The SEC has amended the proxy rules to require universal proxy cards (UPCs) for both management and shareholders soliciting votes for their own candidates in contested director elections held after August 31, 2022 on condition the activist investor solicit at least 67 percent of the outstanding voting power.
What is the UPC? The universal proxy rules now require all management and dissident nominees to be included on the proxy cards solicited by each side. This format allows shareholders to support a combination of management and dissident nominees up to the number of eligible seats for election.
What has changed? Under the now obsolete system that has been in place for decades, shareholders typically received separate proxy cards from the company and the activist containing only each side’s respective nominee(s). Consequently, holders could only easily vote one card, which essentially limited the ability to vote for a mix of nominees from both slates.
In order to vote for a combination of candidates from both slates often required shareholders to attend the meeting in person and vote by ballot. With all nominees listed on one card, the new UPC will allow shareholders to vote for a mix of company and dissident candidates without attending the meeting.
What should firms be prepared for? According to the SEC’s final rule on UPCs, dissidents may distribute proxy materials using the notice & access guidelines that can significantly reduce the cost of a campaign, particularly at an issuer with a sizable retail population. The lower cost could open doors for first-time activists or those with limited budgets that until now may not have had the financial resources to launch an impactful campaign for change. Of note is that many activists leverage their public wins when raising capital.
Further, we may witness the emergence of shareholder interest groups – previously not traditional board composition activists – that may view the rule change as a way to increase their voice on matters related to ESG, diversity, equity and inclusion and employee rights through a formal proxy contest.
What about the ’67 percent solution’? The activist’s minimum 67 percent solicitation threshold required under the rule was designed to protect companies from frivolous proxy contests and was increased from a simple majority in the SEC’s proposed rules. While this may be seen as a burden on activists, companies are required to solicit all holders, and activists can take advantage of lower-cost mailing methods – such as notice & access – yet have the benefit of their nominees ‘free-riding’ on the company’s card to all holders.
Are there any other considerations to be aware of? The new rules prohibit companies that have not adopted a true majority vote standard from including an ‘against’ voting option on their proxy card because such votes have no legal effect. Companies with a plurality standard must allow only ‘for’ and ‘withhold’ options and disclose the treatment and effect of a withhold vote in the election.
How will UPCs impact proxy adviser recommendations? ISS will still be looking for an activist to make a compelling argument that change is needed on the board before supporting its nominees. But it signaled that there may be situations where, while it generally supports management, it may take advantage of the opportunity to replace ‘a long-tenured, overboarded director who seems disengaged, with a new nominee who brings clearly relevant skills to the board or perhaps enhances diversity.’ On a positive note, ISS seems unlikely to support an activist using a UPC to weaponize an ESG issue.
Looking ahead to the impact The key takeaway is that activist shareholders will now have easier access to a company’s proxy card without the minimum ownership requirements required by a proxy access bylaw. As a result, we expect an increase in board-level activism and the continued trend of first-time activist funds looking to establish credibility. Companies should begin to strategize now for how that new contested battlefield may look – and be prepared for it.
Morrow Sodali is a leading provider of strategic advice and shareholder services to corporate clients around the world. The firm provides corporate boards and executives with advice and services relating to corporate governance, shareholder and bondholder communication and engagement, capital markets intelligence, proxy solicitation, shareholder activism and M&A.
From headquarters in New York and London and through offices and partners in major capital markets, Morrow Sodali serves around 1,000 corporate clients in 80+ countries, including many of the world’s largest multinational corporations. In addition to listed and private companies, its clients include financial institutions, mutual funds, ETFs, stock exchanges and membership associations.
For more information, visit morrowsodali.com.
