Recently, the Securities and Exchange Commission (SEC) adopted new, final rules that provide new guidance for parties during a contested election. Now, the SEC requires all parties to use universal proxy cards that include all of the director nominees at an election during a shareholder meeting. While the new rules were proposed in 2016, no activity was taken until 2021. Then, the SEC opened the rules up for a new comment period, and the final rules include numerous amendments, proposals, and guidance related to the overall proxy process.
The final rules now require dissident shareholders and registrants to provide shareholders with a proxy card. The proxy card has to include all registrants and dissidents who have been nominated. The rules now require all registrants and dissidents to provide each other with the names of all nominees, set a filing deadline and minimum solicitation requirement for dissidents, and clearly list all formatting requirements for universal proxy cards. In addition, these proxy cards are required to specify all voting options for shareholders during elections and include proxy statements that state what will happen if the shareholders decide to withhold their votes during the election.
The Specific Rules Changes
There are several specific changes that will unfold. These changes include:
Now, only duly nominated candidates are required to be listed on the universal proxy card. If the nominations from shareholder dissidents do not comply with these advanced notice rules, the nominees are allowed to be omitted from the proxy card itself.
Disclosures in the Events of a Shareholder Challenge
If a shareholder decides to move forward with litigation that challenges the ability of the registrants to exclude a specific nominee, the registrant will be required to show exactly how the director nominations are invalid. The registrant will have to issue a brief description explaining the determination, specify that the shareholder initiated a litigation challenge, and list the impacts of including the shareholder’s nomination on the proxy card.
If a court later determines that the dissident’s nominations are valid and should have been included on the original proxy card, the registrant will be required to discard all previous proxy cards and issue new universal proxy cards that include the names of those nominated by the dissident shareholder. All shareholders also need to be given enough time to review and cast their votes on universal proxy cards accordingly.
Each Party Must Use a Universal Proxy Card
Every party involved in the voting process is required to use a universal proxy card. Dissident shareholders are no longer allowed to provide their own proxy cards. The Universal proxy card has to include all of the names of the director candidates.A dissident shareholder is required to solicit holders of at least 67 percent of the voting power of shares entitled to a vote. A representation to that effect has to be included in its proxy statement.
The goal of this requirement is to prevent a dissident shareholder from capitalizing on the inclusion of its nominees on the registrant’s universal proxy card without making meaningful solicitation efforts.
An Overview of New Timeline Requirements
The SEC has a chart that everyone can use related to the timing of soliciting universal proxy cards. Some of the most important pieces of information to keep in mind include:
Timing of Deadline
By 60 calendar days before the anniversary of the annual meeting of the previous year (if an annual meeting was held during the previous year), or by 60 days prior to the date of the new annual meeting
Dissidents need to specify whether they are going to solicit more than 67 percent of the voting power to get other director nominees included on the proxy card in addition to the nominees proposed by the registrant
By 50 calendar days before the anniversary of the annual meeting of the previous year (if an annual meeting was held during the previous year), or by 50 calendar days prior to the new date of the annual meeting
The registrant is required to notify the dissidents of the names of the nominees proposed by the registrant
By 20 business days prior to the record date of the meeting
The registration is required to conduct a broker search to determine the number of proxy cards needed to be distributed to various owners
By 25 calendar days prior to the date of the meeting, or by 5 calendar days after the registrant files a definitive proxy statement
The dissident is required to file a definitive proxy statement with the Commission
As the public comment period unfolded, there was some concern that the shareholders would be confused about which directors were endorsed by which faction of the company. The SEC has included an amendment that would require a clear distinguishing disclosure to be present on the proxy card. This will make it easier for building shareholders to determine which groups are endorsing which candidates and why that is the case.
Who Do These Rules Apply To?
These rules do not apply to companies that have been registered under the Investment Act of 1940. These rules also do not apply to business development companies (BDCs).
On the other hand, these rules do apply to all other entities that are subject to the proxy rules under the Exchange Act. This includes emerging growth companies and smaller reporting companies.
Implications and Preparing for Your Annual Meeting
All entities subject to SEC proxy rules must make sure that they comply with these new requirements. Please consult your legal counsel as necessary. At Colonial Stock Transfer, we can manage your shareholder meeting from start to finish, making sure that your company’s annual meeting proceeds smoothly. We can help with the following:
Planning of record and meeting dates
Tabulation of proxy votes and online voting
Send Reminders to Vote
Compliance with Notice and Access Document Hosting and other Rules