In this Reuters article, the author delivers the scoop that the SEC has shelved its 2016 proposal to mandate the use of universal proxy cards in contested elections of directors. In case you were thinking that anything from 2016 was probably old and cold anyway, keep in mind that the just-adopted rules changing the definition of “smaller reporting company” were proposed back in 2016. (See this PubCo post.) In fact, the proposed rule mandating the use of universal proxies was still on the SEC’s Spring 2018 agenda for long-term actions, and Reuters reports that “SEC officials have said publicly in recent months that the proposed rule-change remains a priority.” However, “several people familiar with the matter” have now advised Reuters that SEC Chair Jay Clayton “has in fact shelved the proposal.”
Currently, in contested director elections, shareholders can choose from both slates of nominees only if they attend the meeting in person. Otherwise, they are required to choose an entire slate from one side or the other. (Dissidents’ “short slates” allow shareholders to select company nominees to round out the short slates, but again, shareholders are then forced to choose between the two complete slates.) Because a later-dated proxy revokes an earlier-dated one under state law, it’s not easy to split votes between slates.
A universal proxy is a proxy card that, when used in a contested election, includes a complete list of board candidates, thus allowing shareholders to vote for their preferred combination of dissident and management nominees using a single proxy card. The SEC apparently considered requiring universal proxies back in 1992. Then, in 2014, the Council of Institutional Investors filed a rulemaking petition asking the SEC to reform the proxy rules to facilitate the use of universal proxies in proxy contests. (See this News Brief.) The SEC issued the proposal in October 2016.
Strongly held opinions have been voiced about universal proxies, both pro and con. Activists—hedge fund and otherwise—tend to favor universal proxies, while companies are more often opposed to them. According to Reuters, activists “say the present system works against them because shareholders are more likely to play it safe and vote for the management list, even if they like some of the activists’ candidates. Companies say changing the rules would spark more disruptive and harmful activist-led fights.” Indeed, in a 2015 speech, Mary Jo White, who chaired the SEC when the proposal was was issued in 2016, said that a hotly debated question was whether universal proxies “would increase or decrease shareholder activism or otherwise impact the outcome of election contests. Some believed that it would embolden activists to run more contests. Others posited that it could stimulate increased cooperation and settlements between issuers and activists, thereby decreasing contests. No one specifically called into question the fundamental concept that our proxy system should allow shareholders to do through the use of a proxy ballot what they can do in person at a shareholders’ meeting.”
As reported in this post on thecorporatecounsel.net, in an apparent first use, one U.S. corporation elected to use a universal proxy card in connection with an election contest. The card names all the nominees of both the company and the dissident hedge-fund activist. Nevertheless, the dissident sent out its own card listing only its nominees, and the company then asked its shareholders to use its universal card to vote for all company nominees and two dissident nominees. (The company ended up settling with dissident and may now be looking at its strategic options.)
While only time will tell whether Reuters’ scoop proves to be true, universal proxy has not been a concept generally favored by the party now in power, as reflected in various bills the House has passed that would preclude the adoption of mandatory universal proxy. For example, the 2017 Financial Choice Act, passed by the House, would have prohibited the SEC from promulgating a rule to require the use of universal proxies. (See this PubCo post.)