On November 17, 2021, the U.S. Securities and Exchange Commission (“SEC”) adopted Rule 14a-19, which will provide shareholders with a more significant voice in electing companies’ boards of directors—one of the fundamental aspects of corporate governance that is critical to holding directors accountable to shareholders.1 By way of background, a company’s board of directors is determined by its shareholders. If there are more candidates than there are available seats, the company’s shareholders have the opportunity to vote for the candidates that they think should have seats. In a contested director election such as this, there are typically two competing slates of director nominees: (1) a “registrant slate” assembled by the board of directors; and (2) a “dissident slate” assembled by dissident shareholders.
Shareholders can participate in the election of directors in one of two ways. First, shareholders can attend a shareholder meeting and cast their vote in person. Second, shareholders can use the proxy process by executing a written directive instructing the entity to whom the proxy is granted how to vote on that shareholder’s behalf at the meeting. Most shareholders are unable to attend meetings in person; consequently, the proxy process is the primary means for shareholders to vote for directors.2
Despite the prevalence of the proxy process, under the current rules, shareholders who choose to vote by proxy must accept that their rights are limited by doing so. Under current rules, the registrant and dissident each disseminate a proxy card to shareholders, whereby the registrant’s proxy card only lists the registrant’s nominees, and the dissidents’ proxy card only lists the dissidents’ nominees. Shareholders who vote by proxy only have the option to vote either “for or against” all of the registrant’s nominees or “for or against” all of the dissidents’ nominees because state law instructs that a later-dated proxy card invalidates (i.e., revokes and supersedes) any earlier-dated proxy card submitted by a shareholder— meaning only one of the shareholder’s proxy cards can be counted.3 Shareholders thus must choose to submit either the registrant’s or the dissidents’ proxy card. Unlike shareholders who vote in person who have the option to vote for particular director nominees from both slates, shareholders voting by proxy must vote for an entire slate from one side or the other because they are unable to vote for a combination of director nominees from competing slates.4 The new rules remedy this limitation.
Rule 14a-19 Improves the Proxy Process for Investors
Rule 14a-19 requires the use of a “Universal Proxy Card” by the registrant and shareholders when soliciting proxy votes for their candidates in most contested elections of directors.5 Rule 14a-19 instructs that the Universal Proxy Card must identify all director nominees presented by the registrant and shareholders for election at the upcoming shareholder meeting.6 This new rule enables shareholders voting by proxy to mix and match director nominees from multiple slates, just as they would have been able to do had they attended the shareholder meeting in person. Indeed, according to the SEC, the purpose of Rule 14a-19 is to “enhance the ability of shareholders to elect directors through the proxy process in a manner consistent with their ability to vote in person at a shareholder meeting.”7
Additionally, Rule 14a-19 will require the dissident to solicit holders of shares representing at least 67% of the voting power of shares entitled to vote on the election of directors, indicating a significant change from the current rules, which do not require a dissident to solicit any minimum number of shareholders.8 This higher threshold requirement ensures a proper balance between achieving the benefits of the Universal Proxy Card for shareholders and preventing dissidents from taking advantage by including dissident nominees on the registrant’s universal proxy card without undertaking meaningful solicitation efforts.9
Moreover, while Rule 14a-19 has a minimum solicitation threshold requirement, it does not mandate any minimum ownership threshold or holding period. That is, for a dissident shareholder to organize a slate of director nominees on a Universal Proxy Card, there are no universal proxy requirements concerning the size of that dissident’s equity stake in a registrant or the period of time it has maintained its equity position.10
The SEC indicated that these new universal proxy rules will apply to all shareholder meetings involving contested director elections held after August 31, 2022.11
The Universal Proxy Card’s Positive Impact on Institutional, Retail, and Activist Investors
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1Universal Proxy Final Rule 14a-19, CFR Part 240, Release No. 34-93596, SEC, (hereinafter “Universal Proxy Final Rule 14a-19”).
2Id. at 6.
3Id. at 8.
4As the Council of Institutional Investors stated, “Imagine if, in a political election, you could vote only for Democrats or only for Republicans[.] ‘That has been the dilemma facing most investors voting in a proxy contest at U.S. companies.’” Press Release, Leading Investor Group Hails SEC Rule Requiring Universal Proxy Cards in Contests for Board Seats (Nov. 17, 2021).
5Fact Sheet: Universal Proxy Rules for Director Elections, SEC, (hereinafter “SEC Rule 14a-19 Fact Sheet”).
7Universal Proxy Final Rule 14a-19, at 1.
8Id. at 37–39.
9Id. at 38.
10Id. at 18. Rule 14a-19 also contains requirements concerning notice, disclosure, presentation, formatting, filing deadlines, and more. See, generally, Universal Proxy Final Rule 14a-19. For example, the rule requires that the font type, style, and size be consistent for all nominees presented on the Universal Proxy Card to avoid concerns about emphasizing certain nominees over others and to ensure clarity and fairness in presentation. Id. at 54.
11SEC Rule 14a-19 Fact Sheet.
12Universal Proxy Final Rule 14a-19, at 17.
13Id. at 101–02.
14Id. at 103.
15Id. at 39.
16Id. at 38.
17Id. at 38–39.
18SEC Commissioner Hester M. Peirce, Dissenting Statement on Universal Proxy, SEC (Nov. 17, 2021).
20Universal Proxy Final Rule 14a-19, at 18.
21Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 381 (1970) (quoting H.R.Rep.No.1383, 73d Cong., 2d Sess., at 13–14).
22Press Release, SEC Adopts New Rules for Universal Proxy Cards in Contested Director Elections, SEC (Nov. 17, 2021).