On November 17, 2021, the U.S. Securities Exchange Commission (the “Commission”) announced the adoption of new rules requiring the use of universal proxy cards in contested director elections. With the Commission calling it “an important aspect of shareholder democracy,” the new rules put shareholders voting by proxy on equal footing with those voting in person by allowing them to vote for their preferred combination of board nominees, whether or not such preferred combination includes directors nominated by the issuer and the dissident shareholder. The Commission also adopted new rules impacting all proxy cards and proxy statement disclosures used in all director elections. The new rules are effective for any shareholder meeting held after August 31, 2022.
Currently, a dissident shareholder identifies its set of director nominees on a separate proxy card from the issuer’s proxy card, and shareholders voting by proxy must pick either the dissident’s proxy card or the issuer’s proxy card, but cannot mix and match between the two slates of directors on the proxy cards. However, if that same shareholder opts to attend the meeting in person, the shareholder may use a ballot to mix and match between the two slates of directors.
The only current exception to this process is the so-called “short slate rule,” which allows a dissident shareholder who is not trying to replace a majority of the board to name on its proxy card the issuer’s nominees for which it is not seeking proxy authority. In other words, the dissident shareholder identifies by name the issuer’s nominees it is targeting to be removed from the board.
The new rule, Rule 14a-19, makes the short slate rule redundant by allowing shareholders voting by proxy to mix and match between the two slates of directors, just as they could do by attending the meeting in person. It requires the issuer and the dissident shareholder to combine all director nominees on one proxy card, and requires this universal proxy card to meet certain presentation and formatting requirements. With this universal proxy card in hand, shareholders may mix and match between the competing slates of nominees on the proxy card itself, without the need to attend in person and use a ballot.
To better manage contested elections using universal proxy cards, the new rules establish notice requirements to give the parties sufficient time to prepare a form of proxy that complies with the universal proxy requirements. Dissident shareholders must notify the issuer of their intent to solicit and provide a list of the nominees no later than 60 calendar days before the anniversary of the previous year’s annual meeting. The issuer must notify dissident shareholders of their nominees within 50 calendar days before the anniversary of the previous year’s annual meeting.
The new rules also raise the minimum solicitation threshold for dissident shareholders. Dissident shareholders will now be required to solicit holders of shares representing at least 67% of the voting power of the shares entitled to vote. The Commission raised the threshold from a majority of the voting power to 67% in order to encourage meaningful solicitation, and to prevent dissident shareholders from “freeriding” on the registrant’s universal proxy card.
The new rules contain new requirements applicable to all director elections, whether or not they are contested.
Universal proxy cards may make it easier for dissident shareholders creating contested elections to achieve the shareholder votes necessary to get one of their director nominees elected to a board. If this proves to be the case, the number of contested elections will likely increase. On the other hand, it seems likely that universal proxy cards will make it more difficult for dissident shareholders to receive the shareholder votes necessary to have a majority slate of dissident nominees elected to the board.
Issuers should carefully review their advance notice bylaws to ensure that they are current and up-to-date. Issuers should also assess which directors, if any, are most open to challenge by a dissident, as dissidents may be looking for “weak” directors that are open to challenge.