On November 17, 2021, the U.S. Securities and Exchange Commission (the SEC) adopted amendments to the proxy rules to require (and implement) the use of a universal proxy card in proxy contests for most SEC-registered companies.1 The new rules do not apply to registered investment companies and business development companies. The SEC indicates in the Adopting Release that these changes, which were originally proposed in 2016, are intended to "enhance the ability of shareholders to elect directors though the proxy process in a manner consistent with their ability to vote in person at a shareholder meeting." The amended rules will be effective for shareholder meetings held after August 31, 2022.
In general, the final rules:
- Mandate the use of a universal proxy card in contested elections that includes the names of both company and dissident nominees, as well as certain other shareholder nominees resulting from proxy access;
- Require dissidents to notify companies of their intent to solicit proxies and the names of their nominees no later than 60 calendar days before the anniversary of the previous year's annual meeting;
- Require companies to notify dissidents of the names of their nominees no later than 50 calendar days before the anniversary of the previous year's annual meeting;
- 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;
- Require dissidents to solicit the holders of at least 67% of the voting power of the shares entitled to vote at the meeting;
- Specify formatting and presentation requirements for universal proxy cards; and
- Require that proxy cards (i) include an "against" voting option for director nominees where such options have legal effect, (ii) include an "abstain" option for director elections where a majority voting standard applies, and (iii) require disclosure about the effect of a withhold vote in director elections.
On October 26, 2016, the SEC proposed amendments to the proxy rules to require the use of a universal proxy card in all non-exempt solicitations in connection with contested elections of directors, among other amendments to the form of proxy and proxy statement disclosure requirements.2 The SEC received numerous comments in response to the Proposing Release and reopened the comment period on April 16, 2021.
Mandatory Use of Universal Proxies in Non-exempt Solicitations
Prior to the amendments to Rule 14a-19(e), shareholders voting by proxy in a contested director election were generally unable to vote for a combination of director nominees from competing slates, while shareholders attending and voting at the meeting could vote for any combination of duly-nominated director nominees presented by all parties.
The SEC amended Rule 14a-19(e), as proposed, to mandate the use of universal proxy cards, with the names of company, dissident, and other shareholder nominees, by registered companies (other than registered investment companies and business development companies) in non-exempt director election contests. The overarching goal of the rulemaking was to permit shareholders casting their votes by proxy to vote in the same manner as they would if those shareholders attended the meeting in person. The SEC identified a lack of resources and sophistication as obstacles to retail investors' ability to attend and vote at meetings, contrasted against the ability of institutional and other large shareholders to vote for any combination of director nominees by sending representatives to meetings if they so choose. While it conceded that the recent rise of virtual meetings and technological advances improves the ability for retail investors to attend and vote at meetings in theory, the SEC explained that many retail investors hold their shares in "street name," requiring a shareholder to obtain a legal proxy from a broker-dealer or other securities intermediary in order to vote at in-person and virtual meetings alike.
The SEC received comments encouraging an optional adoption of universal proxy cards, but adopted the mandatory standard as originally proposed. According to the Adopting Release, "[a] mandatory system better protects the shareholder voting franchise, while avoiding the confusion that could result from a voluntary universal proxy system, where one party or the other strategically uses universal proxy only when they perceive it to be to their advantage." In the Adopting Release, the SEC explained that it is unclear whether the rules changes will increase or decrease the number of proxy contests and the influence of dissidents and short-term activist investors.
The SEC also amended the formatting and presentation requirements for universal proxy cards to require the conditions below, among others:
- The proxy card must set forth the names of all duly nominated director candidates;
- The proxy card must provide a means for shareholders to grant authority to vote for the nominees set forth in the proxy card;
- The proxy card must clearly distinguish among company nominees, dissident nominees, and proxy access nominees, with nominees being listed in alphabetical order within each group;
- The proxy card must present all nominees in the same font type, style, and size;
- The proxy card must prominently disclose the maximum number of nominees for which authority to vote can be granted; and
- The proxy card must prominently disclose the treatment and effect of a proxy executed in a manner that grants authority to vote for more nominees than the number of directors being elected, in a manner that grants authority to vote for fewer nominees than the number of directors being elected, or in a manner that does not grant authority to vote with respect to any nominees.
Notice of Nominees, Deadline to File Definitive Proxy Statement
Dissident's Notice of Its Nominees, Deadline to File Definitive Proxy Statement
The SEC amended Rule 14a-19(b), as proposed, to require that a dissident provide the company with the names of its nominees no later than 60 calendar days before the anniversary of the previous year's annual meeting date. In the SEC's view, "the Rule 14a-19(b) notice requirement is necessary to provide a definitive date by which the parties in a contested election will know that use of universal proxies has been triggered and to provide the parties with a definitive date by which they will have the names of all nominees to compile a universal proxy card." However, the SEC notes that the 60-day period "is a minimum period that does not override or supersede a longer period established in the registrant's governing documents" and that most companies' advance notice bylaws establish an earlier deadline than that required by Rule 14a-19(b).
The SEC also adopted, as proposed, a requirement for the dissident in a contested director election to file its definitive proxy statement by the later of 25 calendar days prior to the meeting date or five calendar days after the registrant files its definitive proxy statement. The SEC notes that "a dissident filing deadline is appropriate to help ensure that shareholders who receive a universal proxy card will have access to information about all nominees sufficiently in advance of the meeting."
Registrant's Notice of its Nominees
The SEC also amended Rule 14a-19(d) as proposed, requiring a company to notify the dissident of the names of its nominees no later than 50 calendar days prior to the anniversary of the previous year's annual meeting date. The SEC explains that having the registrant's deadline 10 days after the dissident's deadline is suitable because "it provides a sufficient period of time for the registrant to consider the dissident's notice, finalize its nominees, and respond with its own notice of nominees. The 10-day period is appropriate, given that the dissident's notice of nominees may be the first indication of a contested solicitation that the registrant receives."
The rules as amended will allow both dissidents and companies to change their nominees after providing the initial notice under Rule 14a-19, while requiring prompt notice of any changes in nominees. Further, the rules do not require dissidents or companies to provide notice under Rule 14a-19 if the information required by the notice is provided by the applicable deadlines in a preliminary or definitive proxy statement.
Minimum Solicitation Requirements for Dissidents
The SEC initially proposed that the dissident in a contested election must (i) solicit holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors and (ii) make a statement in its proxy materials and notice to the registrant affirming its intention to satisfy the minimum solicitation requirement.
The SEC received "significant comment on the proposed minimum solicitation requirement for dissidents." The SEC raised the minimum solicitation threshold from the proposed majority to at least 67%, after considering comments and conducting an updated economic analysis of the costs and benefits of various minimum solicitation thresholds. According to the Adopting Release, "Comments from a wide range of market participants, including comments received from the Universal Proxy Working Group and the [SEC Investor Advisory Committee] indicated that a 67% threshold enjoys broad support and represents a reasonable compromise between the competing policy objectives related to this topic."
To address some commenters' concerns regarding costs imposed on dissidents to deliver proxy materials to shareholders, the SEC notes in the Adopting Release that "the adopted rules, like the Proposed Rules, do not mandate a specific method of furnishing the proxy materials. A dissident may choose to use the less costly e-proxy delivery method (i.e., the "notice and access" method of mailing a notice of internet availability and posting the proxy materials on a website) should it wish."
Access to Information for Nominees
As amended, Item 7(h) of Schedule 14A requires each party in a contested election to "refer shareholders to the other party's proxy statement for information about the other party's nominees and explain that shareholders can access the other party's proxy statement without cost on the [SEC]'s website."
Amended Rule 14a-5(c) allows parties to refer to information that would be furnished in the other party's filing in order to satisfy disclosure obligations. The SEC notes that "these proposed changes were intended to enable shareholders to access information with respect to all nominees when they receive a universal proxy card."
The SEC also changed the definition of "participant" in Instruction 3 to Items 4 and 5 of Schedule 14A, clarifying that only a party's own nominees would be considered "participants" in that party's solicitation, even though all nominees would be included on the universal proxy card.
Voting Standards Disclosure and Voting Options
As adopted, Rule 14a-4(b) requires the inclusion of an "against" voting option, rather than a "withhold authority to vote" option, on the form of proxy for director elections where there is a legal effect to an "against" vote, and prohibits the inclusion of an "against" voting option on a proxy card where there is no legal effect to an "against" vote.3 Similarly, Rule 14a-4(b)requires the inclusion of an "abstain" voting option, rather than a "withhold authority to vote" option, in a director election with a majority voting standard. The SEC notes the amendments "will provide shareholders with a better understanding of the effect of their votes on the outcome of the election." These requirements apply to both contested and uncontested elections.
In response to comments, the SEC modified these proposed amendments, noting in the Adopting Release: "[w]e agree with commenters, however, that including an 'against' voting option on a proxy card where there is no legal effect to such vote is unnecessarily confusing for shareholders and have therefore amended Rule 14a-4(b) to prohibit such a voting option on the proxy card where such votes have no legal effect. Further, in light of comment received from the public, we are retaining the phrase 'the method by which votes will be counted' from Item 21(b) of Schedule 14A to avoid any ambiguity regarding the need for clear disclosures in the proxy statement regarding the effect of each voting option presented to shareholders."
Bona Fide Nominees and Short Slate Rule
Previously, a bona fide nominee would be required to consent to being named in the proxy statement of the party listing that nominee on its card. In order to facilitate universal proxy requirements, the SEC expanded the scope of a bona fide nominee's consent in an election contest to "include consent to being named in any proxy statement for the applicable meeting."
The SEC also eliminated the short slate rule, which "allows dissidents soliciting in support of a partial slate of nominees that would make up a minority of the board of directors to seek authority to vote for some of a registrant's nominees," for companies that will be subject to the universal proxy requirements, noting that "it would be unnecessary with a universal proxy requirement and the revised bona fide nominee rule." The SEC clarified that the short slate rule would still be available with respect to registered investment companies and business development companies, as they are not subject to universal proxy requirements at this time.
Applicability of the Rule Changes
As previously noted, the rule changes do not apply to registered investment companies and business development companies. In the adopting release, the SEC stated "In light of developments since 2016, as well as the comments that we have received, we believe further consideration of the application of a universal proxy mandate to some or all funds before deciding how to proceed with respect to funds is appropriate."
All of the rule changes will become effective on January 31, 2022. However, the rules are subject to a transition period and therefore begin to apply for any shareholder meetings held after August 31, 2022. In the Adopting Release, the SEC notes "[t]he length of this transition period is designed to allow adequate time for affected parties to plan and prepare for compliance with the new rules, and to adjust to the elimination of existing provisions, such as the short slate rule." The SEC notes in the Adopting Release that certain of the rule amendments apply to all director elections, not just to contested director elections, and these changes will involve enhanced disclosure of the legal effect of votes under the applicable voting standard for the election and will impose new voting options where the applicable voting standards give effect to abstain or withhold votes.
Even if they do not expect to be subject to a contested election, all companies should review and consider these rule changes. Companies should revisit their advance notice bylaws in light of the final rules, as well as the applicable voting standards in director elections. Companies should reevaluate their disclosures regarding director elections and determine whether changes are necessary in anticipation of the new rules.
1 Release No. 34-93596, Universal Proxy (Nov. 17, 2021), available at: https://www.sec.gov/rules/final/2021/34-93596.pdf (the "Adopting Release").
2 Release No. 33-10668, Modernization of Regulation S-K Items 101, 103, and 105 (Aug. 8, 2019), available at https://www.sec.gov/rules/proposed/2019/33-10668.pdf (the "Proposing Release").
3 The SEC notes in the adopting release that state law and the company's governing documents determine the voting standard for director elections, as well as whether an "against" voting option has a legal effect under the applicable voting standard. For example, the SEC notes that, under a plurality voting standard, a director nominee can be elected to the board with a single vote in favor of his or her election, with the "withhold or "against" votes having no impact on the outcome of the election.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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