Kai Liekefett and Derek Zaba are partners and Leonard Wood is senior managing associate at Sidley Austin LLP. This post is based on an Ethical Boardroom publication. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.
On 17 November 2021, the US 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 non-exempt director election contests at publicly traded companies in the US.
The new rules contain only slight modifications from rules the SEC first proposed in October 2016. When the SEC reopened the public comment period in 2021, members of Sidley’s Shareholder Activism & Corporate Defense Practice sent a formal comment letter to the SEC regarding the proposed rules. We argued that the rules create the equivalent of “proxy access on steroids.” While comparable to the vacated Rule 14a-11, which allowed shareholders holding at least three per cent 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). Unfortunately, the SEC proceeded to adopt these rules without meaningful safeguards against misuse.
The new rules will significantly change the methods by which proxy contests at public companies have been conducted for decades. Public advocates of shareholder activism have championed the adoption of the new rules. Their enthusiasm may reflect a premonition that the universal proxy rules will afford dissidents additional leverage when negotiating with boards and, ultimately, allow them to place more dissident candidates on boards. As such, we expect a significant increase in proxy contests and threats thereof once the universal proxy rules take effect for shareholder meetings after 31 August 2022. It is nothing less than the most dramatic change in the US proxy system in a generation.