SEC’s Mandatory Universal Proxy Rules are in Effect for Contested Board Elections Held After August 31, 2022
As a reminder, the SEC’s rule amendments requiring the use of universal proxy cards in contested director elections will apply to contested elections at annual meetings held after August 31, 2022. Last November we published an alert covering the rule amendments in greater detail. As we noted then, the rule amendments create pre-meeting deadlines for the company and dissident to notify each other of their candidates – no later than 60 calendar days before the anniversary of the prior year’s meeting for dissident candidates, and 50 calendar days for the company’s candidates – which means that companies with director elections at meetings scheduled from and after September may begin to receive (or may have already received) such notices from dissident stockholders seeking to wage a proxy contest.
What to do Now
The vast majority of public companies with annual meetings scheduled for the spring will soon have a window into how proxy contests may unfold with the use of universal proxy cards. Companies should have already implemented off-season shareholder engagement strategies and should be reviewing their advance notice bylaws. There are additional actions that can be taken now in preparation for what may be a seismic paradigm shift in the way contests are conducted, as discussed below.
Review the qualifications of each board nominee
Companies should carefully review, through an activist’s lens, the qualifications, attributes and potential vulnerabilities of each board nominee in the context of the overall composition of the board. Universal proxy cards will make it easier for shareholders to vote for a mix of company and dissident nominees of their choosing (or as proposed by proxy advisors). Consequentially, an individual nominee’s personal background, accomplishments and skills will assume even greater importance. To that end, shareholders may vote to replace a more vulnerable company director with a dissident nominee if they are more impressed with the dissident nominee’s qualifications when compared on a one-on-one basis. Therefore, companies should be prepared to communicate with greater specificity the qualifications of their board nominees on a per individual basis.
Prepare for more critical proxy advisor recommendations
Proxy advisors, such as ISS and Glass Lewis, have long expressed support for universal ballots. In the past, shareholders could not easily implement vote recommendations supporting split slates. However, mandated universal proxies will make it much easier for shareholders to submit split-ticket votes, which will give greater heft to proxy advisor recommendations. Moreover, companies should plan to see proxy advisor vote recommendations that include more in-depth and critical reviews of each nomine, rather than a just a company versus dissident slate comparison.
Adjust annual meeting preparation timelines
Companies should plan for dissidents to launch contests much earlier in the annual meeting cycle than in prior years, not just to comply with the aforementioned new notice deadlines, but also to socialize with shareholders and proxy advisors the individual qualifications of each of its nominees, as well as to get ahead of other potential activists who may now consider launching a contest with the arguably lower barriers to entry that come with a universal proxy system. As a result, companies should plan to line up their team of advisors and solicitors much earlier in the cycle.
Review the universal proxy card format requirements
The amended rules include requirements designed to help ensure that universal proxy cards clearly and fairly present information, including, among other things: clearly distinguishing between company, dissident and any proxy access nominees; font type, style and size requirements; disclosure of the maximum number of nominees for which authority to vote can be granted; and disclosure of how a proxy that grants authority to vote for more or fewer nominees than the number of directors being elected, or in a manner that does not grant authority to vote with respect to any nominees, will be treated. See our previous alert for a summary of these new proxy card requirements.
Review the new proxy statement disclosure and proxy card format requirements applicable in all elections
As noted in our previous alert, the adopted rule amendments include amendments to the form of proxy and proxy statement disclosure requirements relating to voting options and standards that would apply to all director elections, contested or not. Under the final rules, if state law gives legal effect to votes cast against a nominee, the form of proxy must include the options to vote “against” the nominee and to “abstain” from voting in a director election governed by a majority voting standard. Disclosure would also be required in the proxy statement about the treatment and effect of a “withhold” vote in a director election. Additionally, under new Rule 14a-5(e)(4), a company is required to disclose in its proxy statement the deadline for shareholders to give notice to the company of dissident nominations for the next annual meeting that sets forth the information required by universal proxy Rule 14a-19.