Understanding the impact of the SEC’s amended proxy rules
New proxy rules introduced by the SEC now require the use of a ‘universal proxy card’ in all non-exempt director election contests, dramatically changing the proxy contest landscape at public companies. Making it significantly easier for shareholders to nominate dissident candidates for election means companies are increasingly likely to face dissident nominations (or nomination threats) from activists known to seek proxy contests, as well as new shareholders for which the barrier to entry has been lowered.
‘Under the new rules, shareholders will be entitled to vote for any combination of director nominees up to the number of open seats for election,’ explains Travis Wofford, partner at international law firm Baker Botts. ‘This is because the SEC now requires both the company and the activist to use a universal proxy card that lists all director nominees, regardless of whether nominated by the company or the activist.
‘The universal proxy card also differs from prior ‘proxy access’ proposals in an important way: there is no minimum number of shares an activist must own, or duration of ownership, before being allowed to nominate a director. One share can be enough. The activist must only meet certain informational, procedural and filing requirements set out in the SEC rules and the company’s advance notice bylaws, which most see as very easy to meet by any activist with sophisticated legal counsel.’
These changes could impact shareholder activism as, with universal proxy card requirements in place, it will be easier for shareholders that desire change at a company to vote for a single dissident director as a change agent or shareholder representative on a public company board.
‘This structural change will tilt negotiating leverage in favor of short-slate activists – those that seek less than a majority but that may nevertheless wind up with ‘negative’ control where board supermajority votes are required,’ says Wofford. ‘As a result, activists will be more likely to threaten and, when their demands are not met, pursue a proxy contest to seek representation on public company boards. In the early years of universal proxy card use, we expect an increase in shareholders supporting the ‘just one dissident’ scenario.
‘We also expect proxy advisers – as they have in prior universal proxy card proxy contests – to commonly recommend that stockholders vote in favor of a mix of company and activist nominees and that shareholders, some required by their investment guidelines, will follow these recommendations. Once this pattern is established, this will further embolden dissident director nominations.
‘Universal proxy card has the potential to usher in a new era of shareholder democracy, but also a new era of shareholder exploitation and corporate raiding. It remains to be seen whether this will be a net positive for shareholders and other stakeholders or disruptive to the long-term value of the corporation.’
Tips for taking action
According to Wofford, boards of public companies should ensure they are prepared for a dissident nomination by an economic activist or an issues-based activist. Actions include:
● Evaluating advanced notice bylaws for relevant updates, both to lay out modern information and procedural requirements for dissident director nominations and shareholder business proposals and to specifically address universal proxy card requirements
● Evaluating and, where appropriate, enhancing, structural defenses of the company
● Training the board to prepare for, identify and respond to abusive takeover and activist practices, including new techniques likely to arise through the use of universal proxy cards
● Updating board evaluation and refreshment policies, in particular to address prior shareholder and proxy adviser feedback
● Considering pre-emptively replacing weak directors likely to be outmatched by credible, experienced dissident nominations by sophisticated activists
● Preparing for the possibility of a dissident director election. Many companies have only had company-nominated directors elected and are unprepared for the culture shock that can come from an activist shareholder representative. Understanding and preparing for those new dynamics in advance of living them will be important both in preparation for life with a mixed board and an understanding of the stakes.