Rule2021-25492
Universal Proxy
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 1, 2021
Effective
January 31, 2022
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is amending the Federal proxy rules to enhance the ability of shareholders to elect directors though the proxy process in a manner consistent with their ability to vote in person at a shareholder meeting. Specifically, the Commission is requiring the use of a universal proxy card in all non-exempt solicitations involving director election contests, except those involving registered investment companies and business development companies. To facilitate the use of a universal proxy card, the Commission is also amending the Federal proxy rules to establish certain notice, minimum solicitation, filing, formatting and presentation requirements, along with other related rule changes consistent with the adoption of a universal proxy requirement. In addition, the Commission is adopting new disclosure requirements relating to voting standards and further requiring certain voting options for all director elections, whether or not contested.
Full Text
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<title>Federal Register, Volume 86 Issue 228 (Wednesday, December 1, 2021)</title>
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[Federal Register Volume 86, Number 228 (Wednesday, December 1, 2021)]
[Rules and Regulations]
[Pages 68330-68381]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-25492]
[[Page 68329]]
Vol. 86
Wednesday,
No. 228
December 1, 2021
Part III
Securities and Exchange Commission
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17 CFR Part 240
Universal Proxy; Final Rule
Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 /
Rules and Regulations
[[Page 68330]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-93596; IC-34419; File No. S7-24-16]
RIN 3235-AL84
Universal Proxy
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
amending the Federal proxy rules to enhance the ability of shareholders
to elect directors though the proxy process in a manner consistent with
their ability to vote in person at a shareholder meeting. Specifically,
the Commission is requiring the use of a universal proxy card in all
non-exempt solicitations involving director election contests, except
those involving registered investment companies and business
development companies. To facilitate the use of a universal proxy card,
the Commission is also amending the Federal proxy rules to establish
certain notice, minimum solicitation, filing, formatting and
presentation requirements, along with other related rule changes
consistent with the adoption of a universal proxy requirement. In
addition, the Commission is adopting new disclosure requirements
relating to voting standards and further requiring certain voting
options for all director elections, whether or not contested.
DATES:
Effective date: The rules are effective January 31, 2022.
Compliance dates: See Section II.K.
FOR FURTHER INFORMATION CONTACT: Christina Chalk, Senior Special
Counsel, or David M. Plattner, Special Counsel, in the Office of
Mergers and Acquisitions, at (202) 551-3440, Division of Corporation
Finance, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR
240.14a-2 (``Rule 14a-2''), 17 CFR 240.14a-3 (``Rule 14a-3''), 17 CFR
240.14a-4 (``Rule 14a-4''), 17 CFR 240.14a-5 (``Rule 14a-5''), 17 CFR
240.14a-6 (``Rule 14a-6''), and 17 CFR 240.14a-101 (``Schedule 14A''),
and new rule 17 CFR 240.14a-19 (``Rule 14a-19''), each under the
Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (``Exchange
Act'').\1\
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\1\ Unless otherwise noted, when we refer to the Exchange Act,
or any paragraph of the Exchange Act, we are referring to 15 U.S.C.
78a of the United States Code, at which the Exchange Act is
codified, and when we refer to rules under the Exchange Act, or any
paragraph of these rules, we are referring to title 17, part 240 of
the Code of Federal Regulations [17 CFR part 240], in which these
rules are published.
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Table of Contents
I. Introduction
A. Background
B. Overview of Final Amendments
II. Discussion of Final Amendments
A. Mandatory Use of Universal Proxies in Non-Exempt
Solicitations in Contested Elections
1. Proposed Rules
2. Comments Received
3. Final Amendments
B. Dissident's Notice of Intent To Solicit Proxies in Support of
Nominees Other Than the Registrant's Nominees
1. Proposed Rules
2. Comments Received
3. Final Amendments
C. Registrant's Notice of Its Nominees
1. Proposed Rules
2. Comments Received
3. Final Amendments
D. Minimum Solicitation Requirement for Dissidents
1. Proposed Rules
2. Comments Received
3. Final Amendments
E. Dissident's Requirement To File Definitive Proxy Statement 25
Calendar Days Prior to Meeting
1. Proposed Rules
2. Comments Received
3. Final Amendments
F. Access to Information About All Nominees
1. Proposed Rules
2. Comments Received
3. Final Amendments
G. Formatting and Presentation of the Universal Proxy Card
1. Proposed Rules
2. Comments Received
3. Final Amendments
H. Director Election Voting Standards Disclosure and Voting
Options
1. Proposed Rules
2. Comments Received
3. Final Amendments
I. Bona Fide Nominee and Short Slate Rules
1. Elimination of the Short Slate Rule
a. Proposed Rules
b. Comments Received
c. Final Amendments
2. Modification of the Bona Fide Nominee Rule
a. Proposed Rules
b. Comments Received
c. Final Amendments
J. Funds
1. Proposed Rules
2. Comments Received
3. Final Amendments
K. Compliance Dates
III. Other Matters
IV. Economic Analysis
A. Introduction
B. Baseline
1. Affected Parties
a. Shareholders
b. Registrants
c. Dissidents in Contested Elections
d. Directors
2. Contested Director Elections
a. Proxy Contest Data
b. Notice, Solicitation, and Costs of Proxy Contests
c. Results of Proxy Contests
d. Split-Ticket Voting
3. Other Methods To Seek Change in Board Representation
C. Discussion of Economic Effects
1. Effects on Shareholder Voting
2. Potential Effects on Costs of Contested Elections
a. Typical Proxy Contests
b. Nominal Proxy Contests
3. Potential Effects on Outcomes of Contested Elections
4. Potential Effects on Incidence and Perceived Threat of
Contested Elections
a. Typical Proxy Contests
b. Nominal Proxy Contests
5. Specific Implementation Choices
a. The Short Slate and Bona Fide Nominee Rules
b. Use of Universal Proxies
c. Voting Standards Disclosure and Voting Options
V. Paperwork Reduction Act
A. Summary of the Collection of Information
B. Effect of the Final Amendments on Existing Collections of
Information
C. Aggregate Burden and Cost Estimates for the Amendments
VI. Final Regulatory Flexibility Act Analysis
A. Need for, and Objectives of, the Final Amendments
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Final Amendments
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
E. Agency Action to Minimize Effect on Small Entities
VII. Statutory Authority
I. Introduction
A. Background
State statutes require corporations to hold an annual meeting of
shareholders for the purpose of electing directors.\2\ A shareholder's
ability to participate in the election of directors is a fundamental
right under state corporate law,\3\ and the process by which directors
are elected is a fundamental aspect of corporate governance that is
central to maintaining the accountability of directors to shareholders.
Today, few shareholders
[[Page 68331]]
of public companies with a class of securities registered under the
Exchange Act attend a registrant's meeting to vote in person.\4\
Instead, the primary means for shareholders to become informed about
matters to be decided on at a meeting and to vote on the election of
directors and other matters is through the proxy process.
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\2\ See, e.g., Model Bus. Corp. Act section 7.01 (2016); Cal.
Corp. Code section 600(b); Del. Code. Ann. tit. 8, section 211(b);
N.Y. Bus. Corp. Law section 602.
\3\ See Preston v. Allison, 650 A.2d 646, 649 (Del. 1994); see
also Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 659 (Del.
Ch. 1988) (``The shareholder franchise is the ideological
underpinning upon which the legitimacy of directorial power
rests.'').
\4\ During the COVID-19 pandemic, many registrants have held
virtual rather than in-person shareholder meetings. Because
registrants holding virtual shareholder meetings conducted proxy
solicitations in the same manner as they would for in-person
meetings, for purposes of this release, our references to in-person
meetings include virtual shareholder meetings unless otherwise
indicated. Although virtual shareholder meetings have become more
prevalent, it remains unclear whether virtual shareholder meetings
will be used as frequently in the future. Because voting at a
virtual shareholder meeting still requires attendance by a
shareholder, most shareholders are likely to continue to rely on the
proxy voting system to exercise their vote. This is supported by the
fact that, during 2020, the vast majority of shareholders who
attended virtual shareholder meetings did not vote at the meetings.
Instead, to the extent they voted, they did so in advance by proxy
or via voting instruction forms submitted in advance of the
meetings, rather than by attending the virtual shareholder meeting
and casting their votes at the meeting. Based on 1,957 virtual
meetings hosted by one proxy services provider in 2020, the average
number of shareholders voting at virtual meetings (rather than
voting in advance by proxy) was 13 shareholders for meetings with
shareholder proposals (218 cases) and 2 shareholders for meetings
without shareholder proposals. See Broadridge, Virtual Shareholder
Meetings 2020 Facts and Figures (April 2021), available at <a href="https://www.broadridge.com/_assets/pdf/vsm-facts-and-figures-2020-brochure-april-2021.pdf">https://www.broadridge.com/_assets/pdf/vsm-facts-and-figures-2020-brochure-april-2021.pdf</a>. Accordingly, the use of virtual shareholder meetings
will not obviate the need for the final rules regarding universal
proxy cards.
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When a shareholder votes by proxy, the shareholder executes a
written directive instructing the entity to whom the proxy is granted
how to vote on that shareholder's behalf at the meeting. Although state
law typically authorizes the use of proxies to vote shares without
requiring in-person attendance at a shareholder meeting,\5\ registrants
and other parties soliciting proxy authority must comply with the
Federal proxy rules.\6\ Regulation of the proxy process has been a core
function of the Commission since its inception.\7\ Further, protecting
the ability of shareholders to vote, including their right to elect
directors through the proxy process, has been the focus of numerous
Commission rulemakings and other efforts over the years.\8\
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\5\ See, e.g., Del. Code Ann. tit. 8, section 212.
\6\ 15 U.S.C. 78n(a).
\7\ Section 14 of the Exchange Act authorizes the Commission to
establish rules and regulations governing the solicitation of any
proxy, consent or authorization in respect of any security
registered pursuant to Section 12 of the Exchange Act. Registrants
with reporting obligations only under Exchange Act Section 15(d) and
foreign private issuers are not subject to the Federal proxy rules
with respect to solicitations of their own security holders.
\8\ See, e.g., Reexamination of Rules Relating to Shareholder
Communications, Shareholder Participation in the Corporate Electoral
Process, and Corporate Governance Generally, Release No. 34-13901
(Aug. 29, 1977) [42 FR 44860 (Sept. 7, 1977)]; Regulation of
Communications Among Shareholders, Release No. 34-30849 (June 23,
1992) [57 FR 29564 (July 2, 1992)] (``Short Slate Rule Revised
Proposing Release''); and Regulation of Communications Among
Shareholders, Release No. 34-31326 (Oct. 16, 1992) [57 FR 48276
(Oct. 22, 1992)] (``Short Slate Rule Adopting Release''); Roundtable
on Proxy Voting Mechanics (May 24, 2007) (materials available at
<a href="https://www.sec.gov/spotlight/proxyprocess.htm">https://www.sec.gov/spotlight/proxyprocess.htm</a>); Proxy Voting
Roundtable (Feb. 19, 2015) (materials available at <a href="http://www.sec.gov/spotlight/proxy-voting-roundtable.shtml">http://www.sec.gov/spotlight/proxy-voting-roundtable.shtml</a>); and Roundtable
on the Proxy Process (Nov. 15, 2018) (materials available at <a href="https://www.sec.gov/proxy-roundtable-2018">https://www.sec.gov/proxy-roundtable-2018</a>).
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As described in greater detail in Section I.B of the Proposing
Release (81 FR 79122, Nov. 10, 2016), the current proxy rules do not
allow shareholders voting by proxy in a contested election \9\ to
replicate the vote they could cast if they voted in person at a
shareholder meeting. Shareholders voting in person at a meeting may
select among all of the duly nominated \10\ director candidates
proposed for election by any party in an election contest and vote for
any combination of those candidates. Shareholders voting by proxy,
however, do not have this same flexibility. The interplay between state
and Federal law means that shareholders voting by proxy generally are
unable to choose a mix of dissident \11\ and registrant nominees. The
dissident and registrant each send a proxy card to shareholders, with
the registrant's proxy card typically listing only the registrant's
nominees and the dissident's proxy card typically listing only the
dissident's nominees. State law provides that a later-dated proxy card
invalidates an earlier-dated card.\12\ Additionally, shareholders
voting by proxy are limited by Federal law in their choice of nominees
by Exchange Act Rule 14a-4(d)(1), the ``bona fide nominee rule,'' \13\
which provides that no proxy shall confer authority to vote for any
person to any office for which a ``bona fide nominee is not named in
the proxy statement.'' The term ``bona fide nominee'' under Rule 14a-
4(d) is a nominee who has ``consented to being named in the proxy
statement and to serve if elected.'' \14\ Thus, in an election contest,
one party cannot include the other party's nominees on its proxy card
without the other party's nominees' consent. In practice, such consent
is rarely provided.\15\ Therefore, shareholders voting by proxy in a
director election contest must choose between the dissident's or
registrant's proxy card. This effectively precludes such shareholders
from voting by proxy for a mix of director candidates from both sides'
slates in the contest.
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\9\ As used in this release, the term ``contested election''
refers to an election of directors where a registrant is soliciting
proxies in support of nominees and a person or group of persons is
soliciting proxies in support of director nominees other than the
registrant's nominees.
\10\ A duly nominated director candidate is a candidate whose
nomination satisfies the requirements of any applicable state or
foreign law provision and a registrant's governing documents as they
relate to director nominations.
\11\ The term ``dissident'' as used in this release refers to a
soliciting person other than the registrant who is soliciting
proxies in support of director nominees other than the registrant's
nominees.
\12\ See, e.g., Standard Power & Light Corp. v. Inv. Assocs., 51
A.2d 572, 608 (Del. 1947); Parshalle v. Roy, 567 A.2d 19, 23 (Del.
Ch. 1989). See also R. Franklin Balotti, et al., Delaware Law of
Corporations and Business Organizations, section 7.20 (3d ed. 2015)
(``Except in the case of irrevocable proxies, a subsequent proxy
revokes a former proxy. In determining whether a proxy is
subsequent, the date of execution controls.'').
\13\ 17 CFR 240.14a-4(d)(1).
\14\ 17 CFR 240.14a-4(d)(4).
\15\ Even if a nominee consents to being named on the other
party's proxy card, each party currently can decide whether to
include the other's nominees for strategic or other reasons. These
kinds of strategic decisions may impede shareholder voting options.
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Although the Commission attempted to address some aspects of this
problem by adopting the ``short slate rule'' in 1992, shareholders
voting by proxy still lack the ability to make selections based solely
on their preferences for particular director candidates as they could
were they voting in person at a shareholder meeting.\16\ For years,
shareholders and their advocates have expressed concerns arising from
being unable to choose a mix of dissident and registrant nominees when
voting by proxy, and support for universal proxy has grown over
time.\17\
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\16\ 17 CFR 240.14a-4(d)(4). The short slate rule permits a
dissident in certain circumstances to solicit votes for some of the
registrant's nominees through the use of its proxy card where the
dissident is not nominating enough director candidates to gain
majority control of the board in the contest, thereby allowing
shareholders using the dissident's proxy card to vote for a
particular split ticket combination. However, as described in
greater detail in Section I.B of the Proposing Release, shareholders
voting on the dissident's proxy card are still limited to voting for
those registrant nominees selected by the dissident, rather than any
registrant nominee of their choice.
\17\ See Section I.C of the Proposing Release and infra Section
II.A.2 and II.A.3.
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In response to the concerns outlined above, the Commission proposed
rule amendments in 2016 to mandate the use of universal proxy cards in
contested director elections to allow shareholders to vote by proxy in
the same manner as they could do if attending a shareholder meeting
(``Proposed Rules'').\18\ In 2021,
[[Page 68332]]
the Commission reopened the comment period for the Proposing Release to
permit commenters to further analyze and comment upon the Proposed
Rules in light of developments since the publication of the Proposed
Rules.\19\ We received many comment letters in response to the
Proposing Release and the Reopening Release.\20\ After taking into
consideration these public comments, which were generally supportive of
the rulemaking, and developments in proxy contests since the Proposing
Release, we are adopting the Proposed Rules substantially as proposed,
with the exception of an increase in the minimum solicitation
requirement (described in detail in Section II.D below) and other minor
changes.
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\18\ The Proposed Rules were set forth in a release published in
the Federal Register on November 10, 2016 (81 FR 79122) (Release No.
34-79164) (``Proposing Release''), and the related comment period
ended on January 9, 2017.
\19\ This reopening of the comment period was set out in a
release published in the Federal Register on May 6, 2021 (86 FR
24364) (Release No. 34-91603) (``Reopening Release''). The comment
period ended on June 7, 2021.
\20\ Unless otherwise indicated, comment letters cited in this
release are comment letters received in response to the Proposing
Release and the Reopening Release, which are available at <a href="https://www.sec.gov/comments/s7-24-16/s72416.htm">https://www.sec.gov/comments/s7-24-16/s72416.htm</a>.
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B. Overview of Final Amendments
The new rules will require use of a ``universal proxy card'' in all
non-exempt director election contests. This universal proxy card must
include the names of all duly nominated director candidates presented
for election by any party and for whom proxies are solicited. Requiring
a universal proxy card in non-exempt director election contests is the
most effective means to ensure that shareholders voting by proxy are
able to elect directors in a manner consistent with their right to vote
in person at a shareholder meeting.\21\
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\21\ Congress intended our proxy rules to effectuate
shareholders' ability to fully and consistently exercise the ``fair
corporate suffrage'' available to them under state corporate law.
See H. R. Rep. No. 73-1383, 2d Sess., at 13 (1934). See also Mills
v. Elec. Auto-Lite Co., 396 U.S. 375, 381 (1970); J. I. Case Co. v.
Borak, 377 U.S. 426, 431 (1964).
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The amendments that we are adopting in this document will not apply
to investment companies registered under Section 8 of the Investment
Company Act of 1940 or business development companies as defined by
Section 2(a)(48) of the Investment Company Act of 1940 (``BDCs,'' and
together with registered investment companies, ``funds'').\22\ Funds
were not covered by the Proposed Rules. In light of developments since
2016, as well as the comments that we have received, we believe further
consideration of the application of a universal proxy mandate to some
or all funds before deciding how to proceed with respect to funds is
appropriate.
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\22\ 15 U.S.C. 80a-8; 15 U.S.C. 80a-2(a)(48). BDCs are a
category of closed-end investment companies that are not registered
under the Investment Company Act, but are subject to certain
provisions of the Investment Company Act. See Proposing Release at
n.178.
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II. Discussion of Final Amendments
We are adopting the Proposed Rules largely as proposed to better
align the Federal proxy rules with a shareholder's ability to vote in
person at a shareholder meeting. The final rules:
<bullet> Require the use of a universal proxy card by all
participants in a non-exempt director election contest. The universal
proxy card must include the names of both registrant and dissident
nominees, along with certain other shareholder nominees included as a
result of proxy access;
<bullet> Expand the determination of a ``bona fide nominee'' to
include a person who consents to being named in any proxy statement for
a registrant's next shareholder meeting for the election of directors;
<bullet> Require dissidents to provide registrants with notice of
their intent to solicit proxies and to provide the names of their
nominees no later than 60 calendar days before the anniversary of the
previous year's annual meeting;
<bullet> Require registrants to notify dissidents of the names of
the registrants' nominees no later than 50 calendar days before the
anniversary of the previous year's annual meeting;
<bullet> Require dissidents to file their definitive proxy
statement by the later of 25 calendar days before the shareholder
meeting or five calendar days after the registrant files its definitive
proxy statement;
<bullet> Require each side in a proxy contest to refer shareholders
to the other party's proxy statement for information about the other
party's nominees and refer shareholders to the Commission's website to
access the other side's proxy statement free of charge;
<bullet> Require that dissidents solicit the holders of shares
representing at least 67% of the voting power of the shares entitled to
vote at the meeting; and
<bullet> Establish presentation and formatting requirements for
universal proxy cards that ensure that each party's nominees are
presented in a clear, neutral manner.
We also are adopting, as proposed, changes to the form of proxy and
proxy statement disclosure requirements applicable to all director
elections. These amendments:
<bullet> Require proxy cards to include an ``against'' voting
option in director elections, when there is a legal effect \23\ to a
vote against a director nominee;
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\23\ State law and the registrant's governing documents
determine the voting standard for director elections, with director
nominees generally elected under either a plurality voting standard
or majority voting standard. They also determine whether an
``against'' voting option has a legal effect under the applicable
voting standard. For example, under a plurality voting standard, a
director nominee can be elected to the board with a single vote in
favor of his or her election, with the ``withhold or ``against''
votes having no impact on the outcome of the election.
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<bullet> Require that the proxy card provide shareholders with the
ability to ``abstain'' in a director election where a majority voting
standard applies; and
<bullet> Require proxy statement disclosure about the effect of a
``withhold'' vote in an election of directors.
We discuss the final amendments in greater detail below.\24\
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\24\ In addition to the substantive final amendments, we are
making technical amendments to: (i) Rule 14a-3 (punctuational and
related minor edits); and (ii) Rule 14a-4(b) and Note 3 to Rule 14a-
6(a) (removal of obsolete references to vacated Rule 14a-11).
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A. Mandatory Use of Universal Proxies in Non-Exempt Solicitations in
Contested Elections
1. Proposed Rules
The Commission proposed to require the use of universal proxy cards
in all non-exempt solicitations in contested director elections except
those involving funds.\25\ The Commission proposed that each side's
proxy card in a contested director election must include the names of
all nominees of both the dissident and registrant and the nominees of
certain shareholders (i.e., proxy access nominees). In proposing the
mandatory use of universal proxy cards in these kinds of contests, the
Commission was guided by the principle that shareholders should enjoy
the same ability to vote on a proxy card as they would have if
attending a shareholder meeting in person.
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\25\ See proposed Rule 14a-19(e).
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2. Comments Received
A number of commenters expressed views on whether the use of a
universal proxy card should be voluntary or mandatory. Most favored the
mandatory approach because it more effectively replicates the voting
options available through in-person voting at a shareholder
meeting.\26\ Some
[[Page 68333]]
commenters favored a mandatory system to avoid logistical issues that
would arise in the absence of such a system, and several commenters
cited the potential for shareholder confusion arising from a voluntary
approach.\27\ Several commenters noted that an optional system would
promote gamesmanship, and would lead to the use of a universal proxy
card as a tactical strategy to benefit a particular participant in a
contest.\28\ Another noted that proxy contest participants would have
little incentive to use a universal proxy card under an optional
system.\29\ One commenter advocated a mandatory system that registrants
could opt out of with approval of a majority of shareholders.\30\
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\26\ See letters dated Dec. 28, 2016, Sep. 7, 2017, Nov. 8,
2018, and Jun. 2, 2021 from Council of Institutional Investors
(``CII''); letters dated Jan. 4, 2017 and Jun. 7, 2021 from Ohio
Public Employees Retirement System (``OPERS''); letter dated Jan. 9,
2017 from Colorado Public Employees Retirement Association
(``Colorado PERA''); letter dated Jan. 9, 2017 from Trian Fund
Management, L.P. (``Trian''); letter dated Jan. 9, 2017 from Ad Hoc
Coalition of Institutional Investors in Closed-End Funds (``Ad Hoc
Coalition''); letter dated Jan. 9, 2017 from CFA Institute (``CFA
Institute''); letters dated Jan. 11, 2017 and Jun. 16, 2021 from
Securities Industry and Financial Markets Association (``SIFMA'');
letter dated Jan. 11, 2017 from State Board of Administration of
Florida (``SBA-FL''); letter dated Jan. 9, 2017 from United
Brotherhood of Carpenters and Joiners of America (``Carpenters'');
letter dated Jan. 9, 2017 from Office of the Comptroller, State of
New York (``NY Comptroller''); letter dated Jan. 9, 2017 from
California State Teachers' Retirement System (``CalSTRS''); letter
dated Jan. 6, 2017 from American Federation of State, County and
Municipal Employees (``AFSCME''); letters dated Dec. 19, 2016 and
Jun. 7, 2021 from Investment Company Institute (``ICI''); letter
dated Jun. 7, 2021 from Institutional Shareholder Services Inc.
(``ISS''); letter dated Jun. 4, 2021 from Elliott Investment
Management L.P. (``Elliott''); letter dated Jun. 3, 2021 from
Canadian Coalition for Good Governance (``CCGG''); letter dated Jun.
4, 2021 from Domini Impact Investment LLC (``Domini''); letters
dated Jan. 9, 2017 and Jun. 7, 2021 from Better Markets (``BM'');
letter dated Jun. 7, 2021 from Mediant, Inc. (``Mediant''); letter
dated Jun. 28, 2021 from Principles for Responsible Investment
(``PRI''); letter dated Jun. 7, 2021 from 41 Signatories with AUM of
$309,413,549,298; letter dated Jun. 7, 2021 from Professor Scott
Hirst, Boston University School of Law (``Prof. Hirst''), letter
dated Jun. 15, 2021 from Matthew P. Lawlor (``M. Lawlor''); letter
dated Jun. 17, 2021 from Chris Fowle (``C. Fowle''); letter dated
Apr. 19, 2021 from Undisclosed Majority Shareholder in Numerous
Ventures (``Anonymous 1''); letter dated Dec. 8, 2017 from Eamonn
Burke (``E. Burke''). See also Recommendation of the SEC Investor
Advisory Committee (IAC): Proxy Plumbing, dated Sep. 5, 2019,
available at <a href="https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-recommendation-proxy-plumbing.pdf">https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-recommendation-proxy-plumbing.pdf</a> (``IAC
Report''). The IAC Report indicated support for the mandatory
universal proxy system proposed, while noting that a minority of
Committee members favored making universal proxy voluntary rather
than mandatory. Previously, as discussed in the Proposing Release,
in 2013, the IAC recommended that we explore revising our proxy
rules to provide proxy contestants with the option to use a
universal proxy card in connection with short slate director
nominations. Exchange Act Section 39(g)(2) requires the Commission
to ``promptly issue a public statement--(A) assessing the finding or
recommendation of the [Investor Advisory] Committee; and (B)
disclosing the action, if any, the Commission intends to take with
respect to the finding or recommendation.'' We have carefully
considered the recommendations of the IAC on the use of universal
proxy cards in connection with this rulemaking.
\27\ See letters from CalSTRS; SIFMA; ISS.
\28\ See letters from SIFMA; CCGG.
\29\ See letter dated Jan. 9, 2017 from Fidelity Investments
(``Fidelity'').
\30\ See letter from Prof. Hirst.
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Several commenters favored making the use of a universal proxy card
optional. One noted that this would allow the Commission to study the
effect of its use before making it mandatory.\31\ Another advocated
that registrants be able to opt out of a universal proxy requirement
through a board vote.\32\ Two commenters argued that shareholders
should have to demonstrate a continued and significant ownership stake
in a registrant in order to trigger the use of a universal proxy
card.\33\
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\31\ See letter dated Jan. 4, 2017 from Davis Polk & Wardwell
LLP (``Davis Polk'').
\32\ See letter dated Jun. 7, 2021 from Sidley Austin LLP
(``Sidley'').
\33\ See letter from Sidley and letters dated Jan. 10, 2017 and
Jun. 7, 2021 from Society for Corporate Governance (``Society'')
(comparing universal proxy to 17 CFR 240.14a-8 (Rule 14a-8) and
vacated 17 CFR 240.14a-11 (Rule 14a-11)).
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Some commenters did not support the use of a universal proxy card.
Some argued that a mandate would increase the number of proxy contests
and thereby expose more registrants to costly distraction or increased
influence of short-term activist investors at the expense of other
investors.\34\ Two of these commenters argued that the mandatory use of
universal proxies would ``encourage balkanization'' of the boards of
public companies by facilitating ``mix and match'' voting between
nominees from different slates of director candidates, ultimately
providing a disincentive for companies to go public in the United
States.\35\ Similarly, another commenter claimed that the ``mix and
match'' voting enabled by universal proxy cards could result in
suboptimal board compositions in which board members lack complementary
skill sets.\36\ Various commenters who opposed the adoption of a
universal proxy requirement contended that there was not a compelling
reason to change the existing system \37\ and noted that adoption of
universal proxy could have unintended consequences, such as shareholder
confusion and more frequent disqualification of defective ballots.\38\
Several commenters argued that a universal proxy requirement would
increase the influence of proxy advisory firms.\39\ One commenter
opposed the proposed amendments, suggesting that the Proposed Rules
``would likely exceed the Commission's authority under the Exchange
Act'' and arguing that a universal proxy requirement represents a
``substantial change'' in policy that the Commission had not justified
under the Administrative Procedure Act.\40\ That commenter noted that
if the Commission proceeds with the rulemaking, it should adopt an
optional approach rather than a mandatory one.
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\34\ See letters dated Jan. 9, 2017 and Jun. 7, 2021 from Center
for Capital Markets Competitiveness, U.S. Chamber of Commerce
(``CCMC''); letter dated Jan. 9, 2017 from Corporate Governance
Coalition for Investor Value (``CGCIV''); letter dated Apr. 30, 2021
from International Bancshares Corporation (``IBC''); letters from
Society. The letters from CCMC and CGCIV also objected to the
mandatory use of a universal proxy on First Amendment grounds. See
Section II.F below for additional detail.
\35\ See letters from CCMC; CGCIV.
\36\ See letter dated Jan. 3, 2017 from National Association of
Corporate Directors (``NACD'').
\37\ See, e.g., letters from Davis Polk; CCMC; CGCIV.
\38\ See, e.g., letters from CCMC; CGCIV.
\39\ See letters from Sidley; CCMC; CGCIV.
\40\ See letter from Davis Polk.
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Another commenter supported mandated universal proxy for operating
companies, but expressly opposed its use for funds, in part due to the
additional protections afforded by the Investment Company Act of
1940.\41\
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\41\ See letters from ICI.
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3. Final Amendments
We are adopting Rule 14a-19(e), as proposed, to require the
mandatory use of universal proxy cards by operating companies in all
non-exempt director election contests. A mandatory system better
protects the shareholder voting franchise, while avoiding the confusion
that could result from a voluntary universal proxy system, where one
party or the other strategically uses universal proxy only when they
perceive it to be to their advantage. The logistics of how votes are
cast through the proxy voting system should not affect the substantive
voting options of shareholders, and therefore potential outcomes of the
vote. The ability of shareholders to fully exercise their right under
state law to elect their preferred candidates through the proxy process
represents a key reason to adopt the rule amendments. In particular, we
note that under existing rules, institutional and other large
shareholders can split their vote between registrant and dissident
candidates--albeit with effort and expense--because they can arrange
for a representative to attend the shareholder meeting and vote in
person. Retail and other smaller investors, however, are unlikely to
have the resources or sophistication to be able to do so.\42\ The
[[Page 68334]]
mandatory use of universal proxy cards would address this disparity and
remove this impediment to retail investors' ability to exercise their
right to vote to the full extent allowed by state law.
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\42\ While an increase in virtual meetings and corresponding
technological advances may theoretically make it easier for certain
retail investors to attend and vote at meetings, most shareholders
(including many retail investors) hold their shares in ``street
name'' and, as such, would need to obtain a legal proxy from the
securities intermediaries that hold their shares (such as a broker-
dealer) in advance to vote at a virtual shareholder meeting, as they
would need to do to vote at the meeting in person. We therefore
expect that the vast majority of retail investors will continue to
vote by proxy and will continue to rely on the ability to do so.
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Use of a universal proxy card should not be dependent on the
potentially self-interested considerations of the contesting parties,
the registrant's board of directors, or any controlling shareholders,
as it would be under an optional system, or one where a registrant
(through, for example, a board or shareholder vote) could opt out of a
universal proxy requirement. Mandating a universal proxy is a more
efficient and effective means to achieve the objective of allowing
shareholders to elect their preferred candidates through the proxy
process. Similarly, a universal proxy requirement should not be
dependent on the size of a dissident's equity stake in a registrant or
the period of time it has maintained its equity position. The purpose
of requiring a universal proxy is to allow shareholders to exercise
their right to vote for directors in the same manner as they could vote
through in-person attendance at a shareholder meeting. Conditioning a
universal proxy mandate on a minimum ownership threshold or holding
period, as certain commenters advocated, would be contrary to this
purpose. Conditioning a universal proxy mandate in such manner would
inappropriately subject shareholders' ability to vote in director
election contests through the proxy process to conditions that are not
imposed upon shareholders' ability to vote if attending a shareholder
meeting.
In response to commenters arguing for an optional universal proxy
system, an optional system without additional accompanying rule changes
would raise problems not presented by a mandatory requirement, such as
issues related to how and when shareholders presented with a universal
proxy card would access information about the other party's nominees in
order to make an informed voting decision. Mandating a universal proxy
in all non-exempt election contests is less likely to cause shareholder
confusion than an optional system which would operate differently,
depending on whether one or both sides elected to opt in or opt out of
universal proxy. Finally, in response to the commenter who advocated an
optional system to allow us to study the impact of universal proxy, we
note that we already have experience with optional universal proxy. Our
existing proxy rules already effectively allow optional universal proxy
for registrants because a registrant can require dissident nominees to
consent to being named on the registrant's proxy card as part of an
advance notice bylaw provision and associated director and officer
(D&O) questionnaire, a tactic used by registrants on multiple
occasions.\43\ This form of optional universal proxy, however, falls
well short of meeting the objectives of our rulemaking. Use of this
tactic creates an unfair advantage for registrants, who are then able
to place dissident nominees on the registrant's proxy card without
granting dissidents the same ability to place registrant nominees on
the dissident's cards. Further, use of universal proxy cards and the
ability of shareholders to select their preferred mix of nominees would
exist at the sole discretion of the registrant and would be subject to
management's self-interest.
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\43\ For example, both the dissident group and the registrant
used universal proxy cards at EQT Corporation's 2019 Annual Meeting.
See DEFC14A filed May 20, 2019 by dissidents and DEFC14A filed May
22, 2019 filed by EQT Corp. The registrant but not the dissident
group used a universal proxy card at Sandridge Energy's 2018 Annual
Meeting. See DEFC14A filed May 10, 2018 by Sandridge Energy, Inc.
and DEFC14A filed May 11, 2018 by dissidents.
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As discussed in Section IV.C.4 below, it is unclear whether the
rule changes we are adopting will increase or decrease the number of
proxy contests. Similarly, it is unclear whether they will increase the
influence, directly or indirectly, of dissidents, including short-term
activist investors, as some commenters predicted. Under current rules,
a shareholder may be forced to make an ``all or nothing'' choice
between one or the other soliciting party's proxy card. However, a
universal proxy card may result in increased split votes where
dissidents do not gain majority control of a board of directors in one
election. We view the arguments that mandatory universal proxy will
lead to distraction for registrants, hamstring directors, and lead to
greater ``balkanization'' of boards of directors as unpersuasive. Even
with the use of universal proxy cards, registrants and dissidents will
retain the same ability to advocate the election of their nominees and
raise concerns about negative boardroom dynamics that they have today.
Shareholders will continue to have the ability to evaluate these
concerns, including potential ``balkanization'' of the board, when they
make their voting decisions. The rule amendments we are adopting are
intended to improve the mechanics of the proxy voting process, not
influence its outcome. Further, it is not apparent that allowing
shareholders to more easily base their vote on individual and
collective characteristics of board candidates, rather than forcing an
``either or'' choice between dissident or registrant nominees, would
negatively impact registrants or boardroom dynamics. We are also
unaware of such arguments about mix and match voting being made in the
context of in-person voting, where such a choice is already possible
for larger shareholders and institutions who expend the effort to vote
through an in-person representative. Lastly, even if the use of
universal proxy will lead to greater frequency of ``split'' boards, it
is unclear whether that effect will necessarily lead to detrimental
changes in board dynamics, with some viewing a diversity of viewpoints
among board members as a positive development.\44\ The mandatory use of
universal proxy cards will permit shareholders to choose their
preferred mix of directors, taking into consideration both
complementary skill sets and other board dynamics.
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\44\ See infra note 295 and accompanying text.
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For the same reason, we do not believe the universal proxy
requirement we are adopting will result in promoting the interests of
special interest groups and short term activists, at the expense of
shareholders generally. Even with the use of universal proxy cards, a
dissident must ultimately persuade shareholders that its agenda is in
their best interests in order to successfully elect its nominees.
Moreover, if elected to the board of directors, such dissident nominees
will be subject to the same state-law fiduciary duties to the
corporation and, and by extension, all of its shareholders as all other
directors, many of whom are also commonly affiliated with other
entities.
Similarly, it is unclear to us how these rule amendments, which
improve the mechanics of the proxy process, would increase the
influence of proxy advisory firms,\45\ also referred to as ``proxy
voting advice businesses.'' These businesses provide voting
recommendations to their clients, mainly institutional investors and
investment advisers, who then may consider such recommendations as part
of their decision-making process. The
[[Page 68335]]
client, not the proxy voting advice business, retains the legal right
to vote and makes the ultimate decision on how it wishes to exercise
that right in the election.\46\ In addition, investment advisers and
other institutional investors using these recommendations are also
subject to fiduciary duties and other legal obligations with respect to
their proxy voting obligations. This would not change if universal
proxy cards are used. Rather, the rule amendments we are adopting
simply make it easier for the shareholder to vote for the nominees that
it wants, regardless of whether they are from the dissident's slate or
the registrant's slate.
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\45\ Several commenters suggested that the use of universal
proxies could increase the influence of proxy advisory firms. See
letters from Sidley; CCMC; CGCIV.
\46\ To the extent a proxy voting advice business has an
interest in the director contest, such as a material relationship
with the dissident or registrant, the Federal proxy rules require
the proxy voting advice business to disclose this conflict of
interest, which may mitigate concerns about the objectivity of the
advice.
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In response to the commenter questioning our authority to adopt a
universal proxy requirement,\47\ the final rules are well within the
plain language of the authority granted by Congress to the Commission
under Section 14(a). The fact that the Commission in the past enacted
measures that did not provide for universal proxies in no way suggests
that the Commission lacked the statutory authority to do so.
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\47\ See letter from Davis Polk.
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In our view, the suggestion that the Commission has not provided a
sufficient justification for these rules is unfounded. We are adopting
these rules now because they best effectuate the Commission's goal of
having proxy voting mirror the choices that a shareholder has in person
at a meeting. As noted above, the Commission has long understood the
limitations that the proxy rules place on a shareholder's ability to
select its preferred mix of registrant and dissident nominees.\48\ As
discussed below, the Commission adopted the short slate rule in 1992 in
an attempt to address this problem. Yet, the short slate rule has not
resolved the problem, with its conditions limiting the full exercise of
shareholders' ability to vote for director nominees through the proxy
process. Further, based on the Commission staff's experience,
substantial confusion exists regarding the use of the short slate rule,
including by dissidents attempting to use it.
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\48\ See, e.g., Short Slate Rule Revised Proposing Release and
Short Slate Rule Adopting Release.
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For many years, we have received comments from shareholders and
their advocates expressing strong concerns about the limitations on
their rights when voting by proxy.\49\ Many commenters on the Proposing
Release reiterated those concerns and supported a mandatory universal
proxy system to address them.\50\ Since the issuance of the Proposing
Release in 2016, the call for universal proxy cards has persisted.\51\
Further, voluntary use of universal proxy cards in director contests
has increased since 2016,\52\ along with an increased presence of
provisions in registrants' governing documents (such as advance notice
bylaws) designed to facilitate the use of universal proxy cards
including by requiring dissidents to provide consents for their
nominees to be listed in the registrant's proxy materials. These
provisions, however, do not typically provide dissidents with similar
consents to include the registrant's nominees and, as discussed above,
do not adequately address many shareholders' concerns. The concerns
described above are valid and can be addressed through the universal
proxy requirement we are adopting in this document. The fact that we
previously took other steps to try to address some of these same
concerns does not preclude us from making the changes now that will
address the current voting limitations. Additionally, we have carefully
considered the economic effects of the rule, including the costs and
benefits to shareholders, in Section IV.C below.
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\49\ See Section I.C of the Proposing Release.
\50\ See, e.g., letters from CII; OPERS; Trian, CalSTRS;
Elliott; Domini; PRI.
\51\ See, e.g., IAC Report; letter dated Aug. 6, 2020 from
Universal Proxy Working Group (``UPWG'').
\52\ See supra note 43 and accompanying text.
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We recognize that whether proxy contests become more frequent may
depend in part on whether the rule amendments increase a dissident's
chances of electing some or all of its nominees. We discuss the costs
associated with proxy contests in Section IV.C below. However, assuming
these rule amendments result in more frequent proxy contests, the
ultimate decision on who is elected to the board of directors rests
with shareholders. In this sense, the mere fact that a dissident mounts
a proxy contest does not necessarily mean it will be successful unless
shareholders are persuaded that its platform will benefit them and the
registrant. Again, these decisions at the heart of corporate governance
are best left to shareholders.
The additional disclosure and presentation provisions adopted in
this document and described in greater detail below will help to avoid
some of the concerns of those who do not favor mandatory universal
proxies. For example, participants in a contested election will not be
required to include information about the opposing side's nominees in
their own proxy statement. Rather, each side's proxy statement must
direct shareholders to the opposing side's proxy statement for
information about that participant's nominees.\53\ Each universal proxy
card will be subject to the formatting and presentation requirements in
the revised rules we adopt in this document. These requirements are
intended to ensure that each side's nominees are grouped together and
clearly identified as such, and presented in a fair and impartial
manner.\54\ In addition, each universal proxy card must disclose the
treatment of proxy cards containing over-votes and under-votes.\55\
These disclosure and presentation mandates in our rule amendments are
intended to avoid shareholder confusion that could result in an
increase in defective ballots and shareholder disenfranchisement. As
shareholders become more familiar with universal proxy cards in
director election contests, any initial confusion will likely
abate.\56\ While we are mindful of the arguments that mandated
universal proxy could have unintended consequences with respect to the
mechanics of voting, the safeguards described above are intended to
reduce that possibility.
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\53\ See newly-adopted Item 7(f) of Schedule 14A.
\54\ See Rule 14a-19(e).
\55\ See Rule 14a-19(e)(7). By ``under-votes,'' we mean
instances in which a shareholder returns a proxy card in a director
election contest but does not exercise a vote with respect to all of
the board seats up for election at the relevant shareholder meeting.
\56\ Current proxy rules relating to split-ticket voting in a
director election contest may also be confusing to shareholders.
Rule 14a-4(d)(4) permits a dissident to ``round out'' the slate of
nominees listed on its proxy card under specified circumstances.
However, Rule 14a-4(d)(4)(ii) prevents a dissident from directly
naming a director nominee whom the dissident supports. (See Section
II.I below.) The staff has observed confusing descriptions in proxy
statements and proxy cards as a result of this rule. We believe that
shareholder confusion will decrease, not increase, as a result of
the amendments we are adopting.
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B. Dissident's Notice of Intent To Solicit Proxies in Support of
Nominees Other Than the Registrant's Nominees
1. Proposed Rules
The Commission proposed to require the dissident to provide notice
to the registrant of the names of the dissident's nominees no later
than 60 calendar days prior to the anniversary of the previous year's
annual meeting date.\57\ The proposed notice had to include a statement
that the dissident intends to solicit the specified percentage of the
voting power of the shares entitled to vote.\58\
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\57\ See proposed Rule 14a-19(a) and (b).
\58\ See proposed Rule 14a-19(b)(3).
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[[Page 68336]]
2. Comments Received
Several commenters discussed the requirement that dissidents
provide the registrant with the names of its nominees no later than 60
calendar days prior to the anniversary of the prior year's annual
meeting date.
Many commenters supported the requirement as proposed.\59\ Two
commenters expressed concern that such requirement could have a
chilling effect on any ongoing settlement discussions between the
parties.\60\ To avoid this, one commenter suggested adopting an
exception that would temporarily exempt the dissident from the proposed
notice requirement while settlement discussions between the parties are
taking place.\61\
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\59\ See letters from CII; Colorado PERA; CalSTRS; CFA
Institute; SBA-FL; Carpenters; NY Comptroller; AFSCME.
\60\ See letters dated Jan. 9, 2017 and Jun. 7, 2021 from Olshan
Frome Wolosky LLP (``Olshan''); Society.
\61\ See letters from Olshan.
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Other commenters expressed concern that the proposed deadline would
compel the board of directors to vet nominees on an accelerated
timeframe, to the detriment of shareholders at large, where a
registrant's advance notice bylaw provision required dissidents to
provide notice of their nominees before the 60-day period mandated in
our proposed rules.\62\ One commenter expressed concern that where a
registrant has an advance notice deadline that falls after the
dissident's 60 calendar day notice deadline (e.g., an advance notice
deadline of 45 days prior to the anniversary of the prior year's
meeting), the proposed notice requirement would give the registrant an
unfair advantage in preparing for an activist campaign, since the
dissident would have to reveal the identities of its nominees before it
would be required to do so under the registrant's own governing
documents.\63\ This commenter suggested adopting an exception to the
proposed notice requirement applicable to registrants that have advance
notice bylaw provisions, such that the dissident's notice deadline
would be the later of the currently proposed deadline or the
registrant's own advance notice deadline.\64\
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\62\ See letters from CCMC; CGCIV; Society; IBC; Sidley.
\63\ See letters from Olshan.
\64\ See letters from Olshan.
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Several commenters supported allowing dissidents to launch a
contest after the 60 calendar day deadline, as they could under
existing rules, without the ability to use a universal proxy card.\65\
Finally, one commenter suggested that the dissident's notice be made
publicly available.\66\
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\65\ See letters from CII; SBA-FL; Carpenters; NY Comptroller;
CalSTRS; Colorado PERA; AFSCME.
\66\ See letter from Fidelity (arguing that such practice could
serve as a means for investors who engage in securities lending to
identify a potential contest before the record date for a meeting,
thereby providing them with the ability to recall loaned shares).
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3. Final Amendments
We are adopting, as proposed, the requirement that a dissident
provide the registrant with the names of the nominees for whom it
intends to solicit proxies no later than 60 calendar days before the
anniversary of the previous year's annual meeting date.\67\ If the
registrant did not hold an annual meeting during the previous year, or
if the date of the meeting has changed by more than 30 calendar days
from the previous year, Rule 14a-19(b)(1), as adopted, requires that
the dissident provide notice by the later of 60 calendar days prior to
the date of the annual meeting or the tenth calendar day following the
day on which public announcement of the date of the annual meeting is
first made by the registrant. Rule 14a-19 requires a dissident to
indicate its intent to comply with the minimum solicitation threshold
in the adopted rules by including in its notice a statement that it
intends to solicit the holders of shares representing at least 67% of
the voting power of shares entitled to vote on the election of
directors.\68\ Rule 14a-19 does not require a dissident to provide this
notice to the registrant if the information required in the notice has
already been provided in a preliminary or definitive proxy statement
filed by the dissident by the deadline imposed by the rule. Rule 14a-19
also does not require a dissident to file the notice with the
Commission or otherwise make the notice publicly available.
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\67\ The rule also mandates that a dissident promptly notify the
registrant if any change occurs with respect to its intent to
solicit proxies in support of its director nominees. See Rule 14a-
19(c).
\68\ See Rule 14a-19(b)(3). See also, infra Section II.D for a
discussion of the minimum solicitation requirement.
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In our view, the Rule 14a-19(b) notice requirement is necessary to
provide a definitive date by which the parties in a contested election
will know that use of universal proxies has been triggered and to
provide the parties with a definitive date by which they will have the
names of all nominees to compile a universal proxy card. The 60-day
deadline provides a definitive date far enough in advance of the
meeting to give the parties sufficient time to prepare a proxy
statement and form of proxy in accordance with the universal proxy
requirements.\69\ In addition, 60 calendar days before the anniversary
of the previous year's annual meeting date does not represent a
significant additional burden for most dissidents. The deadline that we
are adopting for the notice is 30 calendar days later than the deadline
found in most advance notice bylaws, which typically require notice to
be delivered no earlier than 120 days and no later than 90 days prior
to the first anniversary of the prior year's annual meeting.\70\ Based
on a review of the filings for the 101 contested elections initiated
from 2017-2020, we estimate that dissidents provided some form of
notice of their intent to nominate candidates for election to the board
of directors 60 or more calendar days prior to the first anniversary of
the prior year's annual meeting in 90% of the contests.\71\
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\69\ For many registrants, the record date for determining
shareholders entitled to notice of the meeting cannot be more than
60 days before the date of such meeting. See, e.g., Del. Code Ann.
tit. 8, section 213. Thus, as a practical matter, registrants very
rarely file their definitive proxy statement prior to such date.
\70\ See Sullivan & Cromwell LLP, Proxy Access Bylaw
Developments and Trends, at 4 (Aug. 18, 2015), available at <a href="https://www.sullcrom.com/siteFiles/Publications/SC_Publication_Proxy_Access_Bylaw_Developments_and_Trends.pdf">https://www.sullcrom.com/siteFiles/Publications/SC_Publication_Proxy_Access_Bylaw_Developments_and_Trends.pdf</a> (``S&C
2015 Report''); Wachtell, Lipton, Rosen & Katz, Nominating and
Corporate Governance Committee Guide, at 22 (2015), available at
<a href="http://www.wlrk.com/files/2015/NominatingandCorporateGovernanceCommitteeGuide2015.pdf">http://www.wlrk.com/files/2015/NominatingandCorporateGovernanceCommitteeGuide2015.pdf</a>. See also
Arthur Fleischer, Jr., Gail Weinstein and Scott B. Luftglass,
Takeover Defense: Mergers and Acquisitions (9th ed. 2020) (stating,
``As of December 31, 2020, over 98% of the S&P 500 firms had at
least a 60-day advance-notice requirement for board nominations and/
or shareholder proposals'').
\71\ The sample (``contested elections sample'') is based on
staff analysis of EDGAR filings for election contests with dissident
preliminary proxy statements filed in calendar years 2017 through
2020, other than election contests involving funds. The staff has
identified 101 proxy contests involving competing slates of director
nominees during this time period. For purposes of determining the
earliest date the dissident provided some form of notice of its
intent to nominate candidates for election to the board, staff
considered disclosure in the dissident's definitive additional
soliciting materials filed under Rule 14a-12, disclosure in
amendments to the dissident's Schedule 13D and disclosure in both
the registrant's and dissident's proxy statements.
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A dissident's obligation to comply with the notice requirement is
in addition to its obligation to comply with any applicable advance
notice provision in the registrant's governing documents. Rule 14a-19's
notice requirement is a minimum period that does not override or
supersede a longer period established in the registrant's governing
documents.\72\ In most cases, Rule 14a-
[[Page 68337]]
19(b) will not meaningfully impact dissidents because, as discussed
above, most registrants' advance notice provisions impose an earlier
deadline to provide notice of a dissident's nominees.\73\ In those
cases, the new requirement does not affect timing considerations, as
dissidents would already have signaled to registrants their intent to
launch a contest pursuant to the registrants' bylaw requirements.
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\72\ Several commenters expressed concern that the proposed 60-
day deadline would shorten the notice that registrants receive of
impending proxy contests. See letters from CCMC; CGCIV; Society;
IBC. To clarify and address these concerns, where an advance notice
bylaw provision requires dissidents to provide earlier notice of its
nominees, that longer time period controls. Rule 14a-19(b)
establishes a minimum, not a maximum, notice period.
\73\ According to a law firm report, 99% of the S&P 500 and 95%
of the Russell 3000 had advance notice provisions at 2020 year-end.
See WilmerHale, 2021 M&A Report, at 6 (2021), available at <a href="https://www.wilmerhale.com/en/insights/publications/2021-manda-report">https://www.wilmerhale.com/en/insights/publications/2021-manda-report</a>
(citing <a href="http://www.SharkRepellent.net">www.SharkRepellent.net</a>) (``WilmerHale M&A Report'').
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We acknowledge that where the registrant does not have an advance
notice provision in its governing documents, or has such a provision
requiring less than 60 days' advance notice, Rule 14a-19(b) imposes an
additional obligation. Such late-developing contests are rare.\74\ The
Rule 14a-19(b) 60-day notice requirement is designed to ensure the
orderly conduct of proxy contests under the new universal proxy
framework and justifies the potential burden that may arise in the few
director contests at companies with no advance notice provision or a
provision requiring less than 60 days' advance notice.
---------------------------------------------------------------------------
\74\ Based on a review of the contested elections sample, see
supra note 71, the staff found that dissidents provided notice of
their intent to nominate director candidates fewer than 60 calendar
days prior to the shareholder meeting date in 10% of the contests.
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Despite some commenters' suggestions,\75\ we are not adopting
exceptions to the 60-day notice deadline imposed by new Rule 14a-19.
The universal proxy requirement we are adopting is designed to ensure
consistency and predictability in election contests; exceptions to the
60-day deadline would likely invite gamesmanship, create confusion, and
fundamentally undermine the goals of the rulemaking. As discussed
above, the orderly use of universal proxy cards in director election
contests requires timely notice to the registrant, with the 60-day
deadline in Rule 14a-19(b) establishing a baseline for such notice.\76\
Exceptions to this deadline, or requiring less than 60 days' advance
notice, could lead to confusion among registrants, dissidents, and
shareholders, as well as increase the risk that universal proxy cards
and other proxy materials would not be delivered in a timely and
orderly manner. Finally, in response to the commenters who supported
allowing contests to take place after the 60-day deadline,\77\ we would
note that while dissidents who are unable to meet the 60-day notice
deadline would be prevented from conducting an election contest under
the rule amendments we are adopting,\78\ such dissidents would not be
prevented from taking other actions to attempt to effectuate changes to
the board, such as initiating a ``vote no'' campaign, conducting an
exempt solicitation, or calling a special meeting (to the extent
permitted under the registrant's bylaws) to remove existing directors
and appoint their own nominees to fill the vacancies.
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\75\ See, in particular, letters from Olshan.
\76\ Further, as previously noted, most registrants require
advance notice under their governing documents far earlier than the
Rule 14a-19(b) notice requirement.
\77\ See supra note 65 and accompanying text.
\78\ In our view, this is appropriate when balanced against the
goals of the rulemaking and the necessity of the notice period for
the orderly solicitation process under a mandatory universal proxy
system.
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The Rule 14a-19(b) notice requirement should not deter settlements
between dissidents and registrants. Under current market practice,
settlements often occur after the parties have filed their proxy
statements and even after they have begun soliciting. The new notice
requirement therefore is unlikely to affect this practice. Finally, the
purpose of the notice requirement is not served by requiring that the
notice be made public. However, in practice, each of the dissident and
the registrant is likely to publicize the sending of the notice
voluntarily.\79\
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\79\ For example, depending on the particular facts and
circumstances, the registrant may disclose the notice under its Form
8-K filing obligations. We acknowledge the commenter who suggested
that a publication requirement could be beneficial to those
investors who engage in securities lending, but we see securities
lenders' voting practices and record date disclosure practices as
outside the scope of this rulemaking, with any concerns more
appropriately addressed through a separate effort.
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C. Registrant's Notice of Its Nominees
1. Proposed Rules
Similar to the notice required from a dissident under Rule 14a-
19(b), the Commission proposed to require the registrant to notify the
dissident of the names of its nominees unless the names have already
been provided in a preliminary or definitive proxy statement filed by
the registrant.\80\ For the registrant, the Commission proposed that
the deadline for such notice be no later than 50 calendar days prior to
the anniversary of the previous year's annual meeting date.
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\80\ See proposed Rule 14a-19(d).
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2. Comments Received
Relatively few commenters addressed this proposed requirement. Two
commenters expressly supported the proposed notice requirement for
registrants.\81\ Three others argued in favor of establishing the same
notice deadline for registrants and dissidents.\82\ One of these
commenters believed the proposed later deadline for registrants would
give registrants a significant strategic advantage over dissidents in
the solicitation.\83\ This commenter suggested that registrants should
be required to publicly announce their nominees before dissidents are
required to provide notice of their nominees.\84\ By contrast, two
commenters opposed any notice requirement for registrants.\85\
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\81\ See letters from CalSTRS; CII.
\82\ See letters from Olshan; CFA Institute; Elliott.
\83\ See letters from Olshan.
\84\ See letters from Olshan.
\85\ See letters from Society; Sidley.
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3. Final Amendments
We are adopting Rule 14a-19(d) as proposed. As discussed in the
Proposing Release and as explained above in the context of the
dissident's notice deadline, notification deadlines are important in a
mandatory universal proxy system to provide the parties with a
definitive date by which they will have the names of all nominees to
compile a universal proxy card. Absent such a requirement for
registrants, dissidents could face an informational and timing
disadvantage in a universal proxy system. Registrants would know the
names of dissident nominees no later than 60 days prior to the
meeting,\86\ while dissidents would not necessarily know the names of
the registrant nominees until the registrant files its preliminary
proxy statement, which is only required to be filed at least 10
calendar days before the definitive proxy statement is first sent to
shareholders and may be filed much closer to the meeting date.\87\ In
that case, dissidents would have to wait to file their definitive proxy
statement and proxy card until the registrant filed its preliminary
proxy statement with the names of the registrant nominees.
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\86\ Because the deadline under proposed Rule 14a-19(b)(1) is
tied to the anniversary of the previous year's annual meeting date,
60 calendar days before the meeting date approximates the latest
date on which registrants would know the names of dissident
nominees.
\87\ See, as adopted, Rule 14a-19(b)(1); 17 CFR 240.14a-6(a).
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[[Page 68338]]
A deadline that is 10 calendar days after the latest date the
registrant will receive the dissident's notice of nominees is
appropriate because it provides a sufficient period of time for the
registrant to consider the dissident's notice, finalize its nominees,
and respond with its own notice of nominees. The 10-day period is
appropriate, given that the dissident's notice of nominees may be the
first indication of a contested solicitation that the registrant
receives. Moreover, the 50-day deadline is appropriate for providing
dissidents with timely access to the names of registrant nominees for
purposes of preparing a universal proxy card. While the deadline for
registrants is 10 days after the deadline for dissidents, as a
practical matter, dissidents are unlikely to be disadvantaged because
registrant nominees are often existing directors about whom information
will already be available.
Based on a review of recent contested elections and the staff's
experience, dissidents typically do not file their definitive proxy
statement more than 50 calendar days before the meeting date.\88\ Thus,
based on this market practice, we would not expect the rules adopted in
this document to delay the timing of the filing of dissident's
definitive proxy statement.
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\88\ Because the deadline under Rule 14a-19(d) is tied to the
anniversary of the previous year's annual meeting date, 50 calendar
days prior to the meeting date approximates the latest date on which
registrants would be required to notify the dissident of the names
of the registrant's nominees. Based on a review of the contested
elections sample, see supra note 71, we estimate that dissidents
filed their definitive proxy statement more than 50 calendar days
prior to the shareholder meeting date in 20% of the contests.
---------------------------------------------------------------------------
It is possible that a registrant could provide notice of the names
of its nominees under Rule 14a-19 and later change its nominees. As
with the notice requirement for dissidents, Rule 14a-19(d), as adopted,
requires a registrant to promptly notify the dissident of any change in
the registrant's nominees. If there is a change in the registrant's
nominees after the dissident has disseminated a universal proxy card,
the dissident could elect, but would not be required, to disseminate a
new universal proxy card reflecting the change in registrant nominees.
Each side will generally be incentivized to amend its own card if such
a change occurs to make it more appealing to shareholders, who could
otherwise turn to the other side's universal proxy card for a current
list of director nominees. Votes for an individual nominee who
withdraws his or her name from consideration are generally disregarded
pursuant to state law, as under current rules.
D. Minimum Solicitation Requirement for Dissidents
1. Proposed Rules
The Commission proposed, as a key piece of the new universal proxy
requirement, that the dissident in a contested election be required to
solicit the holders of shares representing at least a majority of the
voting power of shares entitled to vote on the election of directors.
The Commission also proposed that the dissident would need to affirm
its intention to meet the minimum solicitation requirement by making a
statement to that effect in its proxy materials and in its notice to
the registrant.\89\
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\89\ See proposed Rule 14a-19(a)(3) and (b)(3).
---------------------------------------------------------------------------
The minimum solicitation requirement was intended to strike the
appropriate balance to ensure that, where a universal proxy requirement
is implemented, dissidents must still engage in meaningful independent
solicitation efforts in order to have their director nominees elected.
Current proxy rules do not obligate a dissident to solicit any number
of shareholders or percentage of voting power in an election contest;
rather, current rules only require a dissident to furnish a proxy
statement to each person solicited.\90\ The Proposed Rules were based
on the premise that, while registrants would have to include dissident
nominees on their universal proxy card, dissidents would be subject to
a new requirement to solicit a minimum percentage of voting power. The
concept of a minimum solicitation threshold for dissidents remains
central to the universal proxy requirement we are adopting, and we have
increased the threshold for the reasons discussed below.
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\90\ See 17 CFR 240.14a-3.
---------------------------------------------------------------------------
2. Comments Received
We received significant comment on the proposed minimum
solicitation requirement for dissidents. Initially, there was
significant support for the majority minimum solicitation requirement
proposed.\91\ When the comment period was reopened in 2021, however,
most commenters who addressed the issue favored an increased minimum
solicitation requirement.\92\ Most of those advocating an increased
solicitation threshold for dissidents recommended either two-thirds or
75% of the voting power. Two commenters advocated a 100% minimum
solicitation requirement for dissidents in order to treat retail
investors equally with institutional investors and because, as a
practical matter, the registrant will solicit all shareholders as
well.\93\ Two commenters recommended that the Commission adopt a
requirement that all soliciting parties solicit proxies from the same
number of shareholders, which in practice would likely mean all
shareholders (because registrants typically solicit all
shareholders).\94\
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\91\ See letters from ICI; CII; CalSTRS; CFA Institute; SBA-FL;
Carpenters; NY Comptroller; Colorado PERA; AFSCME.
\92\ See letters from ICI; Society; CCMC; OPERS; Mediant;
Elliott; letter dated May 27, 2021 from American Business Conference
(``ABC''). CII, in its third letter submitted to the comment file,
dated Nov. 8, 2018, indicated that, while it continued to agree with
the minimum solicitation requirement as originally proposed, it
would--in light of concerns expressed by then-Chairman Clayton--
support moving to a higher threshold in the final rule that would
(i) increase the minimum solicitation requirement to 75% and (ii)
require that the total number of persons solicited exceeds 10. In
its fourth and final letter submitted to the comment file, dated
Jun. 2, 2021, CII indicated support for moving to a minimum
solicitation threshold of two-thirds of outstanding voting power.
See also letter from UPWG, which states that a two-thirds dissident
minimum solicitation requirement ``could also be workable,'' while
noting that its members held differing views on the subject. See
also IAC Report, which also supports increasing the dissident
minimum solicitation threshold to 67%.
\93\ See letters from SIFMA; Mediant.
\94\ See letters from BM; Mediant.
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Another commenter urged a minimum solicitation threshold of a
majority of shareholder accounts (versus voting power) entitled to vote
on director nominations, asserting that this would help ensure
meaningful dissident solicitation efforts.\95\ Another commenter
suggested that the Commission consider whether an additional
requirement that a minimum number of registered shareholders are
solicited is necessary to prevent frivolous use of universal proxy.\96\
---------------------------------------------------------------------------
\95\ See letter from Elliott.
\96\ See letter from CalSTRS.
---------------------------------------------------------------------------
One commenter suggested that, ``as a compliance mechanism, a
dissident should provide the registrant with a written statement
indicating that the dissident has taken the necessary steps to solicit
shareholders of at least a majority of the voting power.'' \97\ Another
commenter suggested that registrants should reimburse dissidents for
the reasonable costs associated with the solicitation process when at
least 50% (or a more appropriate percentage established by the
Commission) of a dissident's nominees are elected.\98\ Another
commenter opposed any type
[[Page 68339]]
of solicitation requirement for dissidents.\99\
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\97\ See letter from CalSTRS.
\98\ See letter from BM.
\99\ See letter dated Dec. 5, 2016 from Bulldog Investors, LLC
(``Bulldog'') (asserting that ``The Commission seems troubled by the
prospect that such a condition is needed to deter `nominal' or
`frivolous' proxy contests but fails to clearly articulate the
actual harm resulting from such contests'').
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3. Final Amendments
For reasons described in more detail in the Proposing Release,\100\
a universal proxy requirement without a minimum solicitation
requirement could enable dissidents to capitalize on the registrant's
solicitation efforts while relieving dissidents of the time and expense
necessary to undertake meaningful solicitation efforts, thereby
potentially exposing registrants to frivolous proxy contests. The
minimum solicitation requirement establishes a fundamentally important
check in that regard.\101\
---------------------------------------------------------------------------
\100\ See Proposing Release at Section II.B.4.
\101\ In response to the commenter who questioned whether actual
harm results from frivolous contests, unserious contests launched by
dissidents who are not truly invested in the registrants they target
impose costs on those registrants and their shareholders without a
corresponding benefit. See supra Section II.D.2 (discussing comments
regarding such contests).
---------------------------------------------------------------------------
After careful consideration of the many comments received on this
topic, and an updated economic analysis of the costs and benefits of
setting the minimum solicitation threshold at various levels, we have
decided to adopt the requirement that dissidents solicit holders of
shares representing at least 67% of the voting power of shares entitled
to vote on the election of directors. We have raised the threshold from
a majority of the voting power to 67% of the voting power in response
to commenters' concerns that setting the threshold at the proposed
majority of the voting power would insufficiently deter the potential
for ``freeriding'' of dissident nominees on the registrant's proxy
card. A 67% threshold represents an appropriate balance between
achieving the benefits of the universal proxy requirement for
shareholders and preventing dissidents from capitalizing on the
inclusion of dissident nominees on the registrant's universal proxy
card without undertaking meaningful solicitation efforts. Comments from
a wide range of market participants, including comments received from
the Universal Proxy Working Group and the IAC indicated that a 67%
threshold enjoys broad support and represents a reasonable compromise
between the competing policy objectives related to this topic.\102\
---------------------------------------------------------------------------
\102\ See letter from UPWG and IAC Report.
---------------------------------------------------------------------------
The increase in the dissident minimum solicitation requirement to
67% should mitigate concerns that the originally-proposed threshold
would have incentivized dissidents to solicit only the minimum number
of shareholders while ignoring all others, particularly retail
shareholders with small holdings. Notably, our analysis of data
provided by a proxy services provider demonstrates that dissidents
overwhelmingly tend to solicit a substantial majority of voting power
despite not being subject to any minimum solicitation threshold in
contested elections.\103\ We agree that a higher threshold better
incentivizes dissidents to engage and solicit votes from more
shareholders without imposing an undue burden on dissidents. As a
practical matter, those shareholders who are not solicited by the
dissident will receive the registrant's proxy materials with the names
of the dissident's nominees and information on how to access the
dissident's materials on the Commission's website. Therefore, those
shareholders who wish to do so can take steps to access information
about dissident nominees before exercising their vote, whether or not
they are solicited by the dissident. As noted above, current proxy
rules do not require a dissident to solicit any minimum number of
shareholders, so the 67% minimum solicitation threshold we are adopting
represents an important step forward in establishing a minimum
requirement for dissidents to engage with shareholders.
---------------------------------------------------------------------------
\103\ Based on industry data from a proxy services provider, all
dissidents solicited a number of shareholders that exceeded a 67%
threshold of shares entitled to vote in a sample of 31 proxy
contests for annual meetings held between July 1, 2018 and June 30,
2019. In addition, data provided by a proxy services provider for an
earlier sample of 35 proxy contests from June 30, 2015 through April
15, 2016, which we used in the economic analysis in the Proposing
Release, show that only two dissidents (around 6% of the sample)
solicited less than 67% of the shares entitled to vote. See infra
Section IV.C.2.a.
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A requirement for dissidents to solicit holders of 100% of the
voting power, as some commenters recommended, would represent a
substantial burden on dissidents and would likely deter bona fide
efforts by dissidents, particularly those with fewer resources, to
elect directors to a registrant's board.\104\ While we recognize that a
minimum solicitation threshold of anything less than 100% of voting
power may mean that dissidents may exclude some retail shareholders
from their solicitation efforts, as noted above, current proxy rules do
not contain a requirement to solicit any minimum number of
shareholders. Under the rules we adopt in this document, as under
current rules, the primary incentive for a dissident to solicit is to
have its director nominees elected, which remains more likely the more
shareholders the dissident solicits. In addition to the sizeable costs
imposed by a 100% voting power solicitation requirement, such a
requirement would represent a drastic change from current proxy rules,
which do not mandate that dissidents solicit even a single shareholder.
In establishing a minimum solicitation requirement for dissidents, we
are cognizant of the fact that those soliciting on behalf of an
incumbent board of directors can, win or lose, routinely expect to be
reimbursed by the company for their costs under state law, while a
dissident's only hope of reimbursement occurs if its solicitation
succeeds, or if it otherwise reaches a settlement with the
registrant.\105\ A significant increase in the minimum solicitation
threshold may therefore further tip the economic scales in favor of the
registrant. Finally, given the practical possibility of a very small
number of shareholders being unintentionally omitted from a proxy
solicitation, we would envision justifiable concerns regarding
compliance, and the potential for related gamesmanship contrary to
shareholder interests--in the form of registrants seeking to take
advantage of dissidents' technical or immaterial failures to solicit
every last shareholder account--if a 100% minimum threshold were
adopted.
---------------------------------------------------------------------------
\104\ See infra Section IV.C.5.b.
\105\ See IAC Report.
---------------------------------------------------------------------------
One commenter suggested imposing a threshold based on a minimum
number of registered shareholders in addition to a voting power
threshold ``to prevent frivolous use of the Universal Proxy rule.''
\106\ We do not agree that such a requirement is necessary to prevent
proxy contests where dissidents have no intention of conducting their
own solicitations. We note that there are relatively few registered
shareholders, as the vast majority of voting shares of public companies
are held in ``street name'' through securities intermediaries (such as
broker-dealers).\107\ Imposing an additional requirement for dissidents
to solicit those relatively few registered shareholders when most
voting shares are held by ``street name'' shareholders would increase
the burdens on
[[Page 68340]]
dissidents while doing little to address the freeriding concerns
discussed above.
---------------------------------------------------------------------------
\106\ See letter from CalSTRS.
\107\ See Concept Release on the U.S. Proxy System, Release No.
34-62495 (Jul. 14, 2010) [75 FR 42982 (Jul. 22, 2010)], at Section
II.A, for an explanation of registered shareholders and ``street
name'' shareholders.
---------------------------------------------------------------------------
For similar reasons, a requirement for the dissident to solicit a
minimum number of all shareholder accounts (both registered and
``street name'' shareholders), as suggested by one commenter, could
impose significantly higher burdens on dissidents, particularly those
seeking to effect change at large, widely-held public companies.\108\ A
requirement to solicit a minimum of 67% or even a majority of the
shareholder accounts could result in dissidents having to deliver proxy
statements and universal proxy cards to thousands or tens of thousands
of shareholder accounts, including those that have relatively few
shares entitled to vote on the director election. The high cost of such
deliveries could unduly deter many dissidents, particularly those with
fewer resources, from attempting to effect change by contesting the
election of registrants' nominees. Such a burden is unnecessary to
address the freeriding concerns underlying the minimum solicitation
requirement.
---------------------------------------------------------------------------
\108\ See infra notes 390-397 and accompanying text for a
detailed discussion of the potential costs associated with such a
requirement.
---------------------------------------------------------------------------
We have not adopted a special mechanism for ensuring compliance
with the minimum solicitation requirement because existing proxy rules
are adequate in that regard. If a dissident fails to meet the 67%
minimum solicitation threshold, that failure would constitute a
violation of Rule 14a-19 and the dissident would face the same
liability as if it had violated any other proxy rules. In addition,
Rule 14a-19(a)(3) requires dissidents to include a statement in the
proxy statement or form of proxy that it intends to solicit holders of
shares representing at least 67% of the voting power of shares entitled
to vote on the election of directors. The dissident would be subject to
liability under 17 CFR 240.14a-9 (Exchange Act Rule 14a-9), which
prohibits material misstatements or omissions in proxy soliciting
materials, if such a statement is false.
In response to the suggestion that registrants reimburse dissidents
for the reasonable costs associated with the solicitation process when
at least 50% of a dissident's nominees are elected, the universal proxy
rules are not intended to address the appropriate cost-sharing between
registrants and dissidents for soliciting fees, which is a separate
issue. The purpose of the minimum solicitation requirement is to
prevent freeriding by dissidents who want to take advantage of the
benefits of the universal proxy requirement but do not intend to
undertake meaningful solicitation efforts. We also note that
registrants often have policies in their governing documents outlining
when reimbursement can be sought, and the universal proxy requirement
is not intended to intrude into those arrangements.
We acknowledge the concern regarding some retail investors not
receiving proxy materials from dissidents electing to solicit the
minimum required. Increasing the minimum solicitation threshold to 67%
of the voting power may help address this concern. However, as
explained above, we must balance this concern against the risk of
imposing undue costs on dissidents and thereby deterring legitimate,
potentially value-enhancing contests.
Finally, we recognize any minimum solicitation requirement imposes
on the dissident the costs of delivering proxy materials to
shareholders. To address this concern, the adopted rules, like the
Proposed Rules, do not mandate a specific method of furnishing the
proxy materials. A dissident may choose to use the less costly e-proxy
delivery method (i.e., the ``notice and access'' method of mailing a
notice of internet availability and posting the proxy materials on a
website) should it wish.\109\ We also acknowledge that some dissidents
might have chosen to initiate contests to pursue goals other than
changes in board composition, such as to publicize a particular issue
or to encourage management to engage with the dissident.\110\ Such
contests will not be possible without meaningful solicitation efforts
under the rules we adopt in this document.
---------------------------------------------------------------------------
\109\ See infra Section IV.B.2.b for additional detail regarding
this topic.
\110\ See discussion in Section IV.B.2.c infra.
---------------------------------------------------------------------------
E. Dissident's Requirement To File Definitive Proxy Statement 25
Calendar Days Prior to Meeting
1. Proposed Rules
The Commission proposed to require a dissident in a contested
election to file its definitive proxy statement with the Commission by
the later of 25 calendar days prior to the meeting date or five
calendar days after the registrant files its definitive proxy
statement, regardless of the proxy delivery method. As proposed, the
five calendar day deadline would be triggered if the registrant files
its definitive proxy statement fewer than 30 calendar days prior to the
meeting date, in which case the dissident would be required to file its
definitive proxy statement no later than five calendar days after the
registrant files its definitive proxy statement.
2. Comments Received
We received few comments on this proposed requirement. Three
commenters expressed support for the deadline imposed on dissidents to
file their definitive proxy statement with the Commission.\111\ One
commenter opposed a filing deadline for the dissident in the absence of
a similar deadline for registrants.\112\ This commenter advocated
requiring the registrant to publicly disclose in a Form 8-K the names
of its nominees, as well as other information about the shareholder
meeting, such as the record and meeting dates, at least 30 days before
the earlier of the nomination deadline under the registrant's governing
instruments or the notice deadline established in proposed Rule 14a-
19.\113\ One commenter proposed, as a disciplinary measure, that if a
dissident fails to file and disseminate its definitive proxy statement
by the deadline, then the dissident should be prohibited from engaging
in a proxy contest at any registrant (or at least, the registrant in
question) for a period of time (e.g., three years).\114\
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\111\ See letters from ICI; CFA Institute; CII.
\112\ See letters from Olshan.
\113\ See letters from Olshan.
\114\ See letter from Sidley.
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3. Final Amendments
We are adopting, as proposed, the requirement that a dissident in a
contested director election file its definitive proxy statement with
the Commission by the later of 25 calendar days prior to the meeting
date or five calendar days after the registrant files its definitive
proxy statement.
Due to the typical sequencing of registrant and dissident proxy
filings, as well as the fact that dissidents may choose not to solicit
all shareholders, shareholders may not have seen information about the
dissident's nominees when they receive a universal proxy card from the
registrant. Therefore, a dissident filing deadline is appropriate to
help ensure that shareholders who receive a universal proxy card will
have access to information about all nominees sufficiently in advance
of the meeting.\115\ We recognize, however, that
[[Page 68341]]
some shareholders could receive the registrant's proxy statement and
submit their votes on the registrant's universal proxy card before the
dissident's proxy statement is available. The 25 calendar day deadline
will provide those shareholders with sufficient time to access the
dissident's proxy statement, once available, and to change their votes
if preferred.
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\115\ As discussed in Section II.F infra, we are also adopting a
requirement that each party in a contested election include a
statement in its proxy materials referring shareholders to the other
party's proxy statement for information about the other party's
nominees and explaining that shareholders can access the other
party's proxy statement on the Commission's website. Because this
required disclosure will be included in the registrant's proxy
materials, which all shareholders would likely receive, the rules
should ensure that even those shareholders that do not receive the
dissident's proxy materials will have access to information about
the dissident's nominees.
---------------------------------------------------------------------------
We acknowledge that dissidents that use the full set delivery
method in a contested election have not previously been subject to a
filing deadline for their definitive proxy statement, and thus this new
requirement will impose a new filing deadline for such dissidents.\116\
Although some dissidents may be required under the final rules to
prepare their proxy statements earlier than they would have otherwise,
dissidents filed their definitive proxy statement 25 or more calendar
days prior to the shareholder meeting date in 82% of the contests
initiated in 2017 through 2020.\117\ Therefore, the new filing deadline
should not impose a significant additional burden for most dissidents.
---------------------------------------------------------------------------
\116\ We understand from a proxy services provider that in the
31 proxy contests from July 1, 2018 through June 30, 2019,
dissidents sent full sets of proxy materials to each of the
shareholders solicited. Dissidents that elect notice and access
delivery are currently required to make their proxy statement
available by the later of 40 calendar days prior to the meeting date
or 10 calendar days after the registrant files its definitive proxy
statement. For such dissidents, the new filing deadline will provide
five fewer days to furnish a proxy statement where the registrant
files its definitive proxy statement less than 30 calendar days
before the meeting date, which we estimate occurred in 11% of recent
contested elections. Based on past practice, as described above, we
would not expect a dissident to elect notice and access delivery in
a contested election, although it is unclear whether this practice
would change under the rules adopted in this document.
\117\ Based on staff analysis of the contested elections sample.
See supra note 71 and infra note 219 and accompanying text. The data
is based on 74 out of 101 identified proxy contests since the
dissident did not file a definitive proxy statement in 27 cases.
---------------------------------------------------------------------------
We are not adopting a filing deadline for registrants. State
corporate statutes generally require a registrant to hold an annual
shareholder meeting for the purpose of electing directors, and those
statutes generally impose a quorum requirement for such meetings.\118\
Unlike dissidents, registrants therefore already have an incentive to
file the definitive proxy statement and proxy card \119\ to solicit
proxies well in advance of the meeting date to achieve a quorum for the
meeting. For example, based on a review of the 101 contested elections
initiated from 2017 through 2020, the staff found that registrants
filed their definitive proxy statement 25 or more calendar days prior
to the shareholder meeting date in over 95% of the contests.\120\ We
also note that where the registrant nominees are incumbent directors,
shareholders will have access to information about those nominees from
prior Commission filings before the registrant files and disseminates
its definitive proxy statement.
---------------------------------------------------------------------------
\118\ See, e.g., Del. Code. Ann. tit. 8, section 211(b) and
section 215(c).
\119\ The definitive proxy statement, form of proxy and all
other soliciting materials must be filed with the Commission no
later than the date they are first sent or given to shareholders. 17
CFR 240.14a-6(b).
\120\ Based on staff analysis of the contested elections sample.
See supra note 71.
---------------------------------------------------------------------------
We recognize that it is possible that a registrant will have
prepared and disseminated its definitive proxy statement, including a
universal proxy card more than 25 calendar days before the meeting
(i.e., the general deadline under Rule 14a-19 for a dissident to file
its definitive proxy statement with the Commission). If a registrant
discovers after disseminating its universal proxy card that a dissident
failed to file its definitive proxy statement 25 calendar days prior to
the meeting (or five calendar days after the registrant files its
definitive proxy statement),\121\ the registrant could elect to
disseminate a new, non-universal proxy card including only the names of
the registrant's nominees. Where a dissident fails to comply with Rule
14a-19, the new rules will not permit the dissident to continue with
its solicitation under 17 CFR 240.14a-1 through 240.14a-21 and Schedule
14A (Regulation 14A).
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\121\ A dissident could meet the deadline for director
nominations under the company's governing documents and the deadline
for providing notice to the registrant under Rule 14a-19 but fail to
proceed with or later abandon its solicitation. This could happen
for a number of reasons. For example, the dissident and the
registrant may enter into a settlement agreement, the dissident may
elect to discontinue its solicitation for another reason or the
dissident may fail to comply with some aspect of Rule 14a-19.
---------------------------------------------------------------------------
In response to the commenter who suggested we adopt a specific
penalty for dissidents who fail to file a definitive proxy statement by
the deadline, we believe that existing proxy rules serve as an adequate
deterrent, in a similar manner to that explained above in the context
of a potential violation of the new minimum solicitation requirement.
If a dissident fails to file its definitive proxy statement by the new
deadline prescribed, that failure would constitute a violation of Rule
14a-19 and the dissident would face the same liability as if it had
violated any other proxy rules.
Because a registrant may disseminate a universal proxy card before
discovering that a dissident is not proceeding with its solicitation,
we are requiring the registrant, as proposed, to include disclosure in
its proxy statement advising shareholders how it intends to treat proxy
authority granted in favor of a dissident's nominees in the event the
dissident abandons its solicitation or fails to comply with Regulation
14A.\122\
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\122\ See newly-adopted Item 21(c) of Schedule 14A.
---------------------------------------------------------------------------
As a result of the adopted rules described above, and as set out in
the Proposing Release, the overall timing of the process for soliciting
universal proxies generally would operate as follows:
------------------------------------------------------------------------
Due date Action required
------------------------------------------------------------------------
No later than 60 calendar days before the Dissident must provide
anniversary of the previous year's annual notice to the registrant of
meeting date or, if the registrant did its intent to solicit the
not hold an annual meeting during the holders of at least 67% of
previous year, or if the date of the the voting power of shares
meeting has changed by more than 30 entitled to vote on the
calendar days from the previous year, by election of directors in
the later of 60 calendar days prior to support of director
the date of the annual meeting or the nominees other than the
tenth calendar day following the day on registrant's nominees and
which public announcement of the date of include the names of those
the annual meeting is first made by the nominees.
registrant. [new Rule 14a-19(b)(1)].
No later than 50 calendar days before the Registrant must notify the
anniversary of the previous year's annual dissident of the names of
meeting date or, if the registrant did the registrant's nominees.
not hold an annual meeting during the
previous year, or if the date of the
meeting has changed by more than 30
calendar days from the previous year, no
later than 50 calendar days prior to the
date of the annual meeting. [new Rule 14a-
19(d)].
[[Page 68342]]
No later than 20 business days before the Registrant must conduct
record date for the meeting. [existing 17 broker searches to
CFR 240.14a-13 (Rule 14a-13)]. determine the number of
copies of proxy materials
necessary to supply such
material to beneficial
owners.
By the later of 25 calendar days before Dissident must file its
the meeting date or five calendar days definitive proxy statement
after the registrant files its definitive with the Commission.
proxy statement. [new Rule 14a-19(a)(2)].
------------------------------------------------------------------------
F. Access to Information About All Nominees
1. Proposed Rules
The Commission proposed new Item 7(h) of Schedule 14A (relettered
as Item 7(f) in this document) to require that each party in a
contested election refer shareholders to the other party's proxy
statement for information about the other party's nominees and explain
that shareholders can access the other party's proxy statement without
cost on the Commission's website. The Commission also proposed to
revise Rule 14a-5(c) to permit the parties to refer to information that
would be furnished in a filing of the other party to satisfy their
disclosure obligations.\123\ Taken together, these proposed changes
were intended to enable shareholders to access information with respect
to all nominees when they receive a universal proxy card. Finally, the
Commission proposed to change the definition of ``participant'' in
Instruction 3 to Items 4 and 5 of Schedule 14A to ensure that, even
though all nominees would be included on the universal proxy card, only
the party's own nominees would be considered ``participants'' in that
party's solicitation.
---------------------------------------------------------------------------
\123\ Prior to these rule changes, Rule 14a-5(c) permits parties
only to refer to information that has already been furnished in a
filing of another party.
---------------------------------------------------------------------------
2. Comments Received
Several commenters expressed support for the requirements that each
soliciting person in a contested election must refer shareholders to
the other party's proxy statement for information about the other
party's nominees and must explain that shareholders can access the
other party's proxy statement without cost on the Commission's
website.\124\ Many of these commenters indicated that such a statement
is sufficient and no additional information, such as instructions as to
how to access proxy statements on the Commission's website or a
hyperlink to that website, is necessary.\125\ One of these commenters
noted that requiring a reference to proxy materials available on the
Commission's website will allow shareholders to make an informed voting
decision where they receive a proxy statement and universal proxy card
from only one soliciting party.\126\
---------------------------------------------------------------------------
\124\ See letters from CII; Fidelity; CFA Institute; SBA-FL;
Carpenters; NY Comptroller; CalSTRS; Colorado PERA; AFSCME.
\125\ See letters from CII; SBA-FL; Carpenters; NY Comptroller;
CalSTRS; Colorado PERA; AFSCME.
\126\ See letter from Fidelity.
---------------------------------------------------------------------------
Several commenters expressed concern that retail investors would
not receive proxy materials from dissidents electing to solicit the
minimum required.\127\ One of these commenters indicated that
shareholders omitted from the dissident's solicitation would be at an
informational disadvantage, making it difficult for those shareholders
to make informed voting decisions which would potentially discourage
shareholders from participating in the election.\128\ Two commenters
suggested adopting an additional requirement to include a toll-free
telephone number where shareholders could request paper copies of proxy
materials free of charge.\129\ To permit retail investors to obtain
dissident materials without having to navigate the Commission website,
two commenters suggested permitting broker-dealers to provide dissident
proxy materials to shareholders upon request and requiring dissidents
to bear any associated costs.\130\
---------------------------------------------------------------------------
\127\ See letters from BM; SIFMA; ABC; CCMC; CGCIV; Davis Polk;
letter dated Jan. 9, 2017 from Business Roundtable (``BR'').
\128\ See letter from BR.
\129\ See letters from Fidelity; SIFMA.
\130\ See letters from Fidelity; SIFMA.
---------------------------------------------------------------------------
Two commenters argued that requiring both the registrant and
dissident to ``publicize the election campaign'' of the opposing side
in the contest is an inappropriate attempt by the Commission to compel
corporate speech, in contravention of the First Amendment.\131\
---------------------------------------------------------------------------
\131\ See letters from CCMC; CGCIV.
---------------------------------------------------------------------------
3. Final Amendments
We are adopting, as proposed: (i) New Item 7(f) of Schedule 14A,
(ii) the changes to Rule 14a-5(c) described above, and (iii) the
changes to Items 4 and 5 of Schedule 14A described above, in each case
for the reasons detailed in the Proposing Release.\132\ Although we
acknowledge the views of the dissenting commenters described above, the
final rule changes will sufficiently enable shareholders to access
information with respect to all nominees when they receive a universal
proxy card. Requiring a new toll-free telephone number is unnecessary,
given that existing rules already mandate that proxy statements include
information on how to obtain paper copies.\133\ In our view, the
Commission website, including the EDGAR system, is sufficiently user-
friendly, with available aids and ongoing enhancements, for all
investors to access proxy statements filed with the Commission through
a simple search, and we therefore disagree that retail investors will
lack the information to locate such materials. Furthermore, proxy
solicitors and others involved in the contest are available to assist
retail investors in this regard. Given these facts, the imposition of
additional costs on dissidents in connection with additional delivery
procedures, such as through required reimbursement of broker-dealers,
would not be justified.
---------------------------------------------------------------------------
\132\ See Proposing Release at Section II.B.5.b.
\133\ See 17 CFR 240.14a-16 (Rule 14a-16).
---------------------------------------------------------------------------
Finally, we do not agree with commenters that suggest that the
final rule runs afoul of the First Amendment. Far from being
``controversial corporate speech,'' \134\ the rule simply provides
shareholders voting by proxy with the same information--the names of
all the candidates for whom they can vote--as they would receive if
they attended the shareholder meeting in person, and is squarely within
the ``economic or investor protection benefits that our rules
ordinarily strive to achieve.'' \135\ Under the existing proxy rules,
soliciting parties in a contest commonly direct shareholders to
required disclosure that appears in the other side's proxy
statement.\136\
---------------------------------------------------------------------------
\134\ See letters from CCMC; CGCIV.
\135\ Nat'l Ass'n of Manufacturers v. SEC, 800 F.3d 518, 521
(D.C. Cir. 2015) (internal quotation marks omitted). Similarly, we
do not agree with the commenter's suggestion that the rule requires
a corporation to ``subsidize and publicize'' speech with which it
may not agree; the rule requirements may be met by, for example, the
registrant simply pointing out that the opponent's materials can be
accessed at no cost on the Commission's website.
\136\ See Rule 14a-5(c).
---------------------------------------------------------------------------
[[Page 68343]]
G. Formatting and Presentation of the Universal Proxy Card
1. Proposed Rules
The Commission proposed Rule 14a-19(e) to include the following
presentation and formatting requirements for universal proxy cards:
<bullet> The proxy card must set forth the names of all duly
nominated director candidates;
<bullet> The proxy card must provide a means for shareholders to
grant authority to vote for the nominees set forth;
<bullet> The proxy card must clearly distinguish among registrant
nominees, dissident nominees, and any proxy access nominees;
<bullet> Within each group of nominees, the nominees must be listed
in alphabetical order by last name on the proxy card;
<bullet> The same font type, style and size must be used to present
all nominees on the proxy card;
<bullet> The proxy card must prominently disclose the maximum
number of nominees for which authority to vote can be granted; and
<bullet> The proxy card must prominently disclose the treatment and
effect of a proxy executed in a manner that grants authority to vote
for more nominees than the number of directors being elected, in a
manner that grants authority to vote for fewer nominees than the number
of directors being elected, or in a manner that does not grant
authority to vote with respect to any nominees.
In addition, where both parties have presented a full slate of
nominees and there are no proxy access nominees, the Commission
proposed Rule 14a-19(f), which would allow (but not require) the
universal proxy card to provide the ability to vote for all dissident
nominees as a group and all registrant nominees as a group.
2. Comments Received
The formatting and presentation requirements for the universal
proxy card and whether each party in a contest should be permitted to
customize and use its own universal proxy card were the subject of
multiple comments. Many commenters expressly supported the Proposed
Rules' presentation and formatting requirements.\137\ Some favored a
more prescriptive approach, including standardized colors for
registrant and dissident proxy cards, noting that priority should be
afforded to standardization and uniformity to avoid shareholder
confusion.\138\ Several commenters favored mandating identical or
similar universal proxy cards,\139\ including specific requirements for
font, style, and text size across both cards.\140\
---------------------------------------------------------------------------
\137\ See letters from Colorado PERA; CalSTRS; SBA-FL;
Carpenters; NY Comptroller; AFSCME; UPWG; ISS.
\138\ See letters from Sidley; OPERS; CFA Institute; UPWG; CII.
\139\ See letters from Mediant; ISS; Broadridge Financial
Solutions, Inc.; Bulldog.
\140\ See letter from SIFMA.
---------------------------------------------------------------------------
3. Final Amendments
We are adopting the formatting and presentation requirements for
universal proxy cards as proposed. As under current rules, each side
will disseminate its own proxy card. Each side will be free to choose
the design of its card, subject to the requirements of the final rules.
As discussed in the Proposing Release, we considered the merits of
creating a system whereby the registrant and dissident distribute an
identical card, with the only difference being the persons given proxy
authority on the card. In our view, such a system would be inferior to
the one adopted in this document for the reasons discussed in the
Proposing Release.\141\ While we recognize the potential benefits of
more prescriptive requirements for the universal proxy card, the final
rules, as adopted, appropriately strike a balance between ensuring
clarity and fairness on the one hand while preserving flexibility on
the other. Under current proxy rules, each side in a contest has the
ability to design and use its own proxy card, subject to the
requirements set forth in the proxy rules. This ability will continue
under the new rules we adopt. Rather than specifically mandating a set
format for each card or requiring that each side's universal proxy card
look identical to the other's, we are allowing each party some latitude
in designing and distributing its own universal proxy card. However, we
note that the font type, style, and size must be consistent for all
nominees presented on the same card. This should avoid concerns about
bolding or otherwise drawing attention to certain candidates. The goal
of our adopted rules with respect to the formatting and presentation of
the universal proxy cards is to ensure clarity and fairness in
presentation, so that the cards allow shareholders to make an informed
voting decision, while at the same time providing flexibility for each
side in a contest to craft its own card, as under current rules.
---------------------------------------------------------------------------
\141\ See Proposing Release at Section II.B.6.
---------------------------------------------------------------------------
Though we understand the concern of commenters who worry about the
potential for shareholder confusion in the absence of additional
formatting and presentation requirements, including the standardization
of proxy card colors, we disagree that such additional regulation is
necessary. Existing disclosure requirements, such as the Rule 14a-4(a)
requirement that the proxy card prominently identify whether the card
is sent by the registrant or dissident, along with the new presentation
requirements described above, will sufficiently inform shareholders as
to the party sending the card and mitigate any potential confusion
resulting from the universal proxy cards. We do not believe it is
necessary to limit each soliciting party to a specific color proxy card
to ensure shareholders know which party is soliciting their vote, and
we note that this is not a limitation under current rules. Furthermore,
any potential confusion over which side may be sending a particular
card may be less consequential, as each side's card will list the full
group of nominees from both sides.
In addition, permitting each side to use its own proxy card will
preserve each side's ability to exercise discretionary authority under
Rule 14a-4(c). As explained in the Proposing Release, we did consider a
system whereby the registrant would distribute a single universal proxy
card that would include the names of the registrant's nominees and the
dissident's nominees, as well as all other proposals to be considered
at the meeting.\142\ However, our reasons for rejecting that idea in
the Proposing Release still hold.\143\
---------------------------------------------------------------------------
\142\ See Proposing Release at Section II.B.6.
\143\ In addition to the reasons set out in the Proposing
Release, we agree with the reasoning set out in the letter from
UPWG: ``We believe both of these alternative models could cause
unnecessary disruption for market participants accustomed to the
circulation of two competing cards. The core improvement we seek is
the ability of shareholders to use any proxy card they choose to
vote for any combination of board nominees they prefer.''
---------------------------------------------------------------------------
Finally, we adopt, in slightly modified form, the rule that permits
(but does not require) the universal proxy card to allow a shareholder
to grant authority to vote for all of the nominees of either the
dissident or the registrant as a group, so long as the card also
provides a similar means by which a shareholder can withhold authority
to vote for such group of nominees and so long as the number of
nominees of the registrant or the dissident is less than the number of
directors being elected.\144\
[[Page 68344]]
A new instruction to the adopted rule clarifies that, where applicable
state law gives legal effect to votes cast against a nominee, a
soliciting party that wishes to present the ``for-all'' voting option
described above on its universal proxy card must also provide
shareholders an ``against-all'' option rather than a ``withhold-all''
option.\145\
---------------------------------------------------------------------------
\144\ See Rule 14a-19(f). Under the final rules and to avoid
shareholder confusion, where the form of proxy includes one or more
shareholder ``proxy access'' nominees, the form of proxy may not
confer the ability to vote for the registrant and dissident nominees
as a group.
\145\ See Instruction 2 to paragraph (f) of Rule 14a-19. See
also Section II.H below and similar changes to the text of Rule 14a-
4.
---------------------------------------------------------------------------
H. Director Election Voting Standards Disclosure and Voting Options
1. Proposed Rules
The Commission proposed additional amendments to the form of proxy
and disclosure requirements with respect to voting options and voting
standards that would apply to all director elections.\146\ First, the
Proposed Rules would amend Rule 14a-4(b) to: (1) Mandate the inclusion
of an ``against'' voting option in lieu of a ``withhold authority to
vote'' option on the form of proxy for the election of directors where
there is a legal effect to such a vote; and (2) provide shareholders
who neither support nor oppose a director nominee an opportunity to
``abstain'' (rather than ``withhold authority to vote'') in a director
election governed by a majority voting standard.\147\ Second, the
proposed rule would amend Item 21(b) of Schedule 14A to expressly
require the disclosure of the effect of a ``withhold'' vote. Finally,
the Proposed Rules would delete the phrase ``the method by which votes
will be counted'' from Item 21(b) of Schedule 14A.
---------------------------------------------------------------------------
\146\ The proposed amendments to the form of proxy and
disclosure requirements with respect to voting options discussed in
this section would apply to funds.
\147\ See proposed Rule 14a-4(b)(4).
---------------------------------------------------------------------------
2. Comments Received
Several commenters supported the proposed requirement that the form
of proxy for a director election governed by a majority voting standard
include a means for shareholders to vote ``against'' each nominee and a
means for shareholders to ``abstain'' from voting in lieu of providing
a means to ``withhold authority to vote.'' \148\ Many of these
commenters requested that the Commission further amend the proxy rules
to prohibit registrants from providing an ``against'' voting option if
making that choice has no legal impact on the outcome of the election
and to require registrants to refer to voting options consistently
throughout the proxy materials.\149\ One commenter suggested that
Instruction 2 to Rule 14a-4(b)(2) be eliminated entirely, and that same
commenter recommended that the Commission replace the ``withhold''
voting option with an ``abstain'' option for director elections
governed by a plurality voting standard.\150\
---------------------------------------------------------------------------
\148\ See letters from CII; Colorado PERA; CalSTRS; SIFMA; SBA-
FL; NY Comptroller; AFSCME; Carpenters; letter dated Jun. 7, 2021
from California Public Employees' Retirement System (``CalPERS'').
\149\ See letters from CII; CalSTRS; SBA-FL; NY Comptroller;
Colorado PERA; AFSCME.
\150\ See letter from Carpenters.
---------------------------------------------------------------------------
Several commenters addressed the proposed changes to Item 21 of
Schedule 14A. These commenters supported the proposed amendment to Item
21(b) of Schedule 14A to require the disclosure of the effect of a
``withhold'' vote.\151\ Another commenter believed that the phrase
``the method by which votes will be counted'' in Item 21 of Schedule
14A should be retained, in order to clarify for shareholders the effect
of each voting option presented on the proxy card, as well as how each
voting option will be counted.\152\
---------------------------------------------------------------------------
\151\ See letters from CalPERS; CII.
\152\ See letter from Carpenters.
---------------------------------------------------------------------------
3. Final Amendments
We are adopting the rule amendments with the modifications
described below. Rule 14a-4(b) mandates, as proposed, the inclusion of
an ``against'' voting option in lieu of a ``withhold authority to
vote'' option on the form of proxy for the election of directors where
there is a legal effect to such a vote. It also provides shareholders
who neither support nor oppose a director nominee an opportunity to
``abstain'' (rather than ``withhold authority to vote'') in a director
election governed by a majority voting standard. These changes will
provide shareholders with a better understanding of the effect of their
votes on the outcome of the election. We also have not eliminated
Instruction 2 to Rule 14a-4(b)(4), as one commenter had requested,
because it may provide useful guidance about voting options where
applicable state law gives legal effect to votes cast against a
nominee.
We agree with commenters, however, that including an ``against''
voting option on a proxy card where there is no legal effect to such
vote is unnecessarily confusing for shareholders and have therefore
amended Rule 14a-4(b) to prohibit such a voting option on the proxy
card where such votes have no legal effect. Further, in light of
comment received from the public, we are retaining the phrase ``the
method by which votes will be counted'' from Item 21(b) of Schedule 14A
to avoid any ambiguity regarding the need for clear disclosures in the
proxy statement regarding the effect of each voting option presented to
shareholders.
I. Bona Fide Nominee and Short Slate Rules
1. Elimination of the Short Slate Rule
a. Proposed Rules
The Commission proposed to amend Rule 14a-4(d) to eliminate the
short slate rule for registrants other than funds. The short slate rule
allows dissidents soliciting in support of a partial slate of nominees
that would make up a minority of the board of directors to seek
authority to vote for some of a registrant's nominees.\153\ The
Proposed Rules would eliminate the short slate rule for operating
companies because it would be unnecessary with a universal proxy
requirement and the revised bona fide nominee rule. The Proposed Rules,
however, would maintain the short slate rule for funds, since, as
proposed, they would not be included in the universal proxy
requirement.\154\
---------------------------------------------------------------------------
\153\ See Rule 14a-4(d)(4). Rule 14a-4(d)(4)(ii) provides that a
dissident using the short slate rule may not name the registrant
nominees for which it will vote using proxy authority; rather, the
dissident may name only those registrant nominees for which it is
not seeking proxy authority. This requirement may render the proxy
card confusing for shareholders.
\154\ See infra Section II.J.
---------------------------------------------------------------------------
b. Comments Received
Relatively few commenters addressed the proposed elimination of the
short slate rule for operating companies that would be subject to a
mandated universal proxy requirement. Several commenters supported its
elimination in connection with the adoption of a universal proxy
requirement, noting that such a system would eliminate many of the
practical constraints associated with the short slate rule (as well as
the bona fide nominee rule).\155\ Another commenter similarly supported
the changes, but also advocated retaining the short slate rule, in
optional form, if the universal proxy requirement is not mandated.\156\
---------------------------------------------------------------------------
\155\ See letters from Elliott; CFA Institute.
\156\ See letter from Colorado PERA.
---------------------------------------------------------------------------
c. Final Amendments
We are eliminating the short slate rule, as proposed, for operating
companies that will be subject to the final rules mandating the use of
universal proxy cards. The revisions we adopt to the bona fide nominee
rule,\157\ along with the changes to mandate the use of a universal
proxy card in all non-exempt director election contests, obviate the
need for the short slate rule
[[Page 68345]]
for operating companies. The amended short slate rule, however, will
continue to be available for funds in contested elections, which will
not be subject to the universal proxy requirements at this time.\158\
If we later adopt rule changes to make the universal proxy requirement
applicable to some or all funds, we will consider whether to eliminate
the short slate rule completely at that time.
---------------------------------------------------------------------------
\157\ See infra Section II.I.2.
\158\ See Rule 14a-4(d)(1)(ii)(A)-(D).
---------------------------------------------------------------------------
2. Modification of the Bona Fide Nominee Rule
a. Proposed Rules
In order to facilitate the ability of both parties in a contested
election to include the names of all nominees on each side's proxy
card, the Proposed Rules would revise the bona fide nominee rule. To
remove the technical impediment to including the names of the other
side's nominees on a universal proxy card created by Rule 14a-4(d)(1)
and (4), the Proposed Rules would revise the determination of a ``bona
fide nominee'' in Rule 14a-4(d).\159\ The proposed revisions would
change the requirement that a nominee consent to being named in ``the''
proxy statement of the party listing that nominee on its card, to a
more general requirement that a nominee consent to being named in ``a''
proxy statement of either side in the contest. Proposed Rule 14a-
4(d)(1)(i) would maintain the requirement that a nominee consent to
serve, if elected.
---------------------------------------------------------------------------
\159\ See proposed Rule 14a-4(d)(1)(i). Without the adoption of
the proposed revisions, Rule 14a-4(d)(1) and (4) would limit the
ability of one side in a contested election from seeking proxy
authority to vote for any director nominee unless such nominee
consented to being named in that side's proxy statement, and to
serve if elected.
---------------------------------------------------------------------------
b. Comments Received
Multiple commenters who supported the adoption of a universal proxy
requirement supported the proposed changes to the bona fide nominee
rule to effectuate that system.\160\ Several of these commenters
expressly supported allowing a soliciting party to include the names of
some or all of the registrant's nominees on its own proxy card even
when the soliciting party is not nominating its own candidates.\161\
---------------------------------------------------------------------------
\160\ See, e.g., letters from CII; CalSTRS; CalPERS; Colorado
PERA; UPWG; NY Comptroller; AFSCME; SBA-FL; Elliott; CFA Institute.
\161\ See letters from CalSTRS; Colorado PERA; CFA Institute;
letter from CII dated Dec. 28, 2016.
---------------------------------------------------------------------------
Some commenters advocated more limited changes to the consent
required by the bona fide nominee rule to narrow its application. As
proposed, revised Rule 14a-4 would permit (but not require) a dissident
soliciting in favor of its own proposal, without its own slate of
director candidates, to include some or all of the registrant's
nominees on the dissident's proxy card. Similarly, a dissident
conducting a ``vote no'' campaign against some of the registrant's
nominees could (but would not be required to) include on the
dissident's proxy card those registrant nominees it did not oppose. One
commenter warned of the shareholder confusion that might result in
those instances in which the dissident chooses not to include all
registrant nominees on the dissident's card, and argued that such
confusion could lead to under-voting that would distort voting
results.\162\ Several commenters favored limiting the consent provided
under the revised bona fide nominee rule to situations where the
opposing side solicits in favor of its own nominees.\163\
---------------------------------------------------------------------------
\162\ See letter from BR.
\163\ See letters from Society; Sidley; Davis Polk; BR.
---------------------------------------------------------------------------
c. Final Amendments
We are adopting changes to the consent requirement for a bona fide
nominee in Rule 14a-4(d)(1)(ii) as proposed. This rule change expands
the scope of a nominee's consent in an election contest to include
consent to being named in any proxy statement for the applicable
meeting. The rule amendment is necessary to permit the universal proxy
requirement we adopt in this document, because it expands the concept
of consent to allow a nominee to be considered a bona fide nominee when
named on any side's proxy card in a director election contest.
As a practical matter and as noted by commenters, it will also
permit a dissident soliciting in favor of a proposal (but not its own
director nominees) to include some or all of the registrant's nominees
on its proxy card. It further allows a dissident conducting a ``vote
no'' campaign without presenting its own slate of competing nominees to
permit shareholders to vote for select registrant nominees on the
dissident's card. In both of these circumstances, the changes to the
bona fide nominee rule will further shareholder enfranchisement.
Although including a registrant's nominees on its own proxy card in
both of these circumstances will remain optional for the dissident
under the final rules, this optionality will not limit shareholders'
voting choices. If the dissident does not include some or all
registrant nominees on the dissident's card, shareholders will always
be able to vote on the registrant's proxy card. Where a dissident
includes some but not all registrant nominees on its proxy card, or
where it solicits in favor of a proposal but does not include
registrant nominees on its proxy card, the dissident should--in order
to avoid potential liability under Rule 14a-9 for omission of material
facts--disclose the fact that its proxy card does not include some or
all of the registrant nominees and that shareholders who wish to vote
for nominees not included on the dissident's proxy card may do so on
the registrant's proxy card. Such disclosure should mitigate the risk
of shareholder confusion.
In addition, and in response to the commenter who was concerned
with the potential of under-voting, we note that the potential for
disenfranchisement exists under the status quo, but in a more severe
form. Under current rules, dissidents who are ineligible to use the
short slate rule (including those not soliciting on behalf of their own
director nominees) lack the ability to list registrant nominees on
their proxy card. The risk of any disenfranchisement under the final
amendments may be mitigated because we expect that dissidents will have
an incentive to include the registrant nominees on their proxy card (so
as to increase the incentive for shareholders to use their card) and
will generally not have strategic reasons to exclude registrant
nominees from their proxy card due to the lack of a competing slate.
Finally, to the extent that shareholders vote for fewer nominees than
open board seats because they are voting on a dissident's proxy card
that does not list all registrant nominees, this will occur in the
context of an uncontested election, in which the consequences of
casting fewer votes in favor of any particular nominee are less
significant than in the context of a contested election.
The final rules maintain the requirement that a bona fide nominee
consent to serve if elected.\164\ This will ensure that neither party
nominates an individual who has not consented to serve if elected as a
director. To the extent that any nominee would not serve if elected
with other nominees (or would not serve unless certain other nominees
were elected), we would expect this material fact to be disclosed
prominently in the proxy statement of the party nominating such
individual. If one or more of the registrant's nominees will not serve
under such circumstances, the registrant should explain in its proxy
statement how such vacancies would be filled.
---------------------------------------------------------------------------
\164\ See proposed Rule 14a-4(d)(1)(i).
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[[Page 68346]]
J. Funds
1. Proposed Rules
The Proposed Rules excluded funds. Like operating companies, funds
have boards of directors that are elected by shareholders. Also like
operating companies, fund boards have significant responsibilities in
protecting shareholder interests and funds are subject to the Federal
proxy rules. However, fund shareholders also have important rights
granted to them under the Investment Company Act of 1940 that
distinguishes funds from operating companies. For reasons detailed in
the Proposing Release,\165\ the Commission did not propose to apply the
universal proxy requirement to funds, but solicited comment on whether
funds should be covered by the Proposed Rules. In the Reopening
Release, the Commission observed that since the Proposing Release,
there had been certain developments in corporate governance matters
affecting funds, particularly registered closed-end funds and BDCs. In
light of such developments, the Commission stated that it was
considering applying the proposed universal proxy card requirements to
registered closed-end funds and BDCs and again solicited comment on
whether funds should be covered by the Proposed Rules, with particular
emphasis on issues related to such funds.\166\
---------------------------------------------------------------------------
\165\ See Proposing Release at Section II.D.
\166\ See Reopening Release at Section II.
---------------------------------------------------------------------------
2. Comments Received
Comments received in response to the Proposing Release and
Reopening Release were mixed. On the one hand, many commenters
supported excluding funds from the Proposed Rules because of the
differences between funds and operating companies--including the
investor protections provided by applicable securities laws and
regulations and fund governance structures.\167\ With respect to
statutory and regulatory protections, some commenters observed that the
Investment Company Act of 1940 supplements state law to provide
shareholders with the right to approve fundamental fund features,
including the right to approve the investment advisory contract and any
material amendments to the investment advisory contract and changes to
any of a fund's fundamental investment policies.\168\ With respect to
fund governance structures, several commenters observed that split-
ticket voting that results in dissident directors joining a fund board
could disrupt the widespread practice of unitary and cluster boards at
funds,\169\ which could lead to additional and costly administrative
complexities and redundancies for funds that ultimately would be borne
by fund shareholders.\170\
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\167\ See, e.g., letters from ICI; CII; Fidelity; letter dated
Jan. 9, 2017 from Independent Directors Council (``IDC''); letter
dated Feb. 27, 2017 from Mutual Fund Directors Forum (``Forum'').
\168\ See letters from CII, ICI; IDC; Fidelity.
\169\ See letters from ICI; IDC; Fidelity; Forum.
\170\ See letters from ICI; IDC; Forum. In addition, those
commenters explained that a dissident director may disrupt other
fund governance standards such as standards regarding disinterested
and independent directors.
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In addition to providing reasons that the universal proxy rules
should not apply to funds generally, some commenters also discussed the
application of those universal proxy rules to specific types of
management investment companies. Specifically, some commenters stated
that universal proxies are not necessary for open-end funds because
open-end funds are not required to have annual shareholder meetings and
investors are able to redeem at net asset value, resulting in contested
elections being rare.\171\ With regard to closed-end funds and BDCs,
several commenters also suggested that universal proxies are not
necessary because dissidents almost always nominate a full slate of
nominees in order to achieve a specific objective, such as a
liquidation event.\172\ Therefore, according to these commenters,
shareholders typically have a binary choice to vote with fund
management or against it and these commenters believed such binary
choices would likely continue with the use of a universal proxy
card.\173\
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\171\ See letters from ICI; IDC; Fidelity; Forum.
\172\ See letters from Forum; ICI; see also letter from IDC. One
commenter stated that to serve the interests of long-term investors,
the Commission should provide closed-end funds with more protections
against activist investors and not erode the protections and
benefits offered by closed-end funds. See letters from ICI.
\173\ See letters from ICI; IDC; Forum.
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On the other hand, many commenters opposed the exclusion of funds
generally, and registered closed-end funds and BDCs in particular, from
the Proposed Rules.\174\ Some commenters contended that because of the
large retail investor base of registered closed-end funds and BDCs, it
is difficult for shareholders to effect change when necessary.\175\ One
commenter expressed support for universal proxies for BDCs and closed-
end funds and suggested that whether shareholders of such entities are
well-served by unitary or cluster boards is an open question.\176\
Another commenter stated that the administrative efficiency of a
unitary board structure, while worth considering, should be secondary
to allowing shareholders to promote nominees of their choosing to
effect the investment objectives of the fund.\177\ A separate commenter
recommended extending the Proposed Rules to closed-end funds and BDCs,
but not to open-end funds, given the latter's greater organizational
complexity and the extreme rarity of proxy contests affecting
them.\178\
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\174\ See letters from Bulldog; Ad Hoc Coalition; E. Burke; BM;
Mediant; letter dated Jan. 12, 2017 from Blue Bell Private Wealth
Management; letter dated Feb. 3, 2017 from Almitas Capital
(``Almitas''); letter dated Jun. 29, 2021 from Saba Capital
Management, L.P. (``Saba'').
\175\ See letters from Almitas; Bulldog.
\176\ See letter from Ad Hoc Coalition.
\177\ See letter from Saba.
\178\ See letter from Mediant.
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3. Final Amendments
The final rules we adopt in this document will not apply to funds
at this time, as the Commission continues to consider any application
of the rules to funds. Developments since 2016, along with various
comments discussed above that we have received have led us to conclude
that further consideration of potential application of the universal
proxy rules to certain funds is warranted.
K. Compliance Dates
Because the rule amendments we adopt in this document involve
significant changes to the manner in which election contests are
conducted, a transition period is appropriate. New Rule 14a-19 imposes
notice and other mandates that will require planning and coordination
by both parties to an election contest. Therefore, to avoid disruption
to the upcoming proxy season, the rule changes we adopt in this
document will become effective for any shareholder meeting featuring an
election contest held after August 31, 2022. The length of this
transition period is designed to allow adequate time for affected
parties to plan and prepare for compliance with the new rules, and to
adjust to the elimination of existing provisions, such as the short
slate rule.
Some of the rule amendments we adopt in this document will apply to
all director elections, not just those that are contested. While these
changes do not require coordination and notice to the other party, as
is required in a contested election, they do involve enhanced
disclosure of the legal effect of votes under the applicable voting
standard for the election. The amendments also impose new voting
options where the
[[Page 68347]]
applicable voting standards give effect to abstain or withhold votes.
Given these changes, the same transition period for compliance (for
shareholder meetings held after August 31, 2022) is appropriate for all
of the rule amendments we adopt in this document.
III. Other Matters
If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application.
Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated these rules a ``major rule,'' as
defined by 5 U.S.C. 804(2).
IV. Economic Analysis
We are attentive to the costs imposed by and the benefits obtained
from the final amendments.\179\ The discussion below addresses the
potential economic effects of the final amendments, including the
likely benefits and costs, as well as the likely effects on efficiency,
competition, and capital formation. We also analyze the potential costs
and benefits of reasonable alternatives to the amendments.
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\179\ Exchange Act Section 3(f) requires us, when engaging in
rulemaking that requires us to consider or determine whether an
action is necessary or appropriate in the public interest, to
consider, in addition to the protection of shareholders, whether the
action will promote efficiency, competition, and capital formation.
15 U.S.C. 78c(f). Exchange Act Section 23(a)(2) requires us, when
adopting rules under the Exchange Act, to consider the impact that
any new rule would have on competition, and prohibits any rule that
would impose a burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act. 15
U.S.C. 78w(a)(2).
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A. Introduction
As discussed above, we are adopting amendments that will require
the use of a universal proxy card in all contested elections with
competing slates of director nominees to address concerns over the
inability of shareholders using the proxy system to vote for the
combination of candidates of their choice in a contested election.
These amendments will allow shareholders voting by proxy to choose
among director nominees in an election contest in a manner that more
closely reflects the choice that could be made by voting in person at a
shareholder meeting. Shareholders voting in person in a contested
election with competing slates of nominees are able to choose among all
of the duly nominated candidates. By contrast, shareholders currently
voting by proxy are typically limited to voting for only registrant
nominees or voting for only the dissident's nominees (or, in the case
of certain short slate elections, for the dissident's nominees and
certain registrant nominees chosen by the dissident).\180\ If
shareholders wish to vote for a combination of nominees across the two
slates, they generally must do so in person by attending or sending a
representative to the shareholder meeting and incurring the costs of
doing so. In some cases, parties such as proxy solicitors may make
arrangements for one or more individuals to attend a meeting on behalf
of certain shareholders to facilitate split-ticket voting. However,
many shareholders, particularly retail shareholders or those who do not
hold a large stake in the registrant, might not be willing or able to
bear the costs of voting in person and may not have access to other
arrangements. Therefore, these shareholders may not currently be able
to vote for their preferred selection of candidates.
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\180\ Though our economic analysis focuses on contests between a
registrant and a single dissident for ease of exposition, we believe
that the economic effects discussed below would also apply to
contests involving more than one dissident. Election contests with
more than one soliciting dissident are uncommon. For example, the
staff has identified only one proxy contest in operating companies
from 2017-2020 that involved more than one dissident with separate
slates of nominees.
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The mandated use of universal proxies will allow shareholders to
vote for any combination of nominees when voting their shares by proxy
in advance of the meeting, which is generally the way in which the vast
majority of shares are voted. For shareholders who would otherwise
incur incremental costs to vote for a combination of candidates that
could not be voted for by proxy, such as by attending the meeting in
person, universal proxies will result in direct cost savings. Universal
proxies will also enable shareholders who want to split their vote but
are unwilling (or unable) to bear additional costs to be able to vote
for their preferred combination of nominees to do so without incurring
additional costs.
The nomination and election of directors by shareholders represents
a fundamental governance mechanism that can mitigate conflicts of
interest between shareholders and management. While the most direct
effect of the final amendments will be to improve the efficiency of the
voting process and permit shareholders greater choice when voting by
proxy in contested director elections, they will also likely impose
direct costs on dissidents and registrants in certain contests. The
final amendments may also have broader impacts on corporate governance
and the relationship between shareholders and management. For reasons
discussed below,\181\ it is difficult to predict the likely extent or
direction of these broader potential effects, but we cannot rule out
the possibility that they could be significant.\182\ For example,
enabling split-ticket voting could lead to a greater number of boards
that are composed of a mix of registrant-nominated \183\ and dissident-
nominated directors (``mixed boards''), which may affect the
effectiveness of boards, either positively or negatively. Additionally,
mandating the use of universal proxies by registrants as well as
dissidents--which, in practice, would likely result in the names of
dissident nominees being disseminated via registrant proxy cards to all
shareholders--may provide potential dissidents with a new means of
generating publicity for alternative nominees or for the broader
concerns behind a contest at a relatively low cost, which could change
the nature of interactions between potential dissidents and
management.\184\ The overall incidence of contested elections may
change as well. These and other potential effects, as well as possible
mitigating factors, are discussed in detail below.
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\181\ See Section IV.C.
\182\ We are unaware of any empirical studies that find that
universal proxies would have significant effects on corporate
governance and the relationship between shareholders and management.
A recent study submitted by a commenter (see letter from Prof.
Hirst) finds that a universal proxy is unlikely to lead to more
proxy contests or to greater success by special interest groups. See
Scott Hirst, Universal Proxies, Yale J. on Reg. 35, 437 (2018)
(``Hirst Study''). This is an updated version of a study we
previously discussed in the Proposing Release (see note 209 in the
Proposing Release). We note that this study relies on several
critical assumptions that might not be reliable. See infra note 284.
\183\ For ease of exposition, we refer throughout this economic
analysis to the nominees of the board, including those that are
incumbent directors, or its nominating committee, as the nominees of
the registrant and, in total, as the registrant slate.
\184\ See, e.g., letter from CCMC (arguing that ``Seeking to
avoid the cost and distraction of an SEC-sanctioned proxy fight,
many companies will simply follow the path of least resistance and
negotiate to place dissident directors directly on their boards
without the need for a shareholder vote.'').
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At the outset, where possible, we have attempted to quantify the
benefits, costs, and effects on efficiency, competition, and capital
formation expected to result from the final amendments. In many cases,
however, we are unable to quantify the potential economic effects
because we lack information necessary to provide a reasonable estimate.
For example, we are unable to quantify the
[[Page 68348]]
potential change in the number of mixed-board outcomes at contests as a
result of the final amendments. We are also unable to quantify the
change in the instance of proxy contests that may result from the final
amendments.
Although many commenters supported the mandated use of universal
proxy in contested director elections, some commenters raised a number
of economic concerns with the proposed amendments and also suggested
alternatives in some cases. We have considered those concerns and,
where appropriate, have expanded our economic analysis to address those
concerns and alternatives.
B. Baseline
To assess the economic impact of the final amendments, we are using
as our baseline the current state of the proxy process. Our baseline
includes existing Commission rules, state laws, and corporate governing
documents that jointly govern the ability to solicit proxies in support
of director nominees other than the registrant nominees and the manner
in which contested elections are conducted. This section discusses the
parties involved in director election contests under the current legal
framework, current proxy voting practices, and the means available to
shareholders to influence the composition of boards of directors.
1. Affected Parties
We consider the impact of the final amendments on shareholders,
registrants, dissidents in contested elections (who are typically also
shareholders), and directors.
a. Shareholders
Different types of shareholders exhibit different degrees of
involvement in voting on matters up for a vote at the companies they
invest in. In particular, a study by a proxy services provider found
that there are, on average, large differences in involvement by
institutional investors compared to retail investors.\185\
Institutional and retail investors also face different levels of
difficulty and resource constraints to vote for their preferred choices
of nominees in contested director elections under current rules.\186\
As a result, the final amendments are likely to have a differential
impact with respect to the costs of voting and feasible voting choices
for these two types of shareholders.
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\185\ See Broadridge and PwC, Proxy Pulse 2020 Proxy Season
Review (2020), available at <a href="https://www.broadridge.com/_assets/pdf/broadridge-proxypulse-2020-review.pdf">https://www.broadridge.com/_assets/pdf/broadridge-proxypulse-2020-review.pdf</a> (``Proxy Pulse 2020'').
\186\ See infra Section IV.B.2.d for a discussion on different
shareholders' current ability to arrange split-ticket voting.
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The number of beneficial shareholder accounts for U.S. public
companies varies significantly by company market capitalization: The
average (median) number of beneficial shareholder accounts is
approximately 3,900 (1,400) for companies with less than $300 million
in market capitalization, approximately 11,000 (5,700) for companies
with between $300 million and $2 billion in market capitalization,
approximately 28,300 (16,500) for companies with between $2 billion and
$10 billion in market capitalization, and approximately 279,000
(102,700) for companies with market capitalization above $10
billion.\187\ Among all companies, we estimate that 91% of account
holders are retail investors.\188\ For U.S. public companies that held
their annual meetings in the main 2020 proxy season (i.e., between
January 2020 and June 2020), a study by a proxy services provider found
that retail investors held approximately 29% of shares held in
brokerage accounts and institutional investors held 71%.\189\ An
earlier study by the same proxy services provider for U.S. public
companies that held their annual meetings in the main 2016 proxy season
(i.e., between January 2016 and June 2016), found that the percentage
of ownership by retail investors varies significantly with company
size, and was estimated to be 67% in companies with less than $300
million in market capitalization, 32% in companies with between $300
million and $2 billion in market capitalization, 23% in companies with
between $2 billion and $10 billion in market capitalization, and 27% in
companies with market capitalization above $10 billion.\190\
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\187\ Based on industry data provided by a proxy services
provider. Note that an individual shareholder may have more than one
account, so the number of beneficial shareholders likely is lower
than the number of beneficial shareholder accounts. For the purpose
of estimating costs related to distribution of proxy materials, the
number of accounts is the more relevant number because dissemination
costs such as intermediary and processing fees apply on a per
account basis per NYSE Rule 451. The data is based on domestic
companies that held shareholder meetings between July 1, 2018 and
June 30, 2019.
\188\ Id.
\189\ See Proxy Pulse 2020.
\190\ See Broadridge and PwC, Proxy Pulse 2016 Proxy Season
Review (3d ed. 2016), available at <a href="https://www.broadridge.com/proxypulse/_assets/docs/broadridge-proxypulse-3rd-edition-2016.pdf">https://www.broadridge.com/proxypulse/_assets/docs/broadridge-proxypulse-3rd-edition-2016.pdf</a>
(``Proxy Pulse 2016'').
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Retail and institutional shareholders exhibit very different voting
behavior. In the main 2020 proxy season, while institutional investors
voted 92% of their shares, retail investors voted only 28% of their
shares.\191\ Based on an earlier study of the main 2015 proxy season,
the voting propensity of retail investors does not vary significantly
by the size of the registrant.\192\ By contrast, institutional
investors vote a significantly smaller portion of their shares in
registrants with less than $300 million in market capitalization (72%)
than in larger registrants (91% to 93%),\193\ which may be a function
of the types of institutions that invest in companies of different
sizes.
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\191\ See Proxy Pulse 2020. We acknowledge that the voting
participation of retail shareholders in particular could increase in
the case of a contested election, because of greater media coverage
and expanded outreach efforts, but we do not currently have data
that would allow us to separately estimate the degree of retail
participation in contested elections.
\192\ See Broadridge and PwC, Proxy Pulse 2015 Proxy Season
Wrap-up (3d ed. 2015), available at <a href="http://media.broadridge.com/documents/ProxyPulse-Third-Edition-2015.pdf">http://media.broadridge.com/documents/ProxyPulse-Third-Edition-2015.pdf</a>.
\193\ Id.
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Retail and institutional investors may also have differential
access to resources that can be expended in order to cast a vote, and
may have different levels of incentive to expend such resources. In
general, we expect retail investors to face greater resource
constraints than institutional investors. Differences across
shareholders in the ability to take advantage of different approaches
to voting and in the resources expended on voting are discussed in more
detail in Sections IV.B.2.d and IV.C.1 below.
b. Registrants
The final amendments mandating the use of universal proxy cards in
director election contests will apply to all registrants that have a
class of equity securities registered under Section 12 of the Exchange
Act and are thereby subject to the Federal proxy rules, except funds.
The amendments will not apply to foreign private issuers or companies
with reporting obligations under only Section 15(d) of the Exchange
Act, whose securities are not subject to the Federal proxy rules. As of
December 31, 2020, we estimate that approximately 5,400 registrants had
a class of securities registered under Section 12 of the Exchange Act
and will be subject to the amendments mandating the use of a universal
proxy card in contested director elections.\194\
[[Page 68349]]
We also are adopting some changes to the form of proxy and proxy
statement disclosure requirements applicable to all director elections.
Because these changes apply to all registrants subject to the Federal
proxy rules, they will also apply to registered funds. As of September
30, 2021, there were 14,062 registered management investment companies
that were subject to the proxy rules: (i) 13,347 Open-end funds, out of
which 2,497 were Exchange Traded Funds (``ETFs'') registered as open-
end funds or open-end funds that had an ETF share class; (ii) 701
closed-end funds; and (iii) 14 variable annuity separate accounts
registered as management investment companies.\195\ In addition, as of
June 2021, we identified 99 BDCs that were subject to the proxy
rules.\196\
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\194\ We are able to estimate the number of registrants with the
class of securities registered under Section 12 of the Exchange Act
by reviewing all Forms 10-K and 10-K amendments filed during
calendar year 2020 with the Commission. After reviewing all forms,
we then count the number of unique registrants that identify
themselves as having a class of securities registered under Section
12(b) or Section 12(g) of the Exchange Act. Foreign private
registrants that filed both Forms 20-F and 40-F, as well as asset-
backed registrants that filed Forms 10-D and 10-D/A during calendar
year 2020 with the Commission are excluded from this estimate. This
estimate also excludes BDCs; see infra note 196.
\195\ We estimate the number of unique registered management
investment companies based on Forms N-CEN filed between December
2020 and September 2021 with the Commission. Open-end funds are
registered on Form N-1A, while closed-end funds are registered on
Form N-2. Variable annuity separate accounts registered as
management investment companies are trusts registered on Form N-3.
\196\ BDCs are entities that have been issued an 814-reporting
number. Our estimate includes 82 BDCs that filed Form 10-K in 2020,
as well as 17 BDCs that were not traded.
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There is substantial variation across registrants in
characteristics such as incumbent executive and director ownership and
governance structure, which may affect the degree to which different
registrants are affected by the final amendments.
Incumbent Executive and Director Ownership
We expect that incumbent executives and directors would vote in
support of the registrant's slate of nominees in a director contest at
the annual meeting,\197\ and that the mandated use of a universal proxy
card is unlikely to change this expected voting behavior. We therefore
think that the percentage of total voting power held by a registrant's
incumbent executives and directors can have an effect on the impact of
the final amendments on the incidence and outcome of contested director
elections.
---------------------------------------------------------------------------
\197\ Note that in the case of a dissident who is also an
insider (such as an incumbent director), this may not be the case.
---------------------------------------------------------------------------
Table 1 below reports estimates of the average combined vote
ownership by incumbent executives and directors for a broad sample of
3,841 potentially affected registrants, as well as for several size-
related sub-samples of registrants: Those included in the S&P 500 index
(``large-cap stocks''), in the S&P 400 index (``mid-cap stocks''), in
the S&P 600 index (``small-cap stocks''), and outside the S&P 1500
index that is composed of these three indices (and which tend to be
smaller than those registrants in the S&P 1500). The average (median)
percentage is 14.6% (5.8%) for all registrants, and this percentage is
greatest for registrants outside the S&P 1500 index. We also estimate
the percentage of registrants for which incumbent executives and
directors hold a majority of the voting power, and hence can control
who is elected to the board in most circumstances. Overall, incumbent
executives and directors hold a majority of votes in 8.1% of
registrants. This percentage ranges from 2.0% for S&P 500 registrants
to 11.4% for non-S&P 1500 registrants.
The data in Table 1 indicates that to the extent incumbent
executives and directors tend to vote for the registrant's slate of
director nominees in contested elections, the impact of such behavior
on the economic effects of the final amendments is likely to be more
important in the non-S&P 1500 category of smaller registrants.
Table 1--Incumbent Executive and Director Vote Ownership of Registrants Subject to Proxy Rules \198\
----------------------------------------------------------------------------------------------------------------
Incumbent executive and director vote ownership (%
of total voting power) Percentage with
---------------------------------------------------- majority
25th 75th ownership
Mean percentile Median percentile
----------------------------------------------------------------------------------------------------------------
All registrants............................ 14.6 1.8 5.8 18.8 8.1
S&P 500 registrants........................ 4.4 0.3 0.8 2.3 2.0
S&P 400 registrants........................ 6.8 1.0 2.0 5.5 2.0
S&P 600 registrants........................ 9.5 1.8 3.4 8.4 4.1
Non-S&P 1500 registrants................... 19.3 4.0 10.4 27.8 11.4
----------------------------------------------------------------------------------------------------------------
Governance Structure
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\198\ Estimates based on staff analysis of director and senior
executive vote ownership data from Institutional Shareholder
Services Inc. (``ISS'') as of calendar year 2019. This data is
available for 3,841 of the potentially affected registrants and may
include ownership through options exercisable within 60 days. The
sample represents over 70% of potentially affected registrants. It
is our understanding that the registrants for which data is missing
in the ISS database tend to be the smallest registrants in terms of
market capitalization, and therefore the data presented may not be
representative for these registrants. In particular, we believe it
is likely that incumbent management ownership for this group of
registrants is on average even greater than for the non-S&P 1500
registrants listed in Table 1.
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Registrants' governance characteristics may affect the incidence
and outcomes of proxy contests currently as well as the effects, if
any, of potential changes in the proxy rules on the incidence and
outcomes of proxy contests.\199\ For example, as discussed in more
detail in the Proposing Release, the presence of a staggered board
structure in a registrant will mitigate the impact on board composition
of any final amendments to the proxy rules by prolonging the time over
which any changes in board composition would occur.\200\ We estimate
that approximately 42% of registrants have a staggered board.\201\ This
percentage varies substantially across market capitalization
categories: Approximately 14% for S&P 500 registrants, 38% for S&P 400
registrants, 43% for S&P 600 registrants, and 48% for non-S&P 1500
registrants.\202\
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\199\ In the Proposing Release, we also discussed the use of
dual class shares, where one class of shares has greater voting
rights than the other, as a mechanism that could potentially
concentrate the voting control of a registrant in the hands of
insiders (see Section IV.B.1.b of the Proposing Release). However,
the potential impact of such dual class share structures on the
economic effects of the final amendments would ultimately flow
through the vote ownership of insiders, which we discuss above.
\200\ See Section IV.B.1.b of the Proposing Release.
\201\ Estimates based on staff analysis of board characteristics
data from ISS as of calendar year 2019. This data is available for
3,841 of the potentially affected registrants.
\202\ Id.
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As discussed in more detail in the Proposing Release, cumulative
voting for directors may increase the ability of
[[Page 68350]]
minority shareholders to elect a director and may therefore also be
important to consider when evaluating the potential effects of the
final amendments on proxy contests.\203\ We estimate that 3.3% of
registrants have cumulative voting. This percentage also varies across
market capitalization categories: Approximately 2.2% for S&P 500
registrants, 3.1% for S&P 400 registrants, 4.1% for S&P 600
registrants, and 3.4% for non-S&P 1500 registrants.\204\
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\203\ See, e.g., David Ikenberry & Josef Lakonishok, Corporate
Governance through the Proxy Contest: Evidence and Implications, 66
J. Bus. 405, 413 (1993) (finding that dissidents are successful in
obtaining at least one seat in 41.3% of contests held under straight
voting and that this increases to 71.9% in contests using cumulative
voting).
\204\ Estimates based on staff analysis of board characteristics
data from ISS as of calendar year 2019. This data is available for
3,841 of the potentially affected registrants. We do not have ready
access to this data for other registrants.
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Registrants' governing documents generally provide that one of two
main standards be applied to the election of directors: Either a
majority voting standard or a plurality voting standard. Under a
majority voting standard, directors are elected only if they receive
affirmative votes from a majority of the shares voting or present at
the meeting, and shareholders can vote ``for'' each nominee,
``against'' each nominee, or ``abstain'' from voting their shares. By
contrast, under a plurality voting standard, the nominees receiving the
greatest number of ``for'' votes are elected, and shareholders can
withhold votes from specific nominees but cannot vote ``against'' any
of them. In those cases in which a majority standard is in place in
director elections, registrants tend to have a carve-out in the bylaws
(or charter) that applies a plurality standard in contested director
elections. In the case of a majority voting standard in a contested
election, there is a risk that some or all of the nominees receiving
the highest relative shareholder support may still not win a majority
of votes cast. This risk is especially high when nominees only appear
on either the registrant's or the dissident's card, which is generally
the case under the current proxy rules. Based on data that we have
available for affected S&P 1500 registrants, we estimate that whereas
approximately 70% have a majority standard in director elections, only
approximately 6% of the affected S&P 1500 registrants have a majority
standard without a carve-out for a plurality standard in the case of a
contested election.\205\
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\205\ Estimates based on staff analysis of governance data for
S&P 1500 companies from ISS as of calendar year 2020.
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c. Dissidents in Contested Elections
The dissidents in contested elections are typically shareholders of
the registrant, but may fit into one of several categories. A common
category of dissidents is activist hedge funds that take a proactive
approach to the companies in their investment portfolios by trying to
influence the management and decision-making through various means,
such as proxy contests. Dissidents may also be former insiders or
employees of the registrant. A party to a possible business combination
may also contest the election of directors at a registrant when, for
example, it is seeking to acquire the registrant but the registrant's
current board does not approve of the transaction. In some cases, a
group of dissatisfied shareholders other than activist hedge funds
jointly contests an election. Section IV.B.2.a below provides further
information about the relative frequency of different types of
dissidents in recent director contests.
d. Directors
We note that reputational concerns may be an important
consideration for directors and potential directors.\206\ Past research
has found that proxy contests may affect the reputation of incumbent
directors, in that such contests appear to have had a significant
adverse effect on the number of other directorships they hold.\207\
Therefore, any changes to the proxy rules that would increase the
likelihood of proxy contests at any given registrant could reduce the
willingness of current and potential directors to be nominated to serve
on the registrant's board in the future.
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\206\ See, e.g., Ronald Masulis & Shawn Mobbs, Independent
Director Incentives: Where Do Talented Directors Spend Their Limited
Time and Energy?, 111 J. Fin. Econ 406, 426 (Feb. 2014) (concluding
that director reputation is a powerful incentive for independent
directors).
\207\ See Vyacheslav Fos & Margarita Tsoutsoura, Shareholder
Democracy in Play: Career Consequences of Proxy Contests, 114 J.
Fin. Econ. 316, 326 (2014) (finding that, following a proxy contest,
all directors in the targeted company experience on average a
significant decline in the number of their directorships, not only
in the targeted company, but also in other, non-targeted companies).
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2. Contested Director Elections
Currently, a shareholder voting by proxy is generally limited to
voting for either the registrant slate or the dissident slate (and,
when used to round out a slate, certain registrant nominees chosen by
the dissident).\208\ By contrast, a shareholder that attends an annual
meeting may vote for any combination of registrant and dissident
nominees.
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\208\ However, it may be possible for a registrant to require a
dissident's nominees to consent to be named on the registrant's card
pursuant to the director questionnaires required under a
registrant's advance notice bylaw provisions. As noted above, the
staff has observed an increased use of this tactic since 2016. This
option is not available to the dissident. In addition, we have
observed at least one case since 2016 where universal proxy was used
by both parties, presumably based on obtaining voluntary consent by
the included nominees. See supra note 43 and accompanying text.
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a. Proxy Contest Data
We identify 148 proxy contests \209\ that were initiated through
the filing of preliminary proxy statements by dissidents in calendar
years 2017-2020 across all registrants subject to the proxy rules other
than funds.\210\ Of these proxy contests, we estimate that 101 involved
an election contest with competing slates of director nominees at an
annual meeting of shareholders.\211\ In one case, there were two
dissidents with separate slates of nominees. Most of the contests with
competing slates of board nominees were in smaller to midsize
companies: Nine were S&P 500 companies, 13 were S&P 400 companies, 17
were S&P 600 companies, and 62 were outside the S&P 1500. In terms of
the type of dissidents initiating proxy contests with competing slates,
activist investors (mainly hedge funds and other types of investment
companies) were dissidents in approximately 79% of the contests,
whereas former or current insiders and employees, other groups of
shareholders, or companies seeking
[[Page 68351]]
business combinations made up the rest of the dissidents.\212\
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\209\ This total number of proxy contests includes all cases in
which a proponent or dissident initiated a ``solicitation in
opposition'' to the registrant, whether in relation to an election
of directors or with respect to another issue. A solicitation in
opposition includes (i) any solicitation opposing a proposal
supported by the registrant; and (ii) any solicitation supporting a
proposal that the registrant does not expressly support, other than
a shareholder proposal included in the registrant's proxy material
pursuant to Rule 14a-8. See 17 CFR 240.14a-6(a), Note 3. The total
number includes consent solicitations for special meetings and
written consent solicitations (36 cases), which may be board related
contests but are not subject to the required use of universal
proxies. This total number of proxy contests does not include exempt
solicitations, which are discussed in Section IV.B.3, infra.
\210\ Based on staff review of EDGAR filings in calendar years
2017 through 2020.
\211\ This represents on average approximately 25 board-
nomination contests per year, which is lower than the average of 36
initiated contests per year we found for 2014 and 2015 in the
Proposing Release. The 47 proxy contests initiated in 2017-2020 that
did not represent election contests with competing slates of
candidates at an annual meeting of shareholders include: Consent
solicitations for the removal and election of directors at a special
meeting or through written consent; contests involving ``vote no''
campaigns; and proposals on issues other than director nominees.
Consent solicitations and ``vote no'' campaigns are discussed in
Section IV.B.3, infra.
\212\ Based on information from Factset's SharkRepellent
database and staff's review of EDGAR filings.
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Approximately 30% of the contests with competing slates were
contests for majority control of the board.\213\ However, because less
than a majority of board seats were up for election in approximately
31% of the contests due to staggered board structures, dissidents
sought majority control in 43% of contests where it was possible to do
so (30 out of 70 cases). Among the 31 cases where less than a majority
of seats were up for election, dissidents nominated candidates for all
of the seats that were up for election in 48% of contests (15 cases).
Overall, dissidents nominated candidates for all of the seats that were
up for election in approximately 25% of contests (25 cases out of 101).
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\213\ This percentage is somewhat larger than the 26% reported
in the Proposing Release for 72 board contests initiated in years
2014 and 2015.
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b. Notice, Solicitation, and Costs of Proxy Contests
The Commission's proxy rules do not currently require dissidents to
provide notice to registrants of their intention to solicit votes for
their nominees. However, as discussed, advance notice bylaws are common
among registrants. For example, at the end of 2020, 99% of S&P 500
registrants had advance notice provisions, and 95% of the Russell 3000
had such provisions.\214\ We understand that the latest date on which
notice may be provided under advance notice bylaws typically ranges
from 90 to 120 days before the anniversary of the meeting date.\215\
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\214\ See WilmerHale M&A Report. An advance notice bylaw can
generally be waived by a registrant's board of directors at their
discretion, though we do not have data that would allow us to
determine the frequency with which such bylaws are waived. If not
waived, such bylaws may also be challenged in court (such as in the
case of ``inequitable circumstances''). See, e.g., AB Value
Partners, L.P. v. Kreisler Mfg. Corp., No. 10434-VCP, 2014 WL
7150465 (Del Ch. Dec. 16, 2015).
\215\ See S&C 2015 Report.
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Among the 101 director election contests initiated in years 2017-
2020, approximately 90% of dissidents either publicly announced or
communicated their intent to nominate directors to the registrant at
least 60 days before the anniversary of the previous year's annual
meeting date (or 60 days before the annual meeting date if the
registrant did not hold an annual meeting during the previous year, or
if the date of the meeting had changed by more than 30 calendar days
from the previous year).\216\ Further statistics on the distribution of
the timing for initial nomination communications and filing of
preliminary proxy statements are shown in Table 2 below.
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\216\ Based on information from Factset's SharkRepellent
database and staff's analysis of EDGAR filings. When available,
staff gathered information on the timing of dissidents' direct
communications to registrants of their intent to nominate directors
from the parties' proxy filings, which frequently list such
information as part of the solicitation background descriptions.
Such communications are not always immediately publicly disclosed.
\217\ Id. For 37 of the 101 director contests initiated in 2017-
2020, the announcement and filing days are measured relative to the
annual meeting date rather than the anniversary of the previous
year's meeting date, because either the registrant did not hold an
annual meeting during the previous year or the date of the meeting
changed by more than 30 calendar days from the previous year.
Table 2--Timing of Initiation of Election Contests and Filing of Preliminary Proxy Statements Relative to
Anniversary of Previous Year's Meeting Dates, in 2017-2020 \217\
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Percentage
---------------------------------
At least At least At least Mean Median Min Max
45 days 60 days 90 days
----------------------------------------------------------------------------------------------------------------
Days between first announcement or 93 90 65 108 93 16 377
communication of election contest
intent and anniversary of previous
year's meeting date...............
Days between dissident filing 75 43 13 65 56 7 369
preliminary proxy statement and
anniversary of previous year's
meeting date......................
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For the contests where dissidents ultimately file a definitive
proxy statement (74 cases), approximately 80% of dissident definitive
statements are filed at most 50 days before the anniversary of the
previous year's annual meeting date (or 50 days before the annual
meeting date if the registrant did not hold an annual meeting during
the previous year, or if the date of the meeting had changed by more
than 30 calendar days from the previous year).\218\ In addition, more
than 82% of dissidents' definitive statements are filed 25 days or more
before the actual annual meeting date.\219\
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\218\ Based on data from Factset's SharkRepellent database and
staff analysis of EDGAR filings.
\219\ Id.
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While dissidents in proxy contests are required to make their proxy
statements publicly available via the EDGAR system, they are not
currently subject to any requirements as to how many shareholders they
must solicit. When dissidents actively solicit shareholders they have
the choice of sending shareholders a full package of proxy materials
(``full set'') or sending only a one-page notice informing them of the
online availability of proxy materials (``notice and access'' or
``notice-only''). We estimate that approximately 52% of dissidents
solicited all shareholders in a sample of recent proxy contests.\220\
Furthermore, the dissidents in this sample of contests sent full sets
of proxy materials to each of the shareholders solicited.\221\ The use
of the full set delivery method may be driven by findings that such
solicitations are associated with a higher rate of voting than notice-
only solicitations.\222\ Among those contests in which dissidents did
not solicit all shareholders, the average (median) percentage of shares
held by solicited shareholders was approximately 95% (96%) of the
outstanding shares of the registrant eligible to vote, and the minimum
(maximum) percentage of the outstanding shares eligible to vote held by
solicited shareholders was approximately 83% (99.9%).\223\ The average
(median) percentage of shareholder accounts solicited in these contests
was approximately 20% (14%), and the minimum (maximum) percentage of
accounts solicited was 1% (71%).\224\
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\220\ Based on industry data provided by a proxy services
provider for a sample of 31 proxy contests for annual meetings held
between July 1, 2018 and June 30, 2019.
\221\ Id.
\222\ See, e.g., Broadridge, Analysis of Traditional and Notice
& Access Issuers: Issuer Adoption, Distribution and Voting for
Fiscal Year Ending June 30, 2013 (Oct. 2013), available at <a href="http://media.broadridge.com/documents/Broadridge-6-Yr-NA-Stats-Report-2013.pdf">http://media.broadridge.com/documents/Broadridge-6-Yr-NA-Stats-Report-2013.pdf</a>.
\223\ Based on industry data provided by a proxy services
provider for a sample of 31 proxy contests for annual meetings held
between July 1, 2018 and June 30, 2019.
\224\ Id.
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[[Page 68352]]
In proxy contests, both registrants and dissidents incur direct
costs of solicitation.\225\ These costs may include, for example, fees
paid to proxy solicitors, expenditures for attorneys and public
relations advisors, and printing and mailing costs. We understand that
for registrants, the costs of solicitation in proxy contests generally
exceed the solicitation costs associated with a shareholder meeting
without a contested election. Both dissidents and registrants are
required to provide estimates of the costs of solicitation in their
proxy statements.\226\ As shown in Table 3 below, based on a review of
proxy contests initiated in years 2017-2020, the median reported
estimated total costs were approximately $1,650,000 for registrants and
approximately $750,000 for dissidents.\227\
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\225\ In some cases, dissidents may seek reimbursement of their
expenses from registrants. Such potential reimbursement is governed
by state law and is more likely in the case of a successful proxy
contest. The proxy rules require dissidents to disclose whether
reimbursement will be sought from the registrant, and, if so,
whether the question of such reimbursement will be submitted to a
vote of shareholders. See 17 CFR 240.14a-101, Item 4(b)(5).
\226\ Registrants may, but do not have to, exclude from the
total estimated solicitation costs the amount normally expended for
a solicitation for an election of directors in the absence of a
contest, and costs represented by salaries and wages of regular
employees and officers, provided a statement to that effect is
included in the proxy statement. It is our understanding that most
registrants exclude such costs from their estimated total costs.
\227\ This represents a substantial increase in median (and
average) reported solicitation expenses for both registrants and
dissidents compared to earlier years, as reported in the Proposing
Release (see Section IV.B.2.b of the Proposing Release for data on
estimated solicitation expenses in earlier years).
\228\ Based on data from Factset's SharkRepellent database and
staff analysis of EDGAR filings in calendar years 2017-2020.
Table 3--Reported Estimates of Solicitation Expenses in Election Contests Initiated in 2017-2020 \228\
----------------------------------------------------------------------------------------------------------------
Mean Median Minimum Maximum
----------------------------------------------------------------------------------------------------------------
Estimated Total Costs:
Registrant.................................. $3,891,886 $1,650,000 $65,000 $35,000,000
Dissident................................... 1,812,938 750,000 20,000 25,000,000
Estimated Fees Paid to Proxy Solicitor:
Registrant.................................. 540,486 300,000 10,000 3,500,000
Dissident................................... 278,614 125,000 12,500 2,500,000
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Beyond these estimated solicitation expenses, proxy contests may be
associated with other indirect costs, such as the cost of management or
dissident time spent in the process of conducting the contest and
expenses associated with any discussions held between management and
the dissident(s) or other participants who could influence the outcome
(e.g., large investors and proxy advisor firms). We do not have data on
these indirect costs. One study that considers the cost of earlier as
well as later stages of engagement between management and activist
hedge fund dissidents, which eventually culminate in a proxy contest,
estimates that a campaign ending in a proxy contest has a total (direct
and indirect) average cost to the dissident of approximately $10
million over the full period of engagement.\229\
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\229\ See Nickolay Gantchev, The Costs of Shareholder Activism:
Ev
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.