No More Blue or Gold Cards

Michael R. Levin is founder and editor of The Activist Investor. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

Negotiating about who gets which color on a proxy card is always an odd highlight of a proxy contest. Company counsel, activist investors, proxy solicitors, and corp gov aficionados understand this, while others just puzzle over different colored scraps of coded paper. Thanks to new SEC regulations mandating a universal proxy card (UPC), this nominally interesting artifact of a baroque, obsolete proxy plumbing system will go away starting later in 2022.

UPCs will change how activist investors solicit proxies for director elections and likely lead to both more proxy contests and more activist directors. Activist investors will need to decide how to comply with some specific rules about how many proxies to solicit, and how much they wish to streamline the solicitation process by relying on the company UPC.

Here, we explain the nature of the change, identify specific highlights that companies and investors should know about the new regulations, and explore some of the implications and decisions for companies and investors.

Who has the blue card?

In November 2021, the SEC adopted long-awaited rules about UPCs. The SEC worked on this for many years, and first proposed these regulations in 2016 (we wrote about UPCs in 2015). Essentially, companies and activist investors will each include identical content in proxy cards. Specifically, both company and activist proxy cards will list all director nominees from the company and activist.

Until now, a company and an activist each send their own proxy card, listing only their director nominees. This confuses shareholders greatly. Individual and even institutional shareholders can’t keep straight the company and activist nominees. Among other weird consequences, each proxy card has a specific color, like blue or gold, so shareholders know which one belongs to the company and to the activist.

More importantly, it means a shareholder cannot vote by proxy for candidates from among both the issuer and activist nominees. If a shareholder wants to split votes between them, they literally cannot support their preferred, specific combination.

Yet, a shareholder can do so if they attend a shareholder meeting in person. At the actual meeting, ballots include all nominees. Thus, the precise rationale for the new rules: currently, voting by proxy does not provide for the same rights and opportunities as voting in person. The SEC seeks to make the two as equivalent as possible. The new UPC rule essentially achieves this (except for snacks and swag).

What do companies and investors need to know?

The 197 pages of regulation contain substantial technical detail. What’s most important for companies and investors?

You can wait a few months to focus, but not too long. The new rules apply to director elections after August 31, 2022:

  • all shareholders will begin to see UPCs in late summer at the earliest
  • activist investors nominating directors will need to plan a little sooner, say in June 2022 for shareholder meetings in September 2022, to comply with new filing deadlines.

The rules are mandatory and apply only to the proxy card:

  • all contested director elections must use a UPC
  • other proxy materials remain largely unchanged, except for wording that refers to UPCs.

Activist investors now must solicit proxies from shareholders representing a minimum of 67% of the outstanding shares. The rules do not make clear what “solicit” means, though, so an activist might satisfy this in a few ways. Activist investors also can possibly reduce proxy solicitation costs by using only the issuer’s UPC. The rules appear to not require an activist to have its own proxy card. Activists that do so may lose some access to monitoring shareholder voting real-time, though. We consider both decisions below.

Going forward, the company includes the activist nominees on their proxy card, and the activist similarly includes the company nominees. For this to occur, they must exchange information about nominees in a timely way. The rules set forth a process with some deadlines:

  • the activist must notify the company of the activist’s nominees at least 60 days before the shareholder meeting
  • the company must similarly notify the activist of the company’s nominees at least 50 days before the meeting
  • the activist must also file its proxy statement at least 25 days before the meeting, or within 5 days after the company files its proxy statement.

These deadlines add to, rather than replace, advance notice deadlines that companies typically impose on activist director nominations. The new rules provide that an activist that complies with company advance notice deadlines will usually also comply with these new UPC notice deadlines.

The rules also prescribe how proxy cards look and how proxy materials refer to them. They have specific formatting standards by which companies and activists present all nominees fairly. Each of the company and activist will include language in the UPC and other proxy materials that directs shareholders to the other’s proxy materials for information about the other’s nominees. Otherwise, proxy materials won’t change – a company still need not include information about an activist’s nominees in the company’s proxy materials.

This should be obvious by now: UPCs apply only to director elections. Other matters that end up on a shareholder meeting agenda, and thus a proxy card, will not change. This includes precatory shareholder proposals, bylaw amendments, and anything else that receives a vote at a shareholder meeting.

Finally, the rules apply to both annual and special shareholder meetings.

A significant change that is mostly positive for activists

Most observers think this is a big deal. UPCs will likely increase the number of proxy contests, since it makes it easier to solicit proxies. We don’t know whether this will also increase the number of activist investor nominees winning BoD elections. It seems inevitable that with more proxy contests, we’ll also see more activist investors prevailing.

Like most regulatory changes that mediate among companies and activists, what one thinks of this depends on what one thinks of them. Companies will no doubt dislike this and will look for new ways to exclude nominees. Activists should love it once they understand how to comply and sort through a couple of new questions: meeting the 67% threshold and whether to use only the company UPC.

Soliciting 67%

For activist investors, the most significant element of the rules arises from the new requirement to solicit shareholders representing votes of at least 67% of the outstanding shares. Until now, an activist could solicit as many or few shareholders and votes as they want. Sure, many activists would plan and budget for soliciting all shareholders, or as many shareholders as possible, and easily hit the 67% level. But, it’s not required.

So, an activist could begin to solicit major institutions, see how that went, and decide how much further to go. Or, it could solicit only the institutions necessary to prevail in the director election. That could amount to as low as, say, 25% of the outstanding shares, depending on the expected participation and voting standard.

Now, an activist investor must meet that 67% level. Specifically, it must notify the company that it “intends” to so solicit. (We note the rule does not define “intend”, so if and activist ends up soliciting less than 67%, it’s not clear how the company would prove it did not so intend, but anyway…) This could mean sending proxy materials and cards to a lot of individual shareholders that an activist might otherwise skip.

The rules also do not define “solicit”. The SEC specifically avoids the subject:

…the adopted rules…do not mandate a specific method of furnishing the proxy materials. A dissident may choose to use the less costly e-proxy delivery method (i.e., the “notice and access” method of mailing a notice of internet availability and posting the proxy materials on a website) should it wish.

We now can imagine a “notional” (the SEC’s term) proxy solicitation, in which an activist:

  • files basic proxy materials in the usual way with the SEC
  • relies on materials that appear only in EDGAR at the SEC website
  • sends a notice postcard or maybe email message to the number of shareholders needed to meet the 67% level.

The postcard or message makes all proxy materials available online, including the UPC. An activist then needs to determine how notional to go – what proxy solicitation steps to undertake to both comply with this requirement at a reasonable cost and meet the goals for attracting votes for its slate.

This element seems to provide the best opportunity for companies to exclude activist nominees. If an activist solicits less than 67%, then companies can question whether an activist did “intend” to solicit 67% of the voting power.

Use only the company UPC

An activist might also consider whether to send its UPC or rely only on the company’s. The new rules appear to allow it to decide simply to not use its own UPC. Our reading (we are not attorneys, and this is not legal advice) suggests the new UPC rules appear to not have any requirement that you use your own proxy card. The new rules are silent here, and insofar as they don’t define “solicit”, could allow this.

If so, an activist can instead use the company proxy card, which lists all nominees from both the company and the activist. The company UPC and proxy materials will direct shareholders to the activist’s materials for information about activist nominees, including any website or similar online resource.

We note other terms within Section 14A of the proxy solicitation rules may require an activist to at least file a UPC with the SEC as part of the preliminary proxy filing process. These other terms may allow an activist to stop there, and not necessarily do anything further beyond that filing. Again, consult an attorney.

An activist that uses only the company UPC will save money in proxy solicitation. It won’t draft, file, produce, transmit, track, collect, and tabulate proxy cards. However, an activist then relies on the company to do this and loses the ability to track proxies as shareholders submit them. An activist might want to see who has and has not voted and use that information to allocate resources in persuading undecided shareholders to support its nominees.

There are other situations and details worth considering. These include multiple activist investor slates, for which UPCs will need to show all nominees from all parties, including the company and each investor. It’s sure to get interesting this way.

In any event, UPCs represent a significant advance in shareholder rights, and could make a difference in a proxy contest in the coming years.

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One Comment

  1. Andrew Shapiro
    Posted Friday, May 6, 2022 at 7:22 pm | Permalink

    Curious to whether advisable and most cost effective for activist to rely on company mailed UPC to satisfy the 65% solicitation rule but then make supplementary calls/solicitation efforts to a narrower list of largest shareholders.