Thursday, November 18, 2021

SEC amends rules to require universal proxy voting, proposes to amend proxy advice rule

By Lene Powell, J.D.

The SEC adopted final rule amendments to eliminate differences in voting options for shareholders voting in person and by proxy. Under the new rules, parties in a contested director election must use universal proxy cards that include all director nominees presented for election at a shareholder meeting. The amended rules, which were adopted by a 4-1 vote, provide for exemptions and exclude director elections involving registered investment companies and business development companies. The amendments will become effective 60 days after publication in the Federal Register and will apply to shareholder meetings featuring election contests held after August 31, 2022 (Universal Proxy, Release No. 34-93596, November 17, 2021).

To facilitate the rule changes, the Commission also adopted amendments to establish certain notice, minimum solicitation, filing, formatting and presentation requirements, and other related amendments. The Commission also adopted new disclosure requirements relating to voting standards and certain voting options for all director elections, contested or uncontested.

Separately, the Commission also proposed to rescind two rules relating to proxy voting advice that were adopted in 2020. The amendments would remove certain conditions on the availability of two exemptions from the proxy rules’ informational and filing requirements on which proxy voting advice businesses often rely. The proposal was issued by a 3-2 vote and will be open for public comments for 30 days after publication in the Federal Register (Proxy Voting Advice, Release No. 34-93595, November 17, 2021).

Universal proxy voting. Under existing rules, shareholders voting in contested director elections by proxy generally do not have the full range of options as shareholders voting in person. Typically, shareholders voting by proxy may only choose between the registrant’s nominees and dissidents’ nominees. In contrast, shareholders voting in person at a meeting can vote for any combination of duly nominated director candidates proposed by any party.

As explained in a fact sheet, the SEC originally put forth proposed rules in 2016 to establish universal proxy voting, which would mandate the use of universal proxy cards in contested director elections to allow shareholders to vote by proxy in the same way as if they were attending a shareholder meeting. The SEC then reopened the comment period on the proposal in April 2021.

The final rule amendments require the use of universal proxy cards in all non-exempt solicitations for contested elections of directors, including both partial slate and full slate contests, other than those involving registered investment companies and business development companies.

Specifically, the amended rules:
  • Require proxy contestants to provide shareholders with a universal proxy card that includes the names of all duly nominated director candidates, which would allow shareholders to vote by proxy for the combination of nominees of their choice;
  • Revise the consent required of a bona fide nominee to consent to being named in any proxy statement relating to the registrants next meeting of shareholders at which directors are to be elected;
  • Eliminate the “short slate” rules, since universal proxy cards would make it unnecessary for dissidents to round out their partial slates with registrant nominees;
  • Require dissidents to provide registrants with notice of their intent to solicit proxies in support of nominees other than the registrant’s nominees, and the names of those nominees, no later than 60 calendar days prior to the anniversary of the previous year's annual meeting date;
  • Require registrants to provide dissidents with notice of the names of the registrants’ nominees no later than 50 calendar days prior to the anniversary of the previous year's annual meeting date;
  • Require dissidents to file their definitive proxy statement by the later of 25 calendar days prior to the meeting date or five calendar days after the registrant files its definitive proxy statement;
  • Require dissidents to solicit the holders of shares representing at least 67 percent of the voting power of shares entitled to vote on the election of directors;
  • Prescribe presentation and formatting requirements for universal proxy cards to ensure that each party's nominees are presented in a clear and impartial manner;
  • Require parties to specify more clearly the applicable voting options and voting standards in all director elections. These amendments (1) mandate that proxy cards include an “against” voting option when applicable state law gives effect to a vote against a nominee; (2) require proxy cards to provide shareholders the ability to abstain in an election of directors where a majority voting standard is in effect; (3) eliminate the current ability to provide a “withhold” voting option on the proxy card when applicable state laws give legal effect to a vote against a nominee; and (4) require disclosure in proxy statements about the effect of a “withhold” vote in an election of directors.
Commissioner positions on universal proxy. The final rule amendments were approved by a 4-1 vote.

“These 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,” said SEC Chair Gary Gensler in a press release. “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.”

Commissioner Allison Herren Lee noted broad support for the amendments, including from the SEC’s Investor Advisory Committee and the Universal Proxy Working Group, an informal working group with a wide range of participants, along with many others. Commissioner Caroline Crenshaw observed that few shareholders attend a corporation’s annual meeting in-person to vote, and stated that the rule achieves uniformity, fairness, and efficiency. Commissioner Elad Roisman voted for the rules but expressed reservations, including that the rule should also have applied to funds, that those launching a proxy contest should have to meet certain eligibility criteria, and that the rule will put even more power in the hands of the proxy advisory businesses.

Commissioner Hester Peirce dissented from the rule, saying it could afford activists without a demonstrated commitment to the company an opportunity to meddle in the company’s affairs.

Proxy advice. Turning to the topic of proxy advice, the Commission voted to issue a proposal to ease certain Clayton-era rules relating to proxy advisory firms. As a fact sheet explains, final rules adopted in 2020 added conditions in Rule 14a-2(b)(9)(ii) to exemptions from the proxy rules’ information and filing requirements that proxy advisory firms often rely on.

Specifically, the 2020 rules added new conditions requiring proxy advisory firms to make their advice available to the companies that are the subject of their advice at or before the time that they make the advice available to their clients. The 2020 rules also require proxy advisory firms to provide their clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding the proxy advisory firms’ proxy voting advice by registrants who are the subject of the advice. Finally, the 2020 rules amended Rule 14a-9, which prohibits false or misleading statements, to add Note (e), which sets forth examples of material misstatements or omissions related to proxy voting advice. Note (e) provides that the failure to disclose material information regarding proxy voting advice could be misleading.

In June 2021, the Division of Corporation Finance announced that staff, at the direction of Chair Gensler, was considering revisiting the 2020 rule amendments as well as its 2019 interpretive guidance. The Division also announced it would not recommend enforcement action based on either the interpretive guidance or the rule amendments during this period.

The final rule amendments rescind Rule 14a2(b)(9)(ii) as well as the related safe harbors and exclusions from those conditions. The amendments also rescind Note (e) to Rule 14a-9 while affirming that the rule applies to material misstatements of facts contained in proxy voting advice, and present Commission guidance regarding the application of Rule 14a-9 to statements of opinion contained in proxy voting advice.

Commissioner positions on proxy advice. The proposal was approved to be released by a 3-2 vote.

"Proxy advice voting businesses play an important role in the proxy process. Their clients deserve to receive independent proxy voting advice in a timely manner," said Chair Gensler in a press release. "I am pleased to release these proposals to the public and encourage the public to share their feedback at"

Commissioner Lee supported the rule, stating that it “represents a targeted reappraisal of only certain aspects of those amendments that generated substantial concern.” Lee said it was clear that the so-called “error rate” with respect to proxy voting advice was essentially none. Further, substantial modifications from proposal to adoption meant that commenters did not have a chance to weigh in on certain features of the rules in their final form until after adoption. Now they have, and they have expressed concerns about impaired independence and significant new costs and delays, said Lee. The rule was also supported by Commissioner Crenshaw.

Commissioners Peirce and Roisman dissented from the rule. According to Peirce, nothing has changed since the rule was adopted, and the SEC has not learned anything new.

“The release takes a stab at justifying the rewrite, but we might as well simply acknowledge that the political winds have shifted,” said Peirce.

Roisman expressed concern that, given the outsized influence of just two proxy advisory firms on the entire market, it is vital to ensure that the voting advice is based on the most accurate information reasonably available and that proxy advisory firms be transparent with clients. Roisman also expressed concerns about the precedent of overturning duly adopted regulation, stating that the existing rules are the product of roughly a decade’s worth of thinking and public feedback.

These are Release No. 34-93596 and Release No. 34-93595.