Were Reports on the Demise of the Universal Proxy Premature?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

The specter of the possible imposition of mandatory universal proxy has long been with us. The SEC apparently considered requiring universal proxies back in 1992 and, in 2014, the Council of Institutional Investors filed a rulemaking petition asking the SEC to reform the proxy rules to facilitate the use of universal proxies in proxy contests. Then, in 2016, the SEC proposed amendments to the proxy rules that would have mandated the use of universal proxy cards in contested elections. And there it sat. With the change of administrations in the White House, followed by the change of administrations at the SEC, the proposal for universal proxy fell off the SEC’s near-term agenda and was relegated to the long-term agenda. Moreover, disfavored by House Republicans, universal proxy would have been prohibited by various bills, including the Financial Choice Act of 2017 (which passed the House but not the Senate). (See this PubCo post.) Then, in July of this year, “several people familiar with the matter” advised Reuters that SEC Chair Jay Clayton “has in fact shelved the proposal.” (See this PubCo post.) The specter of mandatory universal proxy had been transfigured into more of a spectral presence.

But perhaps that conclusion was just a bit premature? In July, Clayton announced that the SEC would be holding a roundtable (now scheduled for November 15) to discuss the proxy process. His lengthy statement announcing the roundtable enumerated a variety of potential agenda topics, and buried under the broad-spectrum caption of “Other Commission Action” was the topic of universal proxy. (See this PubCo post.)

And then, at the recent meeting of the SEC’s Investor Advisory Committee meeting, there seemed to be some consensus developing on the potential value of universal proxy cards, even though concerns remain that it could favor one party over the other. One participant observed that, although the historic view has been that universal proxy cards help only the dissident shareholders in a proxy contest, in his experience, that has not necessarily been the case. In the example given, ISS might recommend in favor of two of dissident candidates only, but shareholders desiring to follow the ISS recommendation would, in the absence of universal proxy, be compelled to choose one full slate or the other—and that could end up being the dissident slate—or engaging in “bullet” voting for only the two directors.

An investor-favorable participant seemed to be conceding points in a behind-the-scenes negotiation over what a rulemaking might look like when he agreed that, in a solicitation by dissidents, a threshold solicitation of at least 75% of the shares and more than ten persons could be required to trigger a mandate for universal proxy, a higher threshold than the majority requirement currently in the SEC proposal. (An issuer-favorable participant advocated that, to be fair, dissidents should have to solicit all shareholders, as the company is required to do.) Yet another participant noted that, should universal proxy be resuscitated, the SEC should require companies to disclose what happens when an incumbent director refuses to serve if a dissident is elected. Another issue raised was the need to ensure that shareholders do not vote for too many directors, which would disqualify the proxy card unless a chance to cure is offered. In sum, there were, curiously, a slew of “comments” offered on a proposal that was thought to be moribund at best.

This white paper from MacKenzie Partners discusses the resuscitation of universal proxy this year—not through SEC action, but rather through private ordering. According to the paper, universal proxy “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.” What’s more, the paper indicates, in these instances, private ordering was initiated by issuers rather than activists. That data supports a thesis of the paper—“that the universal proxy card can, in certain situations, be more advantageous for issuers than for activists.” The paper provides the following hypothetical illustrations:

“Suppose that a shareholder voting in a proxy contest wishes to support some board-level change, but is wary of potentially ceding majority control of the board to an activist investor. Under the current rules, shareholders in this situation have only a limited choice, each with its own inherent risks. Voting on the dissident’s card for three out of seven nominees can ensure that the board undergoes some level of change; however, because voting on the dissident card deprives four of management’s nominees of votes, it can inadvertently lead to an unwanted change-in-control. On the other hand, a vote on management’s card, withholding votes from certain disfavored incumbent directors, only increases the chances that there are spots left open for some dissident nominees; it does not guarantee that the dissident nominees that are ultimately elected are the ones that the shareholder actually supports…. The universal proxy can also benefit management by disadvantaging the dissident. For example, suppose there are ten board seats up for election, and the dissident nominates a short slate of four. Two of its nominees are highly-qualified, while the other two are less so. With the universal ballot, shareholders can more easily avoid supporting the dissident’s less-qualified nominees, thereby reducing the likelihood that the entire short slate will be elected.”

On occasion in the past, the paper reports that shareholders have used a little “self-help,” manipulating the proxy cards by scratching out and writing in names and special instructions, but these cards may be subject to challenge or processed incorrectly.

In 2018, however, universal proxy was “adopted” in three proxy contests, although only one actually went to a vote. The paper suggests that that event may open the door for future use. In the first instance, a recently public company faced an election contest related to half the board from a well-known hedge-fund activist with “an incredibly strong track record of placing directors on boards.” That risk led the company to agree to use a universal proxy; however, the proxy contest ultimately settled before either side filed a preliminary proxy statement. In the next instance, an Israeli semiconductor company was faced with a proxy contest for a board majority from the same activist. In this case, because of Israeli law, the company opted to submit the question of the use of a universal proxy card directly to shareholders at a meeting in advance of the director election vote. The proposal received overwhelming support from shareholders; however, a settlement was reached in that case also.

Universal proxy was actually used in one proxy contest. In that case, the dissident nominated a full slate of five directors. The company’s initial response was to expand the board to seven, in the hope of preventing a complete change of control at the board level. However, the dissident just expanded its slate to seven directors. The paper notes that the company was emerging from bankruptcy, and, as a result, its shareholder base consisted largely of hedge-fund creditors that had converted their debt holdings to equity, which left the company more vulnerable in a proxy contest. However, as a result of a possible oversight, the paper suggests, the dissident’s nominees had consented to be named as nominees in the company’s proxy statement, which allowed the company to use a universal proxy card without separately getting their consent. Accordingly, the company designed a proxy card that included its five nominees and the dissident’s seven nominees, recommending that shareholders vote only for its five nominees and “two of the three other nominees that were deemed independent” of the dissident. According to the paper, 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.”

Notwithstanding the use of a universal proxy card, strategic maneuvering continued, as the company “became aware of rumors that [the dissident] was attempting to persuade other shareholders to reallocate their votes among their chosen candidates towards those who were not supported by ISS and Glass Lewis, with the goal of bolstering his prospects of achieving majority control of the board.” The dissident also sent out its own proxy card with its nominees. At the end of the day, the company and the dissident settled, with the company having three seats and the dissident five. The paper observes that, although this loss of majority control

“may have appeared to represent a significant loss for [the company] and perhaps even a setback for the use of the universal proxy,…it should be noted that, had the company used a traditional proxy card, it is highly likely that even more shareholders would have used [the dissident’s] gold proxy card to vote for some or all of his nominees, increasing the possibility that [the dissident] would have won control of the entire board. In that sense, the first use of the universal proxy card in the United States was a qualified success. Its use allowed shareholders greater flexibility in selecting their preferred candidates, and likely dissuaded some holders from voting for[the dissident’s] nominees on his card. Furthermore, despite the historical protestations of Broadridge, the universal proxy card did not present any significant logistical challenges with respect to vote processing. And in its first use at a US company, the universal proxy card proved its benefit to management in certain cases as many had theorized, rather than being a one-sided dissident-friendly tool.”

Whether the SEC moves ahead with its universal proxy proposal remains to be seen. But the paper suggests that the devil may well be in the details that remain to be worked out, which must be consistent and not disadvantage either party. These include presentation and formatting requirements, procedures for electronic tabulation, processes to address multiple dissidents submitting competing slates, proxy contests run concurrently with shareholder proxy access campaigns and voting errors that may arise where a card is voted for more nominees than there are seats, potentially disenfranchising the shareholder. The paper indicates that the SEC is well aware of the potential significance of the adoption of universal proxy, and several respondents to the proposal had “urged caution, warning of the risks of unintended consequences from introducing far-reaching changes into a process that works ‘reasonably well.’” In conclusion, the paper suggests that

“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. 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; by remaining something that is privately negotiated rather than mandated will allow 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 legislative initiative.”

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