SEC Proposes to Require Universal Proxy Cards for All Contested Director Elections: Would Require Both Issuer and Dissident to Use Proxy Cards Listing All Nominees, Permitting Shareholders to Choose Their Desired Mix of Issuer and Dissident Nominees; Dissident Must Solicit Holders of at Least a Majority of Shares

Sullivan & Cromwell LLP - October 27, 2016

Yesterday morning, the Securities and Exchange Commission, by a 2-to-1 vote, proposed the mandatory use of universal proxy cards in all contested director elections at annual meetings of listed U.S. public companies. In contrast to the current system of competing cards sent by the issuer and the dissident shareholder, the proposed rules would enable shareholders in contested elections to vote by selecting any mix of directors from slates proposed both by the issuer and a dissident shareholder using one proxy card. The proposed rules would require the dissident shareholder to solicit proxies with its own proxy statement from the holders of at least a majority of the shares entitled to vote in the director election. The SEC also proposed changes to proxy cards and proxy statements in both contested and uncontested elections to clarify the voting options available to shareholders. Comments on the proposed rules will be due 60 days after publication in the Federal Register. A press release and fact sheet, along with the full text of the proposed rules, are available on the SEC’s website and highlights from the proposed rules are summarized in this memo.

Chair White and Commissioner Stein voted for the proposal, while Commissioner Piwowar voted against, focusing in particular on the lack of a requirement for all shareholders to receive the dissident shareholder’s solicitation materials. The approving Commissioners and the SEC staff noted at the open meeting that the proposal is intended to replicate, to the extent practicable, the voting flexibility that shareholders have when they attend a meeting in person.

Although the practical effect of a move to universal proxy cards is hard to predict and will vary from contest to contest, commentators have previously raised concerns that universal proxy cards may lead to confusion and undesired outcomes given that each shareholder could vote for a mix of directors that differs from that preferred by either the company or the dissident. Some argue that universal proxy cards may benefit dissident shareholders by providing a less costly process to put forth nominees and making a vote for individual nominees more appealing due to the flexibility in selecting the exact mix of directors a shareholder wants to elect. Universal proxy cards could ultimately lead to more proxy contests and therefore higher costs and greater disruptions for reporting companies and their shareholders generally. The SEC’s proposed changes to the proxy card rules may also encourage the use of dissident proxy cards in “vote no” campaigns and campaigns on proposals other than director elections.