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Proposal on Universal Ballots Likely in Fall 2016

The SEC is developing a proposal it wants to release later this year to make it easier for shareholders to vote for independent candidates for corporate board seats. Investors asked the SEC to ban the general practice of distributing ballots listing only management-sponsored candidates and separate ballots for independent nominees in contested elections. The practice makes it hard for shareholders who can not attend the annual meeting to split votes among management-backed and dissident candidates.

A staffer in the SEC’s Division of Corporation Finance recently said the agency is working on a proposal to make it easier for shareholders to vote for candidates for corporate board seats in contested elections without showing up at annual meetings.

During the annual SEC Speaks conference hosted by the Practising Law Institute in Washington on February 19, 2016, Michele Anderson, the division’s associate director, said she could not specify the timing for releasing the proposal, but she said it is one of the agency’s priorities for the year ahead.

According to the Office of Management and Budget website, the SEC wants to have a proposal for comment issued by fall 2016.

“We are looking at this issue principally from the point of view of the shareholder that wants to vote the mix of directors that the shareholder believes would best serve the company,” Anderson said. “This isn’t about favoring the company or the dissident. Frankly, it isn’t always clear which side the universal proxy would favor anyway.”

Institutional investors have been pushing the SEC to amend Rule 14a-4(d) of the Securities Exchange Act of 1934 and allow a universal proxy card, which would list nominees backed by management and independent shareholders. Investors want the SEC to ban the general practice companies follow of distributing proxy ballots listing only management-sponsored candidates and separate ballots for independent nominees. Investors say the practice makes it difficult for shareholders who cannot attend the meeting to split their tickets among management-backed and dissident candidates.

The SEC staff has been studying the issue after the Investor Advisory Committee in July 2013 recommended that the agency make technical fixes to its proxy rules to allow for universal ballots. In January 2014, the Council of Institutional Investors (CII), which is represented on the panel, formally petitioned the SEC to write a rule.

The inability to choose from all nominees “limits shareowner choice and diminishes director accountability,” CII’s general counsel Jeff Mahoney wrote in a March 2015 follow-up letter. “This limitation weakens the quality of corporate governance in the U.S.”

Anderson said while the staff’s goal is to look at the issue from the shareholder’s side, the staff is “also very sensitive to the fact that we are talking about situations where control of the board of directors may be at stake.” As a result, the SEC wants to understand how companies and shareholders may use universal ballots once they are in place. The Corporation Finance Division is thinking about whether the use of the universal ballot should be mandatory or optional, or if the rule should generally permit a company the option of deciding when to use a universal ballot until certain criteria have been met, and then mandating the ballots.

“Should it be in every contested election?” Anderson said. Alternatively, the SEC could limit the universal ballot’s use to elections where control of the board is at stake.

SEC staffers plan to issue a proposal that also considers the universal ballot’s appearance and whether all candidate names should appear on both sides.

Shareholders tend to support the use of universal ballots, but some companies do not see their merit.

During an SEC roundtable in March 2015, David Katz, a partner with Wachtell, Lipton, Rosen and Katz LLP, said a requirement could have unintended consequences.

“It’s one thing when you have one activist that’s looking at something,” said Katz, who frequently advises companies in proxy contests. “But when you have several activists in a company, and you could conceivably put a universal ballot together, it could become extremely confusing.”