On October 26, 2016, the Securities and Exchange Commission (“SEC”) proposed to amend the proxy rules to require parties in contested elections of directors to use universal proxy cards that include the names of all director nominees, both management’s and dissident’s nominees. The amended rules would allow the shareholders to vote by proxy in a manner that more closely replicates how they vote in person at a shareholders’ meeting by allowing shareholders to vote for their preferred combination of candidates. The amended rules would apply to all non-exempt solicitations for contested elections of directors except those involving registered investment companies and business development companies. Foreign private issuers and companies with reporting obligations only under Section 15(d) of the Securities Exchange Act are not subject to the proxy rules and would not be subject to these amended rules.
The full text of the proposed amendments is available here.
Currently, shareholders who vote in person at a shareholders’ meeting cast written ballots provided at the meeting, which include the names of all director nominees in a contested election. On the other hand, shareholders voting by proxy do not have the same choices available. During the proxy solicitation process, management’s nominees are presented as one slate in the company’s proxy statement and proxy card, while the dissident’s slate of nominees is presented separately in the dissident’s proxy statement and proxy card. Therefore, shareholders voting by proxy must vote using either the company’s proxy card or the dissident’s proxy card and cannot choose a combination of nominees from both cards.
In proposing the new rules, the SEC recognized that today, most shareholders do not attend shareholders’ meetings to vote in person and must use the proxy mechanism to vote in contested elections, which in many cases limits the shareholder’s voting choices compared to voting in person. The proposed rules would allow shareholders to fully exercise their votes for their preferred nominees by allowing them to choose any combination of candidates from both management’s and dissident’s nominees in the same manner as they could if they were casting written ballots in person.
Proposed Amendments to Implement Universal Proxy Cards
Among other things, the proposed amendments would:
- Require parties in all non-exempt solicitations in contested directors’ elections to provide shareholders with a universal proxy card that includes both management and dissident nominees;
- Amend the definition of a “bona fide nominee” to include any person who agrees to be named in any proxy statement relating to the company’s next shareholders’ meeting at which directors are to be elected, rather than only in a particular party’s proxy card, as currently provided
- The amendment would allow parties in contested elections to include all director nominees on a single proxy card without the need to obtain additional consents;
- Eliminate the “short slate rule” under Rule 14a-4(d)
- The use of universal proxy cards would make the short slate rule, which allows a dissident to round out its slate with management’s nominees, unnecessary;
- Require proxy contestants to notify each other of their respective nominees
- A dissident would be required to provide the company with its nominees’ names no later than 60 calendar days prior to the anniversary of the previous year’s annual meeting date and
- Management would be required to provide the dissident with their nominees’ names no later than 50 calendar days prior to the anniversary of the previous year’s annual meeting date;
- Establish a filing deadline for a dissident’s definitive proxy statement
- A dissident would be required to file its definitive proxy statement with the SEC by the later of 25 calendar days prior to the meeting date or five calendar days after the company files its definitive proxy statement;
- Require dissidents to solicit shareholders representing at least a majority of the voting power of shares entitled to vote on the election of directors
- This requirement would prevent a dissident from triggering the mandatory universal proxy requirement for both parties unless the dissident intends to conduct a meaningful independent solicitation effort by distributing its own proxy statement and form of universal proxy card;
- Require proxy contestants to refer shareholders to the other party’s proxy statement for information about that party’s nominees
- Proxy contestants would be required to inform shareholders that they can access the other party’s proxy statement for free on the SEC’s website; and
- Prescribe presentation and formatting requirements for universal proxy cards to ensure clear and fair presentation of information, including clearly distinguishing dissident nominees from management nominees.
In addition, in order to further facilitate shareholder voting in all director elections, the SEC proposes to modify proxy cards to require inclusion of an “against” vote option instead of a “withhold authority to vote” option when an “against” vote has legal effect under applicable state laws on director elections and to provide shareholders the ability to “abstain” in a director election governed by a majority voting standard. The proposed rules would also require that the proxy statement disclose the effect of a shareholder’s decision to withhold its vote.
Comments on the proposed rules may be submitted until 60 days after publication in the Federal Register.
*Jennifer Huh, a law clerk, assisted in the preparation of this article.