Kai Liekefett, Derek Zaba, and Beth Berg are partners at Sidley Austin LLP. This post is based on their Sidley memorandum. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).
On November 17, 2021, the U.S. Securities and Exchange Commission (SEC) adopted new Rule 14a-19 and amendments to existing rules under the Securities Exchange Act of 1934 to require the use of “universal” proxy cards in all nonexempt director election contests at publicly traded companies in the U.S. The new “Universal Proxy Rules” contain only slight modifications from rules the SEC first proposed in October 2016, for which the SEC reopened the public comment period during 2021. The rules will take effect for shareholder meetings after August 31, 2022. We expect a significant increase in proxy contest threats once the Universal Proxy Rules go in effect.
Members of Sidley’s Shareholder Activism & Corporate Defense Practice sent a formal comment letter to the SEC regarding the proposed rules — the only letter from a U.S. law firm suggesting material amendments that would protect against the potential for misuse of a mandatory universal proxy system. As we argued previously, the Universal Proxy Rules create the equivalent of “proxy access on steroids.” While comparable to the vacated Rule 14a-11, which allowed shareholders holding at least 3% of a company’s outstanding shares for three years to put dissident directors on the company’s proxy statement, the Universal Proxy Rules confer substantially more significant rights to shareholders without any minimum ownership requirements (i.e., owning only one share for one minute will be sufficient). Although this was a concern voiced by several Commissioners, the SEC proceeded with the adoption of the Universal Proxy Rules as originally proposed. The new rules will reshape the process by which hostile bidders, activist hedge funds, social and environmental activists, and other dissident shareholders may utilize director elections to influence control and policy at public companies.
As the rules will dramatically change the methods by which proxy contests at public companies have been conducted for decades, this article summarizes the principal mechanics of the Universal Proxy Rules and the implications of the rules for public companies.
