By Amy Leisinger, J.D.
In recent comments, Davis Polk & Wardwell LLP and the National Association of Corporate Directors objected to the SEC’s universal proxy proposal, citing several regulatory and administrative concerns. According to Davis Polk, the proposal likely exceeds the Commission’s authority and lacks sufficient supporting data to ensure that the proposed changes would not adversely affect board effectiveness, and, if the SEC proceeds with the changes, an optional approach limited to contested elections would be more appropriate. Alternatively, the NACD noted that universal ballots could result in a “mix and match” voting approach causing investor confusion and ultimate election of directors not suited to the specific company.
Universal proxy proposal. Under the current proxy rules, only shareholders who attend a meeting in person at which directors are elected are able to vote for nominees on both management and dissident proxy cards; those who vote by proxy must submit their votes on one or the other and cannot choose a combination. The proposed amendments to the proxy rules would require proxy contestants to provide a universal proxy card that includes the names of registrant and dissident nominees, allowing shareholders to choose among all of the candidates rather than casting an all-or-nothing vote.
Davis Polk. Davis Polk suggested that the proposal, if adopted, would exceed the SEC’s Exchange Act authority and may also be vulnerable to a challenge under the Administrative Procedure Act. In previously preserving the bona fide nominee rule many years ago, the firm noted, the SEC implicitly concluded that it lacked authority to prescribe universal proxies. Exchange Act Section 14(a) was designed to address proxy-process abuses, and, if the Commission intends to reinvent the process in addition to policing it, it needs additional congressional authority, Davis Polk stated. Further, when an agency seeks to reverse an established policy, the courts and the Administrative Procedure Act impose a high bar. Before mandating universal proxies, the SEC would need to provide specific evidence justifying its policy reversal, which it does not currently possess, the firm explained.
If the Commission proceeds with the proposed changes, it should make the use of universal proxies optional, require any users to solicit all shareholders, and address only contested elections, according to the firm. An optional approach allowing the dissident and management the choice either to list only its own nominees or to use a universal proxy that lists the nominees of all parties would allow the Commission to study the impact of universal proxies before mandating use to meet its goals while minimizing investor confusion, Davis Polk explained. In addition, requiring solicitation of all shareholders (rather than the majority stated in the proposal) would create a level playing field for all parties involved, the firm concluded.
NACD. The NACD noted that the “mix and match” approach permitted by universal proxies could result in boards less-than suited to serve specific companies. Slates are typically created by individuals who have given extensive thought to the group that would make up an optimal board, the organization said, and shareholders choosing among names on a universal proxy could end up voting for a random set of nominees instead of a cohesive group put together with particularized focus on the needs of the company.
The NACD said that, ideally, an election would not be contested because boards and shareholders would communicate effectively but opined that, if dissident slates arise, the contest should be among the groups. “[A] mix and match of board-nominated and dissident-nominated candidates in a universal proxy is not the solution,” the NACD concluded.