In early January 2015, hedge fund activist Trian launched a closely followed proxy fight against DuPont, claiming that the company had underperformed and that it should, among other things, be broken up into three parts. DuPont responded that, through implementation of its own strategic plan, it had delivered total shareholder return and cumulative capital return in excess of its proxy peers and the S&P 500. Rejecting DuPont’s offer of a single board seat, Trian nominated a short slate of four directors and commenced an election contest. Fast forward to February, when Trian submitted to the DuPont board a request that DuPont allow the use of a “universal proxy,” thus allowing shareholders to vote for their preferred combination of DuPont and Trian nominees using a single proxy card. Trian argued that it would provide shareholders with “maximum freedom of choice” and represent “best-in-class corporate governance.” After consulting “with a range of proxy and governance experts” and evaluating the DuPont shareholder base, DuPont rejected that request, contending that there was “insufficient infrastructure” to support the use of a universal proxy card and that the process could “undermine voting access” for DuPont’s huge contingent of retail shareholders. In particular, DuPont was concerned that “the use of a universal proxy card would limit voting options for our ‘Street-name’ holders, as well as deprive holders of the ability to simply sign and return voting forms without marking a preference.” At the annual meeting, Trian lost its bid, and DuPont’s full slate of nominees was elected. But the DuPont story ultimately ended favorably for Trian, notwithstanding its loss in the proxy contest. After the election contest, Trian reignited its battle to break up the company and, after the company failed to hit targeted earnings, the CEO resigned. DuPont ultimately entered into an agreement to be acquired. A new rulemaking from the SEC to mandate the use of universal proxy, adopted last week by a vote of four to one, would likely have affected the course of that campaign and perhaps its outcome. Will we see more contested elections in the future?
SEC adopts universal proxy and proposes significant amendments to 2020 rules governing proxy voting advice
At an open meeting yesterday, the SEC took up two rulemakings aimed at shareholder voting. First, the SEC voted four to one (a bipartisan if not unanimous vote) to adopt amendments to the proxy rules—initially proposed in 2016 and then shelved—relating to the use of universal proxy cards. The final rules require, in a contested director election, that proxy cards identify all director nominees for election at the upcoming shareholder meeting, including those candidates on dissident slates, allowing proxy voters to split their tickets and more closely replicate in-person voting. The final rules also enhance disclosures regarding voting options and voting standards that will apply to all director elections. According to SEC Chair Gary Gensler, the amendments “address concerns that shareholders voting by proxy cannot vote for a mix of dissident and registrant nominees in an election contest, as they could if voted in person….Today’s amendments will put these candidates on the same ballot. They will put investors voting in person and by proxy on equal footing. This is an important aspect of shareholder democracy.” The Council of Institutional Investors, which had petitioned the SEC in 2014 to adopt universal proxy, hailed the rule: “Imagine if, in a political election, you could vote only for Democrats or only for Republicans….That has been the dilemma facing most investors voting in a proxy contest at U.S. companies.”
The SEC also voted, three to two, to propose amendments to the proxy rules governing proxy voting advice, reversing some key provisions of the controversial amendments adopted in July 2020. Those amendments had codified the SEC’s interpretation making proxy voting advice subject to the proxy solicitation rules and included a significant new condition to the exemptions (with two components) from those solicitation rules essentially requiring proxy advisory firms to engage with the companies that are the subjects of their advice. The proposed amendments would rescind the key condition regarding engagement as well as the 2020 changes that were made to the proxy rules’ liability provision. According to Gensler, proxy advisory firms “play an important role in the proxy process. Their clients deserve to receive independent proxy voting advice in a timely manner.” The U.S. Chamber of Commerce said that the “rules finalized by the SEC last year created a level playing field and ensured that investors would have access to high quality information free of bias. If the SEC decides to roll back these rules, it will signal that it is not serious about rooting out and eliminating misinformation and conflicts of interest in the proxy process and will instead place special interests at the head of the line, harming investors and markets. We will engage with the SEC to stop these misguided proposals from moving forward.”
In a virtual “fireside chat”—is that an oxymoron?—hosted by NYU law, SEC Chair Gary Gensler was interviewed by former SEC Commissioner and current NYU professor Robert Jackson. Much of the discussion involved topics that Gensler has already addressed in the past, such as gamification and digital engagement practices (see e.g., this PubCo post and this PubCo post). Gensler was also quite reluctant to “get ahead of the rest of the SEC” on some issues and purposefully avoided discussion of actions by specific companies, such as Glass-Lewis’s recent announcement that it would offer equity plan advisory services—will that present a conflict?—and BlackRock’s recent decision to pass-through certain voting rights to institutional clients (see this PubCo post). However, he did offer some updates on various projects at the SEC.
In remarks in March to the Center for American Progress, Acting SEC Chair Allison Lee said that she had asked the staff to consider whether the SEC should “re-open the comment file on the 2016 universal proxy rule proposal to take into account market developments since then and move towards finalization.” Under that proposal, in a contested election, universal proxy cards identifying all the candidates for director on both slates would be required, more closely replicating in-person voting. In Lee’s view, the proposal would be “a common-sense step forward in modernizing our proxy rules and protecting shareholder rights. The proposal has been outstanding for far too long and should be finalized.” (See this PubCo post.) On Friday, the SEC announced that it had voted to reopen the comment period for the universal proxy proposal for 30 days following publication of the reopening release in the Federal Register. According to Corp Fin Acting Director John Coates, “[r]eopening the comment period will allow the public to share additional views on the use of universal proxy cards in director elections, particularly in light of the corporate governance developments that have occurred since the Commission issued its proposal.”
With so much going on in connection with COVID-19 and its impact, it would be easy to overlook the rest of the SEC’s agenda. And it’s a lengthy one. The new Spring Regulatory Flexibility Act Agenda was published at the end of June, so it’s time to look at what’s on deck for the SEC in the coming year or so. (That reference to “on deck” may be the only sports anyone gets this year….) SEC Chair Jay Clayton has repeatedly made clear his intent to make the RegFlex Agenda more realistic, streamlining it to show what the SEC actually expects to take up in the subsequent period. (Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually planned to pursue in the following 12 months. See this PubCo post and this PubCo post.) The SEC’s Spring 2020 short-term and long-term agendas reflect the Chair’s priorities as of March 31, when the agenda was compiled. What stands out here are the matters that have, somewhat surprisingly, moved up onto the final-rule-stage agenda—think universal proxy—from perpetual residence on the long-term (i.e., the maybe never) agenda.
Yesterday morning, at a telephonic meeting of the SEC’s Investor Advisory Committee, the Committee voted to adopt revised recommendations addressing “proxy plumbing”—the panoply of problems associated with the infrastructure supporting the proxy voting system. (See this PubCo post.) The recommendations were originally presented at a meeting of the Committee in late July, but the Committee elected to study the proposal further and offer revisions before voting. The changes are fairly nuanced, now also including some minority views. For the most part, the recommendations would not “reinvent” the proxy voting system, instead targeting improvements that are considered essentially “low-hanging fruit.” However, there appeared to be a consensus that eventually more would need to be done. The recommendations were adopted by a majority of the Committee with two dissents. Will the SEC pay attention?
At a meeting on Thursday of the SEC’s Investor Advisory Committee, a subcommittee reported on its recommendations addressing the “proxy plumbing” conundrum—not the Roto Rooter variety, but rather the panoply of problems associated with the infrastructure supporting the proxy voting system. Shareholder voting is viewed as fundamental to keeping boards and managements accountable, and according to the recommendations, every year, over 600 billion shares are voted at more than 13,000 shareholder meetings. However, there is broad agreement that the current system of proxy plumbing is inefficient, opaque and, all too often, inaccurate. As the recommendations observe, under the current system, shareholders “cannot determine if their votes were cast as they intended; issuers cannot rapidly determine the outcome of close votes; and the legitimacy of corporate elections, which depend on accurate, reliable, and transparent vote counts, is routinely called into doubt.” In 2010, the SEC issued a concept release soliciting public comment on whether the SEC should propose revisions to its proxy rules to address these issues, but to no avail. (See this Cooley News Brief.) However, in the last year or so, proxy plumbing has reemerged as a serious problem to be addressed. The Committee took up this issue almost a year ago and, at the SEC’s proxy process roundtable last year, proxy voting mechanics was actually a hot topic—described by one panelist as “the most boring, least partisan and, honestly, the most important” of the roundtable topics.
The possibility of the imposition of mandatory universal proxy has long been with us. 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. Then, in 2016, the SEC proposed amendments to the proxy rules that would have mandated the use of universal proxy cards in contested elections. And there it sat. With the change of administrations in the White House, followed by the change of administrations at the SEC, the proposal for universal proxy fell off the SEC’s near-term agenda and was relegated to the long-term agenda. Moreover, disfavored by House Republicans, universal proxy would have been prohibited by various bills, including the Financial Choice Act of 2017 (which passed the House but not the Senate). (See this PubCo post.) Then, in July of this year, “several people familiar with the matter” advised Reuters that SEC Chair Jay Clayton “has in fact shelved the proposal.” (See this PubCo post.) The possibility of mandatory universal proxy had been transfigured into more of a spectral presence.
At a meeting last week of the SEC’s Investor Advisory Committee, the primary focus of the discussion was the panoply of problems associated with the infrastructure supporting the proxy voting system, so-called “proxy plumbing.” Shareholder voting is viewed as fundamental to keeping boards and managements accountable, and the current system of proxy plumbing has been criticized as inefficient, opaque and, all too often, inaccurate. In 2010, the SEC issued a concept release soliciting public comment on whether the SEC should propose revisions to its proxy rules to address these issues, but to no avail. Perhaps the task was too daunting. However, at the end of his brief appearance at the committee meeting, SEC Chair Jay Clayton observed that it was clear that there was room for improvement in the voting system—enough room for improvement that the SEC should do something. SEC Commissioner Robert Jackson was decidedly more emphatic. In a statement posted on the SEC website on Friday, he characterized as “urgent” the need “to fix the basic mechanics of modern corporate democracy.” He indicated that “there is broad agreement that the Byzantine system that makes it impossible to know whether investors’ votes are being counted must be fixed. Over the last decade, while voting technology has made enormous leaps forward, retail investor participation in corporate elections has declined: today, fewer than one in three investors have their vote counted in those contests. The Commission has known this for years—we issued an impressively thorough concept release on the subject in 2010—and it is time to act. Investors should not have to wait any longer for their votes to be counted in corporate elections.” But the question remains: will the SEC undertake the comprehensive analysis and overhaul that appears to be required or settle for grabbing only the low-hanging fruit?
SEC Chair Jay Clayton announced earlier this week that the SEC will be holding a roundtable to discuss the proxy process, date TBD. Potential topics include the voting process, retail shareholder participation, shareholder proposals, proxy advisory firms and technology and innovation. In 2010, the SEC issued a concept release soliciting public comment on whether the SEC should propose revisions to its proxy rules to address the infrastructure supporting the proxy system, so-called “proxy plumbing.” Back then, the SEC had decided that it was time to do some maintenance on the creaky old plumbing system. However, as then Commissioner Elisse Walter, quoting Kurt Vonnegut, commented at the 2010 open meeting to vote on the concept release: “It’s a flaw in the human character that everyone wants to build, but nobody wants to do maintenance.” That statement was more prophetic than she probably anticipated when she made it: nothing came of the concept release. Whether more results from this current effort remains to be seen.