SEC Proposes to Require Universal Proxy Cards in Contested Director Elections

Practical Law Legal Update w-004-1576 (Approx. 8 pages)

SEC Proposes to Require Universal Proxy Cards in Contested Director Elections

by Practical Law Corporate & Securities

Proposed Amendments to Implement Universal Proxy

Shareholders who attend a meeting in person generally vote by casting a written ballot provided at the meeting, which includes the names of all duly nominated candidates for the board of directors. As a result, in a contested election, shareholders attending the meeting in person and casting a written ballot can vote for the nominees of their choice from each party's slate of nominees, up to the specified number of board seats up for election. In the current proxy solicitation process, however, management's director nominees are typically presented as one slate in a company's proxy statement and proxy card, and the dissident's full or partial slate of nominees is presented in another. Shareholders voting by proxy generally must submit their votes on either the company's or the dissident's proxy card and cannot choose a combination of nominees from both cards.

The proposed amendments would allow shareholders to vote by proxy for any combination of candidates for the board of directors, as they could if they attended the shareholder meeting in person and cast a written ballot. Among other things, the proposed amendments would:

Revise the consent required of a bona fide nominee (see Consent Required of Bona Fide Nominees).
Eliminate the short slate rule (Rule 14a-4(d)(4)) (see Elimination of Short Slate Rule).
Require the use of universal proxy cards in all non-exempt solicitations in connection with contested elections (see Mandatory Use of Universal Proxy Cards in Non-Exempt Solicitations in Contested Elections).
Require dissidents to provide registrants with notice of intent to solicit proxies in support of nominees other than the registrants' nominees, and the names of those nominees (see Dissident's Notice of Intent).
Require registrants to provide dissidents with notice of the names of the registrant's nominees (see Registrant's Notice of its Nominees).
Establish a filing deadline for a dissident's definitive proxy statement (see Dissemination of Proxy Materials).
Require dissidents to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors (see Minimum Solicitation Requirements for Dissidents).
Prescribe requirements for universal proxy cards (see Form of Universal Proxy).

Consent Required of Bona Fide Nominees

The proposal would amend the definition of "bona fide nominee" in Rule 14a-4(d) to mean a person who has consented to being named in a proxy statement relating to the registrant's next meeting of shareholders at which directors are to be elected, rather than in the proxy statement as the rule currently provides. As a result of this change, parties in a contested election will be able to include all director nominees on their proxy cards, instead of only those nominees who have consented to being named on that particular party's proxy card.

Elimination of Short Slate Rule

The proposal would eliminate the short slate rule from Rule 14a-4(d). The short slate rule permits a dissident seeking to elect a minority of the board to round out its slate by soliciting proxy authority to vote for some of the registrant's nominees on the dissident's proxy card (by representing that it will vote for all registrant nominees other than those specified by the dissident on its card). The purpose of the rule is to mitigate the disadvantage that dissidents face when setting out a partial slate of nominees.

If the proposed amendments are approved, the short slate rule will no longer be necessary to accomplish its intended purpose. Requiring a mandatory universal proxy with the names of all nominees would result in shareholders being able to select their preferred combination of nominees, including the specific registrant nominees, when voting for directors using the dissident's proxy card. While eliminating the short slate rule would take away the ability of a dissident to select the registrant nominees it prefers to round out its slate of nominees, the dissident would still have the ability to include recommendations for its preferred registrant nominees in its proxy materials.

Solicitation Without a Competing Slate

The proposal notes that the proposed amendments would affect proxy contests even when a proponent is not nominating its own candidates for the board. For example:

A proponent might seek authority to vote "against" one or more, but fewer than all, of the registrant nominees. The current bona fide nominee rule would prevent the proponent from naming and soliciting votes "for" any of the other registrant nominees because they did not consent to being named in the proponent's proxy statement. In addition, the short slate rule is not available for a proponent's solicitation of authority to vote "against" one or more of the registrant nominees.
A proponent might solicit votes for a proposal unrelated to director elections, such as a corporate governance proposal. While the proponent might want to include the registrant nominees on its proxy card so that shareholders supporting its proposal would be able to use the proponent's proxy card to vote in the election of directors, the current bona fide nominee rule would not allow the proponent to include the names of the registrant nominees or solicit votes "for" those nominees.

Under the proposed amendments, proponents in these situations would be permitted to solicit authority to vote on some or all of the named registrant nominees because a person would be a bona fide nominee as long as he or she consents to being named in a proxy statement for the next meeting at which directors are to be elected. However, the proponents in these situations (conducting a solicitation without a competing slate) would not be required to include the names of all registrant nominees on their proxy cards.

Mandatory Use of Universal Proxy Cards in Non-Exempt Solicitations in Contested Elections

Proposed Rule 14a-19(e) would require that proxy cards used in a non-exempt solicitation in connection with a contested election of directors include the names of all duly nominated candidates for election to the board. A registrant's proxy card would clearly distinguish the dissident's nominees from the registrant's nominees. The registrant's proxy materials would not need to include:

Detailed information about the dissident or its nominees.
Any statements by the dissident in support of its nominees' election.

Instead, the registrant would only be required to include a statement in its proxy statement directing shareholders to refer to the dissident's proxy statement for information required by Schedule 14A about the dissident's nominees. The dissident would be responsible for disseminating information about its nominees to shareholders and soliciting proxies in support of its nominees.

A "contested election" would be an election where a person or group of persons is soliciting proxies in support of director nominees other than the registrant's nominees. The proposed mandatory universal proxy system would not apply to:

An election of directors involving only registrant and proxy access nominees.
A dissident's consent solicitation to remove existing registrant directors and replace them with dissident nominees.

Current Rule 14a-2(b) provides that certain provisions of Regulation 14A do not apply to the exempt solicitations described in Rule 14a-2(b). The proposal would revise Rule 14a-2(b) to specify that the requirements of proposed Rule 14a-19 similarly would not apply to exempt solicitations under Rule 14a-2(b).

Dissident's Notice of Intent

The proposed amendments would require a dissident to provide notice to the registrant of its intent to solicit proxies in support of director nominees other than the registrant's nominees. Proposed Rule 14a-19 would require a dissident to provide the registrant with the names of the nominees for whom it intends to solicit proxies no later than 60 calendar days prior to the anniversary of the previous year's annual meeting date. If the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, proposed Rule 14a-19 would require the dissident to provide notice by the later of:

60 calendar days prior to the date of the annual meeting.
The tenth calendar day following the day on which public announcement of the date of the annual meeting is first made by the registrant.

The proposal would also require a dissident to indicate its intent to comply with the minimum solicitation threshold in proposed Rule 14a-19 (see Minimum Solicitation Requirements for Dissidents) by including in its notice a statement that it intends to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors.

Proposed Rule 14a-19 would not require a dissident to:

Provide a notice of intent to the registrant if the information required in the notice has been provided in a preliminary or definitive proxy statement filed by the dissident by the deadline imposed by proposed Rule 14a-19.
File its notice of intent with the SEC.

A dissident would be required to promptly notify the registrant of any change to its intent to comply with the minimum solicitation threshold in proposed Rule 14a-19 or with respect to the names of its nominees. The proposal would require a registrant to include disclosure in its proxy statement advising shareholders how it intends to treat proxy authority granted in favor of the dissident's nominees in the event the dissident abandons its solicitation or fails to comply with proposed Rule 14a-19. In those instances, the registrant could elect to disseminate a new, non-universal proxy card including only the names of the registrant's nominees. If there is a change in the dissident's nominees after the registrant has disseminated a universal proxy card, the registrant could elect, but would not be required, to disseminate a new universal proxy card reflecting the change in dissident nominees.

In addition to the notice requirement in proposed Rule 14a-19, a dissident would remain obligated to comply with any applicable advance notice provision in the registrant's governing documents.

Registrant's Notice of Its Nominees

The proposal would require the registrant to notify the dissident of the names of its nominees, unless the names were already provided in a preliminary or definitive proxy statement filed by the registrant. The registrant would need to provide the names of the nominees for whom the registrant intends to solicit proxies no later than 50 calendar days prior to the anniversary of the previous year's annual meeting. If the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, proposed Rule 14a-19(d) would require the registrant to provide notice no later than 50 calendar days prior to the date of the meeting. A registrant would not need to file the notice with the SEC.

A registrant would be required to promptly notify a dissident of any change with respect to the names of the registrant's nominees. If there is a change in the registrant's nominees after the dissident has disseminated a universal proxy card, the dissident could elect, but would not be required, to disseminate a new universal proxy card reflecting the change in registrant nominees.

Minimum Solicitation Requirements for Dissidents

The proposed amendments would require dissidents in a contested election subject to Rule 14a-19 to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors. The minimum solicitation requirement would prevent a dissident from triggering mandatory universal proxy for both parties unless the dissident intends to conduct an independent solicitation by distributing its own proxy statement and form of proxy.

A dissident would also be required to state in its proxy materials that it will solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors. Like any other statement made in the dissident's proxy materials, this statement would be subject to Rule 14a-9 (prohibition against false or misleading statements or material omissions).

Dissemination of Proxy Materials

The proposal would require a dissident in a contested election to file its definitive proxy statement with the SEC by the later of:

25 calendar days prior to the meeting date.
Five calendar days after the registrant files its definitive proxy statement, regardless of the proxy delivery method.

The proposal does not impose a filing deadline on registrants because unlike dissidents, registrants have an incentive to file and distribute definitive proxy statements and proxy cards well in advance of the meeting date to ensure there is sufficient time to achieve a quorum for the meeting. If a registrant discovers after disseminating a definitive proxy statement and universal proxy card that a dissident failed to comply with the filing deadline, the registrant could elect to disseminate a new non-universal proxy card including only the names of its nominees.

Because a registrant may disseminate a universal proxy card before discovering that a dissident is not moving ahead with its solicitation, the proposal would also require the registrant to disclose in its proxy statement how it intends to treat proxy authority granted in favor of a dissident's nominees if the dissident fails to comply with Regulation 14A or otherwise abandons its solicitation.

Access to Information About All Nominees

The proposal would create new Item 7(h) of Schedule 14A to require that each party in a contested election:

Refer shareholders to the other party's proxy statement for information about the other party's nominees.
Explain that shareholders can access the other party's proxy statement for free on the SEC's website.

Since the dissident would not be required to solicit all shareholders (see Minimum Solicitation Requirements for Dissidents), it is possible that some shareholders would not receive the dissident's proxy materials including information about its nominees. Because this new Item 7(h) disclosure would be included in the registrant's proxy materials, which all shareholders would likely receive, those shareholders that do not receive the dissident's proxy materials would still have access to information about the dissident's nominees.

The proposal would also:

Revise Rule 14a-5(c) to permit the parties to refer to information that would be furnished in a filing of the other party to satisfy their disclosure obligations.
Define "participant" in Instruction 3 to Items 4 and 5 of Schedule 14A separately for solicitations made by registrants and solicitations made by dissidents, since Item 5 of Schedule 14A requires specific disclosure about all participants in a contested election. As a result, although all nominees would be included on the form of proxy, only the party's nominees would be considered "participants" in that party's solicitation.

Form of Universal Proxy

Proposed Rule 14a-19(e) would include the following requirements for the presentation and formatting of all universal proxy cards used in contested elections (in addition to proxy card requirements in Rule 14a-4):

The proxy card must clearly distinguish between registrant nominees, dissident nominees, and any proxy access nominees. For example, the card could list each party's nominees in a separate column (but then any proxy access nominees would also have to be clearly distinguished such as by listing in another separate column). The proposal does not direct where to place the groups of nominees on the card or prohibit the parties from listing their group of nominees first.
Within each group of nominees, the nominees must be listed in alphabetical order by last name on the proxy card.
The proxy card must use the same font type, style, and size to present all nominees.
The proxy card must prominently disclose the maximum number of nominees for which authority to vote can be granted.
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;
- grants authority to vote for fewer nominees than the number of directors being elected; or
- does not grant authority to vote with respect to any nominees.

Also under the proposal:

Where both parties have proposed a full slate of nominees and there are no proxy access nominees, the proxy card may provide the ability to vote for all dissident nominees as a group and all registrant nominees as a group.
Where proxy access nominees will be included on the proxy card or where a dissident or registrant is proposing a partial slate, neither proxy card would be permitted to provide the option to vote for any nominees as a group.

Exceptions

The proposed changes to require a universal proxy card would not apply to solicitations involving:

Foreign private issuers or companies with reporting obligations only under Section 15(d) of the Exchange Act, which are not subject to the federal proxy rules.
Registered investment companies.
Business development companies.

Proposed Amendments Relating to Voting Options and Standards in All Director Elections

The proposal would also amend Rule 14a-4(b) to:

Mandate that proxy cards include an "against" voting option instead of a "withhold authority to vote" option when applicable state laws give legal effect to a vote against (such as under a majority voting standard).
Require that proxy cards give shareholders the ability to "abstain" rather than "withhold authority to vote" in an election governed by a majority voting standard.

In addition, the proposal would amend Item 12(b) of Schedule 14A to mandate disclosure about the treatment and effect of a "withhold" vote in an election.

To learn more about the requirements for proxy cards, see Form Check Guide: Annual Meeting Proxy Card.

SEC Proposes to Require Universal Proxy Cards in Contested Director Elections | Practical Law