November 1, 2016
On October 26, 2016, the Securities and Exchange Commission (SEC) voted (2-to-1) to issue proposed rules that would mandate the use of universal proxy cards by both issuers and dissidents in contested proxy solicitations for the election of directors. Advancing rules to require universal proxy cards has been a priority of SEC Chair Mary Jo White, and she and Commissioner Kara Stein voted to issue the proposed rules while Commissioner Michael Piwowar dissented. The SEC proposal also includes new disclosure requirements designed to ensure that voting options and standards applicable to the election of directors are clearly presented to shareholders.
In issuing the proposed rules, the Commissioners supporting the rule proposals aimed to minimize the differences that currently occur in contested director elections when shareholders vote by proxy instead of in person at the shareholder meeting. In his dissent, Commissioner Piwowar voiced concern that a universal proxy card may serve to empower special interest groups that seek to use their influence to the detriment of other shareholders, particularly retail investors, and that any increased costs associated with the use of universal proxy cards would be borne by shareholders. He also noted that the minimum solicitation requirement, discussed below, may result in retail shareholders not being included in the dissident’s proxy solicitations.
Currently, under SEC rules, a proxy card (and the corresponding voting instruction form distributed to shareholders who hold their stock through a bank or brokerage firm) can include a director nominee’s name only if that candidate has consented to the soliciting party (the issuer or the dissident) including the nominee’s name on that party’s proxy card. As a result, in a contested election of directors, the issuer’s proxy card typically lists only the issuer’s nominees and not the dissident’s nominees, while the reverse applies to the dissident’s proxy card. This situation can be particularly challenging when a dissident has nominated fewer candidates than the number of directors to be elected (a "short slate"), because a shareholder who returns the dissident’s proxy card is not able to instruct the dissident as to which (if any) of the issuer’s nominees to vote for to round out the slate.
A universal proxy card lists all director candidates, regardless of whether the candidate was nominated by the issuer or a shareholder. In a contested election, universal proxy cards thus allow shareholders to authorize proxy voting for a full slate of directors of their choice using a single proxy card, regardless of who nominated each candidate.
In 2013, the SEC’s Investor Advisory Committee (IAC) recommended revising the rules for proxy ballots to permit universal ballots for proxy contestants in short-slate campaigns. The IAC’s recommendations are available here. The SEC is required by statute to review recommendations from the IAC and issue a public statement including what actions the SEC plans to take as a result of the recommendations. On February 19, 2015, the SEC held a roundtable to discuss universal proxy cards and retail shareholder proxy participation, the transcript of which is available here. The SEC’s proposed rules follow the passage by the U.S. House of Representatives, in July 2016, of a spending bill (still pending in the U.S. Senate) with a rider aimed at preventing universal proxy card rules. The rider seeks to achieve this goal by restricting the SEC’s use of funds to pursue rulemaking on the basis that universal proxy cards may increase proxy contests to the detriment of shareholders, who may indirectly bear the cost. These sentiments were echoed by Commissioner Piwowar.
Summary of the Proposed Rules
Applicability and Requirements. Under the proposed rules, any participant in a contested solicitation for the election of directors, including the issuer and any dissidents, would be required to provide shareholders with a universal proxy card that includes the names of all director nominees. The proposed rules also would require nominating shareholders to solicit proxies from at least a majority of the voting power of shares entitled to vote on the election of directors, which would create a minimum solicitation requirement where none exists now. The SEC’s proposed rules also include presentation and formatting requirements for universal proxy cards, including that:
The proposed rules would not otherwise change how proxies are solicited in contested elections today; each side would file and disseminate its own proxy statement, include the universal proxy card with its materials and solicit shareholders to sign and return the universal proxy card to it.
Notices and Deadlines. In order to allow all parties to create and distribute universal proxy cards, issuers and dissidents would be required to notify each other of their respective director candidates by certain pre-established deadlines. For dissidents, this notification would be in addition to its obligation to comply with any applicable advance notice bylaw, and the deadline would be no later than 60 calendar days prior to the first anniversary of the previous annual meeting. The deadline for issuers would follow 10 days later, with notice required to the dissident no later than 50 calendar days prior to the first anniversary of the previous annual meeting. If an issuer changed the date of its annual meeting by more than 30 calendar days from the previous year or if the issuer did not hold an annual meeting during the previous year, the proposed rule would require that the dissident provide notice by the later of (i) 60 calendar days prior to the date of the annual meeting, or (ii) the tenth calendar day following the day on which the issuer first publicly announces the date of the annual meeting, and issuers would be required to provide notice to the dissident no later than 50 calendar days prior to the date of the annual meeting. Both the issuer and the dissident also would be required to include in their respective proxy statements a reference to the existence and availability of the other party’s proxy materials. Dissidents would be required to file their definitive proxy statements with the SEC by the later of (i) 25 calendar days prior to the meeting date, or (ii) 5 calendar days after the issuer files its definitive proxy statement.
Issuers Subject to the Proposed Rules. The proposed universal proxy card rules would apply to all solicitations for contested director elections other than those involving (i) foreign private issuers or companies with reporting obligations arising only under Section 15(d) of the Exchange Act, (ii) registered investment companies, or (iii) business development companies.
Comparison of Proxy Access and Universal Proxy Cards
Proxy access is similar to, but operates differently from, the SEC’s proposed universal proxy cards that would be used in a contested solicitation. A shareholder utilizing proxy access has the ability to include a limited number of shareholder-nominated director candidates on the issuer’s proxy card and to include a statement of support for those candidates in the issuer’s proxy statement, provided that the shareholder satisfies the ownership and other bylaw requirements for proxy access. With a universal proxy card, a shareholder likewise will be able to include shareholder-nominated director candidates on a single proxy card that is utilized by both the issuer and the shareholder, but the nominating shareholder will be required to file and distribute its own proxy materials, and will not be entitled to include a statement in support of its nominees in the issuer’s proxy statement. Proxy access requires a nominating shareholder to file a Schedule 14N with the SEC and is typically conditioned upon satisfying certain ownership and other eligibility requirements beyond those that apply in the context of a traditional proxy contest, including restrictions on the nominating shareholder’s intention to change or influence control. Accordingly, when comparing the requirements to use proxy access with the alternative of filing a proxy statement and satisfying the conditions to use a universal proxy card, many nominating shareholders may elect to conduct a traditional proxy contest using universal proxy cards instead of utilizing proxy access.
Proxy Card and Proxy Statement Disclosures Regarding Director Election Voting Standards
The SEC also proposed new rules with respect to the presentation of voting options relating to the election of directors, which would apply for both contested and uncontested solicitations. These rules are intended to address ambiguities both in the SEC rules and in some issuers’ disclosures in light of the widespread adoption of majority voting standards in the election of directors. To clarify the nuanced disclosure differences that are required depending on whether plurality or majority voting applies in the election of directors, the SEC’s proposed rules would amend Rule 14a-4(b) to require that all proxy cards for director elections in which majority voting is the applicable voting standard to include an "against" and an "abstain" voting option. Further, proxy statements would be required to clearly disclose the effect of "withhold" votes when the election is governed by a plurality voting standard.
Materials from SEC Open Meeting
Chair White’s statement during the open meeting proposing the universal proxy rules is available here, Commissioner Stein’s statement is available here, and Commissioner Piwowar’s statement is available here. The SEC’s proposing release, including a fact sheet, is available here, and the proposed rules are available here. In her opening remarks, Chair White specifically asked for comments on the logistical and technical aspects of the rules, as well as whether the SEC’s regulatory objective can be better met through other procedural mechanics. The comment period for the proposed rules will expire 60 days after the proposed rules are published in the Federal Register.
Considerations for Companies and Commenters
While the proposed universal proxy card rules leave in place many of the mechanisms that are currently implicated during a proxy contest, such as advance notice bylaws, dueling solicitations and efforts to obtain the last voted proxy, the proposed rules nevertheless could significantly impact the dynamics for companies that are engaged in, or that are negotiating to avoid, a proxy contest. Companies should work with their outside proxy solicitors, legal counsel and other advisors in evaluating how the proposed rules – including the notice and timing requirements – would operate in various contexts. Based on those reviews, companies may wish to submit comments on the proposed rules. In this respect, the SEC appears particularly open to comments on the mechanics and logistics of the proxy solicitation process, including whether the deadlines and notice requirements are feasible for parties in a contested solicitation. Companies should also consider whether any bylaw amendments would be appropriate to avoid unintended consequences if the proposed rules go into effect.
Regardless of whether or when the proposed rules are adopted, companies should carefully review their proxy card and proxy statement disclosures regarding director elections. As evidenced by recent SEC staff comments, the proposed rules on proxy card options and proxy statement disclosures regarding these standards confirm what already is commonly disclosed under existing SEC rules. Thus, these provisions should be implemented by issuers even in advance of final rules being adopted.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any lawyer in the firm’s Securities Regulation and Corporate Governance practice group, or any of the following practice leaders and members:
Elizabeth Ising – Co-Chair, Washington, D.C. (202-955-8287, firstname.lastname@example.org)
James J. Moloney - Co-Chair, Orange County, CA (949-451-4343, email@example.com)
Brian J. Lane - Washington, D.C. (202-887-3646, firstname.lastname@example.org)
Ronald O. Mueller – Washington, D.C. (202-955-8671, email@example.com)
John F. Olson – Washington, D.C. (202-955-8522, firstname.lastname@example.org)
Michael J. Scanlon - Washington, D.C. (202-887-3668, email@example.com)
Lori Zyskowski – New York (212-351-2309, firstname.lastname@example.org)
Gillian McPhee – Washington, D.C. (202-955-8201, email@example.com)
Michael A. Titera - Orange County, CA (949-451-4365, firstname.lastname@example.org)
Please also feel free to contact any of the following members of the firm’s Mergers and Acquisitions practice group:
Barbara L. Becker – Co-Chair, New York (212–351–4062, email@example.com)
Richard J. Birns – New York (212-351-4032, firstname.lastname@example.org)
Dennis Friedman – New York (212-351-3900, email@example.com)
Eduardo Gallardo – New York (212-351-3847, firstname.lastname@example.org)
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