On October 26, 2016, the Securities and Exchange Commission (the SEC) voted 2-1 to propose amendments to the proxy rules that would require parties in contested director elections to use universal proxy cards. The SEC also proposed amendments to existing proxy statement disclosure about voting options and standards that would affect most domestic public operating companies. The proposing release may be found on the SEC website.
Under current proxy rules, in contested elections the company and the dissident each mail a separate proxy card to shareholders, which includes only their own nominees. Shareholders voting by proxy must use either the company proxy card or the dissident proxy card, and cannot mix and match nominees from either side (i.e., split their vote), as shareholders can do when attending a shareholder meeting in person. The SEC release states that the proposed rules would allow shareholders to vote by proxy in a manner that more closely resembles how they can vote in person at a shareholder meeting.
Noteworthy aspects of the proposed rules include:
Universal Proxy Card. The proposed rules would require the company and the dissident to provide shareholders with a universal proxy card that includes the names of both company and dissident nominees and allows shareholders to vote by proxy for any combination of nominees. The proposed rules would require dissidents to solicit shareholders representing at least a majority of the voting power of shares entitled to vote on director elections. The proposed rules would also impose a variety of procedural requirements, and would impose presentation and formatting requirements to help ensure that the proxy cards clearly and fairly present the required information.
Timing of Universal Proxy Solicitation Process. In order to provide advance notice of the requirement to use a universal proxy, the proposed rules would require that dissidents provide the names of nominees for whom they intend to solicit proxies to companies no later than 60 days before the anniversary of the previous year’s annual meeting date, and require that the company provide notice of their nominees to dissidents no later than 50 days before that anniversary date. A dissident’s obligation to comply with the notice requirement would be in addition to its obligations to comply with any applicable advance notice bylaw provisions. Dissidents would be required to file their definitive proxy statement by the later of 25 days before the meeting date or five days after the company files its definitive proxy statement.
Under the proposed rules, the universal proxy system would not apply to an election of directors involving only company and “proxy access” nominees, solicitations that do not involve a contested election with alternative nominees, such a “vote no” or “withhold” campaign, or where a shareholder is only soliciting proxies in support of a shareholder proposal.
Disclosure of Voting Options and Standards
According to the proposing release, the SEC is concerned about ambiguities and inaccuracies in disclosures about voting standards in director elections. In reviewing proxy statement voting standard disclosure provided by a broad set of companies, SEC staff found ambiguities or inaccuracies including (1) failure to include an “against” voting option on the proxy card when a majority voting standard applies; (2) mistaken use of an “against” option on the proxy card when a plurality voting standard applies and the only appropriate voting alternative would be “withhold”; and (3) incorrect statements that “withhold” votes are counted in determining director election outcomes.
The proposed rules would require, in all director elections (contested and uncontested), the following:
- “against” and “abstain” voting options for the election of directors, in lieu of a “withhold” option, when applicable state law gives legal effect to a vote against a nominee;
- elimination of the current ability to provide a “withhold” voting option when an “against” vote has legal effect under applicable state law;
- an “abstain” voting option in a director election governed by a majority voting standard; and
- disclosure about the treatment and effect of a “withhold” vote in director elections.
In addition, the SEC specifically requests comment on elimination of a “withhold” option where plurality voting standards apply, replacing this with an “abstain” option so that shareholders are aware that such votes do not legally affect the outcome of the director election.
The proposed voting options and standards amendments would not apply to foreign private issuers, companies with reporting obligations only under Section 15(d) of the Securities Exchange Act of 1934, registered investment companies, or business development companies.
Implementation and SEC Statements on Proposed Rules
The proposed rules will be subject to public comment for 60 days after publication in the Federal Register, which is expected to occur within several weeks. While it is unclear whether the proposed rules would be effective for the spring 2017 annual meeting cycle, given the volume of public comments the SEC will receive, we expect that if the proposed rules become effective, the effective date would be sometime thereafter.
At the SEC open meeting approving the proposed amendments, Chair Mary Jo White and Commissioner Kara Stein supported the proposed amendments noting that few shareholders have the time and resources necessary to attend a shareholder meeting in person to split their vote for a combination of directors of their choice, and that a universal proxy would permit them to exercise their vote by proxy in the same manner as at a shareholder meeting. Commissioner Michael Piwowar, who dissented, expressed concern that the new rules would increase the likelihood of proxy fights thereby distracting management from operating its business. Commissioner Piwowar also contended that a universal proxy may empower certain shareholders to advance their own special interests and disproportionality impact retail shareholders who may not receive important disclosure about dissent nominees because the dissident would not be required to mail a proxy statement to all shareholders.