The SEC has seen a huge exodus of key officials and employees since the recent change in administration, and the ultimate effect of these changes on pending or proposed rule making remains to be seen. However, some proposed rules, whether published or still in drafting process, will remain largely unaffected by the political changes. This could be one of them. In particular, on October 16, 2016, the SEC proposed amendments to the federal proxy rules to require the use of universal proxy cards in connection with contested elections of directors. The proposed card would include the names of both the company and opposed nominees. The SEC also proposed amendments to the rules related to the disclosure of voting options and standards for the election of directors.
Currently where there is a contested election of directors, shareholders likely receive two separate and competing proxy cards from the company and the opposition. Each card generally only contains the directors supported by the sender of the proxy – i.e. all the company’s director picks on one card and all the opposition’s director picks on the other card. A shareholder that wants to vote for some directors on each of the cards, cannot currently do so using a proxy card. The voting process would only allow the shareholder to return one of the cards as valid. If both were returned the second would cancel out and replace the first under state corporate law.
Shareholders can always appear in person and vote for any directors, whether company or opposition supported, but such appearance is rare and adds an unfair expense to those shareholders. In an effort to provide the same voting rights to shareholders utilizing a proxy card instead of in person appearance, the proposed new rule would require the use of a universal proxy card with all nominees listed on a single card.
Opposition to the proposed rule is concerned that it will give more power to shareholder activists groups and encourage additional proxy contests ultimately damaging the corporation that pays the price, both directly and indirectly, by such adversarial processes.
In an era of strong shareholder activism, the regulation of a company’s obligation in the face of a shareholder proposal has been complex, populated with a slew of no-action letters, SEC guidance through C&DI, and court rulings. In October 2015, the SEC issued its first updated Staff Legal Bulletin on shareholder proposals in years (see my blog HERE) and on the same day the SEC issued specific guidance related to merger and acquisition transactions (see my blog HERE).
SEC Proposed Rule
Introduction and Background
Each state’s corporate law provides for the election of directors by shareholders and the holding of an annual meeting for such purpose. Company’s 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. Private companies, and companies that voluntarily file reports with the SEC (called ’33 Act companies) are not subject to the Section 14 proxy requirements. The SEC views its regulatory authority over the proxy process as “preventing the recurrence of abuses which have frustrated the free exercise of the voting right of stockholders.”
Currently shareholders that appear in person for a meeting, can vote from any of the choices for a director. However, shareholders voting by proxy, which is the vast majority (as high as 99.9%) can only choose from the candidates on the proxy card provided by the party soliciting such vote. In a contested election a shareholder will receive two separate proxy cards and solicitations, one from the company and one from the opposition. Under state law, a shareholder cannot submit two separate proxy cards as the second cancels out and replaces the first.
Although the current proxy rules do allow for all candidates to be listed on a single card, such candidate must agree. Generally in a contested election the opposing candidates will not agree presuming it will impede the process for the opposition or have the appearance of an affiliation or support that does not exist. Moreover, neither party is required to include the other’s nominees, and accordingly, even if the director nominees would consent, they are not included for strategic purposes.
As mentioned, shareholders appearing in person can vote for any duly nominated directors, regardless of whether supported by a company or the opposition. However, in today’s world shareholders rarely appear in person. Besides the time and expense of traveling to and appearing at a meeting, where shares are held in a brokerage account in street name, a shareholder desiring to appear in person needs to go through an added process of having a proxy changed from the brokerage firm to their individual name before they will be on the list and allowed to appear and vote in person. Over the years some large shareholders have taken to sending a representative to meetings so that they could split a vote among directors nominated by a company and those nominated by opposition.
In 1992 the SEC adopted Rule 14a-4(d)(4), called the “short slate rule,” which allows an opposing group that is only seeking to nominate a minority of the board, to use their returned proxy card, and proxy power, to also vote for the company nominees. The short slate rule has limitations. First it is granting voting authority to the opposition group who can then use that authority to vote for some or all of company nominees, at their discretion. Second, although a shareholder can give specific instruction on the short slate card as to who of the company nominees they will not vote for, they will still need to review a second set of proxies (i.e. those prepared by the company) to get those names.
In 2013 the SEC Investor Advisory Committee recommended the use of a universal proxy card and in 2014 the SEC received a rulemaking petition from the Council of Institutional Investors making the same request. As a response, the SEC issued the new rule proposal which would require the use of a “universal proxy” card that includes the names of all nominated director candidates.
In its rule release the SEC discusses the rule oppositions fear that a universal proxy card will give strength to an already bold shareholder activist sector, but notes that “a universal proxy card would better enable shareholders to have their shares voted by proxy for their preferred candidates and eliminate the need for special accommodations to be made for shareholders outside the federal proxy process in order to be able to make such selections.”
Companies have a concern that dissident board representation can be counter-productive and lead to a less effective board of directors due to dissension, loss of collegiality and fewer qualified persons willing to serve. The SEC rule release solicits comments on this point.
Moreover, there is a concern that shareholders could be confused as to which candidates are endorsed by who, 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.
Proposed Amendments
In order to provide for the use of universal proxy cards, the SEC has proposed amendments to the proxy rules related to the solicitation of proxies, the preparation and use of proxy cards and the dissemination of information about all director nominees in a contested election. In particular the proposed rules:
- Revise the consent required of a bona fide nominee such that a consent for nomination with include the consent to be included in all proxy statements and proxy cards. Clear disclosure distinguishing company and dissident nominees will be required in all proxy statements;
- Eliminates the short slate rule for companies other than funds and BDC’s as the rule would no longer have an effect or be necessary;
- Requires the use of universal proxy cards in all non-exempt solicitations in connection with contested elections. The universal proxy card would not be required where the election of directors is uncontested. There may be cases where shareholder proposals are contested by a company in which case a shareholder would still receive two proxy cards, however, in such case, all director nominees must be included in each groups proxy cards.
- Requires dissidents to provide companies with notice of intent to solicit proxies in support of nominees other than the company’s nominees, and to provide the names of those nominees. The rule changes specify timing and notice requirements;
- Requires companies to provide dissidents with notice of the names of the company’s nominees;
- Provides for a filing deadline for the dissidents’ definitive proxy statement;
- Requires dissidents to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors;
- Prescribes requirements for the universal proxy cards, including form, content and disclosures;
- Makes changes to the form of proxy including requiring an “against” and “abstain” voting option; and
- Makes changes to the proxy statement disclosure to require a better explanation of the effect of a “withhold” vote in an election.
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. [proposed Rule 14a-19(b)(1)] | Dissident must provide notice to the registrant of its intent to solicit the holders of at least a majority 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. [proposed 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. [proposed Rule 14a-19(a)(2)] | Dissident must file its definitive proxy statement with the Commission. |
The proposed 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.
The Author
Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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