SEC Adopts Rules to Require Universal Proxy Cards in Contested Director Elections

Practical Law Legal Update w-033-4298 (Approx. 8 pages)

SEC Adopts Rules to Require Universal Proxy Cards in Contested Director Elections

by Practical Law Corporate & Securities

Amendments to Implement the Universal Proxy

In a contested director election, shareholders attending the meeting in person and casting a written ballot can vote for the nominees of their choice from each party's slate of nominees, up to the specified number of board seats up for election. In the current proxy solicitation process, however, the company and dissidents each send proxy cards to shareholders listing only their director nominees, and shareholders voting by proxy generally must submit their votes on either the company's or the dissident's proxy card. Thus, shareholders voting by proxy cannot choose a combination of nominees from both cards.

A universal proxy card will allow shareholders to vote by proxy for any combination of candidates for the board of directors as if they attended the shareholder meeting in person and cast a written ballot. Among other things, the adopted amendments:

Require the use of universal proxy cards by all participants in all non-exempt solicitations in connection with contested elections, which must include the names of both company and dissident nominees (as well as any shareholder nominees included as a result of proxy access), and prescribe presentation and formatting requirements for universal proxy cards (see Universal Proxy Cards).
Require dissidents to provide companies with notice of intent to solicit proxies in support of nominees other than the companies' nominees and the names of those nominees within a certain period of time (see Dissident's Notice of Intent).
Require companies to provide dissidents with notice of the names of the company's nominees within a certain period of time (see Company's Notice of its Nominees).
Establish a filing deadline for a dissident's definitive proxy statement (see Dissemination of Proxy Materials).
Require dissidents to solicit the holders of shares representing at least two-thirds (67%) of the voting power of shares entitled to vote on the election of directors (see Minimum Solicitation Requirements for Dissidents).
Expand the definition of bona fide nominee, revise the consent required of a bona fide nominee and eliminate the short slate rule (Rule 14a-4(d)(4)) (see Bona Fide Nominee and Short Slate Rules).

Universal Proxy Cards

The SEC adopted Rule 14a-19(e) to require proxy cards used in all non-exempt contested director elections to include the names of all duly nominated candidates for election to the board. Consistent with current rules, both companies and dissidents will send their own proxy card to shareholders and both sides will be free to choose to the design of their cards, subject to Rule 14a-19(e)'s formatting and presentation requirements and existing proxy card requirements under Rule 14a-4.

Under Rule 14a-19(e), universal proxy cards must:

List the names of all company nominees, dissident nominees, and any proxy access nominees.
Provide shareholders with a means to grant authority to vote for the nominees listed.
Clearly distinguish between company nominees, dissident nominees, and any proxy access nominees.
Within each group of nominees, list the nominees in alphabetical order by last name.
Use the same font type, style, and size to present all nominees.
Prominently disclose the maximum number of nominees for which authority to vote can be granted.
Prominently disclose the treatment and effect of a proxy executed in a manner that:
- grants authority to vote for more nominees than the number of directors being elected;
- grants authority to vote for fewer nominees than the number of directors being elected; or
- does not grant authority to vote for any nominees.

In addition, under Rule 14a-19(f), universal proxy cards can allow shareholders to grant authority to vote for either all of the company's nominees or all of the dissident's nominees as a group, provided that:

Shareholders have a similar means to withhold the authority to vote for such groups of nominees.
A full slate of nominees has been presented by both sides.
There are no proxy access nominees.

Dissident's Notice of Intent

The adopted amendments will require dissidents to provide companies with notice of their intent to solicit proxies in support of director nominees other than the companies' nominees. Unless a dissident has previously filed a preliminary or definitive proxy statement providing the required information, dissidents must provide companies with the names of the nominees for whom it intends to solicit proxies no later than 60 calendar days prior to the anniversary of the previous year's annual meeting date. If the company did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, Rule 14a-19(b) will require the dissident to provide notice by the later of:

60 calendar days prior to the date of the annual meeting.
The tenth calendar day following the day on which public announcement of the date of the annual meeting is first made by the company.

The dissident will also need to indicate its intent to comply with the minimum solicitation threshold in Rule 14a-19 (see Minimum Solicitation Requirements for Dissidents) by including in its notice a statement that it intends to solicit the holders of shares representing at least 67% of the voting power of shares entitled to vote on the election of directors. A dissident's Rule 14a-19 notice to the company does not need to be filed with the SEC or otherwise made publicly available.

If the information required by Rule 14a-19(b) has already been provided in a preliminary or definitive proxy statement previously filed by a dissident, the dissident does not need to provide notice to the company under Rule 14a-19(b).

The notice requirement in Rule 14a-19 is a minimum period that does not supersede any longer notice requirements in a company's organizational documents. Dissidents remain obligated to comply with any applicable longer advance notice provision in the company's governing documents.

Under Rule 14a-19(b), the dissident will also need to promptly notify the company of any change to its intent to comply with the minimum solicitation threshold or with respect to the names of its nominees.

Company's Notice of Its Nominees

Under Rule 14a-19(d), companies will be required to notify dissidents of the names of its nominees, unless the names were already provided in a preliminary or definitive proxy statement filed by the company. The company must provide the names of the nominees for whom it intends to solicit proxies no later than 50 calendar days prior to the anniversary of the previous year's annual meeting. If the company did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, companies must provide notice no later than 50 calendar days prior to the date of the meeting. Companies do not need to file the notice with the SEC.

Companies will also be required to promptly notify a dissident of any change with respect to the names of its nominees. If there is a change in the company's nominees after the dissident has disseminated a universal proxy card, the dissident could elect, but would not be required, to disseminate a new universal proxy card reflecting the change in company nominees.

Minimum Solicitation Requirements for Dissidents

Under Rule 14a-19, to take advantage of the universal proxy card, dissidents in a contested election must solicit the holders of shares representing at least 67% of the voting power of shares entitled to vote on the election of directors. The minimum solicitation requirement prevents dissidents from triggering the mandatory universal proxy card for both parties unless they intend to conduct an independent and meaningful solicitation by distributing their own proxy statement and form of proxy.

In addition to identifying the minimum solicitation requirement in the notice to the company, dissidents will also be required to state in their proxy materials that they will solicit the holders of shares representing at least 67% of the voting power of shares entitled to vote on the election of directors. Like any other statement made in a dissident's proxy materials, this statement will be subject to Rule 14a-9 (prohibition against false or misleading statements or material omissions).

Dissemination of Proxy Materials

Dissidents in a contested election will be required to file a definitive proxy statement with the SEC by the later of:

25 calendar days prior to the meeting date.
Five calendar days after the company files its definitive proxy statement, regardless of the proxy delivery method.

The SEC is not imposing a filing deadline on companies because unlike dissidents, companies have an incentive to file and distribute definitive proxy statements and proxy cards well in advance of the meeting date to ensure there is sufficient time to achieve a quorum for the meeting. If a company discovers after disseminating a definitive proxy statement and universal proxy card that a dissident failed to comply with the filing deadline, the company could elect to disseminate a new non-universal proxy card including only the names of its nominees.

Because companies may disseminate a universal proxy card before discovering that a dissident is not moving ahead with its solicitation, companies will also be required to disclose in their proxy statements how they intend to treat proxy authority granted in favor of a dissident's nominees if the dissident fails to comply with Regulation 14A or otherwise abandons its solicitation.

Taking into account all new notice and filing requirements discussed above, the SEC's adopting release provided the chart below to illustrate how the process for soliciting universal proxies would generally operate:

Due Date	Action Required
No later than 60 calendar days before the anniversary of the previous year’s annual meeting date or, if the company did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, by the later of 60 calendar days prior to the date of the annual meeting or the tenth calendar day following the day on which public announcement of the date of the annual meeting is first made by the company. [New Rule 14a-19(b)(1)]	Dissident must provide notice to the company of its intent to solicit the holders of at least 67% of the voting power of shares entitled to vote on the election of directors in support of director nominees other than the company's nominees and include the names of those nominees.
No later than 50 calendar days before the anniversary of the previous year’s annual meeting date or, if the company did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, no later than 50 calendar days prior to the date of the annual meeting. [New Rule 14a-19(d)]	Company must notify the dissident of the names of the company's nominees.
No later than 20 business days before the record date for the meeting. [Existing Rule 14a-13]	Company must conduct broker searches to determine the number of copies of proxy materials necessary to supply such material to beneficial owners.
By the later of 25 calendar days before the meeting date or five calendar days after the company files its definitive proxy statement. [New Rule 14a-19(a)(2)]	Dissident must file its definitive proxy statement with the SEC.

Access to Information About Nominees

Under the universal proxy system, participants in contested elections will not be required to include information about the opposing side's nominees in their own proxy statement. Instead, under new Item 7(h) of Schedule 14A, companies and dissidents will be required to include in their proxy statement a statement directing shareholders to refer to the opposing side's proxy statement for information required by Schedule 14A about their nominees. The statement must also explain to shareholders that they can access the other side's proxy statement, and any other relevant documents, on the SEC's website free of charge.

Since dissidents will not be required to solicit all shareholders (see Minimum Solicitation Requirements for Dissidents), it is possible that some shareholders will not receive a dissident's proxy materials including information about its nominees. However, because the new Item 7(h) disclosure will be included in the company's proxy materials, which all shareholders should receive, those shareholders that do not receive a dissident's proxy materials will still have access to information about the dissident's nominees.

The adopted amendments also:

Revise Rule 14a-5(c) to permit the parties to refer to information that will be furnished in a filing of the other party to satisfy their disclosure obligations (as opposed to only information that has already been furnished).
Define "participant" in Instruction 3 to Items 4 and 5 of Schedule 14A separately for solicitations made by companies and solicitations made by dissidents, since Item 5 of Schedule 14A requires specific disclosure about all participants in a contested election. As a result, although all nominees will be included on the form of proxy, in one party's solicitation, only that party's nominees will be considered "participants".

Exceptions

The universal proxy amendments do not apply to:

Registered investment companies.
Business development companies.

Bona Fide Nominee and Short Slate Rules

Amended Bona Fide Nominee Rule

To facilitate the ability of both parties in contested elections to include the names of all nominees on their proxy cards, the SEC is amending the determination of "bona fide nominee" in Rule 14a-4(d). The revision expands the scope of a nominee's consent in an election contest to mean a person has consented to being named in any proxy statement relating to the applicable shareholders meeting at which directors are to be elected (rather than in the proxy statement as the rule currently provides). As a result of this change, parties in a contested election will be able to include all director nominees on their proxy cards, instead of only those nominees who have consented to being named on that particular party's proxy card.

Solicitation Without a Competing Slate

As discussed in both the SEC's proposing and adopting releases, the amended bona fide nominee rule will permit, but not require, dissidents soliciting votes unrelated to director elections (such as soliciting votes in favor of a corporate governance proposal) to include some or all of the company's nominees on its proxy card. Dissidents can list some or all of the company nominees on their proxy cards because the director nominees consented to being named in a proxy statement for the applicable shareholder meeting.

However, to avoid potential liability under Rule 14a-9 for omission of material facts, where a dissident includes some but not all company nominees on its proxy card, or where it solicits in favor of a proposal but does not include company nominees on its proxy card, the dissident should disclose this fact and that shareholders wishing to vote for nominees not included on the dissident's proxy card can do so on the company's proxy card.

Elimination of Short Slate Rule

The short slate rule from Rule 14a-4(d) is being eliminated for operating companies subject to the mandatory use of universal proxy cards. The short slate rule allowed dissidents seeking to elect a minority of the board to round out their slate by soliciting proxy authority to vote for some of the company's nominees on the dissident's proxy card (by representing that it will vote for all company's nominees other than those specified by the dissident on its card). The purpose of the rule was to mitigate the disadvantage that dissidents face when setting out a partial slate of nominees.

However, the short slate rule is no longer necessary to accomplish its intended purpose under the new universal proxy system. The mandatory universal proxy card will allow shareholders to select their preferred combination of nominees, including specific company nominees, when voting for directors using the dissident's proxy card. Dissidents will also still have the ability to include recommendations for their preferred company nominees in their proxy materials.

Voting Standards Disclosure and Voting Options in All Director Elections

In addition to rule changes to mandate the use of universal proxy card in contested elections, the SEC also adopted rule amendments applicable to all director elections. Specifically, the SEC amended Rule 14a-4(b) to:

Require or prohibit the inclusion of an "against" voting option depending on whether state law gives legal effect to such a vote cast:
- when applicable state law gives legal effect to a vote against (such as under a majority voting standard), proxy cards must include an "against" voting option instead of a "withhold authority to vote" option; and
- when applicable state law does not give legal effect to a vote cast against a nominee, proxy cards are prohibited from including an "against" voting option and instead must provide a "withhold authority to vote" option.
Require that proxy cards give shareholders the ability to "abstain" rather than "withhold authority to vote" in an election governed by a majority voting standard.

In addition, amendments to Item 21(b) of Schedule 14A will mandate disclosure about the treatment and effect of a "withhold" vote in an election of directors (in addition to such disclosure already required under Item 21(b) regarding abstentions and broker non-votes).

To learn more about current requirements for proxy cards, see Form Check Guide: Annual Meeting Proxy Card. For Practical Law resources on proxy materials and the conduct of annual meetings, see Proxy Statement and Annual Meeting Toolkit.

SEC Adopts Rules to Require Universal Proxy Cards in Contested Director Elections | Practical Law