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.

Background

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.

Summary

Proxies for Contested Director Elections

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.

Proxies for All Director Elections

The new rules contain new requirements applicable to all director elections, whether or not they are contested.

• The new rules will require issuers to include “against” and “abstain” voting options for director elections in proxy cards when those standards are applicable.

  • Whether a particular voting option is applicable depends on the voting standard governing the director election.

  • If the election is governed under a majority voting standard, which gives legal effect to an “against” vote and nominees are only elected if they receive affirmative “for” votes from a majority of voting shares, then proxy cards must include both an “against” option and an “abstain” option.

  • By comparison, if the election is governed under a plurality voting standard, a director nominee is elected by receiving more affirmative “for” votes than competing nominees, then the proxy card does not need to include an “against” voting option, as it has no legal effect and is unnecessarily confusing to voters.

• Amended Item 21(b) of Schedule 14A will require issuers to disclose within the proxy statement the effect of a “withhold” vote on director elections in the proxy statement.

Practical Guidance

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.