On Friday, Corp Fin released some new CDIs, summarized below, relating to the proxy rules. The CDIs can all be found under the caption Proxy Rules and Schedule 14A, and all are new with one exception for a newly revised CDI under Rule 14a-6. Universal proxy is once again a hot topic, and there are three new CDIs on universal proxy to add to your collection. (You might recall that Corp Fin issued new CDIs on universal proxy in August and December last year. See this PubCo post and this PubCo post.) Summaries are below, but each CDI number below is linked to the CDI on the SEC website, so you can easily read the version in full.
- Revised Question 126.03. Rule 14a-6 provides that, if a company is required to file a preliminary proxy with the SEC, the company must send five preliminary copies to the SEC at least 10 calendar days prior to the date definitive copies are first sent or given to shareholders. To calculate the “10 calendar day” period in Rule 14a-6, the date of filing is day one (Rule 14a-6(k)). For example, if the preliminary proxy statement is filed on Friday, October 20, 2023, then Sunday, October 29, 2023, would be day ten for purposes of Rule 14a-6. The company may send the definitive proxy statement to shareholders starting at 12:01 a.m. on October 30, 2023. For some reason, the revised version of the CDI changes the filing date to October 20 from the January 6 filing date in the last version—too much of a hot button? But more importantly, the revised CDI also adds that these calculations assume that the prelim is submitted on or before 5:30 p.m. Eastern Time on October 20, 2023. If the filing is submitted after 5:30 p.m., the 10-day period does not start until the next business day, which would be Monday, October 23, 2023. See Rule 13(a)(2) of Regulation S-T.
- Question 132.03. Rule 14a-12 permits solicitations before furnishing a proxy statement so long as, among other things, the written soliciting material includes certain information. More specifically, Rule 14a-12(a)(1)(i) requires the soliciting party to disclose the “identity of the participants in the solicitation…and a description of their direct or indirect interests, by security holdings or otherwise, or a prominent legend in clear, plain language advising security holders where they can obtain that information.” Corp Fin advises that this requirement cannot be satisfied by including a legend that provides only a general reference to filings made by the soliciting party or the participants, such as a reference to their Forms 10-K, because a general reference would not sufficiently advise shareholders where they can obtain the required participant information. According to Corp Fin, participant information allows shareholders “to understand the interests of those soliciting the shareholders at the time when the solicitations occur, including before the shareholders receive a proxy statement. When the Commission amended Rule 14a-12 to expand the ability to solicit before furnishing a proxy statement, the Commission cited the legend information as one of the safeguards to protect against misleading solicitations and maintain the integrity of the solicitation process.” Corp Fin advises that the legend should:
- “clearly identify the specific filing(s) where participant information appears (including by filing date);
- clearly describe the specific locations of the participant information in such filings, whether by reference to the relevant section headings, captions or otherwise; and
- include active hyperlinks to the referenced filings, when possible.”
Corp Fin also advises soliciting parties to remember that participants’ direct and indirect interests in the solicitation are not limited to their security holdings.
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.) Under Rule 14a-19(e), each soliciting party must include all director nominees of all soliciting parties on each universal proxy card (UPC), with the result that there are more nominees than director seats up for election. Under Rule 14a-19(e)(6), a UPC must “[p]rominently disclose the maximum number of nominees for which authority to vote can be granted,” and under Rule 14a-19(e)(7), the UPC must “[p]rominently disclose the treatment and effect of a proxy executed in a manner that grants authority to vote for the election of fewer or more nominees than the number of directors being elected and the treatment and effect of a proxy executed in a manner that does not grant authority to vote with respect to any nominees.” An M&A panelist at the recent PLI Securities Regulation Institute signaled that questions regarding UPC overvoting (where authority is granted to vote “for” the election of more nominees than the number of director seats up for election) and undervoting (where authority is granted to vote “for” fewer nominees than the number of director seats up for election) have arisen recently (see this PubCo post). Now we have answers from Corp Fin:
Question 139.07. Rule 14a-19(e)(6) mandates that a UPC prominently disclose the maximum number of director nominees for whom a shareholder may grant authority to vote. According to Corp Fin, if a shareholder submits an overvoted proxy card, the soliciting party may not use discretionary authority to vote the shares in accordance with its own voting recommendations for director. Although Rule 14a-4(e) states that, where a person solicited specifies on a proxy card “a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the specifications so made,” when a shareholder has overvoted, the shares “cannot as a practical matter be voted in accordance with the shareholder’s specifications.” Nor can a soliciting party rely on discretionary authority (under Rule 14a-4(b)(1)) to vote the shares. Although the shares represented by an overvoted proxy card cannot be voted on the election of directors, they can be voted on other matters included on the UPC and can be counted for purposes of determining a quorum. The corresponding voting instruction form should receive the same treatment and have the same effect as that disclosed on the UPC under Rule 14a-19(e)(7). Corp Fin advises that, to the extent that intermediaries contact shareholders or beneficial owners to seek a correction of an overvoted proxy card or VIF before the meeting date, they may continue this “helpful practice.”
Question 139.08. Similarly, a soliciting party may not use discretionary authority to vote the shares represented by undervoted UPCs for the remaining director seats up for election. In this case, the shareholder has specified the shareholder’s choice(s) for the election of directors with an undervoted UPC, and the shares can be voted in accordance with the shareholder’s specifications. The treatment and effect of the corresponding VIF should be the same as that disclosed on the UPC under Rule 14a-19(e)(7).
Question 139.09. But if a shareholder submits a signed but unmarked UPC, the soliciting party can, in that circumstance, use discretionary authority to vote the shares in accordance with the soliciting party’s voting recommendations. Rule 14a-4(b)(1) states that “[a] proxy may confer discretionary authority with respect to matters as to which a choice is not specified by the security holder,” so long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified. Here, the shareholder has not specified any choices, so the soliciting party can use discretionary authority to vote in this manner. Corp Fin emphasizes that Rule 14a-19(e)(7) requires that a UPC prominently disclose the treatment and effect of a proxy executed in a manner that does not grant authority to vote with respect to any nominees. The treatment and effect of the corresponding VIF should be the same as that disclosed on a UPC pursuant to Rule 14a-19(e)(7).
Note A to Schedule 14A provides that “[w]here any item calls for information with respect to any matter to be acted upon and such matter involves other matters with respect to which information is called for by other items of this schedule, the information called for by such other items also shall be given. For example, where a solicitation of security holders is for the purpose of approving the authorization of additional securities which are to be used to acquire another specified company, and the registrants’ security holders will not have a separate opportunity to vote upon the transaction, the solicitation to authorize the securities is also a solicitation with respect to the acquisition. Under those facts, information required by Items 11, 13 and 14 shall be furnished.” [Emphasis added.]
Question 151.02. After a company closes an acquisition of another company in a transaction that did not require security holder approval and the transaction involved partial consideration of convertible securities, the company seeks security holder approval for the authorization of additional shares of common stock that could be issued on the conversion of the securities issued in the acquisition. Corp Fin concluded that, under Note A, the solicitation of security holder approval for the authorization of the additional shares “is an integral part of the acquisition because it is necessary for the registrant to meet its obligation under the convertible securities issued as consideration for the acquisition,” and, therefore, the “proposal to authorize additional shares of common stock ‘involves’ the acquisition.” Corp Fin explained that, under Note A, a proposal “involves” another matter “when information about the other matter that is called for by Schedule 14A is material to a security holder’s voting decision on the proposal presented. The determination as to whether there is a substantial likelihood that a reasonable security holder would consider the information important in making a voting decision on a proposal ultimately depends on all the relevant facts and circumstances.” As a result, in this case, the company “would have to include in the proxy statement information about the acquisition called for by Schedule 14A, unless such information has already been disclosed or sufficient time has passed so that the registrant’s historical filings fully reflect the acquisition.”