Corp Fin has issued three new CDIs regarding universal proxy. In November 2021, the SEC amended the federal proxy rules to mandate the use of universal proxies in all non-exempt solicitations in connection with contested elections of directors of operating companies. By mandating the use of universal proxies—proxy cards that, when used in a contested election, include a complete list of all candidates for director duly nominated by both management and dissidents—the SEC’s rules now allow a shareholder voting by proxy to choose among director nominees in an election contest in a manner that closely mirrors in-person voting. (See this PubCo post.) The new CDIs address questions that have arisen in connection with compliance by dissident shareholders with advance notice provisions and the use by dissident shareholders of their own proxy cards. Below are brief summaries.
Question 139.04 Where a company determines that director nominations received from a dissident shareholder are invalid because the dissident shareholder failed to comply with the company’s advance notice bylaw requirements, the company may omit the names of the dissident shareholder’s nominees on its proxy card pursuant to Rule 14a-19(e)(1). Only duly nominated candidates are required to be included on a universal proxy card: the adopting release provides that universal proxy cards “must include the names of all duly nominated director candidates presented for election by any party…,” and explains that “[a] duly nominated director candidate is a candidate whose nomination satisfies the requirements of any applicable state or foreign law provision and a registrant’s governing documents as they relate to director nominations.”
Question 139.05 In the circumstances above, where the company excludes the dissident shareholder’s director nominations from its proxy card because the company has determined that the nominations do not comply with its advance notice bylaw requirements, if the dissident shareholder then initiates litigation challenging the company’s determination of invalidity, the company “must disclose in its proxy statement its determination that the dissident shareholder’s director nominations are invalid, a brief description of the basis for that determination, the fact that the dissident shareholder initiated litigation challenging the determination, and the potential implications (including any risks to the registrant or its shareholders) if the dissident shareholder’s nominations are ultimately deemed to be valid.” If, however, the company does not include the shareholder’s nominees and a court subsequently determines that the shareholder’s candidates are duly nominated, then, under Rule 14a-19, the company must furnish universal proxy cards that include the dissident shareholder’s candidates and discard any previously furnished proxy cards that it received. The company may need to postpone or adjourn the meeting to ensure that shareholders have sufficient time to receive the new universal proxy cards and cast their votes on those cards prior to the shareholder meeting.
Question 139.06 A dissident shareholder conducting a non-exempt solicitation in support of its own director nominees must conduct meaningful solicitation efforts by furnishing its own universal proxy cards to holders of at least 67% of the voting power; it may not simply file a proxy statement on EDGAR and rely exclusively on the company’s proxy card. Under Rule 14a-19(e), each soliciting party in a director election contest must “use a universal proxy card that includes the names of all director candidates, including those nominated by other soliciting parties and proxy access nominees. Rule 14a-19(a)(3) further requires a dissident shareholder to solicit holders of at least 67% of the voting power of shares entitled to vote on the director election contest and to include a representation to that effect in its proxy statement. This requirement is intended to prevent a dissident shareholder from capitalizing on the inclusion of its nominees on the registrant’s universal proxy card without undertaking meaningful solicitation efforts.” The shareholder may deliver its universal proxy cards using permitted methods of delivering proxy materials, such as the Rule 14a-16 “notice and access” method.