Georgeson LLC has compiled the following overview of the SEC’s rule amendments requiring the use of Universal Proxy Cards (UPC).
- The SEC’s rule amendments requiring the use of Universal Proxy Cards (UPC) in contested director elections for corporate issuers became effective at annual meetings beginning September 1, 2022. Please note that UPC does not apply to registered investment companies or business development companies.
- The UPC system gives shareholders the ability to “mix and match” their voting instructions for any combination of director candidates from both slates during a proxy contest
- Rule amendments create pre-meeting deadlines for the company and dissident to notify each other of their candidates:
- no later than 60 calendar days before the anniversary of the prior year’s meeting for dissident candidates, and 50 calendar days for the company’s candidates
- The rules require shareholders presenting their own director candidates in the contest to solicit holders of a minimum of 67 percent of the voting power of shares entitled to vote in the election
- Under the new framework, directors’ individual qualifications are likely to come into greater focus (compared to the merits of an overall slate under the previous system) making a board’s “weakest” members become more vulnerable in a proxy contest
- According to ISS, its two-prong approach (1. Is change warranted; 2. If so, how much change) to evaluating proxy fights will not change, although the second prong "How much change?" will demand a greater degree of scrutiny, potentially resulting in greater engagement with each side
- ISS has also indicated that it will not directly support an activist solely on the basis of qualification of a specific nominee. However, ISS will continue to highlight to its investor clients those nominees that appear particularly well-qualified.
- Glass Lewis has similarly indicated that its overall approach to evaluating proxy contests will not change under the universal proxy card system. In order to support any dissident nominee in a proxy contest, it will still require the activist to make a compelling case for change and to nominate qualified, unconflicted director candidates who seem better suited to address deficiencies or to facilitate a superior outcome for shareholders.
- An activist can lower its cost by running a nominal solicitation expending only the absolute minimum effort and cost needed to nominate one or more director candidates and solicit proxies (utilizing notice-and-access). The ability to run a contest more cheaply under the new rules could result in an increase in the number of activist situations. The lower cost to entry may enable more “single issue” dissidents to run contests.
- Certain investors may see it as an opportunity to improve board composition by replacing weak directors (for instance, replacing a long-tenured, overboarded director) with a new nominee who brings needed skills to the board, or perhaps enhances diversity
- Companies should plan for dissidents to launch contests much earlier in the annual meeting cycle than in prior years, not just to comply with the new notice deadlines, but also to engage with shareholder and proxy advisors about the individual qualifications of each of its nominees
- Companies should consider updating their bylaws to account for the universal proxy rules and to fill any other gaps relating to advance notice requirements
How Georgeson can help
- The new universal proxy card rule only increases the importance of being prepared. The universal proxy system shifts the focus of proxy campaigns from the quality of a party’s overall slate to the quality of individual director candidates.
- Given this shift, it is critical for a company to conduct board vulnerability analysis to help identify, assess and address any potential board weaknesses that might become the target of an activist attack. The analysis will:
- identify potential concerns relating to directors’ diversity, time commitments, tenure and qualifications, among others
- assess your board skills to identify any gaps or weaknesses and benchmark them against your peers
- identify board’s needs for future director candidates
- enhance director biographies, skills matrices, and related voluntary disclosures
- Monitor annual meeting vote results and develop plans for dealing with problematic vote outcomes
- Evaluate potential outcomes for director elections in a potential proxy contest to help inform company’s fight strategy
- Familiarize you with the hedge funds and other investors that have made activist approaches in your industry and the tactics each fund has used
- Help engage with your investors to share company’s perspective on business and corporate governance issues and to build credibility before activists surface
- Help enhance company disclosures or updates to governance and oversight practices as appropriate in light of evolving shareholder expectations
Please direct related questions to:
- Rajeev Kumar, CFA – Senior Managing Director, Corporate Governance – rkumar@Georgeson.com
- William P. Fiske – Head of M&A and Contested Situations – firstname.lastname@example.org
This notice is provided by Georgeson for general informational purposes only and is not intended and should not be construed as legal, regulatory, financial or tax advice. Georgeson is not licensed or authorized to practice law in any jurisdictions and hence does not provide any legal advice and it does not hold itself out as doing so. Neither Georgeson nor any of its affiliates or contributors accept any responsibility or liability for the quality, accuracy or completeness of any information contained in this notice. It is important that you seek independent professional advice relating to the subject matter of this notice before relying on it.