by Cydney Posner
At an open meeting this morning, the SEC voted, by a vote of two to one, to propose amendments to the proxy rules that mandate the use of universal proxy cards in contested elections and relate to disclosure about voting options and voting standards in all director elections. The SEC also voted unanimously to adopt rule amendments related to Rule 147 to facilitate intrastate and regional securities offerings, to increase the cap on offerings under Rule 504 of Reg D and to repeal Rule 505 under Reg D.
Universal Proxy
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 and, 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.) in June last year, SEC Chair May Jo White announced in a speech that she had asked the staff to prepare a rulemaking on the use of universal proxies. (See this PubCo post.) The press release has now been posted.
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. Strongly held opinions have been voiced about universal proxies, both pro and con. One hotly debated issue, White said in her 2015 speech, is 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.” [Emphasis added.] Acknowledging that the devil will be in the details, White observed that some of those details will include issues such as when a universal proxy could be used, “whether it would be optional or mandatory and under what circumstances, whether any eligibility requirements should be imposed on shareholders to use universal ballots, what the ballot would look like, and whether both sides must use identical universal ballots.”
SideBar: The WSJ reports on a forthcoming study by an academic at Harvard Law School showing that, for the years 2008 through 2015, the current rules may have resulted in the wrong candidates being elected in as much as 22% of all votes. In the study, the author attempted to assess how shareholders would vote if they had access to universal proxies. To that end, he looked at “withhold” votes for one or more of the candidates identified on a card, which he interpreted as a protest vote. He found that, in 17 elections out of 77, “the number of shares withheld from a winning candidate could have put the losing candidate onto the board if shareholders had been allowed to vote on both cards. That amounted to 44 candidates who might have been elected in a universal ballot. Further, he found that there wasn’t a significant benefit to one side or the other: Eight times a dissident was elected that may not have been under a universal ballot, and six times the current rules benefited a management-nominee.”
While all the details are not yet clear (because the rule proposal has yet been posted), the proposal provides for mandatory universal proxy cards in all non-exempt contested elections, both partial and full slates. The SEC decided not to make universal proxies optional to avoid their being used as tactical tools. Each party would file its own proxy statement and conduct its own solicitation using the universal cards.
Sidebar: Activists — hedge fund and otherwise — tend to favor universal proxies, while companies are more often opposed to them. In the Trian-DuPont proxy contest, Trian requested that DuPont allow stockholders to use a universal proxy card, a practice that Trian argued would “reflect best-in-class corporate governance….” DuPont rejected the request.
The universal proxy requirement would come into play only if both parties conduct meaningful solicitations — that is, the dissidents would be required to solicit that number of shareholders holding in the aggregate at least a majority of the voting power. The amendments would revise the consent requirement of the “bona fide nominee” rule and eliminate the “short slate” rule. The amendments would also require companies and dissidents to provide each other with notice of the names of their nominees: a dissident would be required to provide a company with the names of its nominees no later than 60 calendar days prior to the anniversary of the previous year’s annual meeting date, and the company would be required to provide the dissident with the names of its nominees no later than 50 calendar days prior to the anniversary of the previous year’s annual meeting date. To ensure that shareholders have timely access to information, dissidents would be required to file their definitive proxy statements by the later of 25 calendar days prior to the meeting date or five calendar days after the company files its definitive proxy statement. The amendments would also prescribe new formatting and presentation requirements for universal proxy cards.
The universal proxy requirements would not apply to solicitations involving foreign private issuers, companies with reporting obligations only under Section 15(d) of the Exchange Act or registered investment or business development companies
The other aspect of this proposal is an amendment to enhance disclosures regarding voting options and voting standards that would apply to all director elections. The amendments would require that voting options be clearly specified on proxy cards and that ambiguous standards be avoided. The amendments require providing for “against” votes when there is a legal effect to a vote against a nominee, “abstain” votes (where the company has majority voting) and, where state law permits, a “withhold” vote. Companies would not be able to provide a “withhold” voting option when an “against” vote has legal effect. Proxy statements would be required to describe the effect of a “withhold” vote.
SideBar: At the open meeting, the staff indicated that they had reviewed a broad set of proxy statements and found a fair amount of ambiguity regarding voting standards. The impetus for that analysis may have come from a 2015 CII rulemaking petition requesting interpretive guidance regarding proxy statement disclosure of voting requirements for items on the ballot and the presentation of voting options on proxy cards. In the petition, CII contended that the disclosure regarding voting for directors was a troubling problem: some companies mischaracterize their voting standards as majority voting, when, in fact, the voting standard is plurality voting (or “plurality plus”), where a director who receives more withhold votes than votes in favor is expected to submit his or her resignation for consideration by the board. In some cases, voting standards described as majority voting in the proxy statement provide on the proxy card for votes “For” and “Withhold,” but not for “Against” votes as would typically be expected in majority voting. CII believed that “Staff guidance clarifying the need for alignment between the voting options on the proxy card for the election of directors and the voting requirement for a director to be elected” would be beneficial. CII also argued in the petition that it would be useful to make disclosures in “plain English” regarding “the method by which votes will be counted, including the treatment and effect of abstentions and broker non-votes” and to eliminate any cross-references to external sources. For example, CII noted that some disclosures require shareholders to refer to the bylaws, the charter and Delaware law to understand the disclosure. In addition, CII requested inclusion of a concise description of every component in the denominator used for the vote tabulation. (See this PubCo post.)
Commissioner Piwowar dissented. In his remarks, he referred to questions raised by Representative Scott Garrett about the SEC’s presumably inappropriate prioritizing of universal proxy rules, a topic that he claimed had been pushed for years. Pivovar argued that universal proxies would facilitate proxy fights and empower special interests to the detriment of smaller retail shareholders. In particular, Piwowar noted that the absence of a requirement that dissidents solicit all shareholders would likely lead to the exclusion of solicitation of retail holders. In addition, companies would only be required to advise in their proxy statements that the dissidents’ disclosure could be located on the SEC’s website; there would be no requirement for paper delivery.
SideBar: It’s hard to keep up with all the efforts by the House to defund various regulatory efforts, but one of the disfavored concepts has been universal proxies. H.R. 5485, passed by the House in July 2016 on a largely party-line vote, provided that none of the funds could be used by the SEC “to propose, issue, implement, administer, or enforce any requirement that a solicitation of a proxy, consent, or authorization to vote a security of an issuer in an election of members of the board of directors of the issuer be made using a single ballot or card that lists both individuals nominated by (or on behalf of) the issuer and individuals nominated by (or on behalf of) other proponents and permits the person granting the proxy, consent, or authorization to select from among individuals in both groups.” Congress is expected to consider a government funding bill in December. (See this PubCo post.)
Intrastate Offerings
The SEC also voted unanimously to adopt rules related to intrastate and regional securities offerings. The SEC hasn’t updated Rule 147 for intrastate offerings since 1974, and, needless to say, there have been a lot of technological advances since then. In light of the ubiquity of the internet, the question now is: what does “local” even mean? The press release is now available.
As originally proposed, a new exemption would have replaced existing Rule 147. However, in response to comments, the final rule establishes a new Rule 147A and continues to make available the current safe harbor under Rule 147, with modernizing amendments. The new exemption for local and regional offerings eliminates a restriction that required offers to be confined to the state of the company. Now, offerings may be accessed by out-of-state residents through the internet or otherwise, so long as sales are made only to residents of the state of the company’s principal place of business. To establish the in-state location of their principal places of business, companies will need to satisfy one of four tests related to gross revenues, consolidated assets, sales or employees. Under the new rules, resales to persons residing within the state of the offering will be limited for a period of six months from the date of the sale by the company to the purchaser.The rules will also implement a “reasonable belief” standard regarding the residency of purchasers, including written representations. Although the proposal had limited offerings to those registered at the state level or relying on a state exemption that included an aggregate offering amount limit and/or investment limitations, those limitations were eliminated in the final rule in light of the significant interest of state regulators in offerings made to their residents. The new rules also provide for an integration safe harbor that would include any prior offers or sales of securities by the company made under another provision, as well as certain subsequent offers or sales of securities by the company occurring after the completion of the offering
The amendments also increase the cap on the aggregate offering price of securities offerings and sales under Rule 504 of Reg D from $1 million to $5 million, and eliminate Rule 505, the Reg D exemption for limited offers and sales of securities with an aggregate offering price up to $5 million. The rules also include disqualification provisions for “bad actors” across Reg D.
Although she voted in favor of adoption of the final intrastate offering rules, Commissioner Stein still had investor-protection concerns in view of the absence of “bad actor” disqualifications, maximum offering limitations and individual purchase caps. She also expressed concern regarding expansion of the integration safe harbor. She questioned whether the rules had sufficient guardrails to protect investors, but took comfort that the staff was required to conduct a study of the new rules in operation and report back in three years.
Amended Rule 147 and new Rule 147A will become effective 150 days after publication in the Federal Register. Amended Rule 504 will become effective 60 days after publication in the Federal Register. The repeal of Rule 505 will become effective 180 days after publication in the Federal Register.
