For the second time in four months, the SEC’s Division of Corporation Finance has issued updated Compliance and Disclosure Interpretations (C&DIs) on proxies. The now six total C&DIs all concern application of Exchange Act Rule 14a-19, which governs the solicitation of proxies in support of director nominees other than the company's nominees (See Proxy Rules and Schedules 14A/14C, December 6, 2022, Questions 139.04 to 139.06).
The first set of these C&DIs, issued August 25, 2022, focused on names of the dissident shareholder’s nominees, notice of names submitted by multiple dissident shareholders, and advance bylaws with shorter time frames than prescribed by Rule 14a-19. The latest set of C&DIs addresses more issues regarding advance notice bylaws, dissident shareholder litigation, and reliance on the registrant’s proxy card.
Specifically, the C&DIs issued December 6, 2022, address:
- Question 139.04—The incoming question asked what to do about nominations deemed invalid because the dissident failed to comply with the company’s advance notice bylaw. CorpFin said the company need not include the dissident shareholder's nominees on the proxy card under Rule 14a-19(e)(1) because only “duly nominated” candidates need to be included. The rule provides that the proxy must: “[s]et forth the names of all persons nominated for election by the registrant and by any person or group of persons that has complied with this section and the name of any person whose nomination by a shareholder or shareholder group satisfies the requirements of an applicable state or foreign law provision or a registrant’s governing documents as they relate to the inclusion of shareholder director nominees in the registrant’s proxy materials.”
- Question 139.05—This C&DI addresses the situation where a dissident shareholder sues regarding the company’s determination concerning the validity of the dissident’s nominations. CorpFin stated that a registrant’s proxy statement must disclose: (1) its determination that the dissident shareholder’s director nominations are invalid; (2) a brief description of the basis for that determination; (3) the fact that the dissident shareholder initiated litigation challenging the determination; and (4) the potential implications (including any risks to the registrant or its shareholders) if the dissident shareholder’s nominations are ultimately deemed to be valid. If a court later found the dissident’s nominations to be valid, CorpFin added, the registrant would have to furnish universal proxy cards with those candidates included and allow shareholders “sufficient time” to cast votes.
- Question 139.06—The final new C&DI asked what consequences may flow from a dissident shareholder in a non-exempt solicitation opting to forgo its own proxy card and instead make the relevant filing on EDGAR and rely on the company’s proxy card. According to CorpFin, each soliciting party must use a universal proxy card that names all director candidates, while a dissident shareholder also must solicit holders of at least 67 percent of the voting power entitled to vote (and represent this in its proxy statement) in order to ensure that the dissident shareholder engages in “meaningful solicitation” due to its candidates being included on the company's universal proxy card.