September 1, 2022
September 1, 2022
On Sept. 1, 2022, the new “universal proxy” rules of the US Securities and Exchange Commission (SEC) will go into effect today. The universal proxy rules require the use of “universal” proxy cards in director election contests in the United States It is expected that the universal proxy will lead to increased proxy contest threats and confer advantages on dissident campaigns that did not previously exist in proxy contests. As the new rules dramatically change the methods by which proxy contests at public companies have been conducted for decades, directors should ensure that their boards understand the impact of this change and are well-prepared for a shareholder activism campaign in the coming years.
Under the previous system, there were two proxy cards: the company’s card with the board’s slate and the dissident’s card with their candidates. Investors had a binary choice: vote for the company’s director slate or the dissident’s slate. Under the new system, every proxy card is required to list both the candidates of the company and the dissident. That means investors can mix-and-match and vote for candidates from both slates. Investors who might not support the dissident’s platform may nevertheless support one or more of the dissident’s nominees. In other words, shareholders can now easily split their vote between the company’s slate and the dissident’s slate. In many contests, this vote-splitting will likely increase the risk that a dissident wins at least seat or two.
There will be a personalization of proxy contests like never seen before. Because the universal proxy system allows shareholders to mix-and-match candidates from the company and dissident slates, directors’ individual qualifications will come into greater focus relative to the merits of an overall slate. Proxy campaign strategies are expected to shift from focusing on company versus dissident platforms (i.e., a “slate contest”) to pitting an activist’s best individual nominees against the company’s nominees whom the activist regards as the weakest targets (i.e., a “candidate contest”). Institutional Investor Services (ISS), the leading global proxy advisory firm, recently issued a research note predicting that under the new system a board’s “weakest” members may now become more vulnerable in a proxy contest.
One concern is that the rule change will make it more difficult to come to a reasonable, amicable resolution with activists. If activists expect they will win one or two seats anyway and are able to threaten to take control of the board, they will believe they have more leverage. There also appears to be almost no downside to “over nominating” a large slate of candidates that is disproportionate to the case for change. This in turn will make it harder to achieve a limited settlement with activists.
The new system also has the potential to open the floodgates for special interest groups because it will also make it easier and cheaper to run proxy fights. Since the universal proxy allows an activist to force a company to put all candidates on the company’s proxy card, a dissident is no longer required to mail its own proxy materials multiple times to tens of thousands of shareholders. These cost savings will enable special interest groups with smaller budgets—environmental groups, unions, NGOs, gadflies, etc.—to run inexpensive issue-based proxy campaigns. To date, such activists made their cases at shareholder meetings by making merely advisory proposals about company policies. Now these groups will be able to nominate directors with environmental or other applicable backgrounds and use these candidacies as leverage to pressure a company to change policies.
To help directors of public companies prepare for the new era, we provide the following practical guidance:
Following this guidance will ensure understanding and informed voting as the universal proxy change takes effect. Directors should ensure that their boards understand the impact of this change and are well-prepared for a shareholder activism campaign in the coming years.
Authors’ Note: Additional information about the universal proxy card rule is available at Sidley’s Universal Proxy Card Resource Center (UPCRC).
Kai H. E. Liekefett is a partner in New York and co-chairs Sidley’s Shareholder Activism practice. He has 20 years of experience in corporate law and spends 100 percent of his time on activism campaigns, proxy fights, and hostile takeovers.
Derek Zaba is a partner in the Palo Alto and New York offices and co-chairs Sidley’s Shareholder Activism practice. He counsels companies on a variety of matters, including activism defense/proxy contests, activism preparedness, takeover defenses, shareholder engagement, and corporate governance.
Leonard Wood is a senior managing associate lawyer in Sidley’s office in Houston where his practice focuses on shareholder activism, mergers and acquisitions, strategic investor relations, and corporate governance involving public companies.
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