In a move that may encourage shareholder activism and increase the potential for proxy contests, the Securities and Exchange Commission (SEC) has voted to propose amendments to the U.S. federal proxy rules (the Proposed Rules). As discussed in a previous post, the Proposed Rules will require parties in all "non-exempt" solicitations in a contested director election to use universal proxy cards that include the name of all board of director nominees (i.e., both dissident and management nominees). As such, shareholders voting by proxy would be able to vote for a combination of management and dissident candidates. Currently, only those shareholders voting in person have the ability to do so.

In addition to prescribing content and deadlines for filing proxy statements and universal proxy cards for both management and dissidents, the Proposed Rules also include the following proposed amendments:

  • Notice to management: dissidents would be required to provide management with notice of its intent to solicit as well as the names of its nominees by a specified date. Shortly after, management would then be required to provide the dissident with its list of nominees;
  • Reference to both proxy statements: in each of their respective proxy materials, each party would be required to refer shareholders to the other party's proxy statement for information about that party's nominees and explain how to access it; and
  • Solicitation: dissidents would be required to solicit shareholders representing at least a majority of the shares entitled to vote on the election of directors.

Overall, these amendments will reduce the barriers dissidents face when engaging in a proxy contest and may increase their likelihood of achieving representation on a board of directors.

Currently, shareholders voting by proxy are required to choose from either management's nominees or the dissident's nominees by submitting either party's respective proxy card, each listing that respective parties' nominees only. Using the proposed universal proxy card, shareholders voting by proxy will see all nominees on one card (i.e., the board and dissident's nominees) and will have the ability to select a combination of directors to elect. This change may increase the dissident's nominees' exposure to all shareholders, eliminate management nominees' ability to "hide in the collective" and may, upon an initial glance, imply that management may be supportive of the dissident's nominees.

The SEC is now seeking public comment on the Proposed Rules for 60 days following which they will vote on it a second time. For a summary of the Commission's reasons for and against the Proposed Rules, see Commissioner Michael S. Piwowar (against), Commissioner Kara M. Stein (for) and Chair Mary Jo White's (for) published statements. For a summary of all amendments as well as the full text and commentary, refer to the SEC's press release and the proposal, respectively.

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