SEC Allows Voting By Proxy For Preferred Combination Of Board Candidates In Contested Elections

The SEC amended federal proxy rules to require (i) parties in a contested election to use universal proxy cards that include all director nominees at a shareholder meeting and (ii) enhanced disclosure and voting options in all director elections. Shareholders will now have the ability to vote for their preferred combination of board candidates by proxy, which was an option previously restricted to in-person votes. With the exception of elections involving registered investment companies and business development companies, the amended rules will be applicable to all non-exempt solicitations for contested elections.

The SEC stated that it views the requirement of universal proxy cards as "the most effective means" to ensure shareholders are able to elect directors in a way that is consistent with in-person voting rights, and will "better align the federal proxy rules with a shareholder's ability to vote in person." Once in effect, the final rule will require dissident shareholders and registrants to:

• provide shareholders with a proxy card that includes the names of all registrant and dissident nominees;
• provide to each other notice of the names of their nominees;
• determine for dissidents a filing deadline for their proxy statement (25 calendar days prior to the shareholder meeting or five calendar days after the registrant files, whichever is later);
• establish for dissidents a minimum solicitation requirement (at least 67% of the voting power of the shares eligible to vote); and
• establish presentation and formatting requirements for universal proxy cards ensuring "nominees are presented in a clear, neutral manner."

The final rule also expands "bona fide nominee" to include an individual who agrees to be named in "any proxy statement for a registrant's next shareholder meeting for the election of directors." In addition, the SEC adopted new disclosure requirements with respect to voting standards and certain voting options for all director elections (regardless of the contested status of the election).

The new obligations involving universal proxy cards in contested director elections and voting options in all director elections will be required for elections held after August 31, 2022.

SEC Commissioners Allison Herren Lee and Caroline A. Crenshaw issued statements of full support for the rulemaking. SEC Commissioner Elad L. Roisman voted in favor of the rule, but stated that he wished it could be expanded to include funds. Mr. Roisman also expressed some reservations, noting that the amendments will "put even more power in the hands of the proxy advisory businesses." SEC Chair Gary Gensler endorsed the measure, saying that it will "put investors voting in person and by proxy on equal footing," which he said was important for "shareholder democracy."

SEC Commissioner Hester M. Peirce voted against the rulemaking, stating that while she is in favor of universal proxy voting, she remains concerned that this version would "facilitate changes to the company that advance special interests rather than enhancing corporate value." Ms. Peirce added that the "price of entry onto the company's proxy card under this rule is low" and expressed concern that the rule "does not condition access to the company's proxy card on a demonstrated commitment to the company."

Commentary

The universal proxy card has gained momentum in recent years. The SEC's new rule will give investors the option to split their votes between candidates nominated by management and those nominated by activist investors.

Primary Sources

1. SEC Final Rule: Universal Proxy
2. SEC Fact Sheet: Universal Proxy Rules for Director Elections
3. SEC Press Release: SEC Adopts New Rules for Universal Proxy Cards in Contested Director Elections
4. Commissioner Allison Herren Lee's Statement on the Final Rulemaking
5. Commissioner Elad L. Roisman's Statement on the Final Rulemaking
6. Commissioner Caroline A. Crenshaw's Statement on the Final Rulemaking
7. Commissioner Hester M. Peirce's Statement on the Final Rulemaking

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