In November 2021, the Securities and Exchange Commission (“SEC”) adopted final rules requiring public companies and shareholder proponents in contested elections to use universal proxy cards that include all director nominees for election, as well as requiring enhanced disclosure of voting options in all elections. The new rules require management and shareholder proponents to provide each other with notice of the names of their nominees, establish a filing deadline and a minimum solicitation requirement for shareholder proponents, and prescribe presentation and formatting requirements for universal proxy cards.
Universal Proxy Card Requirements
Under the existing rules, in a contested election of directors, a shareholder is presented with two different proxy cards to vote for director nominees: one card from the company presenting the company’s nominees and one from the shareholder proponent presenting the alternative slate of nominees. This means that shareholders voting by proxy are unable to vote for a combination of director nominees from competing slates, but a shareholder voting in person could vote for any combination of director nominees, regardless of their nominator.
Under the new rules, the universal proxy card must include all director nominees, regardless of whether the nominee is presented by management or a shareholder proponent. Essentially, this rule will allow shareholders to vote by proxy in the same manner as they could by voting in person.
Coordinating the use of a universal proxy card will require public companies and shareholder proponents to communicate in advance about director nominees. Accordingly, the final rules require that a shareholder proponent provide the subject company with notice of its intent to solicit proxies for alternative nominees no later than 60 calendar days before the anniversary of the previous year’s annual meeting. The rules also impose a reciprocal obligation for the company to notify a shareholder proponent of the names of its nominees no later than 50 calendar days before the anniversary of the previous year’s annual meeting.
A shareholder proponent must file their definitive proxy statement by the later of 25 calendar days before the shareholder meeting or five calendar days after the company files its definitive proxy statement. The proponent must solicit the holders of at least 67% of the voting power of the shares entitled to vote at the meeting and represent in its proxy statement that it intends to solicit at least 67% of the voting power of the shares entitled to vote at the meeting. If the proponent does not actually meet the minimum solicitation threshold, it would be subject to liability under the Exchange Act for making a material misstatement or omission in proxy soliciting materials. Additionally, in their separate proxy statements, the shareholder proponent and the company will be required to refer shareholders to the other party’s proxy statement for information about the other party’s nominees and to the SEC’s website to access that proxy statement free of charge.
The rules apply to all non-exempt solicitations for contested elections other than those involving registered investment companies and business development companies.
Disclosure Requirements
State law and a company’s governing documents determine the voting standard applicable to director elections (i.e., whether a director is elected by a majority or plurality vote). Under a plurality voting standard, the nominee must receive the most votes of the nominees up for election in that position. In an uncontested election, this means that a nominee could be elected with just one “for” vote from one shareholder. By contrast, under a voting standard requiring a majority of votes cast, a nominee must receive more “for” votes than “against” votes. Under the plurality standard, whether a vote is “withheld” or voted “against” the nominee typically does not impact the outcome of an election because the only votes that affect the outcome are “for” votes. Regardless of whether the election is contested, the new rules require that proxy cards include an “against” option in lieu of a “withhold” option where there is a legal effect to such a vote. Where there is no legal effect, the “against” option is prohibited to avoid shareholder confusion. In addition, the new rules require proxy cards to provide shareholders who neither support nor oppose a director nominee the option to “abstain” rather than “withhold authority to vote” in a director election governed by a majority voting standard.
In the adopting release for the new rule, the SEC made clear that public companies must clearly describe the effect of each voting option presented to shareholders in their proxy statements.
Next Steps for Public Companies
The final rules will be effective January 31, 2022. Compliance with the rules related to universal proxy cards and the enhanced disclosure is required for any director election held after August 31, 2022. Companies should understand and make plans to comply with the rule changes prior to the implementation date.
The SEC’s public statement announcing the approval of the new rules is available here and the final rule is available here.
If you would like more information on universal proxy cards, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group at 716.853.1616 or 585.232.6500.