Four and a half years later, the SEC is formally restarting its project to draft a universal proxy rule for contested director elections, which is supported by investors but opposed by business groups.
The SEC under then-chair Mary Jo White issued a proposal in October 2016 in response to investor demand in Release No. 34-79164, Universal Proxy, and the commission last week opened up the file again for public comment. Release No. 34-91603, Reopening of Comment Period for Universal Proxy, was issued on April 16, 2021.
Comments are due 30 days after publication in the Federal Register.
After Jay Clayton took the helm four years ago, the SEC had put that aside until late during his tenure because of support by Commissioner Elad Roisman, who took the agency’s lead on proxy issues when Clayton ran the agency. The SEC never took any action then as Clayton largely prioritized cutting back rules or implementing rules favored by businesses.
Now with a different administration, “This is an important step toward finalizing rules that will facilitate clarity and efficiency for shareholders voting in director elections,” then-SEC Acting Chair Allison Herren Lee said in a statement following commission vote. A day later on April 17, Gary Gensler was sworn in as permanent chair of the SEC.
“Reopening the comment period will allow the public to share additional views on the use of universal proxy cards in director elections, particularly in light of the corporate governance developments that have occurred since the Commission issued its proposal,” John Coates, acting director of the SEC’s Division of Corporation Finance, said in a statement.
The proposal would require public companies to use ballots that include both management-backed nominees for board seats and shareholder-sponsored candidates running against the management slate. Currently, only shareholders who attend annual meetings in person can freely choose among candidates backed by management and dissident investors. Investor advocates said the rule change is needed to let shareholders who do not attend annual meetings and vote by proxy freely choose among candidates backed by management and dissident investors.
Business groups, however, believe shareholders who want to split their votes should show that they take the issues seriously and show up at the meetings. Moreover, they think the current process works well and is well understood in the marketplace. It warned unintended consequences of over-voting, more frequent disqualification of defective ballots, and shareholder confusion. In addition, they are worried that a universal proxy is likely to increase the number and frequency of proxy contests and impede the ability of directors to make good, long-term decisions.
Davis Polk & Wardwell LLP even wrote a comment letter in January 2017, arguing that the SEC has no authority to write the rule.
“The proposal, if adopted, would likely exceed the Commission’s authority under the Exchange Act and would also be vulnerable to challenge under the Administrative Procedure Act,” the law firm wrote, referring to Section 14(a) of the Securities Exchange Act of 1934.
“The proposing release states that ‘fair corporate suffrage,’ the key principle underlying Section 14(a), is most appropriately served by ‘replicating the vote that could be achieved at a shareholder meeting,’ and that therefore ‘the proxy voting process should mirror to the greatest extent possible the vote that a shareholder could achieve by attending the shareholders’ meeting and voting in person,’” Davis Polk wrote in the comment letter. “The proposing release does not cite direct Commission or other authority to justify this statement, which conflicts with the understanding of Section 14(a) that the Commission held at least through 1992, the last time it undertook amendments to the bona fide nominee rule, Rule 14a-4(d)(1) under the Exchange Act. At that time, the Commission implicitly recognized that requiring a universal proxy was beyond the scope of its mandate – even though it found the idea ‘appealing.’”
Rule 14a-4(d) requires shareholders who use a proxy ballot to choose between a slate of candidates put forth by management or the separate slate backed by dissident investors. In contrast, shareholders voting in person at annual meetings receive a ballot that lists all the director nominees, and they may vote for any combination of candidates. The rule requires board candidates to give their consent to appear on a proxy card. Because a management-backed nominee is unlikely to agree to appear on an opposition ballot, the proxy voting is limited to all-or-nothing slates. The proposal would change the definition of a bona fide nominee to include any candidate who has agreed to be named in a proxy statement for the company’s next meeting of shareholders in which a director election is held.
Davis Polk said it is easy to see why the commission implicitly concluded that it lacked statutory authority in 1992.
“The conclusion follows directly from the basic premise that Section 14(a) was designed to address abuses in the proxy process – in which management and sometimes dissident shareholders solicit proxies to vote for their own preferred slate of candidates,” the law firm wrote. “Corporate proxies are a convenience of state law, and no state has legislated that their use must be designed to give shareholders who do not attend a meeting the same experience as those who do attend. …The proposing release reconceptualizes and extends the Commission’s mandate under Section 14(a) in a way that would certainly effect a ‘substantial change in the Commission’s proxy rules.’ If the Commission intends to substantially reinvent the proxy process in addition to policing it for abuses, the Commission would need to obtain additional authority from Congress.”
Not everyone agrees.
“I believe the issue comes down to state law, and since most public companies are incorporated in Delaware, it is Delaware law,” Dave Brown, a partner with Alston & Bird LLP, said on April 19. “Delaware provides a legal basis for voting and then the SEC has authority for the disclosure of how that vote is laid out. The SEC has had Delaware law experts on staff, and I would assume that the SEC has consulted Delaware lawyers on the issue. Although it would be a change in policy and direction—even change in policy that has been in place for decades—I think the SEC has broad enough discretion under the Exchange Act to undertake rulemaking in this area.”
In an August 2020 comment letter, the Universal Proxy Working Group, a coalition of various market participants, including law firm Wachtell, Lipton, Rosen & Katz, the Council of Institutional Investors, the Investment Company Institute, JP Morgan, among several others, believe the SEC has authority and suggested rule changes.
In the meantime, Alston & Bird’s Brown said the timing of Release No. 34-91603 is striking, given Gensler’s confirmation by the Senate on April 14.
“This issue has been important for both Acting Chair Lee and Acting Director Coates, and it may be that they would like to squeeze it under the wire to make sure to get this process opened,” Brown said. “Given the shareholder friendly focused SEC, this is not surprising. This is one that I can certainly see the SEC finalize in the next 12 months and will definitely change the nature of proxy contests.”
This article originally appeared in the April 20, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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