The SEC, by a two-to-one vote on October 26, 2016, proposed amendments to its proxy rules to require universal proxy cards in contested director elections at annual meetings of listed U.S. public companies. If adopted, the universal proxy rules would require each soliciting party in a contested election to distribute a "universal" proxy card that includes the names of all candidates, both company nominees and dissident nominees, for election to the board of directors. The dissident shareholder would be required to solicit proxies for at least a majority of the voting power of the shares entitled to vote on the election of directors using its own proxy statement and its own universal proxy card.

The proposed rules set forth certain notice, filing and formatting requirements that would apply to universal proxy cards. The SEC also proposed amendments to the federal proxy rules that would require public companies to more clearly specify the applicable voting options and standards in all director elections. The SEC's proposing release is available here. The SEC will seek comment on the proposed rules for 60 days following their publication in the Federal Register. 

Background

Currently, SEC proxy rules and state corporate laws limit the options of shareholders in voting for board candidates. Shareholders voting by proxy in a contested board election must generally vote either for company-nominated board candidates on the company's proxy card or for dissident-nominated candidates on the dissident shareholder's proxy card. A shareholder generally can vote for its preferred combination of company and dissident nominees only by attending the annual meeting and voting by ballot.

Investor groups have advocated for universal proxy cards for decades—including leading up to a 1992 SEC rulemaking that resulted in the short-slate rule discussed below—with a renewed push in recent years. In public remarks on the current proposal, both Chair Mary Jo White and Commissioner Kara Stein stated that the proposed universal ballot would further the principle of fair corporate voting—the idea that shareholders have a meaningful, effective voice—by eliminating the disparity between in-person and proxy voting.

However, the universal proxy card has faced staunch criticism. Commissioner Michael Piwowar, in voting against the proposal, suggested that universal ballots would encourage distracting and protracted proxy fights, disrupt the balance of shareholder power by strengthening special interest groups and disproportionately impact retail investors. Other opponents expressed concern that the universal proxy card would increase short-term investor activism and create voter confusion. The proposal also generated opposition in the U.S. House of Representatives, which voted in July 2016 to add language to a spending bill (not passed in the Senate) that would have blocked the SEC from engaging in universal proxy rulemaking, due to concerns that universal ballots would empower special interest shareholders at the expense of the majority of shareholders.

Highlights of the Universal Proxy Card Proposal

Applicability. Universal proxy cards including the names of all director nominees would be mandated only where there is a contested election for directors. Universal proxy cards would not apply to the following:

• Consent solicitations;
• Solicitations that are exempt under existing Exchange Act Rule 14a-2(b), such as solicitations where the number of persons solicited is 10 or less;
• Solicitations relating to director elections for investment companies registered under Section 8 of the Investment Company Act of 1940 or business development companies; and
• Solicitations relating to foreign private issuers and companies with reporting obligations only under Section 15(d) of the Exchange Act, each of which are not subject to the SEC proxy rules generally.

Revision to the Definition of a Bona Fide Nominee. The key barrier to a shareholder's ability to pick and choose among director nominees arises from the SEC's "bona fide nominee" rule, operating in conjunction with state corporate law voting provisions. The bona fide nominee rule, found in Exchange Act Rules 14a-4(d)(1) and 14a-4(d)(4), prevents solicitation of a proxy for a nominee unless the nominee has consented to being named in the proxy statement used to solicit the vote and to serving if elected. Such consent is rarely given in contested elections because it might suggest the nominee's endorsement of the opposing party's position or nominees, and because there is a perceived advantage to forcing shareholders to choose between competing slates of director nominees. Thus, the bona fide nominee rule effectively creates a system of competing proxy cards. State law generally prohibits a shareholder from submitting two proxy cards, providing that a later-dated proxy card revokes and invalidates any earlier-dated one. As a result, shareholders are required to submit their votes on either the company's or the dissident's proxy card. Only by attending a meeting in person and voting by ballot can a shareholder choose among all the candidates who are nominated, which is impractical for most investors.

The proposed rules would break this barrier by expanding the meaning of "consent." If a nominee consents to being named in any proxy statement for the company's next shareholder meeting at which directors are to be elected, the nominee has consented to inclusion in all proxy statements for that meeting.

The SEC recognized that the change to the bona fide nominee rule could affect all proxy contest matters, even those unrelated to director elections. For example, a shareholder soliciting proxies for a corporate governance proposal would be permitted under the proposed rules to include some or all company director nominees on its proxy card. However, the SEC reasoned that such situations do not implicate its rationale for mandating use of universal proxy cards since they would never result in company nominees serving alongside dissident nominees, and the SEC did not believe there was potential for shareholder confusion.

Elimination of the Short-Slate Rule. Under current Exchange Act Rule 14a-4(d)(4), a dissident shareholder can run a "short slate" of director nominees, meaning that it can propose its own nominees for less than all of the open seats and "round out" its slate by soliciting authority to vote for all company nominees other than those specified by the dissident as nominees for whom it will not vote. The SEC has proposed to eliminate the short-slate rule as unnecessary in light of the adoption of universal proxy card rules, as the universal proxy card permits a shareholder to choose from among all company and dissident nominees.

Minimum Solicitation Requirement for Dissidents. The proposed rules would require a dissident shareholder in a contested election to solicit proxies from holders of shares representing at least a majority of the company's voting power, regardless of the applicable voting standard. Under current rules, dissidents in proxy fights are required only to deliver a proxy statement to each person solicited, but are not required to solicit a minimum number of shareholders. The proposed minimum solicitation requirement is intended to prevent dissident shareholders from benefiting from the right to have their nominees included on a universal proxy without undertaking the effort and expense to actually solicit votes for those nominees.

For the benefit of shareholders who do not receive the dissident shareholder's soliciting materials, the proposed rules would require the company to include in its proxy statement a direction to access those materials, for free, on the SEC's Edgar website, with no obligation for the company or dissident shareholder to provide paper copies. In his dissent, Commissioner Piwowar argued that this arrangement will be detrimental to retail investors, who are unlikely to receive dissident proxy materials and will have the burden of accessing the materials on their own.

Process Requirements for Universal Proxy Cards. The SEC also proposed the following general rules governing the processes related to universal proxy cards:

• No later than 60 days before the anniversary of the previous year's annual meeting (which date the company would have to include in the prior year's proxy statement), the dissident shareholder must provide notice and its nominees' names to the company;
• The company, in turn, must notify the dissident of the company's nominees no later than 50 days before the anniversary of the previous year's annual meeting (unless the nominees are named in a preliminary or definitive proxy statement filed by the company before such deadline);
• The dissident shareholder's notice must state that such person intends to solicit holders of at least a majority of the company's voting power;
• The dissident must file its definitive proxy statement with the SEC by the later of 25 days prior to the annual meeting and five days after the company files its definitive proxy statement; and
• The proxy statements used by the company and the dissident shareholder must refer shareholders to the other party's proxy statement for information regarding such party's nominees, and explain that shareholders can access the proxy statements on the SEC's Edgar website.

The universal proxy card notice is in addition to the notice the dissident shareholder will still need to provide under the company's advance-notice bylaw for director nominees, which often has an earlier deadline.

Form Requirements for Universal Proxy Cards. The proposed rules include requirements for universal proxy card formatting intended to ensure that instructions are clear while still allowing companies and dissidents to have insight into preliminary results of the solicitation and to appoint separate proxies to exercise any discretionary authority permitted under the SEC's proxy rules. Each universal proxy card must:

• Distinguish clearly between company nominees, dissident nominees and any proxy access nominees;
• List the nominees, within each group of nominees, in alphabetical order by last name;
• Use the same font type, style and size for all nominees;
• Disclose prominently the maximum number of nominees for which authority to vote can be granted; and
• Disclose prominently the treatment and effect of a proxy executed in a manner that grants authority to vote for greater or fewer nominees than the number of nominees being elected.

If the company and the dissident shareholder each has proposed a full slate of nominees and there are no proxy access nominees, the universal proxy cards may provide the ability to vote for all company nominees as a group and all dissident nominees as a group. The proposed rules would not prohibit the existing practice of companies and dissidents distinguishing their respective universal proxy cards by color.

How a Universal Proxy Card Differs From Proxy Access

Universal proxy cards in a contested director election provide different opportunities and limitations than proxy access bylaws that have been adopted by many companies in recent years. The table below compares characteristics of the proposed rules and proxy access bylaws.

 

Proposals Applicable to All Director Elections

The SEC also proposed additional rules applicable to all proxy cards and proxy statements for the election of directors, whether or not contested. These proposed rules reflect concerns the SEC staff has raised previously about poorly-drafted, ambiguous and sometimes incorrect proxy disclosure for the voting standard and how votes will be counted for director elections. The proposals would require the following:

• If a company uses a majority vote standard for the election of directors and a vote cast against a nominee would have legal effect under state law, the proxy card would be required to include options to vote "against" the nominee and to "abstain" from voting. The company would not be permitted to offer an option to "withhold" against a director.

• If a company applies a plurality voting standard for director elections, including a plurality voting standard with a director resignation policy (often called "plurality plus"), it would need to disclose in its proxy statement the treatment and effect of a "withhold" vote in the election.

Takeaways: Uncertainty Ahead, Heed SEC’s Concerns

Although the proposed use of universal proxy cards has the potential to fundamentally change proxy solicitations involving contested elections and facilitate shareholders' abilities to choose from among competing slates of directors, the practical implications are not clear. It is not known whether universal proxy cards will result in more election contests (as opposed to settlements between companies and dissident shareholders), increased communication between companies and shareholders or increased success of dissident nominees and how any of the above will impact board effectiveness and shareholder value.

• The SEC has requested comment on a wide variety of fundamental issues and concerns, and the responses it receives may materially influence the form of any final rules. Parties that believe the proposed rules will have a major impact on their activities should consider submitting a comment letter to the SEC.
• Any final rules will be subject to an additional vote by the SEC commissioners, making it unlikely that the new universal proxy card rules will be in effect for the regular 2017 proxy season. The SEC's two vacant seats will likely be filled by appointees of a new administration by the time any final rule is presented for consideration, and it is unknown how the newly appointed commissioners will impact the final vote.  
• Regardless of the outcome of the proposed rules, companies in the upcoming proxy season should heed the SEC's concerns about poorly drafted proxy disclosures and verify the accuracy of their proxy statement and proxy card descriptions of the voting standard for director elections. 

© 2016 Perkins Coie LLP

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