November 18, 2021
On November 17, 2021, the Securities and Exchange Commission (SEC) approved amendments to the federal proxy rules to mandate the use of a universal proxy card in public solicitations involving director election contests. After the rules become effective on August 31, 2022, proxy cards distributed by both public companies and activist shareholders in a contested director election will have to include both sides’ director nominees, such that shareholders casting their vote can “mix and match” nominees from the company’s and dissident’s slates of nominees. We believe that the new rules are likely to embolden activists and increase the incidence of contested director elections.
Rule Amendments
The final rules adopted by the SEC require that both public companies and activists use a universal proxy card when soliciting shareholders in a director election contest – that is, each proxy card, regardless of who delivers it, must include the names of both the company and activist nominees. Such a proxy card allows shareholders to combine candidates from the separate slates submitted by the company and activist shareholder. This contrasts with the current system in which shareholders generally have a binary choice of casting their vote for the company’s slate in the company’s proxy card, or the activist’s slate in the activist’s proxy card.[1]
In order to implement the use of universal proxy cards, the new rules also mandate the following in connection with director election contests:
The new rules also require each side of the contest to refer shareholders to the other party’s proxy statement for information about the other party’s nominees, and establish presentation and formatting requirements for universal proxy cards.
What Does Universal Proxy Mean For Public Companies?
Although the impact of mandated universal proxies has been the subject of intense debate since 2016, the reality is that before the rules come into effect in the fall of 2022, we are all only able to engage in (educated) speculation:
At the risk of oversimplifying: going forward an activist can comply with state law and the company’s governing documents to submit a nomination within the prescribed timeline, file electronically with the SEC a proxy statement, disseminate the proxy statement via notice-and-access with distribution of electronic copy (pdf) to the largest institutional holders, lobby ISS and Glass Lewis, and rely on the company’s mailing of a universal proxy card to get the activist’s nominees across the finish line. There is certainly more to it, but even the perception of a faster and cheaper process is likely to encourage activists (and aspiring activists) to launch a director election campaign. And needless to say, the new system compels companies to make sure they have state-of-the-art advance notice bylaws to protect the integrity of the director election process.
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[1] In the case of certain short slate elections, the activist’s slate may include company nominees cherry-picked by the activist.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Mergers and Acquisitions, Capital Markets, or Securities Regulation and Corporate Governance practice groups, or the following authors:
Eduardo Gallardo – New York (+1 212-351-3847, egallardo@gibsondunn.com)
James J. Moloney – Orange County, CA (+ 949-451-4343, jmoloney@gibsondunn.com)
Andrew Kaplan – New York (+1 212-351-4064, akaplan@gibsondunn.com)
Please also feel free to contact the following practice leaders:
Mergers and Acquisitions Group:
Eduardo Gallardo – New York (+1 212-351-3847, egallardo@gibsondunn.com)
Robert B. Little – Dallas (+1 214-698-3260, rlittle@gibsondunn.com)
Saee Muzumdar – New York (+1 212-351-3966, smuzumdar@gibsondunn.com)
Capital Markets Group:
Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com)
Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com)
Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com)
Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)
Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
James J. Moloney – Orange County, CA (+ 949-451-4343, jmoloney@gibsondunn.com)
Lori Zyskowski – New York, NY (+1 212-351-2309, lzyskowski@gibsondunn.com)
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