The Universal Proxy Card - What It Is, What To Expect
27 January 2023 | Applicable law: US | 5 minute read
With the 2023 proxy season now underway in the US, shareholders of public companies should know that they may be impacted by the new "universal proxy card," which changes how a contested election for a board of directors will be held. Here's what you should know.
A proxy contest occurs when a shareholder launches a campaign to solicit votes, or proxies, against a public company's board of directors at an annual or special meeting. Typically seeking to force change in the company's strategic plans or day-to-day operations, the "activist" shareholder in a proxy contest tries to gain either total control of the company, by nominating a full slate of prospective directors to run against the company slate, or at least representation by running a "short slate" of a minority of the directors.
For decades, proxy contests involved a binary choice: shareholders not in attendance at the meeting where the contest was decided could either vote for the slate of directors put forward by the company's management or for the "activist" or "dissident" slate. Both the company and the activist would send different proxy cards to shareholders, each reflecting its own slate, and the shareholders could return only one of those cards, choosing one slate in its entirety over the other. Since the vast majority of votes at a shareholder meeting are cast by proxy card, a contested election of directors resulted in a binary choice, denying shareholders the ability to select nominees interchangeably among the different slates. It also created inequities among the shareholders, as those attending the meetings where director elections were held could vote as they wished, picking and choosing director nominees according to their preferences.
This system had reverberations. Companies ran the risk that a proxy contest could result in management losing its entire slate, while shareholders with limited resources to wage a contest would often find it difficult to meaningfully change or at least influence "C-level" decisions. Still, corporate governance reforms in recent years, such as the removal by many public companies of traditional takeover defenses like classified boards and poison pills, have made it easier for activist shareholders to successfully challenge management, and both the number and success rate of proxy contests have generally increased in recent years.
What is a Universal Proxy Card?
In order to avoid the indirect disenfranchisement that resulted from the multiple proxy card regime, proponents of enhanced corporate governance for years advocated the adoption of the universal proxy card, whereby all board candidates – those nominated by the company and those duly nominated according to company by-laws by activist shareholders (as well as "proxy access" nominees who are listed by agreement between the company and large shareholders) – would be included on a single card. This would obviously give shareholders the "pick and choose" option they lacked unless they voted in person and help further democratize the election of the senior management of public corporations.
The Long Road to Adoption
As attractive – and logical – as the universal proxy card may seem, public companies were reluctant to embrace the concept, and many were steadfastly opposed for obvious reasons. Those who had long favored its adoption as a means of leveling the playing field between management and activist shareholders could be forgiven for thinking it would never come to fruition. But beginning in 2014, the idea began to gather momentum, particularly when important associations such as the Council of Institutional Investors endorsed the universal proxy card and began petitioning for it.
Even so, things did not exactly move quickly from this point. The Securities and Exchange Commission (the "SEC" or the "Commission") formally proposed a universal proxy card rule in 2016, but a change in presidential administrations the following year stalled the effort. It was not until 2021, after another change in administration, that it revived. The rulemaking process eventually ran its course, and, in November 2021, the Commission voted to adopt final rules requiring parties in a contested election for directors to use a universal proxy card in elections taking place after August 31, 2022. As of September 1, proxy cards must include the company's slate of nominees and any qualifying slate of opposing nominees, and all shareholders can now vote their preferences among the entire population of candidates.
SEC Rule 14a-19
In approving the universal proxy card, the SEC was mindful that parameters had to be established so as to not make the card too unwieldy for investors. If every shareholder could nominate a person or slate for election to a board without restriction, this could easily result in a chaotic, overlong, and possibly indecipherable proxy card that would ultimately defeat the purpose of the rule change.
As part of its rulemaking, the SEC promulgated Rule 14a-19 which establishes several notice and filing requirements in order for an opposing slate to be placed onto the proxy card. Among these requirements are the following:
- No later than 60 days before the anniversary of the prior year's annual meeting, the shareholder must inform the company, in writing (by delivery of a hardcopy notice at the company's principal executive offices) of its intent to solicit proxies for director nominees in opposition to the company's slate and therefore have its nominees listed on the proxy card;
- This notice must include the names of all shareholder nominees for which proxies will be solicited, as well as a statement that the shareholder intends to solicit at least 67% of the voting shareholder population; and
- No later than 25 days before the annual meeting, or five calendar days after the company files its definitive proxy statement, whichever falls later, the shareholder must file its own definitive proxy statement. Failure to comply with this requirement would permit the company to distribute a new proxy card that omits the shareholder nominees.
Assuming these requirements are satisfied, the company and the shareholder may design and circulate their own separate proxy cards, but they must, per Rule 14a-19, each set forth, in alphabetical order, the names of all duly nominated director candidates, while distinguishing which are nominated by the company or the shareholder. The same font type, style and size must be employed for each name.
As noted above, the activist shareholder must solicit at least 67% of voting shareholders, and state as much in its notice to the company and the proxy statement it sends to the other shareholders. However, the activist does not need to actually mail a full proxy statement to each shareholder; it can rely on the long-established "notice and access" method of mailing a notice of how and where the proxy statement can be accessed online.
Many public companies hold their annual meetings in the first half of the year, and have been preparing for a possible universal proxy card situation. Among other things, these companies have reportedly codified, or are in the process of codifying, changes to their charter documents, such as amending their bylaws to include "advance notice" provisions that require activist shareholders to comply with Rule 14a-19, in order to provide an added layer of protection against them. Also, proxy statements mailed by the companies to their shareholders will likely include new disclosure that addresses the impact of casting votes other than "FOR" the management slate, such as "AGAINST," "ABSTAIN," or "WITHHOLD."
Companies are also reviewing their slates of director candidates to assess any potential vulnerabilities that could expose them to a proxy contest. Shareholder engagement by senior management, particularly with institutional investors, is said to be on the rise as well. Opinions have varied as to the effect the universal proxy card will have on corporate governance and whether the number of proxy contests will markedly increase in 2023 and beyond, but there is no question that the potential for significant change is present. A proxy contest conducted in December 2022 under the universal proxy rules resulted in the defeat of an incumbent director renominated to the board by management at the hands of an opposing nominee put forward by an activist shareholder. Whether this result signals the beginning of a trend or will be seen as an aberration in the months ahead remains to be seen.
What This Means for You
If you are a public company director or an aspiring director, or if you are a shareholder who is dissatisfied with the management of one of your companies or one who perceives dissension among the shareholder base, you should familiarize yourself with the universal proxy card regime. Shareholder activism has been increasing in recent years, especially in the area of ESG (Environmental, Social and Governance) issues, and now that it will be easier to wage a proxy contest it is quite possible that, as you look toward the next annual meeting, you may have reason to understand the universal proxy card rules and their implications.
P.S. REGISTERED INVESTMENT COMPANIES AND BUSINESS DEVELOPMENT COMPANIES ARE CURRENTLY NOT SUBJECT TO THE UNIVERSAL PROXY RULES.