Securities and Exchange Commission Issues New Universal Proxy Rules¹

Recent changes in the Securities and Exchange Commission (SEC) proxy rules will give shareholders the ability to vote for directors like never before. The new rules will require companies to provide universal proxy cards to shareholders voting by proxy in contested director elections.  Universal proxy cards will require the company and the dissident to each list all nominated directors on their proxy cards.  This is an important change—currently, shareholders voting by proxy in a contested director election can only vote for either the company’s entire slate of directors or the dissident’s entire slate of directors, with limited exceptions.  The SEC is also issuing new rules along with the universal proxy card requirement.  Companies will be required to comply with the new rules starting September 1, 2022.

Introduction

On November 17, 2021, the Securities and Exchange Commission (the “SEC”) adopted a final rule (the “Universal Proxy Rules” or the “Rules”) that will require operating companies to furnish universal proxy cards to shareholders voting by proxy at shareholder meetings in all non-exempt[2] shareholder solicitations involving contested director elections.[3] The Universal Proxy Rules will also establish certain notice, minimum solicitation, filing, formatting, and presentation requirements to properly implement a universal proxy voting system. The Rules become effective September 1, 2022, and will not apply to investment companies and business development companies under the Investment Company Act of 1940.

Primary Rule

For context, few shareholders of public companies currently attend a company’s meeting in person to vote—shareholders primarily vote for directors remotely through the proxy process. Generally, companies and other parties[4] soliciting proxy authority in director elections at shareholder meetings must comply with federal proxy rules. Federal proxy rules currently require shareholders voting by proxy in a contested director election to vote for either the company’s or the dissident’s entire designated slate of directors, without being able to vote for any combination of directors from those slates.[5] However, shareholders who attend meetings in person can vote for any combination of nominated directors. 

The Universal Proxy Rules amend the current rules to allow shareholders voting by proxy in a contested director election to vote for any combination of candidates. Both the company and the dissident must furnish universal proxy cards that include the names of the nominees of all parties, providing shareholders voting by proxy the same voting options as shareholders voting in person. Additionally, the proxy cards must distinguish between the company’s and dissident’s nominees; list all nominated director candidates in alphabetical order by last name; and maintain the same font type, style, and size for all nominees on the proxy card, among other requirements.[6] Otherwise, parties will be free to choose the design and style of their universal proxy cards.

Other Changes

Notice

The dissident and the company will be required to provide notice to the opposing party of the names of its nominees at least 60 calendar days, and at least 50 calendar days, respectively, before the anniversary date of the company’s previous year’s annual shareholder meeting date. The Rules provide alternative notice requirements if the company did not hold an annual shareholder meeting the previous year. The dissident must include a statement in its notice indicating that it intends to solicit at least 67% of the voting power of the shares entitled to vote (see below). The parties are not required to provide notice if the information is already provided in a filed preliminary or definitive proxy statement.

Minimum Solicitation Requirement for Dissidents

Under the current rules, there is no minimum solicitation requirement for dissidents seeking to oust incumbent directors—dissidents are only required to furnish a proxy statement to each person solicited, if any. However, mandating universal proxies without a minimum solicitation requirement would allow dissidents to take advantage of the company’s solicitation of all investors. As such, the Rules will require dissidents to solicit shareholders who represent at least 67% of the voting power of the shares entitled to vote in the election. This requirement is based on the SEC’s cost-benefit analysis of the burden imposed on dissidents by the solicitation requirement versus the possibility of dissidents failing to solicit retail investors or taking advantage of the company’s solicitation.

Filing, Disclosure Reference, and Form

Under the Universal Proxy Rules, dissidents in a contested director election will be required to file a definitive proxy statement with the SEC by the later of (i) 25 calendar days before the meeting date or (ii) five calendar days after the company files its definitive proxy statement. If the dissident violates the filing rules, it will not be permitted to continue its solicitation and the company can elect to disseminate a new, non-universal proxy card with only its own nominees listed. Companies will not be subject to a filing deadline.

The Rules will also: (i) require that each party refer shareholders to the other party’s proxy statement for information about the other party’s nominees,[7] (ii) allow a party to refer to information in a filing made by the other party to satisfy its own disclosure obligations, and (iii) change the definition of “participant”[8] in Instruction 3 to Items 4 and 5 of Schedule 14A to ensure that only each party’s own nominees are considered “participants” in that party’s solicitation.

Elimination and Modification of Current Rules

The Universal Proxy Rules will make certain currently enacted rules unnecessary. The Universal Proxy Rules eliminate Rule 14a-4(d)(4) (known as the Short Slate Rule), which currently allows dissidents who solicit proxies in support of a partial slate of nominees to seek authority to vote for specific company nominees to fill the remainder of the slate. The Rules will also modify Rule 14a-4(d)(1) (known as the Bona Fide Nominee Rule) by changing the requirement that a director nominee consent to being named in the proxy statement of the party listing the nominee on its card, to a requirement that a director nominee consent to being named in a proxy statement of either side.

The Rules as Applicable to All Director Elections

The above changes to the current federal proxy rules apply only to contested director elections. However, as applicable to all director elections, the Rules will modify Rule 14a-4(b) to require an “against” voting option instead of a “withhold authority to vote” option if that option would have legal significance. The Rules will also allow shareholders who neither support nor oppose a director nominee to “abstain” in a director election governed by a majority voting standard.

Although companies will not have to comply with the Universal Proxy Rules until September 1, 2022, reviewing the requirements is recommended to understand the impact of the Rules on each company’s proxy process.

Footnotes:

[1]This Article does not purport to provide a comprehensive examination of the newly implemented proxy rules.  It is written to serve as a brief overview for companies for informational purposes.  Please see generally Universal Proxies, infra note 3, for a comprehensive examination of the new proxy rules, including the rationale for their implementation and associated cost-benefit analyses performed by the SEC.

[2] Analyzing the exemptions for shareholder solicitation requirements is outside the scope of this Article. For more information relating to solicitation exemptions, see 17 C.F.R. § 240.14a-2.

[3]See Securities and Exchange Commission, Universal Proxy, Final Rule, Release No. 34-93596, at 7 n.9 (Nov. 17, 2021) [hereinafter Universal Proxies] (stating how “contested elections,” as referred to in the Universal Proxy Rules, refer to elections of directors where a company is soliciting proxies for its nominees and another party is doing the same for its own nominees). 

[4] For purposes of this Article, any party who is not the company is referred to as the “dissident” unless otherwise indicated.

[5]See 17 C.F.R. § 240.14a-4(d)(1) (setting out the “bona-fide nominee rule,” which requires a nominated director’s consent to be included on a party’s proxy card—in practice, directors rarely give consent to be listed on the opposing party’s proxy card).

[6] For a complete list of all proxy card requirements, see Universal Proxies, supra note 3, at 52–53.

[7] Each party must also provide information relating to the ability to access the other party’s proxy statement, without cost, on the SEC’s website.

[8] Items 4 and 5 of Schedule 14A require disclosure of names, substantial interests, and other information of “participants” in the solicitation.

Republished with permission. This article was originally written for the ACC Tampa Bay Newsletter.