SEC Adopts Requirement for Universal Proxy Cards in Director Elections

On November 17, 2021, the Securities and Exchange Commission (SEC) adopted Rule 14a-19 and amended existing proxy rules to require the use of universal proxy cards in all non-exempt contested director elections. The universal proxy card must include the names of all duly nominated directors presented by both the company and a shareholder or shareholder group (referred to in the adopting release as a "dissident"). The newly amended rule will give shareholders the ability to mix and match for their preferred combination of board candidates, rather than the existing regime, which only provides the choice between the slate of candidates presented by management or a dissident. Importantly, a universal proxy is allowed, but is not required, for other types of solicitations, such as a shareholder proposal.

As a result of the amendments, the universal proxy card must now include the names of all nominees listed in alphabetical order by last name, clearly distinguishing among company nominees, dissident nominees, and any proxy access nominees, as applicable. The amendments also require that all nominees be presented in the same font type, style, and size. The universal proxy card must also provide a means for the shareholders to grant authority to vote for the nominees and the maximum number of nominees for which this authority can be granted. In addition, each party in a contested election—company and dissident—must now refer shareholders to the other party's proxy statement for information about the other party's nominees. Each party may also now refer to information furnished in a filing of the other party to satisfy disclosure obligations under Rule 14a-5(c). These changes reflect a desire by the SEC to enable shareholders to "access information with respect to all nominees when they receive a universal proxy card."

The amended rules will likely lead to more contested director elections as activists perceive that shareholders will be more inclined to vote for one or two of their director candidates when presented on a universal proxy card. Also, a universal proxy card means that activists will only need to mail one copy of the proxy card to shareholders, thereby saving money on contested director campaigns.

In order to enable the universal proxy card, the amended rules also establish a series of notice requirements. In the adopting release, the SEC stated that "notification deadlines are important in a mandatory universal proxy system to provide the parties with a definitive date by which they will have the names of all nominees to compile a universal proxy card."

The amended rules require that a dissident shareholder provide the company with the names of the nominees for which it intends to solicit proxies no later than 60 calendar days prior to the anniversary of the previous year's annual meeting. In practice, we do not believe this notice requirement will have a significant impact on the contested election process because most public companies' advance notice bylaw provisions require dissidents to disclose their director nominees at least 90 days prior to the annual shareholder meeting.

Thereafter, the company must provide to dissident shareholders the names of its director nominees no later than 50 calendar days prior to the anniversary of the previous year's annual meeting unless the names have already been provided in a preliminary or definitive proxy statement filed by the company. The SEC chose this filing schedule based on the current filing practice of definitive proxy statements by dissident shareholders. The amended rules require dissident shareholders to file their definitive proxy statement by either the later of 25 calendar days before the annual shareholder meeting or five calendar days after the company files its definitive proxy statement.

Although the amended rules are effective for shareholder meetings held after August 31, 2022, a public company should carefully review its proxy statement for its 2022 annual meeting to ensure that the proxy statement properly describes the advance notice requirements applicable to the 2023 annual meeting, including the interaction between the company's advance notice bylaw provisions and these universal proxy related notice provisions.

The amended rules also contain a minimum solicitation requirement. Dissidents must solicit the holders of at least 67% of shares with voting power entitled to vote at the annual shareholders meeting—up from a majority of shares with voting power in the proposed rule. Despite this increase in the minimum solicitation percentage, current activist campaigns regularly involve the solicitation of more than 67% of the outstanding shares of the company. The minimum solicitation requirement will be a deterrent to more opportunistic dissidents seeking to piggyback on the company's solicitation efforts without conducting meaningful solicitation efforts of their own. The definition of solicitation is also fairly broad, with the use of notice-and-access solicitations permitted. However, it is not clear in the amended rules how the SEC will enforce a dissident's failure to meet the minimum solicitation requirement.

The amendments also address changes to the form of proxy and proxy statement disclosure requirements applicable for all director elections. The amended rules require that proxy cards include an "against" option in director elections where state law or the company's governing documents are determinative for the vote against a director nominee, and provide shareholders with the ability to "abstain" in a director election when a majority voting standard is applicable. In addition, a proxy statement must also now disclose the legal effect of a "withhold" vote in a director election.