At its October 26th open meeting, the Securities and Exchange Commission voted to propose amendments to the proxy rules which would require the use of a universal proxy card in a contested election of directors. If adopted, the Commission believes the amendments will make it easier for shareholders to vote for whatever combination of director candidates they desire. The universal proxy card would include the names of all director nominees, whether proposed by management or a dissident shareholder. The Commission stated that the proposal would enable shareholders voting by proxy to vote in a way that more closely resembles how they could vote if they were in attendance at a shareholder meeting. The proposal would apply to all non-exempt solicitations in contested elections, with limited exceptions. Further, under the proposal, management and dissidents would be required to provide each other with notice of the names of their respective nominees. Dissidents and the company would be required to provide the other with the names of its nominees no later than 60 days and 50 days, respectively, prior the anniversary of the previous year’s annual meeting date. Dissidents would be required to solicit shareholders representing at least a majority of the votes entitled to vote on the election of directors and provide them with their own proxy solicitation materials. Both the company and the dissidents would be required to refer shareholders to the other party’s proxy statement for information about the other party’s nominees and inform shareholders that the other party’s proxy statement is available on the Commission’s website for free. Dissidents would be required to file their definitive proxy statement with the Commission by the later of 25 days prior to the meeting date or five days after the company files its definitive proxy statement. Universal proxy cards would be subject to presentation and formatting requirements. The proposal is subject to a 60 day comment period beginning with publication in the Federal Register. A copy of the SEC press release may be found here.
At first blush, the Commission appears to be taking a corporate governance neutral step intended to give proxy card voters the same flexibility as shareholders who attend the meeting in person and vote by ballot. However, the proposal will further advance the means available to dissident shareholders in waging disputes with management over corporate governance and other company affairs. One might expect that this proposal will motivate dissident investors to alter their tactics in campaigns to unseat directors, force a sale of the company, or other self-serving goals. Many shareholders may not recognize the difference between management and dissident nominees on a universal proxy card. A contested election is already confusing enough without comingling the nominees. While the Commission's intentions may be laudable, we are unaware of empirical evidence that shows that more than an anecdotal number of shareholders desire to split their votes in contested elections. It is our experience that in the overwhelming number of instances, a shareholder is either for management's slate of nominees or not.
From the perspective of a dissident, the requirement that a majority of the votes entitled to vote on the election of directors must be solicited and provided with the dissident’s own proxy solicitation materials, with the additional potential cost component this entails, may be a disincentive to some dissidents to proceed.
In light of the potential complexities raised by the Commission's proposal, and the competing perceptions of fostering vs. impeding shareholder rights, companies may want to prepare and submit a comment letter. Moreover, boards and managements should consider consulting with counsel long before any possibility of a contested election appears on the horizon.
For more information about this piece or our practice please contact our authors, Douglas P.
Faucette and Daniel P. Weitzel.
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