Securities and Exchange Commission Reopens Debate on Universal Proxy Proposal
On April 16, 2021, the Securities and Exchange Commission (SEC) reopened the comment period on its proposal originally issued in October 2016 for the use of universal proxy cards in all proxy solicitations for contested director elections that are not exempt solicitations under the proxy rules. By reopening the comment period, the SEC is again permitting interested parties to submit comments and data on the rule amendments proposed in 2016, as well as additional comments on the questions raised in the new reopening release. It also allows parties to comment on developments since 2016 when the proposing release was issued. The 2016 proposal was not finalized or adopted after the comment period expired in 2017.
In its 2016 release, the SEC proposed that each universal proxy card list all management and dissident nominees for director, thereby allowing shareholders voting by proxy to choose among the different slates of nominees in the same manner in which shareholders vote in person at a contested shareholders meeting. The SEC also proposed corresponding changes to disclosure requirements of the proxy rules applicable to proxy statements and proxy cards used in all election contests.
Universal Proxy Card
A universal proxy card lists all the director nominees up for election in a contested election at an annual meeting of stockholders, including the dissident’s nominees, and permits stockholders to choose among the various candidates. This differs significantly from the current proxy rules in contested elections, which essentially require at least two separate proxy cards, one with only the company’s nominees and one with only the dissident’s nominees. Although each party in a contested election would continue to distribute its own proxy materials, and use its own proxy card to solicit votes for its preferred slate of nominees, each party’s proxy card would be required to list the names of all nominees, which would enable the proxy voters to select their preferred combination of candidates. Currently, stockholders voting by proxy must generally choose between the two slates, instead of choosing individual directors among those nominated by either side, which is what the stockholder could do if the stockholder attended the meeting and voted in person by ballots distributed to meeting attendees.
Elimination of Short-Slate Rule
In addition to mandating a universal proxy, the proposal would eliminate the existing “short slate” rule, which allows a dissident to nominate a partial slate of directors by using the voting authority granted by its proxy to vote for some nominees set forth in the company’s proxy statement in order to round out its slate of directors. In a short-slate election contest, a dissident is soliciting proxies in support of nominees who, if elected, would constitute a minority of the board of directors. Dissidents sometimes choose to run a short slate, rather than a “control slate,” in circumstances where they believe proxy advisory firms are more likely to support adding a limited number of a dissident’s nominees as a greater benefit to the company and may be less disruptive to the company than a full control slate. In some cases, dissidents may want to achieve some influence over the company but not want to run the company. The view of the SEC is that the short-slate rule would not be necessary if the proposal is adopted because universal proxies give shareholders the ability to vote for any combination of dissident and company nominees, thereby permitting shareholders to cast a vote for the full slate of directors. Note that the proposed amendment to the short-slate rule will not apply to investment companies and business development companies as defined in the Investment Company Act of 1940.
Definition of “Bona Fide Nominee.”
The proposal would amend the definition of a bona fide nominee for director so that it includes a person who has consented to being named in any proxy statement relating to the company’s next annual meeting for the election of directors. The effect of this change to the definition is that a nominee who consents to be named in the company’s proxy statement would also consent to be named in the dissident’s proxy statement. This would enable both the company and the dissident to include the other party’s nominees on their universal proxy cards even when a consent did not specify to which proxy statement (company or dissident) it applied.
Change in Voting Standards
To address the SEC’s “concerns that some company proxy statements had ambiguities and inaccuracies in their disclosures about voting standards in director elections,” the 2016 proposal includes amendments to the proxy rules relating to voting standards applicable to the election of directors. If adopted, the proposal would require proxy cards for all director elections to include an “against” option instead of a “withhold authority to vote” option, if applicable law provides for a legal effect for a vote against a nominee. In addition, proxy statements would be required to disclose the effect of a “withhold” vote in an election of directors. In cases where a majority voting standard is used in the election of directors, shareholders would be given the opportunity to abstain from voting rather than withholding authority to vote.
If the universal proxy requirements are adopted, they can be expected to have a significant impact on election contests and the ability of companies to elect their slate of nominees. The significance of this change would be that the company’s proxy card would have to include the dissident’s slate of director nominees in addition to the company’s board nominees. Including the dissident’s nominees on the company’s proxy card may be confusing to shareholders, as it may appear that the company is soliciting proxies in favor of the dissident’s candidates. Accordingly, companies should consult with their counsel regarding the appropriateness of amending their governing documents if these changes to the proxy rules are adopted by the SEC. Note that it is not necessary to enact any such changes to governing documents prior to the amendments to the proxy rules being finalized by the SEC.
The comment period on the reopening of the universal proxy proposal expired on June 7, 2021. Given the change in the presidential administration and the new SEC chair, the SEC may have different views or priorities in 2021. Therefore, it is possible that the new proxy rules will be finalized this year and may become effective for the 2022 proxy season.