On November 17, 2021, the Securities and Exchange Commission (SEC) adopted final rules requiring parties (management and shareholders) in a contested election to use universal proxy cards that include the names of all director nominees presented for election at a shareholder meeting. The SEC also adopted final rule amendments to require enhanced disclosure and voting options in all director elections, including uncontested director elections.

Effective Date: The final rules will be effective January 31, 2022. The final rules regarding universal proxies and the final rule amendments regarding enhanced disclosure and voting options will apply to all shareholder meetings held after August 31, 2022.

Background: Currently, in contested elections, a proxy card generally cannot include the name of a nominee who has not consented to being named in the proxy statement,^[1] resulting in shareholders being sent two separate proxy cards: one card from management reflecting management’s slate of director nominees and one card from the dissident shareholder reflecting the dissident’s slate of director nominees. Shareholders who vote by proxy generally must choose which proxy card to vote on, essentially choosing between management and dissident slates. In 2016, the SEC proposed rules requiring the use of universal proxy cards in contested director elections. In April 2021, the SEC reopened the comment period for the 2016 proposal.

Contents of the Final Rules Regarding Universal Proxies (Contested Director Elections): The final rules will require in contested director elections that management and dissident shareholders provide shareholders with a proxy card that includes the names of all management and dissident director nominees, regardless of whether the candidates were nominated by management or by shareholders (but each group of nominees must be identified by who nominated them as discussed in more detail below). Shareholders will be allowed to pick and choose among all director nominees to vote on their preferred mix of directors, similar to the manner in which a shareholder currently is able to vote in person in a contested election. The rules will apply to all nonexempt solicitations (under Rule 14a-2(b)) for contested director elections other than those involving registered investment companies and business development companies.^[2] The rules will also require procedural and disclosure requirements of both management and dissidents, including the following:

• Provide each other with notice of the names of their director nominees.

  • For dissidents, notice must be provided no later than 60 calendar days before the anniversary of the prior year’s annual meeting.^[3]

  • For management, notice must be provided no later than 50 calendar days before the anniversary of the prior year’s annual meeting.

• Establish a filing deadline.

  • Dissidents must file their definitive proxy statement by the later of 25 calendar days before the shareholder meeting or five days after the registrant files its definitive proxy statement.

• Establish a minimum solicitation requirement for dissidents.

  • Dissidents must solicit holders of shares representing 67% of voting power entitled to vote on the election of directors in order to trigger the universal proxy rules.

• Prescribe presentation and formatting requirements for universal proxy cards, including, among other things, the following:

  • All duly nominated directors must be presented on the proxy card, and the proxy card must clearly distinguish between management and dissident director nominees, as well as proxy access nominees, if applicable.

  • The proxy card must provide a means for shareholders to grant authority to vote for the nominees.

  • Within each group of nominees, the nominees must be listed in alphabetical order by last name.

  • Nominees must be presented in the same font type, style, and size on the proxy card.

  • The proxy card must prominently disclose the maximum number of nominees for which authority to vote can be granted.

  • The proxy card must prominently disclose the treatment and effect of a proxy executed (i) in a manner that grants authority to vote for more nominees than the number of directors being elected, (ii) in a manner that grants authority to vote for fewer nominees than the number of directors being elected, or (iii) in a manner that does not grant authority to vote with respect to any nominees.

Further, for registrants subject to the universal proxy requirements, the SEC has eliminated the short slate rule, which previously allowed dissidents to include management nominees on the dissident’s proxy card where the dissident nominees would comprise only a minority of the board.

Contents of the Final Rules Regarding Enhanced Disclosure and Voting Options (All Director Elections): The SEC also voted to adopt amendments to the proxy rules relating to enhanced disclosure and voting options in all director elections, not just contested director elections. The final rules require disclosure regarding the effect of a shareholder vote of “against,” “abstain,” or “withhold,” which effect will vary depending on the voting standard applicable,^[4] and mandate that the appropriate voting option be listed on the proxy card. Specifically, the final rules state the following:

• A proxy card must include an “against” voting option in director elections when there is a legal effect to a vote “against” a nominee (i.e., any voting standard other than a plurality).

• A proxy card must include an “abstain” option in director elections where a majority voting standard applies.

• The proxy statement must include disclosure about the effect of a “withhold” vote on director elections. 

Considerations: It remains to be seen whether the new universal proxy rules could increase the number of contested elections (which is an expensive process for the company), but this is certainly a potential outcome. The final rules provide easy access to a registrant’s proxy card without any minimum thresholds such as the ownership thresholds often required by proxy access bylaws or holding period requirements governing shareholder proposals. As a result, registrants may face opportunistic shareholders with limited investment in a potential outcome nominating directors because of the ease of access to the universal proxy card that the registrant will be required to disseminate to all of its shareholders, provided the dissident meets the requirement to solicit shares holding 67% of voting power. Further, to the extent that shareholders may be more willing to select a few nominees from the dissident slate while still supporting most of the nominees from management’s slate (i.e., “splitting the difference approach,” with the idea by a shareholder that all parties “win”), the universal proxy rules could potentially result in more activists winning a seat on the registrant’s board.

Recommendations and Next Steps: In response to the new rules, registrants should review their corporate defense profile (see our prior client alert), including potential revisions to their bylaws (such as their advance notice bylaw) and potential exposure to activist campaigns. Further, even though the amendments will not apply to shareholder meetings before August 31, 2022, registrants should review the adequacy of their proxy statement disclosure descriptions of the applicable voting options and standards in light of the new amendments, and registrants may also want to review their proxy calendars to potentially highlight any timing issues that the new rules could impact in a contested election in the future (for example, finalizing nominees earlier to potentially meet the new obligation for registrants to provide notice of their nominees to the dissident shareholder 50 calendar days prior to the anniversary of the prior year’s meeting).

1] Under existing Exchange Act Rule 14a-4(d), shareholders voting by proxy are limited in their choice of nominees by the “bona fide nominee” rule, which provides that no proxy can confer authority to vote for any director nominee who has not “consented to being named in the proxy statement and to serve if elected.” (Emphasis added.) Accordingly, in a contested election, one party cannot include the name(s) of the other party’s director nominee(s) on its proxy card without the consent of the other party’s nominee(s). In practice, management’s director nominees have rarely provided consent to being named in the dissident’s proxy statement, and dissident director nominees have rarely provided consent to being named in the company’s proxy statement. To be compatible with the adoption of the mandatory universal proxy rules, the final rules amended the Rule 14a-4(d) definition of “bona fide nominee” to encompass a person who has consented to being named in a proxy statement rather than the proxy statement.

[2] If there are proxy access nominees but no dissident nominees, the universal proxy rules will not apply.

[3] The notice requirement is in addition to any advance notice requirements set forth in the registrant’s bylaws.

[4] State law and a company’s governing documents will determine the voting options for director elections and the legal effects of such options. Generally, these voting options primarily include a plurality standard, a majority of votes cast standard, and majority of shares present and entitled to vote standard. The plurality voting standard, in which the nominees receiving the greatest number of “for” votes are elected, allows shareholders to give voting instructions of “for” or “withhold,” but it generally does not allow shareholders to “abstain.” The majority voting standards, in which directors are elected only if they receive affirmative votes from a majority of the shares voting or present at the meeting, allow shareholders to give voting instructions of “for,” “against,” or “abstain” but typically do not allow shareholders to “withhold” votes.