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E-MailLizanne Thomas and Robert A. Profusek are partners at Jones Day. This post is based on a Jones Day memorandum by Ms. Thomas, Mr. Profusek, Randi C. Lesnick, and James P. Dougherty. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).
For the first time, a dissident shareholder group won board control in a proxy contest using a “universal proxy card” that included the names of both the company’s and the dissident’s slates. The battle for a majority of the board seats at EQT Corporation was waged by brothers Toby and Derek Rice, whose November 2017 sale of Rice Energy to EQT made EQT the largest natural gas producer in the United States.
Following the acquisition, EQT’s performance suffered and its share price declined—ultimately falling to less than half its value at the time of the acquisition. The Rice brothers (who with their allies had a ~3% stake in EQT) reached out privately to EQT in late 2018 to discuss their concerns but then announced that they planned to wage a proxy fight for control of EQT’s board and, if successful, to appoint Toby Rice as its CEO. Ultimately, the Rice Brothers nominated seven candidates to EQT’s 12-member board, including incumbent director Daniel Rice, who joined the EQT board after the sale.
In a typical proxy contest for control, the company and the dissident shareholder send separate proxy cards to shareholders, with the company’s proxy card listing only management’s director nominees and the dissident’s card listing only the dissident’s slate. Accordingly, shareholders who choose to vote by proxy must choose whether to use the dissident’s proxy card or the company’s—neither of which presents a complete list of director candidates. (Shareholders who vote in person at the meeting may select a mix of director nominees from the two proposed slates.)
EQT’s director nomination procedures, however, required that dissident nominees complete a form of questionnaire provided by the company, which included the nominee’s “consent to being named as a director or executive officer in [EQT’s] filings with the SEC.” EQT interpreted this consent provision as a consent by the nominees to be included in EQT’s proxy materials, and refused to waive it. The Rice team pushed for EQT to use a universal proxy card, and EQT capitulated only after the Rice team challenged the fairness of the one-sided consent requirement in a Pennsylvania state court. In the end, EQT and the Rice brothers agreed to use a universal proxy card that listed all nominees, with the company’s card highlighting its 12 nominees and the Rice team’s card highlighting its seven nominees and the five EQT director candidates it designated as “unopposed.”
Ultimately, the Rice brothers’ campaign won the support of large EQT shareholders, including T. Rowe Price (~10%) and D.E. Shaw (~5%), and was backed by proxy advisor ISS. (Glass Lewis supported management in the contest.) In the end, each of the dissident group’s nominees won more than 80% of the votes cast at the EQT annual meeting, and Toby Rice was installed as EQT’s CEO.
EQT is the first successful use of a universal proxy card by a dissident in the United States in a majority proxy fight. Although the SEC last proposed universal proxy card rules several years ago, those rules stalled in the proposal stage, and universal cards are seldom used. Companies can be expected to continue to resist using universal proxy cards in contested elections following EQT, even though the ballot form was likely not the determinative factor in the Rice team’s success.
Companies involved in “short slate” proxy contests should also carefully consider the optional design for proxy cards used in those contests. Under the current proxy rules, an insurgent that nominates less than a majority of the board may use its proxy card to solicit votes for select management nominees in order to fill out its “short slate,” even if those nominees have not agreed to be named on the insurgent’s proxy card. This provides a significant advantage to the insurgent. Companies should adopt clarifying bylaws to make this rule apply equally to the company and the insurgent, absent agreement otherwise. Although there is no authority supporting such a requirement and an activist may contest it, we believe that a properly informed court presented with the issue should conclude that this type of reciprocal bylaw is valid.
More generally, companies and their boards should ensure that proxy cards are easy to use and not unnecessarily complicated. For example, even in uncontested elections, many corporate ballots require shareholders to scroll through the name of each individual director nominee before coming to a “vote for all nominees” option. This is a silly structure—putting the “vote for all” button first (and requiring a click-through in online voting for individual selection) would facilitate voting by shareholders who wish to support management’s entire slate—which is, after all, running unopposed.
Likewise, proxy cards used in elections governed by plurality voting should not include an “against” vote for directors. By its very nature, a plurality voting system uses only “for” and “withhold” votes—the “against” vote is not only meaningless but also nonexistent, and its inclusion may confuse investors. Accordingly, when plurality voting is in effect for an election of directors—either because the company has not adopted majority voting or because a majority vote standard defaulted to a plurality vote due to a contested election—”for” and “withhold” votes should be the only options.
Ultimately, a proxy card should be designed to make it easy for shareholders to review their options and cast their votes easily and efficiently on all matters. Companies and their boards should not miss the opportunity to design their corporate ballots in a manner that best facilitates shareholder voting.
Three Key Takeaways
- EQT is a reminder of the importance of the corporate ballot—which is typically only one page of a 100+ page proxy statement—in director elections, whether or not contested. In a proxy fight, the attention of management and the board is often focused on the daily drama that is characteristic of a contested election—including incendiary public statements by the dissident shareholder, letters to shareholders, and extensive media campaigns, as well as litigation. When it comes to the polls, however, the completed corporate ballots dictate the election results—and the form and wording of the proxy card can be critical.
- Companies intent on preserving a two-card format for a contested election should be wary of including a one-sided consent requirement that applies solely to dissident candidates, which will likely be challenged as unfair. (Companies may also wish to lay an early claim to the white-colored proxy card typically used for management nominees.) If a company decides to use a universal proxy card in a contested election, its director nominees should be listed separately, clearly identified as the management slate, and should be listed first, in order to present a clear choice to shareholders and to clarify which individuals were nominated by the dissident.
- Even when all ballot items are routine, proxy cards should be clear and concise, and voting options should be presented in a manner that facilitates ease of use by shareholders, without any extraneous, unnecessary, or confusing voting options.
