On December 6, 2022, the Division of Corporation Finance ("Corp Fin") of the Securities and Exchange Commission ("SEC") issued three new compliance and disclosure interpretations ("C&DIs") related to new Rule 14a-19, the Universal Proxy rule.1
Effective September 1, 2022, Rule 14a-19 requires the use of a universal proxy card in contested director elections. This change gives shareholders the ability to vote by proxy for their preferred combination of candidates duly nominated by the company's board of directors and a dissident shareholder, and decreases the costs for a dissident shareholder to run a proxy contest, as described in our prior client alert.2
Universal proxy has been receiving significant attention from companies, shareholder activists and the press, and the new C&DIs indicate Corp Fin and the SEC are focused on questions related to universal proxy cards as the 2023 proxy season approaches. In particular, the C&DIs make clear the importance of well-drafted advance notice bylaws to ensure that companies can obtain information to properly evaluate and respond to activists and potential director candidates and can exclude candidates who are not properly nominated in accordance with such bylaw provisions.
- Question 139.04 – This C&DI states that if a company "determines that [a dissident's] nominations are invalid due to the dissident shareholder's failure to comply with its advance notice bylaw requirements" in a company’s bylaws, the company can properly exclude such candidates from its universal proxy card.
- Question 139.05 – This C&DI explains what information a company must include in its proxy statement if a dissident shareholder's nominees were excluded from the proxy card due to the dissident's failure to comply with the company’s advance notice bylaws and the dissident thereafter challenges this exclusion in court. In this case, the company must disclose in its proxy statement "[(i)] its determination that the dissident shareholder's director nominations are invalid, [(ii)] a brief description of the basis for that determination, [(iii)] the fact that the dissident shareholder initiated litigation challenging the determination, and [(iv)] the potential implications (including any risks to the registrant or its shareholders) if the dissident shareholder's nominations are ultimately deemed to be valid."3
- Question 139.06 – This C&DI confirms that a dissident shareholder cannot conduct a Rule 14a-19 solicitation in support of its own director nominees simply by filing a proxy statement on EDGAR and relying exclusively on the registrant's proxy card. Rule 14a-19(e) "requires each soliciting party in a director election contest to use a universal proxy card that includes the names of all director candidates, including those nominated by other soliciting parties and proxy access nominees" [emphasis added]. Rule 14a-19(a)(3) further requires a dissident shareholder to solicit holders of at least 67% of the shares entitled to vote and to include a representation to that effect in its proxy statement. This means that a dissident shareholder must furnish its own universal proxy cards to holders of at least 67% of the voting power through permitted methods of delivering proxy materials. Such methods include the Rule 14a-16 "notice and access" method, which requires the mailing of a notice of the internet availability of proxy materials and the posting of such materials on a website, rather than printing and mailing a full set of materials.
The full text of the C&DIs are provided below in Exhibit A.
Appendix A
Question 139.04
Question: A registrant receives director nominations from a dissident shareholder purporting to nominate candidates for election to the registrant's board of directors at an upcoming annual meeting. The registrant, however, determines that the nominations are invalid due to the dissident shareholder's failure to comply with its advance notice bylaw requirements. Must the registrant include the names of the dissident shareholder's nominees on its proxy card pursuant to Rule 14a-19(e)(1) under these circumstances?
Answer: No. Only duly nominated candidates are required to be included on a universal proxy card. See Release No. 34-93596 (Nov. 17, 2021) (noting that universal proxy cards "must include the names of all duly nominated director candidates presented for election by any party…", and explaining that "[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"). If the registrant determines, in accordance with state or foreign law, that the dissident shareholder's nominations do not comply with its advance notice bylaw requirements, then it can omit the dissident shareholder's nominees from its proxy card.
Question 139.05
Question: A registrant determines that a dissident shareholder's director nominations do not comply with its advance notice bylaw requirements and excludes the dissident shareholder's nominees from its proxy card. The dissident shareholder then initiates litigation challenging the registrant's determination regarding the validity of the director nominations. Under these factual circumstances, what are the registrant's obligations with respect to its proxy statement disclosures and solicitation efforts?
Answer: The registrant must disclose in its proxy statement its determination that the dissident shareholder's director nominations are invalid, a brief description of the basis for that determination, the fact that the dissident shareholder initiated litigation challenging the determination, and the potential implications (including any risks to the registrant or its shareholders) if the dissident shareholder's nominations are ultimately deemed to be valid.
If a registrant furnishes proxy cards that do not include the dissident shareholder's director candidates and a court subsequently determines that the dissident shareholder's candidates are duly nominated, then the registrant is obligated under Rule 14a-19 to furnish universal proxy cards with the dissident shareholder's candidates. Accordingly, it should discard any previously-furnished proxy cards that it received. The registrant also should ensure that shareholders are provided with sufficient time to receive and cast their votes on the universal proxy cards prior to the shareholder meeting, including, if necessary, through the postponement or adjournment of the meeting.
Question 139.06
Question: Can a dissident shareholder conducting a non-exempt solicitation in support of its own director nominees simply file a proxy statement on EDGAR, avoid providing its own proxy card, and instead rely exclusively on the registrant's proxy card to seek to have its director nominees elected?
Answer: No. Rule 14a-19(e) requires each soliciting party in a director election contest to use a universal proxy card that includes the names of all director candidates, including those nominated by other soliciting parties and proxy access nominees. Rule 14a-19(a)(3) further requires a dissident shareholder to solicit holders of at least 67% of the voting power of shares entitled to vote on the director election contest and to include a representation to that effect in its proxy statement. This requirement is intended to prevent a dissident shareholder from capitalizing on the inclusion of its nominees on the registrant's universal proxy card without undertaking meaningful solicitation efforts. See Release No. 34-93596 (Nov. 17, 2021). A dissident shareholder would fail to comply with these rules if it does not furnish its own universal proxy cards to holders of at least 67% of the voting power through permitted methods of delivering proxy materials (such as the Rule 14a-16 "notice and access" method).
1. Available here.
2. For more information, see our prior alert, "In Another Win for Shareholders, SEC Adopts New Rules for Universal Proxy Cards in Contested Director Elections."
3. Further, if a company furnishes proxy cards that do not include the dissident shareholder's candidates and a court subsequently determines that the dissident's candidates were duly nominated, then, under Rule 14a-19, the company must furnish universal proxy cards with the dissident shareholder's candidates, and any previously furnished proxy cards should be discarded. The company also should ensure that shareholders have "sufficient time to receive and cast their votes on the universal proxy cards prior to the meeting, including, if necessary, through the postponement or adjournment of the meeting."
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