March 3, 2023

Universal Proxy: A Wrinkle For Paper VIFs

Just a couple of days ago, I blogged that “early returns” from the universal proxy card regime show that the sky isn’t falling (yet). While that may be true for the moment, this HLS blog from Keir Gumbs – Broadridge CLO, SEC/Covington/Uber alum, & long-time friend to many in this community – suggests we also aren’t out of the woods. Keir highlights new Corp Fin guidance on Voting Instruction Forms, which arose as part of the aborted Trian/Disney proxy contest, and could “open the floodgates” to successful activist campaigns. Here’s an excerpt:

Specifically, the staff of the SEC’s Division of Corporation Finance has taken the position that:

– a voting instruction form should mirror the proxy card to the furthest extent possible, including with respect to the instructions relating to signed, but unmarked cards, partially marked proxy cards and overmarked proxy cards, and

– a soliciting party can include the instructions of their choosing so long as the disclosure in the proxy statement, proxy card and voting instruction form are clear to investors.

The SEC took this position in response to a new approach to proxies and VIFs advocated for by the Trian Group. Specifically:

Unmarked but Signed Proxies and Voting Instructions – Trian Group took the position that unmarked proxy cards and VIFs should be instructed as “FOR” their nominee to the Board and “WITHHOLD” on all of the nominees recommended by The Walt Disney Company.

Overmarked Voting Instructions – Trian Group took the position that overmarked proxy cards and VIFs (where a shareholder votes “FOR” more directors than available seats) should be marked “FOR” their nominee to the Board, “FOR” the 10 unopposed management nominees and “WITHHOLD” on the one opposed management nominee.

Partially Marked Voting Instructions – Voting instructions were to be executed exactly as cast i.e., whichever Director nominees get a “FOR” vote will be marked as a “FOR” and the remaining nominees will be marked as “WITHHOLD”

The key to this new approach is disclosure. From the SEC’s perspective, these and similar changes are acceptable under the proxy rules as long as the soliciting party is clear regarding these outcomes.

Keir goes on to explain that this guidance is “meaningfully different” from how this issue has been addressed in the past – where unmarked proxy cards & VIFs would be completed in accordance with management’s recommendation, partially marked proxy cards & VIFs would be submitted only with respect to those items, and overmarked proxy cards & VIFs were returned to banks or brokers for further instructions. Here’s more detail:

The big change resulting from the new SEC guidance most directly impacts how Broadridge processes overmarked VIFs (e.g., voting for 12 nominees when there are only 11 seats that are up for re-election). Historically Broadridge has pulled out overmarked VIFs and sent them to the relevant bank or broker for further instruction from the relevant investor. Now, instead of sending such forms for further instructions, the SEC guidance requires that firms rewrite overmarked VIFs to follow the instructions from the soliciting party regarding such votes. This means, as was the case in the Trian/Disney contest, that an overmarked card could be voted in favor of the soliciting party’s candidates to the Board with withhold votes for the other side’s candidates.

Here’s the good news, per Keir:

One might wonder what this portends for proxy contests based on past practice. There, the news is good. As a starting matter, investors voting online can’t overvote, and we [at Broadridge] are updating our systems to ensure that they can’t undervote either. This means that the proposed changes should not impact voting by institutional investors, which typically represent 70% or more of shares entitled to vote and who largely vote online using the voting tools provided by ISS, Glass Lewis and Broadridge. This also helps for online voting by retail investors, which typically represent 20-25% of shares entitled to vote a proxy. Excluding online voting, we are left principally with the 5-6% of shares that are voted using paper VIFs.

The pool gets even smaller – of the 5-6% of shares that are voted through paper VIFs, a very small percentage – typically less than 0.05% of shares – include overmarks. Those are the VIFs that are most impacted by the new SEC guidance.

Keir agrees that it’s too early for grand predictions about the impact of universal proxy. But he makes clear that we are witnessing a lot of big changes to proxy voting right now. Keir shares that Broadridge is making several changes to accommodate the changing mechanics of proxy contests – including the increasing ability of retail investors to easily vote. Those include Broadridge’s online voting app (ProxyVote), working on pass-through voting solutions, and providing end-to-end vote confirmation. That’s a lot of action!

Liz Dunshee