Days before the universal proxy compliance deadline, the SEC issued 3 new compliance and disclosure interpretations (C&DI) addressing issues raised by the new rules.
On November 17, 2021, the SEC adopted final rules requiring parties in a contested election to use universal proxy cards that include all director nominees presented for election at a shareholder meeting (see HERE). The original rules were proposed on October 16, 2016 (see HERE) with no activity until April, 2021, when the SEC re-opened a comment period (see HERE).
The rule adoption came with a flurry of rule amendments, proposals and guidance related to the proxy process, some of which reverses recent rules on the same subject, including amendments to the rules governing proxy advisory firms (see HERE) and additional proposed amendments to Rule 14a-8 governing shareholder proposals (see HERE).
The final rules require dissident shareholders and registrants to provide shareholders with a proxy card that includes the names of all registrant and dissident nominees. The rules apply to all non-exempt solicitations for contested elections other than those involving registered investment companies and business development companies. The rules require registrants and dissidents to provide each other with notice of the names of their nominees, establish a filing deadline and a minimum solicitation requirement for dissidents, and prescribe presentation and formatting requirements for universal proxy cards. The SEC also adopted amendments to the proxy rules to ensure that proxy cards clearly specify the applicable shareholder voting options in all director elections and to require proxy statements to disclose the effect of a shareholder’s election to withhold its vote.
As with any rule amendments, the devil is in the implementation and universal proxy cards are no different. With compliance with the new rules now required, practitioners had plenty of questions, some of which prompted the SEC to issue three new C&DI on the subject.
Rule 14a-19(a)(1), in conjunction with Rule 14a-19(b), generally requires a dissident shareholder in an election contest to provide the company with notice of the names of the dissident shareholder’s nominees for whom it intends to solicit proxies at least 60 calendar days before the anniversary of the prior year’s annual meeting date. The first C&DI questions whether a dissident shareholder can include in the Rule 14a-19(b) notice the names of more nominees than there are director seats up for election, without the intent of actually soliciting proxies for all of them but, instead, finalizing its slate of nominees after the Rule 14a-19(b) deadline and closer to the date of the shareholder meeting.
The SEC responds in the negative. The Rule 14a-19(b) notice must contain only the names of nominees for whom the dissident shareholder intends to solicit proxies. The purpose of this requirement is to provide a definitive date by which the parties in a contested election will have the names of all nominees in order to compile a universal proxy card. Knowingly submitting the names of more nominees than there are director seats up for election, with the intention of finalizing the actual slate of nominees after the Rule 14a-19(b) notice deadline, would be inconsistent with the purpose of the rule.
The SEC, however, recognizes that a dissident shareholder may need to change its slate of nominees after the Rule 14a-19(b) notice deadline, for example, because a nominee withdraws from the slate or the increases increases the number of director seats up for election. As such, the SEC indicates it will not object if the dissident shareholder includes in its Rule 14a-19(b) notice: (i) the names of the nominees for whom it intends to solicit proxies and (ii) the names of additional or alternate nominees who, in accordance with the company’s governing documents and state law, would be presented for election in the event of a need to change the original slate, so long as the notice clearly identifies the persons who are being presented as additional or alternate nominees. If the dissident shareholder later changes its slate to include any of the additional or alternate nominees, then it must promptly notify the company of the change as required by Rule 14a-19(c).
The SEC also clarifies that the same rules would apply to the ability of a company to include in its Rule 14a-19(d) notice the names of more nominees than director seats up for election.
The second C&DI also clarifies notice requirements. As noted, Rule 14a-19(b) generally requires a dissident shareholder in an election contest to send a notice to the company with the names of its nominees. Similarly, Rule 14a-19(d) requires the company to provide the names of its nominees to any person conducting a solicitation pursuant to Rule 14a-19. The second C&DI questions whether in a contested director election where more than one dissident shareholder intends to present a slate of director nominees, should the company inform each dissident shareholder of the Rule 14a-19(b) notice that it received with respect to persons nominated by other dissident shareholders.
The SEC answers in the affirmative. The Rule 14a-19 notification requirements are intended to provide the parties in a contested election with the names of all director nominees by a definitive date so they can compile a universal proxy card. Although Rule 14a-19 does not expressly address a situation where there is more than one dissident shareholder submitting a slate of nominees, the company is best positioned to notify all parties of the slates submitted by the dissident shareholders as it alone receives the notices that all dissident shareholders must send in a contested election. As such, the company should notify each dissident shareholder, by the deadline prescribed in the rule, of not only the names of its nominees and any nominees submitted under a “proxy access” provision but also of the names of any other persons nominated by another dissident shareholder who provided a Rule 14a-19(b) notice.
Further, the SEC confirms that a company would have to provide notice to all dissident shareholders where there are any changes in the company’s and dissident shareholders’ slates of nominees.
In order to assist with compliance with Rule 14a-19(b)(1), which requires the dissident shareholder in an election contest to send notice of its director nominees no later than 60 calendar days before the anniversary of the prior year’s annual meeting, a company must disclose in its proxy statement the Rule 14a-19(b)(1) deadline to provide notice of its director nominees for election at the next annual meeting. The third C&DI questions the circumstance when the company’s advance notice bylaw provision imposes an earlier deadline for notice of a dissident shareholder’s nominees than the rules and whether the company must then include both deadlines in its proxy.
The SEC answers in the negative. Rule 14a-19(b)(1) establishes a minimum, not a maximum, notice period for a dissident shareholder to inform the registrant of its intent to present its own director nominees and does not override or supersede a longer period established in the company’s governing documents. Accordingly, where the company’s advance notice bylaw provision requires earlier notice than Rule 14a-19(b)(1), then the company disclosing only the earlier advance notice bylaw deadline would satisfy the rules.
The SEC also notes that to the extent the company’s advance notice bylaw provision does not require the same information as that required by Rule 14a-19(b), then the company’s proxy statement must clearly state the need for a dissident shareholder to comply with the additional requirements of Rule 14a-19(b).
Refresher on Universal Proxy Rules
Each state’s corporate law provides for the election of directors by shareholders and the holding of an annual meeting for such purpose. Companies subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”) must comply with Section 14 of the Exchange Act, which sets forth the federal proxy rules and regulations. While state law may dictate that shareholders have the right to elect directors, the minimum and maximum time allowed for notice of shareholder meetings, and what matters may be properly considered by shareholders at an annual meeting, Section 14 and the rules promulgated thereunder govern the proxy process itself for publicly reporting companies.
When a shareholder votes by proxy, they execute a written directive instructing the entity to whom the proxy is granted how to vote on the shareholder’s behalf. Protecting the ability of shareholders to vote, including their right to elect directors through the proxy process, has been the focus of numerous SEC rulemakings and other efforts over the years.
On November 17, 2021, the SEC adopted new Rule 14a-19 under the federal proxy rules to require the use of universal proxy cards in connection with contested elections of directors. Under new Rule 14a-19, the universal proxy card must include all director nominees presented by management and shareholders for election at the upcoming shareholder meeting. To facilitate the use of universal proxy cards, the SEC amended the proxy rules so each side can list the other side’s director candidates on its universal proxy card. The new rules also established new notice and filing requirements for all soliciting parties, as well as formatting and presentation requirements for universal proxy cards. In addition, the final rules require shareholders presenting their own director candidates in the contest to solicit holders of a minimum of 67% of the voting power of shares entitled to vote in the election.
The rules also establish new requirements for all director elections, including uncontested elections. The rules mandate that “against” and “abstain” voting options be provided on a proxy card where such options have legal effect under state law. The rules require disclosure in the proxy statement about the effect of all voting options provided.
In summary, the final rules:
- Create new Rule 14a-19 to require the use of universal proxy cards by all participants in all non-exempt solicitations in connection with contested director elections. The universal proxy card must include the names of both registrant and dissident nominees, along with certain other shareholder nominees included as a result of proxy access;
- Expand the determination of a “bona fide nominee” to include a person who consents to being named in any proxy statement for a registrant’s next shareholder meeting for the election of directors;
- Require dissidents to provide registrants with notice of their intent to solicit proxies and to provide the names of their nominees no later than 60 calendar days before the anniversary of the previous year’s annual meeting;
- Require registrants to notify dissidents of the names of the registrants’ nominees no later than 50 calendar days before the anniversary of the previous year’s annual meeting;
- Require dissidents to file their definitive proxy statement by the later of 25 calendar days before the shareholder meeting or five calendar days after the registrant files its definitive proxy statement;
- Require each side in a proxy contest to refer shareholders to the other party’s proxy statement for information about the other party’s nominees and refer shareholders to the SEC’s website to access the other side’s proxy statement free of charge;
- Require that dissidents solicit the holders of shares representing at least 67% of the voting power of the shares entitled to vote at the meeting; and
- Establish presentation and formatting requirements for universal proxy cards that ensure that each party’s nominees are presented in a clear, neutral manner.
The new rules implement changes to the form of proxy and proxy statement disclosure requirements applicable to all director elections. These amendments:
- Require proxy cards to include an “against” voting option in director elections, when there is a legal effect to a vote against a director nominee;
- Require that the proxy card provide shareholders with the ability to “abstain” in a director election where a majority voting standard applies; and
- Require proxy statement disclosure about the effect of a “withhold” vote in an election of directors.
The SEC rule release has a useful chart on the timing of soliciting universal proxy cards:
|Due Date||Action Required|
No later than 60 calendar days before the anniversary of the previous year’s annual meeting date or, if the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, by the later of 60 calendar days prior to the date of the annual meeting or the tenth calendar day following the day on which public announcement of the date of the annual meeting is first made by the registrant. [new Rule 14a-19(b)(1)]
Dissident must provide notice to the registrant of its intent to solicit the holders of at least 67% of the voting power of shares entitled to vote on the election of directors in support of director nominees other than the registrant’s nominees and include the names of those nominees.
|No later than 50 calendar days before the anniversary of the previous year’s annual meeting date or, if the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, no later than 50 calendar days prior to the date of the annual meeting. [new Rule 14a-19(d)]||Registrant must notify the dissident of the names of the registrant’s nominees.|
|No later than 20 business days before the record date for the meeting. [current Rule 14a-13]||Registrant must conduct broker searches to determine the number of copies of proxy materials necessary to supply such material to beneficial owners.|
|By the later of 25 calendar days before the meeting date or five calendar days after the registrant files its definitive proxy statement. [New Rule 14a-19(a)(2)]||Dissident must file its definitive proxy statement with the Commission.|
The new rules will not apply to companies registered under the Investment Company Act of 1940 or BDC’s but would apply to all other entities subject to the Exchange Act proxy rules, including smaller reporting companies and emerging growth companies.
There is a concern that shareholders could be confused as to which candidates are endorsed by whom, and the effect of the voting process itself. In order to avoid any confusion as to which candidates are endorsed by the company and which by opposition, the SEC is also including amendments that would require a clear distinguishing disclosure on the proxy card. Additional amendments require clear disclosure on the voting options and standards for the election of directors.
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