amended bona fide nominee determination includes any nominee who consents to being named in any proxy statement for the applicable meeting, allowing such nominee to be named on any side’s proxy card. If a nominee would not consent to serve if elected with other nominees, this material fact should be disclosed prominently on the proxy statement of the party nominating that individual, and if it is the registrant’s nominees, then the registrant should explain how such vacancies would be filled.
Background
The amendments were initially proposed in late 2016 and were adopted as part of the SEC’s efforts to bolster shareholder rights. The SEC stated in the final rules, “the Commission has long understood the limitations that the proxy rules place on a shareholder’s ability to select its preferred mix of registrant and dissident nominees.”
The new rules were adopted by a 4-1 vote, with SEC Chair Gary Gensler stating that the change “is an important aspect of shareholder democracy.” In her dissenting statement, Commissioner Hester M. Peirce expressed concerns that the universal proxy would advance special interests rather than enhance corporate values and noted that “the price of entry onto the company’s proxy card under this rule is low. . . the rule does not condition access to the company’s proxy card on a demonstrated commitment to the company.” Although he voted in favor of the rules, Commissioner Elad L. Roisman expressed similar concerns in his statement, noting he would have “preferred that the rule require those launching a proxy contest to meet certain eligibility criteria, such as thresholds of ownership in the target company or holding periods for the company’s stock,” but saw “no compelling reason to prevent shareholders from mixing and matching their votes.” In further support of the rule, both Commissioners Caroline A. Crenshaw and Allison Herren Lee emphasized in their statements (here and here) the importance of ensuring symmetry between shareholders voting in person and via proxy and fairness in the director election process.
The new rules will be effective for shareholder meetings held after August 31, 2022.
