On November 17, 2021, the SEC adopted final rules requiring parties in a contested election to use universal proxy cards that include all director nominees presented for election at a shareholder meeting. The original rules were proposed on October 16, 2016 (see HERE) with no activity until April, 2021, when the SEC re-opened a comment period (see HERE). The rule adoption comes with a flurry of rule amendments, proposals and guidance related to the proxy process, some of which reverses recent rules on the same subject.
The final rules will require dissident shareholders and registrants to provide shareholders with a proxy card that includes the names of all registrant and dissident nominees. The rules will apply to all non-exempt solicitations for contested elections other than those involving registered investment companies and business development companies. The rules will require registrants and dissidents to provide each other with notice of the names of their nominees, establish a filing deadline and a minimum solicitation requirement for dissidents, and prescribe presentation and formatting requirements for universal proxy cards. The SEC also adopted amendments to the proxy rules to ensure that proxy cards clearly specify the applicable shareholder voting options in all director elections and to require proxy statements to disclose the effect of a shareholder’s election to withhold its vote.
Each state’s corporate law provides for the election of directors by shareholders and the holding of an annual meeting for such purpose. Companies subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”) must comply with Section 14 of the Exchange Act, which sets forth the federal proxy rules and regulations. While state law may dictate that shareholders have the right to elect directors, the minimum and maximum time allowed for notice of shareholder meetings, and what matters may be properly considered by shareholders at an annual meeting, Section 14 and the rules promulgated thereunder govern the proxy process itself for publicly reporting companies.
When a shareholder votes by proxy, they execute a written directive instructing the entity to whom the proxy is granted how to vote on the shareholder’s behalf. Protecting the ability of shareholders to vote, including their right to elect directors through the proxy process, has been the focus of numerous SEC rulemakings and other efforts over the years. In addition to regulating the form, content and timing of proxy solicitation materials, the SEC regulates proxy advisory firms (some rules for which are in flux – see HERE) and shareholder proposals (see HERE).
Currently where there is a contested election of directors, shareholders are likely receive two separate and competing proxy cards from the company and the opposition. Each card generally only contains the directors supported by the sender of the proxy – i.e., all the company’s director picks on one card and all the opposition’s director picks on the other card. A shareholder that wants to vote for some directors on each of the cards, cannot currently do so using a proxy card. The voting process would only allow the shareholder to return one of the cards as valid. If both were returned, the second would cancel out and replace the first under state corporate law.
Although the current proxy rules do allow for all candidates to be listed on a single card, such candidate must agree. Generally, in a contested election the opposing candidates will not agree, presuming it will impede the process for the opposition or have the appearance of an affiliation or support that does not exist. Moreover, neither party is required to include the other’s nominees, and accordingly, even if the director nominees would consent, they are not included for strategic purposes.
Shareholders can always appear in person – or in today’s world, virtually in person – and vote for any directors, whether company or opposition supported, but such appearance is rare and adds an unfair expense to those shareholders. Besides other impediments, where shares are held in a brokerage account in street name, a shareholder desiring to appear in person needs to go through an added process of having a proxy changed from the brokerage firm to their individual name before they will be on the list and allowed to appear and vote in person. Over the years, some large shareholders have taken to sending a representative to meetings so that they could split a vote among directors nominated by a company and those nominated by opposition. To provide the same voting rights to shareholders utilizing a proxy card as they would have in person, the proposed new rule would require the use of a universal proxy card with all nominees listed on a single card.
To address some aspects of the problem, in 1992 the SEC adopted Rule 14a-4(d)(4), called the “short slate rule,” which allows an opposing group that is only seeking to nominate a minority of the board, to use their returned proxy card, and proxy power, to also vote for the company nominees. The short slate rule has limitations. First, it is granting voting authority to the opposition group who can then use that authority to vote for some or all of company nominees, at their discretion. Second, although a shareholder can give specific instruction on the short slate card as to who of the company nominees they will not vote for, they will still need to review a second set of proxies (i.e., those prepared by the company) to get those names.
In 2013 the SEC Investor Advisory Committee recommended the use of a universal proxy card, and in 2014 the SEC received a rulemaking petition from the Council of Institutional Investors making the same request. After a stall in the rulemaking process, the SEC has now adopted the use of a “universal proxy” card that includes the names of all nominated director candidates.
The final rule amendments regarding universal proxy will apply to all shareholder meetings involving contested director elections held after August 31, 2022. The rule amendments regarding voting options will be applicable to all shareholder meetings involving director elections held after August 31, 2022.
Universal Proxy Rules
On November 17, 2021, the SEC adopted new Rule 14a-19 under the federal proxy rules to require the use of universal proxy cards in connection with contested elections of directors. Under new Rule 14a-19, the universal proxy card must include all director nominees presented by management and shareholders for election at the upcoming shareholder meeting. To facilitate the use of universal proxy cards, the SEC amended the current proxy rules so each side can list the other side’s director candidates on its universal proxy card. The new rules also establish new notice and filing requirements for all soliciting parties, as well as formatting and presentation requirements for universal proxy cards. In addition, the final rules require shareholders presenting their own director candidates in the contest to solicit holders of a minimum of 67% of the voting power of shares entitled to vote in the election.
The final rules also establish new requirements for all director elections, including uncontested elections. The rules mandate that “against” and “abstain” voting options be provided on a proxy card where such options have legal effect under state law. The rules also require disclosure in the proxy statement about the effect of all voting options provided.
In summary, the final rules:
- Create new Rule 14a-19 to require the use of universal proxy cards by all participants in all non-exempt solicitations in connection with contested director elections. The universal proxy card must include the names of both registrant and dissident nominees, along with certain other shareholder nominees included as a result of proxy access;
- Expand the determination of a “bona fide nominee” to include a person who consents to being named in any proxy statement for a registrant’s next shareholder meeting for the election of directors;
- Require dissidents to provide registrants with notice of their intent to solicit proxies and to provide the names of their nominees no later than 60 calendar days before the anniversary of the previous year’s annual meeting;
- Require registrants to notify dissidents of the names of the registrants’ nominees no later than 50 calendar days before the anniversary of the previous year’s annual meeting;
- Require dissidents to file their definitive proxy statement by the later of 25 calendar days before the shareholder meeting or five calendar days after the registrant files its definitive proxy statement;
- Require each side in a proxy contest to refer shareholders to the other party’s proxy statement for information about the other party’s nominees and refer shareholders to the SEC’s website to access the other side’s proxy statement free of charge;
- Require that dissidents solicit the holders of shares representing at least 67% of the voting power of the shares entitled to vote at the meeting; and
- Establish presentation and formatting requirements for universal proxy cards that ensure that each party’s nominees are presented in a clear, neutral manner.
The new rules also implement changes to the form of proxy and proxy statement disclosure requirements applicable to all director elections. These amendments:
- Require proxy cards to include an “against” voting option in director elections, when there is a legal effect to a vote against a director nominee;
- Require that the proxy card provide shareholders with the ability to “abstain” in a director election where a majority voting standard applies; and
- Require proxy statement disclosure about the effect of a “withhold” vote in an election of directors.
The SEC rule release has a useful chart on the timing of soliciting universal proxy cards:
|Due Date||Action Required|
No later than 60 calendar days before the anniversary of the previous year’s annual meeting date or, if the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, by the later of 60 calendar days prior to the date of the annual meeting or the tenth calendar day following the day on which public announcement of the date of the annual meeting is first made by the registrant. [new Rule 14a-19(b)(1)]
Dissident must provide notice to the registrant of its intent to solicit the holders of at least 67% of the voting power of shares entitled to vote on the election of directors in support of director nominees other than the registrant’s nominees and include the names of those nominees.
|No later than 50 calendar days before the anniversary of the previous year’s annual meeting date or, if the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, no later than 50 calendar days prior to the date of the annual meeting. [new Rule 14a-19(d)]||Registrant must notify the dissident of the names of the registrant’s nominees.|
|No later than 20 business days before the record date for the meeting. [current Rule 14a-13]||Registrant must conduct broker searches to determine the number of copies of proxy materials necessary to supply such material to beneficial owners.|
|By the later of 25 calendar days before the meeting date or five calendar days after the registrant files its definitive proxy statement. [New Rule 14a-19(a)(2)]||Dissident must file its definitive proxy statement with the Commission.|
The new rules will not apply to companies registered under the Investment Company Act of 1940 or BDC’s but would apply to all other entities subject to the Exchange Act proxy rules, including smaller reporting companies and emerging growth companies.
There is a concern that shareholders could be confused as to which candidates are endorsed by whom, and the effect of the voting process itself. In order to avoid any confusion as to which candidates are endorsed by the company and which by opposition, the SEC is also including amendments that would require a clear distinguishing disclosure on the proxy card. Additional amendments require clear disclosure on the voting options and standards for the election of directors.