The Securities and Exchange Commission (SEC) announced on November 17, 2021 that it would be introducing the universal proxy card for all contested director elections after August 31, 2022. Principally, a universal proxy card would require all directors in a contested election, both a company’s own nominees and any shareholder or dissident nominated directors, to be listed on a single proxy voting card, whether physical or electronic.

Announcing the rule change, SEC chair Gary Gensler said that it would “put investors voting in person and by proxy on equal footing.” Under previous rules, only shareholders attending the meeting could vote for both a company’s directors and any dissident nominated candidates.

Since the rules were first proposed in 2016, there have been a number of governance developments. These include: proxy access, widespread use of virtual annual meetings, and the introduction by some companies of bylaw provisions that require the consent of dissident director nominees to give prior agreement to being named on the proxy statement. These developments have changed the way shareholders vote for directors. A universal proxy card, the SEC says, will simplify the process by removing barriers to voting, regardless of the situation.

IN DETAIL

In more detail, the new rule, 14a-19, will eliminate the current regulations that prevent the inclusion of all nominees on either the company’s proxy card or a proxy card circulated by a dissident shareholder. Earlier, the SEC had tried to address concerns about shareholders’ inability to split their vote between the company’s and a dissident’s proxy cards through the adoption of a rule known as the ‘short slate rule’. The short slate rule allows a dissident who is not seeking to replace the entire board to ask the company to include those directors it is not challenging on the dissident’s own proxy card. Adoption of the universal proxy will make the short slate rule redundant.

The rule also establishes specific time periods for dissidents and companies to notify each other of their respective director nominees, 60 days and 50 days respectively. Also, dissidents in a contested election are required to solicit at least 67% of shareholders entitled to vote on the election of directors, rather than the 50% under the original proposed rule.

Finally, the rules include other improvements to the proxy voting process, such as requiring that proxy cards include an ‘against’ and an ‘abstain’ voting choice, where permitted by state law, as well as requiring disclosure about what the effect of such votes might be. For example, if a company operates a plurality voting standard, a director can be elected to the board with a single vote in favor of their election, with the ‘withhold’ or ‘against’ votes having no impact on the outcome.

BACKGROUND CONTEXT

The SEC first proposed the rules in November 2016, and the comment period for the initial proposal ended at the beginning of January 2017. The reopening of the comment period in April this year was intended to allow further comments on the proposed rules in light of developments in voting practices since then. The questions for comment were new questions, based on governance and practice changes since 2016. But commenters could also revise or add further commentary on the original set of questions issued in 2016.

The new questions focused on a number of topics, but of most interest were those related to the proxy access revolution that has occurred since the original issuing of the rules – with more than three-quarters of the S&P 500 having adopted some form of proxy access and over half of the Russell 1000, according to figures an ISS Corporate Solutions analysis. Proxy access allows in certain instances for shareholders to nominate their own candidates for directorships. In addition, some companies have already adopted the use of universal proxies in contested elections. For example, both EQT Corporation and the dissident group proposing directors used universal proxy cards at its 2019 annual meeting. Also, at Sandridge Energy’s 2018 annual meeting, the company also used a universal proxy card.

While some companies have used universal proxy cards in contested elections, the most notable proxy contest in 2021, at ExxonMobil, did not. Instead, shareholders were asked either to vote ExxonMobil’s blue card, or to vote Engine No.1’s (the dissident shareholder) white card. None of the four dissident candidates were on the blue ExxonMobil card and none of the current ExxonMobil board were on the dissident’s white card.

The new questions also focused on the enormous increase in virtual annual meetings in 2020 and 2021 because of the pandemic. This trend may not, of course, continue. Nevertheless, most shareholders do not attend physical annual meetings at any time. The questions remained relevant, however, because in order to vote a split ticket – or vote for some of the dissident’s nominees and some of the company’s – a shareholder would have to physically attend the meeting.

The reopening of the comment period had been announced earlier by acting SEC chair Allison Herren Lee in a speech in March 2021. She said its adoption would “better replicate how in-person voting works,” and concluded her remarks on the rule saying that it represented “a common-sense step forward in modernizing our proxy rules and protecting shareholder rights. The proposal has been outstanding for far too long and should be finalized.”

The rule is supported by all but one of the SEC commissioners, with only Hester Peirce dissenting. Commissioner Peirce’s dissent is based on her concerns that not enough protections are in place to prevent frivolous shareholders from even just threatening a company with a dissident slate – never mind actually proposing one – in order to get it to take some action that the shareholder intends. This concern is triggered by the fact that the new rule contains no requirements for minimum or long-term shareholding, potentially allowing a shareholder to buy a single share the day before announcing a dissident nomination.

PUBLIC RESPONSE

Some 45 comments were posted after the reopening of the comment period, notably with submissions from the Chamber of Commerce, Principles for Responsible Investment and the Council of Institutional Investors. Received comments from shareholders were generally in favor of introducing the universal proxy, while corporate and professional service firm commenters were a more mixed bag. For example, the submission by the Society for Corporate Governance said that their use should be voluntary not mandated and that it should come as part of a package of proxy-related reforms; “other reforms,” the letter said, “to the proxy process could more meaningfully promote shareholders’ ability to exercise their voting rights, such as the use of technology to allow for verification that proxies were voted in accordance with a shareholder’s instructions.”

In contrast, a submission from 41 signatories with aggregate assets under management of $309 billion, including labor fund AFL-CIO, BMO Global Asset Management and the Interfaith Center on Corporate Responsibility, was fully in support of the use of universal proxies. “Shareholders voting by proxy,” said the letter, “are generally limited to supporting either the management slate or, in a short slate contest, the particular combination of candidates supported by the shareholder proponent.” The letter continues, saying that shareholders can only freely pick and choose between the two sets of candidates and “split their ticket” by attending the annual meeting and voting in person.