The Universal Proxy Gains Traction: Lessons from the 2018 Proxy Season

David Whissel is Senior Vice President and Director of Corporate Governance at MacKenzie Partners, Inc. This post is based on a MacKenzie Partners memorandum by Mr. Whissel. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

Despite recent reports that it has been shelved as an item on the SEC’s agenda, the universal proxy card, which makes it easier for shareholders to pick-and-choose from a combination of management and dissident nominees in a proxy contest, found new life this year as it was used for the first time in a proxy contest involving a US-listed company, and was on the verge of being implemented in at least two other contests that were settled prior to the proxy being mailed.

The universal proxy card has long been a topic of discussion among regulators and industry practitioners, and it looked like the initiative had gained sufficient traction in October 2016 as then-SEC Chair Mary Jo White proposed a new rule on the issue. However, the new SEC administration had reportedly put the universal proxy on the back burner and shifted its attention towards other rulemaking initiatives. It is somewhat surprising, then, that the private ordering that occurred this year primarily emanated from issuers rather than activists, who have historically been more outspoken in their support of the universal proxy.

Most notably, in June 2018, a universal proxy card was used by SandRidge Energy in its proxy contest with Carl Icahn—a first for a US-listed company. In that case, SandRidge developed a unique card that offered up both its own five nominees and Icahn’s seven nominees as potential choices, but, crucially, recommended that shareholders vote only for its five nominees and two of the three other nominees that were deemed independent of Icahn. The move received praise from various constituencies, including the Council of Institutional Investors, which wrote a letter to the company’s board expressing its support. And while the company ultimately ceded five board seats to the Icahn nominees in a last-minute settlement agreement, it should be noted that, had the company used a traditional proxy card, it is highly likely that even more shareholders would have used Icahn’s gold proxy card to vote for some or all of his nominees, increasing the possibility that Icahn would have won control of the entire board.

The universal proxy was also proposed, though not ultimately used, in two other situations: first, at Cars.com, and second, at Mellanox Technologies. Coincidentally, both companies were targeted by activist investor Starboard Value, and in both cases, Starboard was nominating directors that would have comprised at least half of the board. In the case of the latter, the company actually submitted the issue of whether or not to use a universal proxy to a shareholder vote at a special meeting that preceded the annual meeting at which the directors were to be elected. The universal proxy received overwhelming support from shareholders at Mellanox’s special meeting, and although both campaigns settled prior to the ultimate shareholder vote, they provided further evidence of the extent to which the universal proxy is a viable option for corporate issuers in a proxy contest.

In the absence of private ordering, with the current SEC administration, there are questions over whether the universal proxy will ever become standard practice. However, with the issue having gained a considerable amount of momentum over the past five years, shareholders appear to be eager to test out the universal proxy on an expedited timeline. During our experiences with the universal proxy card this past spring, the feedback we received from investors was overwhelmingly positive. And, importantly, the universal proxy did not lead to any unexpected results or insurmountable logistical challenges in any of the three contests in which it was used in 2018.

For those advocating for the widespread adoption of the universal proxy, however, a glimmer of hope arrived in August 2018, when the SEC announced plans to convene a roundtable to discuss the proxy process. Though the release indicates that the focus of the discussion will be predominantly on the “plumbing” of the voting system, it did make relatively brief mention of the 2016 proposed universal proxy amendments to the proxy rules. The logistical information regarding this roundtable has yet to be released, but the proposed agenda should provide some indication as to whether the universal proxy will be a focal point or merely a side issue.

For the time being, however, the spread of the universal proxy is likely to be ad hoc, driven by private ordering rather than legislative initiative. This is not necessarily a bad thing; the fact that the universal proxy remains something that is privately negotiated rather than mandated can give the parties to a proxy contest some flexibility in creating a body of acceptable “best practices” around the universal proxy, which could encourage its further use and may even provide a template for a future SEC rulemaking initiative. Nonetheless, the proxy contest at SandRidge Energy provided a much-needed “case of first impression,” demonstrating the universal proxy’s usefulness as a tool to facilitate shareholder franchise.

The complete publication is available here.

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