(Much Too Early) Observations on the Universal Proxy Card

Eleazer Klein is a Partner and Sean Brownridge is an Associate at Schulte Roth & Zabel LLP. This post is based on their piece. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.

A considerable amount of ink has already been spilled over the universal proxy rules, their potential impact, and what public companies and engaged shareholders should do to prepare for, adapt to, and take advantage of the required use of universal proxy cards in certain director election contests. In this article, we will not journey down the well-trodden path of summarizing the universal proxy rules and making predictions regarding how they could change the relationship between companies and their shareholders, but rather review what has occurred since the rules were announced and took effect, including by providing select observations regarding the first three contests in the universal proxy era.

Advance Notice Bylaws And The First Universal Proxy Contest That Wasn’t

Advance notice bylaws require shareholders that intend to make director nominations at a shareholder meeting to give the subject company notice of their intention to do so. In addition to timeliness requirements, these bylaws contain informational components that, in theory, are meant to facilitate shareholder assessment of nominee backgrounds and eligibility, as well as the interests of the nominating party. But, advance notice bylaws have transformed into highly technical, ever-expanding, and disconnected defensive mechanisms principally designed to discourage, frustrate, and entirely prohibit a shareholder vote on nominees selected by shareholders. That is, what was once meant to be a neutral tool to ensure electoral fairness and a knowledgeable electorate has developed into a potent defense to board-related activism and companies’ most significant solution to the adoption of the universal proxy rules (i.e., universal proxy cards (“UPC”) are of no consequence when a nomination notice is declared invalid at the outset and shareholders are denied the opportunity to vote for directors other than those selected by the incumbent board).

Indeed, to our knowledge, the first attempted proxy contest under the universal proxy rules was, in fact, no contest at all precisely because of advance notice bylaws. AIM ImmunoTech Inc.’s (“AIM”) board of directors rejected an activist’s attempt to nominate a control slate of directors because the underlying notice apparently failed to disclose members of the shareholder’s group and arrangements and understandings involving the undisclosed group members, as required by AIM’s bylaws. AIM shareholders re-elected all of the company’s nominees and did so using a proxy card that listed only AIM’s candidates (i.e., a non-universal proxy card)—the activist’s director nominations were disregarded and no proxies or votes in favor of its nominees were recognized or tabulated at the shareholder meeting, according to the company’s revised definitive proxy statement.

Shareholders and other members of the corporate governance community should carefully consider the equity and breadth of this evolving frontier of activism defense.[1] It’s our view that the universal proxy rules should not be reason for boards of directors to adopt or preserve advance notice bylaws with the desire to divest shareholders of their ability to present and consider leadership alternatives. Instead, boards of directors should embrace, and be required to utilize, tailored advance notice bylaws necessary to assuring a fair shareholder decision-making process and affording shareholders the information needed to make an informed selection.

The Second Universal Proxy Contest Almost Goes The Distance

In the first universal proxy campaign to properly launch and conclude, Capital Returns Management (“CRM”) sought the election of two candidates to the seven-member board of directors of Argo Group International Holdings, Ltd. (“Argo”).

CRM argued, among other things, that (i) Argo had underperformed its peers and applicable indices over relevant measurement periods and (ii) CRM’s two nominees had decades of experience as industry investors and executives while indicating that the targeted company candidates appeared not to have any meaningful experience in the industry. Argo advocated, in part, that it had the right board in place and that CRM’s nominees (a) had no or poor public board experience, (b) lacked the industry experience or professional availability to serve on the board, and (c) would bring skills and experiences that were already represented on the board.

Both CRM and Argo expended significant energy advancing the qualities of their respective candidates and criticizing the qualifications of the other party’s nominees. However, the themes employed were not necessarily new. That is, while it is true that, prior to the universal proxy rules, companies and shareholders would seek to convince voters that their director slate as a whole was best for the future of the company and better-suited to drive shareholder value, considerable effort was nonetheless spent explaining why the other party’s candidates, on an individual basis, were not best for shareholders. The fight, to a degree, was still personal.

With respect to the universal proxy cards filed by CRM and Argo, CRM’s card had three categories of nominees: The two CRM nominees (placed at the top of the voting options), the five Argo nominees that were “acceptable” to CRM (placed in the middle of the voting options), and the two Argo nominees that were opposed by CRM (placed at the bottom of the voting options). The company’s card had two categories of nominees: Argo’s recommended nominees and the CRM nominees opposed by the company. Importantly, both cards indicated that if a shareholder voted for (i) less than seven nominees, the card would be voted as instructed and (ii) more than seven nominees, the card would be invalid with respect to the election of directors.

Institutional Shareholder Services (“ISS”) and Glass Lewis & Co. (“Glass Lewis”) each recommended that Argo shareholders vote for all seven of the company’s nominees. ISS concluded that (i) CRM did not make a compelling case for change, (ii) the board’s earlier addition of the principal of an approximately 9.5% shareholder, Voce Capital Management, bolstered its credibility, including in light of the fact that such individual was appointed to chair Argo’s strategic review committee, and (iii) the company appeared to have adopted a more focused strategy. Similarly, Glass Lewis observed that (a) the Argo board and management team had significantly focused the company in a manner that appeared to position it to generate value for shareholders, (b) CRM did not offer alternative suggestions to improve the company’s business beyond actions that Argo was already pursuing, and (c) CRM’s nominees were not “clearly additive” to the company’s ongoing strategic review process or “likely to improve” the outcome for all shareholders.

Shortly after ISS and Glass Lewis provided their voting recommendations, CRM announced that it had decided to withdraw its nominees. As a result, all of Argo’s nominees were elected at the company’s annual meeting.

The Third Universal Proxy Contest Goes To A Vote

Land & Buildings Investment Management’s (“L&B”) contest at Apartment Investment and Management Co. (“Aimco”) represented the first contested election taken to a vote using UPCs. Aimco was formed following the spin-off of Apartment Income REIT in 2020. At Aimco, L&B sought the election of two nominees to the company’s ten-member board, which was classified (three seats were available at the annual meeting).

L&B argued, among other things, that (i) Aimco had disregarded the perspectives of its shareholders in connection with the spin-off, (ii) the company was undervalued and had underperformed both prior to and after the spin-off, and (iii) its director nominees were well-positioned to maximize shareholder value. Aimco advanced the following arguments, among others: (a) the board of directors had been reconstituted since the spin-off and a new executive leadership team had been installed, (b) the company had demonstrated a successful track record of executing on strategic priorities after the spin-off, and (c) Aimco’s nominees were key contributors to the company’s achievements and who had substantial institutional knowledge, such that election of any alternate candidates would remove expertise from the boardroom that was critical to the company’s success.

The universal proxy cards used by L&B and Aimco were substantially similar to those used by CRM and Argo. Notably, where CRM identified non-targeted directors as “acceptable,” L&B identified the single class member that it did not target for replacement as “unopposed.” Under-voted and over-voted cards, in both cases, were treated in a manner identical to the treatments used by CRM and Argo.

Glass Lewis, consistent with its recommendation at Argo, recommended that shareholders vote for all of Aimco’s nominees, concluding that (i) it did not believe that there was a compelling case to warrant board change, (ii) it did not believe that L&B’s nominees would be “additive” to the Aimco board, (iii) it believed that the Company’s performance had been “generally strong” and its valuation “broadly in-line” with peers, and (iv) it believed that current leadership deserved credit for the actions taken related to Aimco’s business, operations, and corporate governance.

ISS, however, reached different conclusions and recommended that shareholders vote for one of L&B’s two nominees using L&B’s blue universal proxy card. In relevant part, when issuing its split recommendation, ISS found that (i) Aimco, since the spin-off, had failed to establish “a solid public communication channel” with investors, (ii) one of L&B’s nominees, James Sullivan, would bring relevant professional experience that could improve the company’s investor communications program, (iii) Aimco’s nominee, Michael A. Stein, was long-tenured, had overseen governance failures prior to the spin-off, and, during engagement with ISS, had made statements that indicated a “shareholder-unfriendly” view of governance, and (iv) despite Mr. Stein’s “extensive,” relevant professional experience, the composition of the board included new, independent directors with experience that mitigated any risk of losing Mr. Stein’s expertise.

At Aimco’s annual meeting, L&B’s nominee, Mr. Sullivan, was elected to the board’s three-member class, receiving the third highest level of support and defeating Mr. Stein by a comfortable margin. L&B’s second director nominee received the lowest level of support.

A Brief Concluding Note On Early UPC Activism Relative To Pre-UPC Activism

So far, and generally speaking, the more things change, the more they stay the same. Despite the refinement of the mechanics by which directors are elected, the purposes and objectives of proxy contests involving board representation have not yet evolved.

As noted above, the early proxy contests conducted under the universal proxy rules have seen companies and activists utilize strategies and themes that brought success prior to the UPC, with adjustments on the margin. At Argo and Aimco, the activists seemingly did not overreach on the size of their slates and attempted to take a surgical approach to board refreshment, including by largely targeting non-diverse men above the age of 65. [2] Contrary to the concerns that activists will now run campaigns “on the cheap,” the activists in both campaigns also apparently spent (or anticipated spending) a substantial amount of money when pursuing minority board representation—$1,000,000 in the case of L&B at Aimco and $750,000 in the case of CRM at Argo. In addition, at both Argo and Aimco, it seems, consistent with past experience, that ISS and Glass Lewis played meaningful parts in the outcome of each contest and that both used analytical frameworks that remained substantially unchanged from the pre-UPC era.

Finally, while we are still in the infancy of the universal proxy rules, the expected uptick in substantial activism has not yet come to fruition. Since the effectiveness of the universal proxy rules, the number of announced election contests, campaigns that have resulted in a board seat, and public settlement agreements are all at depressed levels relative to equivalent periods during the two prior years. [3] For companies, it does not appear that the sky is falling. For shareholders, it does not appear that it’s open season. But, as the universal proxy rules age and the activism landscape settles around the UPC, we anticipate that the next two- to three-year period will reveal the true, immediate import of the mandatory use of universal proxy cards in certain director election contests.

For the full post including disclaimers and footnotes, see here.


1Since the adoption of the universal proxy rules on November 17, 2021, at least 556 U.S.-incorporated issuers have implemented changes to their advance notice disclosure and eligibility requirements or timeliness requirements. Deal Point Data, as of January 28, 2023. In November 2022 alone, 113 companies specifically disclosed bylaw changes that were related to “Rule 14a-19” or “universal proxy” matters. Deal Point Data, Record Month for Bylaw Amendments: Changes to Advance Notice Provisions Drive Volume (December 5, 2022).(go back)

2As noted, the Aimco board was classified and L&B sought two of the three available board seats. At AIM, the entirety of the board was comprised of three directors and the activist sought control through its nomination of two candidates. (go back)

3FactSet, as of January 28, 2023. Data (i) includes U.S.-based companies only and excludes funds, (ii) includes publicly disclosed “settlement” and “standstill” agreements that have been filed with the U.S. Securities and Exchange Commission, and (iii) is measured between September 1 (the date on which the universal proxy rules became effective in 2022) and January 28 in each applicable year. The authors acknowledge that (a) there may be macroeconomic factors impacting the data for a given year and (b) the number of campaigns resulting in a board seat may increase as 2022-2023 engagements mature.(go back)

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