On October 26, 2016, the Securities and Exchange Commission proposed amendments to the proxy rules that would require parties in a contested election to use universal proxy cards. Additionally, the SEC proposed amendments applicable to all director elections to ensure that proxy cards specify clearly the applicable voting options and require that proxy statements disclose the effect of a shareholder’s election to withhold authority in a director election.
Universal Proxy Cards
Background. Under current rules, a shareholder attending a meeting in person may select among all of the duly nominated candidates proposed for election and vote for any combination of those candidates. However, very few shareholders actually attend the shareholder meetings, even when the matters are contested; instead they vote by proxy. Consequently, under current rules, shareholders voting by proxy in a contested election may be unable to replicate the vote they could cast in person at a shareholder meeting. Even if the soliciting parties wish to do so, it can be difficult to provide shareholders with the full range of voting options because a soliciting party may provide shareholders with the full selection of duly nominated candidates only if all such nominees have consented to being named on that party’s proxy card. This typically does not occur because of the current proxy rules and the parties’ strategic interests in not giving shareholders the ability to pick and choose among nominees on competing slates. The result is that most shareholders are forced to choose between one or the other slate of nominees presented by the competing soliciting parties.
Proposed Amendments. Under the amendments proposed by the SEC:
- Proxy contestants would be required to provide shareholders with a universal proxy card that includes the names of management’s and the dissident’s nominees, allowing shareholders to vote by proxy for a combination of the nominees of their choice. Use of universal proxy cards would be mandatory in all non-exempt solicitations in contested elections. Parties would be required to clearly distinguish between the management and dissident nominees on the proxy card.
- The definition of a “bona fide nominee” in Rule 14a-4(d) would be revised to enable all nominees to be named in the universal proxy cards.
- The “short slate” rule in Rule 14a-4(d)(4), which permits a dissident seeking to elect a minority of the board to “round out its slate” by soliciting proxy authority to vote for some registrant nominees on the dissident’s card, would be eliminated.
- Proxy contestants would be required to notify each other of their respective director candidates. For dissidents, this would have to be done no later than 60 calendar days prior to the anniversary of the prior year’s annual meeting, and for companies, no later than 50 calendar days prior to such anniversary.
- Dissidents would be required to solicit shareholders representing at least a majority of the voting power of shares entitled to vote on the election of directors.
- Proxy contestants would be required to refer shareholders to the other party’s proxy statement for information about the other party’s nominees and explain that such proxy statement can be accessed for free on the SEC’s website.
- Dissidents would be required to file their definitive proxy statement with the SEC by the later of 25 calendar days prior to the meeting or five calendar days after the company files its definitive proxy statement.
The proposed amendments would not apply to solicitations involving foreign private issuers or companies whose reporting obligations arise only under Section 15(d) of the Exchange Act (as such companies are not subject to the federal proxy rules) or to registered investment companies or business development companies.
Voting Options and Standards in All Director Elections
Background. The SEC staff has noted in recent years that disclosure regarding voting standards in proxy statements and proxy cards have been “sloppy” and “imprecise.” For example, companies have included an “against” option in director elections when they should have used “withhold” and have described “plurality plus” voting as “majority voting.”1
Proposed Amendments. In the release, the SEC proposed:
- Amendments to Rule 14a-4(b) that (1) mandate the inclusion of an “against” option in lieu of “withhold authority” on the proxy card where there is a legal effect to such a vote and (2) provide shareholders that neither support nor oppose a director nominee an opportunity to “abstain” rather than “withhold authority” in a director election governed by a majority voting standard.
- An amendment to Item 21(b) of Schedule 14A to include an express requirement to disclose the effect of a “withhold” vote.
The SEC will seek public comment on the proposed rules for 60 days from publication of the release in the Federal Register.
The proposed amendments are available here.
1 See, “‘Sloppy’ Proxy Disclosures May Necessitate SEC Rule,” Bloomberg BNA, February 22, 2016, http://www.bna.com/sloppy-proxy-disclosures-n57982067566/.