November 18, 2021

Proxy Contests: SEC Mandates Universal Proxy Cards!

Yesterday, the SEC announced that it had adopted final rules that will require parties to proxy contests to use “universal” proxy cards that list all director nominees who are being presented for election. The rules also create new requirements for all director elections (including uncontested elections) – because they mandate that “against” and “abstain” voting options be provided on a proxy card where the options have legal effect under state law, and they require disclosure in the proxy statement about the effect of all voting options that are provided. All of this goes into effect for elections held after August 31, 2022.

The Commissioners adopted the rule at an open meeting by a rare 4-1 vote, with Commissioners Lee and Crenshaw issuing statements in full support of the rule, Commissioner Roisman supporting adoption but suggesting that the Commission consider in the future whether to impose additional eligibility criteria on dissidents launching campaigns and expressing reservations about the power that the rule could give to proxy advisors, and Commissioner Peirce dissenting. The Council of Institutional Investors issued a press release applauding the rule.

The SEC’s Fact Sheet summarizes the high points of the 197-page adopting release. To understand what this actually means for companies, though, you’ll want to read this Sidley memo – which predicts a “significant increase in proxy contest threats” once the rules go into effect. Here’s an excerpt:

While comparable to the vacated Rule 14a-11, which allowed shareholders holding at least 3% of the shares for three years to put dissident directors on the company’s proxy statement, the Universal Proxy Rules confer substantially more significant rights to shareholders without any minimum ownership requirements (i.e., owning only one share for one minute will be sufficient). While this was a concern voiced by several Commissioners, the SEC eventually went ahead with the adoption of the Universal Proxy Rules. The new rules will reshape the process by which hostile bidders, activist hedge funds, social and environmental activists, and other dissident shareholders may utilize director elections to influence control and policy at public companies.

As the rules will dramatically change the methods by which proxy contests at public companies have been conducted for decades, this Update summarizes the principal mechanics of the Universal Proxy Rules and the implications of the rules for public companies.

For more of this saga’s backstory, check out my blog from last spring when the SEC re-opened the comment period for these rules and my summary of themes from notable comment letters. We’ll be posting the avalanche of memos in our “Proxy Cards” Practice Area.

Liz Dunshee