It has long been the view that a shareholder's ability to elect directors is a fundamental right under corporate law. Few shareholders attend meetings in person, and therefore the instrument used to exercise that right has been the proxy. However, due to a combination of U.S. federal and state law requirements, the current U.S. proxy regime has been unable to replicate the options available to shareholders voting at a meeting. This has been particularly evident in the case of proxy contests, where shareholders are often left with the option of voting for either the company's director nominees or the dissident's director nominees, but not a combination.
On October 26, 2016, by a 2-1 vote among Commissioners, the SEC proposed a rule to fundamentally change the nature of proxy contests. If approved, instead of voting for directors on one slate or the other, shareholders voting by proxy could choose a combination of management and dissident nominees.
Altering the power dynamics of proxy contests is expected to be controversial, despite the fact that the intent of the SEC seems to be to replicate as closely as possible the choices available to a shareholder at a meeting. The proposed rule likely would enhance dissidents' ability to achieve at least some board representation, and we expect the SEC to receive significant numbers of comment letters both supporting and denouncing the proposal. Supporters will highlight the importance of shareholder enfranchisement while detractors will express concern about activists disrupting boards and the potential for confusion among shareholders. Given its contentiousness and the upcoming U.S. election, a new rule is unlikely to be finalized before the 2017 proxy season.
The proposed rule would not apply to Canadian MJDS issuers or other foreign private issuers, since they are exempt from the U.S. proxy rules.
Voting Mechanics with Universal Proxies
In a contested election under the existing proxy voting system, shareholders receive two sets of meeting materials, one from the company and one from the dissident group. The company's proxy card lists management's proposed slate, and the dissidents' proxy card lists the dissident slate. The SEC's proposed rule would require proxy cards to list all candidates for election to the board of directors, so all shareholders could vote in contested elections for whichever combination of directors they believe will best represent their interests.
Companies and dissidents would continue to be able to prepare their own forms of proxy cards, but all cards would be subject to certain formatting requirements, including listing all nominees while clearly distinguishing between management and dissident nominees and indicating the maximum number of nominees that a shareholder can select and the consequences of selecting too few or too many nominees. The proposed rules would also prescribe (i) notice requirements, under which a dissident would have to give the company 60-days' notice of its intent to solicit proxies and provide the names of its nominees; (ii) filing deadlines, under which the dissident's definitive proxy statement would have to be filed by the later of 25 days before the meeting date or five days after the company files its definitive proxy statement; and (iii) mandatory solicitation requirements, under which the dissident would be required to solicit shareholders representing at least a majority of the voting power of the company's shares entitled to vote in the election of directors.
Universal Proxies vs. Proxy Access
Proxy access grants certain larger, longer-term shareholders the ability to nominate directors. Proxy access is not meant to affect control of the company. Nonetheless, a mandatory SEC rule adopted several years ago was highly controversial and was ultimately struck down in court. In the past two years, however, over 250 U.S. companies have chosen to adopt proxy access by-laws. Like proxy access, universal proxies are meant to increase shareholder enfranchisement and director accountability. But unlike proxy access, universal proxies are used in proxy contests where control of the board is at stake.
Canadian Comparison
Universal proxies are permitted under Canadian law and have been used successfully in a small number of proxy contests. Canadian corporate statutes also permit shareholders who own at least 5% to nominate directors via a shareholder proposal. The Canadian Coalition for Good Governance, representing major institutional investors, advocates for legislative amendments to make universal proxies mandatory and proxy access rules more shareholder-friendly. In the meantime, the CCGG urges Canadian public companies to adopt these mechanisms voluntarily. Although neither mechanism has become popular in Canada yet, we expect continued debate among shareholder advocates, institutional investors, regulators and Canadian public companies in light of the SEC's proposed rule and the significant influence that U.S. governance developments typically have on Canadian law and practice.
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