The SEC's Proposed Universal Proxy Rule: Beneficial to Shareholders or Tilting the Result toward Activist Investors?

By Bryan Pitko and Steve Quinlivan

Under current law and practice, a shareholder of a public company that is asked to vote in a contested election of directors where a slate of directors had been proposed by the company and an activist investor would likely receive two competing proxy cards from the company and the activist that asks the shareholders to vote for the nominees presented:

Company Proxy Card                   Activist Proxy Card
Company Nominee A                     Activist Nominee D
Company Nominee B                     Activist Nominee E
Company Nominee C                     Activist Nominee F

It is entirely possible after reviewing all the biographies of the director nominees that a shareholder would want to split his or her vote amongst the nominees from the two camps– for instance Company Nominees A and C, and Activist Nominee E. However, the shareholder is not offered this choice and cannot submit both proxy cards because one or both cards would likely be invalidated since a subsequent proxy card revokes a former proxy card under state law. The shareholder could achieve her goal by attending the shareholder meeting and voting in person but in many circumstances that is not feasible.

The Securities and Exchange Commission would like to solve the shareholder's dilemma through its proposed amendments to the proxy rules to require the use of a universal proxy card that would require all of the nominees in a contested election to be listed on a single proxy card. The proposed rules also would require disclosure about voting options and voting standards in all contested director elections – including elections involving partial and full slates of directors.

At the October 26, 2016 SEC open meeting to consider the proposed rules, representatives of the Division of Corporation Finance emphasized that the proposed changes to the proxy rules are intended to address the disparity in voting experience between shareholders voting in person at a shareholder meeting and shareholders voting by proxy. The staff's focus on furthering the cause of "fair corporate suffrage" was similarly echoed in statements made by Chairman Mary Jo White and Commissioner Kara Stein.

However, as the SEC and its staff noted at the open meeting, few shareholders attend meetings in person and the primary means of voting occurs through the proxy process. As such, despite the expressed goal of facilitating "shareholder democracy," the mechanics and application of a mandatory universal proxy rule could embolden activist investors and special interest groups, encourage additional proxy contests, and alter the landscape of corporate governance in favor of shareholder activists.

For a summary of the proposed universal proxy rule and the SEC's view on its effect on contested elections and shareholder activism, please visit our Dodd-Frank blog.

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