In remarks in March to the Center for American Progress, Acting SEC Chair Allison Lee said that she had asked the staff to consider whether the SEC should "re-open the comment file on the 2016 universal proxy rule proposal to take into account market developments since then and move towards finalization." Under that proposal, in a contested election, universal proxy cards identifying all the candidates for director on both slates would be required, more closely replicating in-person voting. In Lee's view, the proposal would be "a common-sense step forward in modernizing our proxy rules and protecting shareholder rights. The proposal has been outstanding for far too long and should be finalized." (See this PubCo post.) On Friday, the SEC announced that it had voted to reopen the comment period for the universal proxy proposal for 30 days following publication of the reopening release in the Federal Register. According to Corp Fin Acting Director John Coates, "[r]eopening the comment period will allow the public to share additional views on the use of universal proxy cards in director elections, particularly in light of the corporate governance developments that have occurred since the Commission issued its proposal."
A universal proxy is a proxy card that, when used in a contested election, includes a complete list of board candidates, thus allowing shareholders to vote for their preferred combination of dissident and management nominees using a single proxy card. In the absence of universal proxy, in contested director elections, shareholders can choose from both slates of nominees only if they actually attend the meeting. Otherwise, they are required to choose an entire slate from one side or the other. (Dissidents' "short slates" allow shareholders to vote for company nominees to round out the short slates; however, shareholders voting on the dissident's proxy card would still be limited to voting for those company nominees selected by the dissident, rather than any company nominee of their choice.) Because a later-dated proxy revokes an earlier-dated one under state law, it's not easy to split votes between slates. One impediment to the use of a universal proxy is the "bona fide nominee" requirement of Rule 14a-4(d)(1), which requires that a nominee consent to be named in the proxy and, if elected, to serve as a director.
Background. The specter of the possible imposition of mandatory universal proxy has long been with us. The SEC apparently considered requiring universal proxies back in 1992 and, in 2014, the Council of Institutional Investors filed a rulemaking petition asking the SEC to reform the proxy rules to facilitate the use of universal proxies in proxy contests. Then, in 2016, the SEC proposed amendments to the proxy rules that would have mandated the use of universal proxy cards in contested elections. (See this PubCo post.) And there it sat. With the change of administrations in the White House, followed by the change of administrations at the SEC, the proposal for universal proxy fell off the SEC's near-term radar and was relegated to the long-term agenda, with no action taken. (See this PubCo post.) Then, the proposal suddenly appeared on the SEC's Spring 2020 RegFlex Agenda, identified as being at the final rule stage, with October 2020 given as the date for final action. (See this PubCo post.) But again no action was taken...until now, that is.
Universal proxy may sound anodyne, but it's still been quite a hot potato, and strongly held opinions have been voiced about it, both pro and con. Back in 2015, former SEC Chair Mary Jo White identified one hotly debated issue as whether universal proxies "would increase or decrease shareholder activism or otherwise impact the outcome of election contests. Some believed that it would embolden activists to run more contests. Others posited that it could stimulate increased cooperation and settlements between issuers and activists, thereby decreasing contests. No one specifically called into question the fundamental concept that our proxy system should allow shareholders to do through the use of a proxy ballot what they can do in person at a shareholders' meeting." [Emphasis added.] The historic view has been that dissidents—hedge fund activists and otherwise—tend to favor universal proxies, while companies have more often opposed them. However, it became apparent at a 2018 meeting of the SEC's Investor Advisory Committee (see this PubCo post), that something of a consensus had recently developed on the potential value of universal proxy cards in proxy contests, as some issuers had apparently recognized that universal proxy could, in some cases, help the management slate. For example, a proxy advisory firm might recommend in favor of two of dissident candidates only; however, shareholders would have difficulty following that recommendation because, in the absence of universal proxy, they would be compelled to either vote for only the two recommended directors or to choose one full slate or the other—and that could end up being the dissident slate.
At the SEC's 2018 Proxy Process Roundtable, the participants debated some of the issues related to universal proxies. One issue that remained on the table was the percentage of shareholders that dissidents would need to solicit, with a hedge fund representative arguing for a low percentage, while others maintained that, to be fair, there should be parity with the solicitation requirements applicable to companies. A representative of the Society of Corporate Governance expressed concern about the possible permutations in the outcomes of the director vote—for example, what if there were no director who could be the audit committee chair? What would happen if the dissident violated the rules? What does the layout of the proxy card look like? Meetings involving proxy contests represented such a small sliver of the total number of meetings, she said, there was really no reason to distract attention from other larger issues. However, another panelist observed that the SEC's 2016 universal proxy proposal was in pretty good shape and would not end up being a major distraction.
And, as suggested in this white paper from MacKenzie Partners, the devil might well be in some of the details, such as presentation and formatting requirements, procedures for electronic tabulation, processes to address multiple dissidents submitting competing slates, proxy contests run concurrently with shareholder proxy access campaigns and voting errors that may arise where a card is voted for more nominees than there are seats, potentially disenfranchising the shareholder.
The 2016 proposal. The 2016 proposal provided for mandatory universal proxy cards in all non-exempt contested elections, both partial and full slates. Each party would file its own proxy statement and conduct its own solicitation using the universal cards. Under the proposal, each party in a contested election would be required to include on its proxy card all candidates who have consented to being named on a proxy card for the applicable meeting. The universal proxy requirement would require dissidents to conduct a "meaningful solicitation" by soliciting at least that number of shareholders holding in the aggregate at least a majority of the voting power entitled to vote on the election of directors. The amendments would revise the consent requirement of the "bona fide nominee" rule and eliminate the "short slate" rule. The amendments would also require companies and dissidents to provide each other with notice of the names of their nominees: a dissident would be required to provide a company with the names of its nominees no later than 60 calendar days prior to the anniversary of the previous year's annual meeting date, and the company would be required to provide the dissident with the names of its nominees no later than 50 calendar days prior to the anniversary of the previous year's annual meeting date. To ensure that shareholders would have timely access to information, dissidents would be required to file their definitive proxy statements by the later of 25 calendar days prior to the meeting date or five calendar days after the company filed its definitive proxy statement. The amendments would also prescribe new formatting and presentation requirements for universal proxy cards.
The other aspect of the proposal was an amendment to enhance disclosures regarding voting options and voting standards that would apply to all director elections. The proposed amendments would require that voting options be clearly specified on proxy cards. More specifically, proxy cards would be required to provide for "against" votes when there was a legal effect to a vote against a nominee, "abstain" votes (where the company had majority voting) and, where state law permitted, a "withhold" vote. Companies would not be able to provide a "withhold" voting option when an "against" vote has legal effect. Proxy statements would be required to describe the effect of a "withhold" vote.
The universal proxy requirements would not apply to solicitations involving foreign private issuers, companies with reporting obligations only under Section 15(d) of the Exchange Act or registered investment or business development companies.
The reopening release. The new reopening release includes a long list of questions for commenters to consider and focuses in particular on the impact of developments since the publication of the proposal in 2016. These include important developments in proxy contests, corporate governance and shareholder activism. For example, the release observes that, since 2016, there have been several proxy contests where one or both parties used a universal proxy card. In that context, the reopening release asks whether participants in these situations can provide any new information about the costs and benefits or other aspects of the proposal?
The MacKenzie Partners paper cited above describes three instances in 2018 when universal proxy was "adopted" in three proxy contests, although only one actually went to a vote. In the first instance, a recently public company faced an election contest related to half the board from a well-known hedge-fund activist with "an incredibly strong track record of placing directors on boards." That risk led the company to agree to use a universal proxy; however, the proxy contest ultimately settled before either side filed a preliminary proxy statement. In the next instance, an Israeli semiconductor company was faced with a proxy contest for a board majority from the same activist. In that case, because of Israeli law, the company opted to submit the question of the use of a universal proxy card directly to shareholders at a meeting in advance of the director election vote. The proposal received overwhelming support from shareholders; however, a settlement was reached in that case also.
Universal proxy was actually used in one proxy contest in 2018. In that case, the dissident nominated a full slate of five directors. The company's initial response was to expand the board to seven, in the hope of preventing a complete change of control at the board level. However, the dissident just expanded its slate to seven directors. The paper notes that the company was emerging from bankruptcy, and, as a result, its shareholder base consisted largely of hedge-fund creditors that had converted their debt holdings to equity, which left the company more vulnerable in a proxy contest. However, as a result of a possible oversight, the paper suggests, the dissident's nominees had consented to be named as nominees in the company's proxy statement, which allowed the company to use a universal proxy card without separately getting their consent. Accordingly, the company designed a proxy card that included its five nominees and the dissident's seven nominees, recommending that shareholders vote only for its five nominees and "two of the three other nominees that were deemed independent" of the dissident. According to the paper, the "move received praise from various constituencies, including the Council of Institutional Investors, which wrote a letter to the company's board expressing its support."
Notwithstanding the use of a universal proxy card, strategic maneuvering continued, as the company "became aware of rumors that [the dissident] was attempting to persuade other shareholders to reallocate their votes among their chosen candidates towards those who were not supported by ISS and Glass Lewis, with the goal of bolstering the dissident's prospects of achieving majority control of the board." The dissident also sent out its own proxy card with its nominees. At the end of the day, the company and the dissident settled, with the company having three seats and the dissident five. The paper observes that, although this loss of majority control
"may have appeared to represent a significant loss for [the company] and perhaps even a setback for the use of the universal proxy,...it should be noted that, had the company used a traditional proxy card, it is highly likely that even more shareholders would have used [the dissident's] gold proxy card to vote for some or all of his nominees, increasing the possibility that [the dissident] would have won control of the entire board. In that sense, the first use of the universal proxy card in the United States was a qualified success. Its use allowed shareholders greater flexibility in selecting their preferred candidates, and likely dissuaded some holders from voting for[the dissident's] nominees on his card. Furthermore, despite the historical protestations of Broadridge, the universal proxy card did not present any significant logistical challenges with respect to vote processing. And in its first use at a US company, the universal proxy card proved its benefit to management in certain cases as many had theorized, rather than being a one-sided dissident-friendly tool."
In addition, since 2016, more companies have adopted proxy access bylaws and, because of the pandemic, virtual shareholder meetings have proliferated. The release observes that in 2016, although the SEC remarked about the reduced burden involved in attending a meeting for the purpose of voting a split ticket in the case of a virtual shareholder meeting, VSMs were rarely convened at that time. Would the increase in frequency of virtual meetings have any impact on the proposal, the SEC asks? Some companies have also adopted advance notice bylaw provisions that require dissident nominees to consent to being named in the company's proxy statement and on its proxy card. The reopening release asks whether experience with that type of advance notice bylaw might affect any aspects of the proposal. And a number of companies have multi-class share structures. Here, the SEC asks whether the recent increase in the number of companies with dual or multi-class stock structures should be taken into account in determining the minimum solicitation requirement, currently proposed as a majority of the voting power?
The new reopening release notes that, as part of this effort, the staff is also considering recommending that the SEC propose amendments to the proxy rules to facilitate vote confirmations for shareholders and improve voting accuracy in the proxy system. It seems to be widely agreed that the current system of proxy plumbing is opaque and, all too often, inaccurate. At the 2018 Proxy Process Roundtable, the SEC staff moderator observed that the Securities Transfer Association found that, out of 183 meetings its members had tabulated in the past year, 130 had overvoting problems. Although most were ultimately reconciled, the question remained as to why the overvoting occurred. Many of the issues related to the inaccuracy of vote counts—overvoting, undervoting, empty voting, uncertainties regarding the accuracy of vote totals, and difficulties associated with vote counting, confirmation and reconciliation—arising out of the decision made decades ago to move to a system of share immobilization, under which most shares are held in street name and reflected in positions listed at a centralized depositary (DTC), where they are treated as a "fungible mass of shares not traceable to any individual." While the system makes share transfers easier, the arrangement is itself complex, compounded by many layers of intermediation—the transfer agent, the custodian and perhaps several subcustodians—that can complicate and obscure proxy voting and lead to mismatches that ultimately disqualify votes. As a basic matter, investors would like the ability to see through the chain of intermediaries to confirm that their shares have been voted as directed.
Not surprisingly, a representative from Broadridge at the Roundtable saw most of these issues as fixed or readily fixable. Problem with overvoting? We have an overvoting service to fix that problem. Vote confirmation? We are all in violent agreement that we should have vote confirmation. Hey, we did a pilot program for end-to-end vote confirmation with transfer agents to address that issue and it was determined to be viable, but we can't get participation from the vote tabulators. The SEC needs to push this process forward, he suggested. However, another panelist that participated in the pilot did not think it was used effectively. A transfer agent suggested that there's no clear definition of what "confirmation" even means. A broker representative insisted that they do have well-functioning processes to track share ownership. One panelist suggested that the various participants in the system should think hard about whether they are more part of the problem than part of the solution. (See this PubCo post.)
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