New Rules for Proxy Contests: SEC Adopts Mandatory Universal Proxy Rules

The U.S. Securities and Exchange Commission (SEC) approved mandatory “universal proxy” on November 17, 2021. The final rules will apply to contested director elections at shareholder meetings held after August 31, 2022. The SEC also approved amendments that will clarify the shareholder voting options in all director elections. When the universal proxy rules become effective on September 1, 2022, they will significantly change the proxy mechanics for contested director elections. The rules provide that each of the company’s and dissident’s proxy card in a contested director election will now be required to include all director nominees up for election, rather than only those of the company or dissident filing the proxy statement. In this regard, the universal proxy rules provide dissidents with a new way to access a company’s proxy card in contested director elections, and unlike “proxy access” bylaws, without having to meet any share ownership thresholds or holding period requirements. In order to do so, dissidents will need to file their own definitive proxy statement and solicit at least 67% of the voting power of the shares entitled to vote on the election of directors at the meeting. 

What Companies Should be Doing Now

The SEC approved the universal proxy and other proxy related amendments just over five years after the original proposal, discussed in this Goodwin alert, in October 2016. Although none of the amendments will apply to shareholder meetings involving director elections (or, in the case of the universal proxy amendments, shareholder meetings involving contested director elections) held before September 1, 2022, we recommend that all companies review the amendments now to evaluate the impact on the company’s proxy statement, proxy card, advance notice bylaws and the state of its overall shareholder activism preparedness. Although most calendar year-end companies will encounter the amendments in the context of their 2023 annual shareholder meetings, the amendments will apply to any shareholder meeting that involves director elections held after August 31, 2022. The rules do not apply to shareholder meetings called to approve a merger, consolidation or other plan if the election of directors is an integral part of the plan.

Director Election Standards Disclosure and Voting Options. The amendments include new requirements with respect to proxy statement disclosure about voting options and voting standards that will apply to all proxy statements that include the election of directors. Although these amendments will not apply to proxy statements for shareholder meetings held before September 1, 2022, we recommend that companies begin reviewing the accuracy and clarity of their proxy statement and proxy card disclosure now, with special attention to disclosure about:

• The voting standard for director elections under the company’s organizational documents and state law, including the number of votes required and whether “withheld,” “against” or “abstain” options are legally applicable to elections of the company’s directors;
• The effect of abstentions, broker non-votes and, to the extent applicable, withholding authority to vote for a nominee on director elections; and
• The requirements that apply to director nominations by shareholders under the company’s advance notice bylaws, proxy access bylaws, or other provisions of its organizational documents.

When the amendments become effective, SEC rules will require disclosure about the impact of voting choices in director elections. The amendments will also impose specific requirements and prohibitions with respect to voting options on proxy cards. As part of their review of their overall shareholder activism preparedness, companies may wish to review these new requirements.

Shareholder Nomination Procedures Disclosure. The amendments require companies to disclose in their proxy statements the deadline for shareholders to give timely notice to the company of director nominations pursuant to the new universal proxy rule (Rule 14a-19) for the next annual meeting (new Rule 14a-5(e)(4)). Although the amendments do not apply to annual shareholder meetings held before September 1, 2022, we recommend that companies with a December 31 year-end review the disclosure that will be included in their 2022 proxy statements to ensure that the proxy statement accurately describes the shareholder director nomination requirements and process, especially the applicable advance notice, proxy access and Rule 14a-8 deadlines.

Advance Notice Bylaws. The amendments impose very few conditions on the use of the universal proxy rules by dissident shareholders. Advance notice bylaws can play an important role in protecting companies and their shareholders from abuse of the proxy solicitation and director elections process. Companies should review their advance notice bylaws and determine whether amendments would be appropriate in light of recent judicial decisions and emerging best practices.

Companies Subject to the Universal Proxy Rules

The universal proxy rules will not apply to registered investment companies or business development companies, but the amendments that require disclosure about the effect of “withheld” votes on director elections and the requirements that apply to voting choices on proxy cards will apply to such companies. Because foreign private issuers are exempt from SEC proxy rules, they will be exempt from all of the amendments.

Proxy Solicitations Subject to the Amendments

As noted above, the universal proxy rules will apply to proxy solicitations in contested director elections at shareholder meetings held after August 31, 2022, without regard to when the proxy solicitation began, unless the proxy solicitation is exempt under SEC rules. The universal proxy rules will not apply to consent solicitations, nor will they apply to shareholder meetings held to approve a merger, consolidation or other plan if the election of directors is an integral part of the plan. The amended rules that require proxy statement disclosure about the effect of “withheld” votes on director elections and require certain voting choices on proxy cards will apply to all director elections, including uncontested elections, held after August 31, 2022.

Amendments Applicable to All Director Elections

The SEC adopted several amendments that are not related to the universal proxy process. 

• When applicable state law gives legal effect to votes cast against a nominee, the proxy card must provide a means for shareholders to vote against each nominee and a means for shareholders to abstain from voting, rather than providing a means to withhold authority to vote.
• When applicable state law does not give legal effect to votes cast against a nominee, the proxy card shall not provide a means for shareholders to vote against any nominee. Instead, the proxy card must clearly provide one of the four means specified in Rule 14a-4(b) for shareholders to withhold authority to vote for each nominee.
• The proxy statement must disclose how votes will be counted, including the treatment and effect abstentions, broker non-votes, and, to the extent applicable, withholding authority to vote for a nominee in an election of directors under applicable state law and a company’s organizational documents.
• The company’s proxy statement must disclose the deadline for providing notice of a solicitation of proxies in support of director nominees, other than the company’s nominees, pursuant to a universal proxy solicitation under Rule 14a-19 for the company’s next annual meeting.

Universal Proxy Rules

The basic principle of the universal proxy rules is that shareholders who do not attend a shareholders’ meeting in person – and therefore must vote their shares by authorizing someone else to vote their shares as the shareholder instructs – should be able to vote in the same way as shareholders who attend the meeting in person. Historically, shareholders who attended a meeting in person could vote for a mix of management nominees and dissident nominees if there were a director election contest. Shareholders voting by proxy, in contrast, were effectively limited to a choice between voting for all of the company’s director nominees or all of the dissident director nominees because they could only vote on the company’s or the dissident’s proxy card.

The two central parts of the universal proxy rules are the required use of a “universal” proxy card by both the company and the dissident shareholder and a series of specific notice and filing requirements that apply to the company and the dissident shareholder.

Universal Proxy Card. “Universal” means, for purposes of the SEC’s universal proxy rules, that both the company’s proxy card and the dissident’s proxy card must provide the option to give voting instructions for each of the director candidates nominated by the company and the dissident shareholder, including any combination of nominees chosen from both groups. If the dissident has nominated a complete slate of candidates, the universal proxy card can also permit shareholders to give voting instructions to vote for either all of the company’s nominees as a group or all of the dissident’s nominees as a group.

The universal proxy rules do not require that the company’s proxy card and the dissident’s proxy card be the same. The rules do contain requirements that universal proxy cards must satisfy regarding presentation, formatting and disclosure. The principal requirements include:

• List the names of all persons nominated for election by the company and by the dissident, in alphabetical order, using the same font type, style and size for all nominees;
• Clearly distinguish between the company’s nominees and the dissident’s nominees;
• Prominently state the maximum number of nominees for which the shareholder can grant authority to vote;
• Provide a way for the shareholder to grant authority to vote for each of the nominees;
• If the dissident has nominated a full slate of candidates, the proxy card may provide a way for the shareholder to grant authority to vote for all nominees of the company or the dissident as a group, but in that case must also provide a way for the shareholder to withhold authority to vote for all of the company’s nominees and all of the dissident’s nominees as a group; and
• Prominently disclose the treatment and effect of a proxy card that (1) grants authority to vote for fewer or more directors than are to be elected or (2) does not grant authority to vote for any nominees.

Because it is possible that a dissident will abandon its proxy solicitation after the company has begun its own proxy solicitation with a universal proxy card that lists a dissident’s nominees, the universal proxy rules require the company to disclose in its proxy how the company intends to treat proxy authority granted in favor of the dissident’s nominees if the dissident abandons its solicitation or fails to comply with SEC proxy rules.

Minimum Number of Shareholders Solicited by Dissident. In contrast to Rule 14a-8 and most “proxy access” bylaws, which require that shareholders satisfy minimum ownership thresholds and holding periods requirements in order to have a proposal or director nomination included on the company’s proxy card, the universal proxy rules require only that a dissident who wishes to use the universal proxy process file its own definitive proxy statement and solicit the holders of at least 67% of the voting power of shares entitled to vote on the election of directors at the shareholder meeting, and include a statement to that effect in its proxy statement or proxy card. This requirement reflects an increase from the original proposal, which would have required the dissident to solicit only at least a majority of such shareholders.

The dissident can choose to use the “notice and access” method to solicit proxies, which requires only mailing a notice of internet availability and posting the dissident’s proxy materials on a website, which is often less expensive than a “full set delivery” of paper proxy materials using the postal service. Historically, dissident shareholders have not used “notice and access” and have opted for “full set delivery” in contested solicitations for strategic reasons.

Notice to the Company and SEC Filing Requirements. The universal proxy rules provide timing and notice requirements that are new and specific to a contested proxy solicitation. The universal proxy rules prohibit dissidents who do not satisfy these requirements from using a universal proxy card and continuing its proxy solicitation. 
A dissident shareholder’s obligation to comply with the notice requirement under Rule 14a-19 is in addition to its obligation to comply with any advance notice provisions in a company’s governing documents that provide more specific requirements regarding the timing and content of a dissident shareholder’s notice of director nominations.

The dissident’s principal notice and filing requirements are summarized below.

• The dissident must provide the company with notice of the names of each of the dissident’s nominees unless the dissident has previously filed a preliminary or definitive proxy statement naming the nominees. The notice must be postmarked or transmitted electronically to the company at its principal executive office not later than 60 calendar days before the anniversary of the date of the company’s annual shareholder meeting in the previous year, except that if the company did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, then the dissident must provide this notice by the later of 60 calendar days before the date of the annual meeting or the 10th calendar day following the day on which the company first publicly announced the date of the annual meeting.
• The dissident must promptly notify the company if there is any change in the dissident’s intent to solicit the holders of shares representing at least 67% of the voting power of shares entitled to vote on the election of directors in support of the dissident’s director nominees or with respect to the names of the dissident’s nominees. If there is a change in the company’s nominees after the dissident has disseminated a universal proxy card, the dissident could elect, but would not be required, to disseminate a new universal proxy card reflecting the change in the company’s nominees.
• The dissident must file a definitive proxy statement with the SEC by the later of 25 calendar days before the date of the shareholder meeting or five calendar days after the date that the company files its definitive proxy statement.

Reference to Company Proxy Statement. New Item 7(h) of Schedule 14A requires the dissident to include a statement in its proxy statement referring shareholders to the company’s proxy statement for information about the company’s nominees. The statement must explain to shareholders that they can access the company’s proxy statement, and any other relevant documents, without cost on the SEC website. The company is subject to an identical requirement in the event of a universal proxy solicitation by a dissident. 

Under amended Rule 14a-5(c), the company and dissident will be able to satisfy certain disclosure obligations by referring to information that is already, or will be, furnished by another party in its proxy statement. Currently, as written, Rule 14a-5(c) permits parties to refer to information that has been previously furnished, but in a universal proxy system this could prevent a company from relying on Rule 14a-5(c) to omit required information by referencing the dissident proxy statement where the dissident proxy statement is still to be filed. The new rules therefore amend Rule 14a-5(c) to clarify that a party can rely on the rule to reference information that is reasonably expected to be filed in an upcoming proxy statement of the other party.

Company Notice and Filing Requirements. The universal proxy rules require the company to provide similar notice to the dissident on a similar timetable, except that the company’s notice to the dissident containing the names of the company’s nominees must be provided not later than 50 days before the anniversary of the date of the company’s annual shareholder meeting in the previous year, which is only 10 calendar days after the dissident’s notice to the company has been postmarked or transmitted electronically to the company. This notice deadline is subject to the same exceptions that apply to the dissident’s notice.

As noted above, new Rule 14a-5(e)(4) requires a company to disclose the deadline for shareholders to give timely notice to the company of dissident nominations for inclusion on a universal proxy card in connection with the next annual meeting in its annual proxy statement, regardless of whether such meeting is expected to be the subject of a contested solicitation.

The table below, reproduced from the SEC’s adopting release, summarizes the overall timetable for a typical universal proxy solicitation.

Due Date	Action Required
No later than 60 calendar days before the anniversary of the previous year’s annual meeting date or, if the company did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, by the later of 60 calendar days prior to the date of the annual meeting or the tenth calendar day following the day on which public announcement of the date of the annual meeting is first made by the company. [new Rule 14a-19(b)(1)]	Dissident must provide notice to the company of its intent to solicit the holders of at least 67% of the voting power of shares entitled to vote on the election of directors in support of director nominees other than the company’s nominees and include the names of those nominees.
No later than 50 calendar days before the anniversary of the previous year’s annual meeting date or, if the company did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, no later than 50 calendar days prior to the date of the annual meeting. [new Rule 14a-19(d)]	Company must notify the dissident of the names of the company’s nominees.
No later than 20 business days before the record date for the meeting. [existing Rule 14a-13]	Company must conduct broker searches to determine the number of copies of proxy materials necessary to supply such material to beneficial owners.
By the later of 25 calendar days before the meeting date or five calendar days after the company files its definitive proxy statement. [new Rule 14a-19(a)(2)]	Dissident must file its definitive proxy statement with the Commission.