IN-DEPTH: Universal proxy battle

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Investors and companies have diverging opinions on the Securities and Exchange Commission’s (SEC) proposal to mandate universal proxy cards for contested elections.

When used in a contested election, a universal proxy card includes a complete list of board candidates both from management and the dissident, allowing shareholders to vote for their preferred combination of dissident and management nominees as opposed to choosing one slate only. Currently, they can do so only by attending annual meetings in person.

Rarely used

The SEC opened the comment period again in mid-April as it believes there have been important developments in proxy contests, corporate governance, and shareholder activism since it first suggested the rule change in 2016. The regulator noted that there have been “several contests” in the U.S. where one or both parties used a universal proxy card since the initial proposal.

Steve Wolosky from Olshan Frome Wolosky disagreed in the law firm’s comment letter regarding the rule change. “While the [SEC] correctly points out that universal proxy cards were used in election contests at EQT, [where Olshan represented the activist] and at Sandridge Energy in 2018, we are not aware of any other U.S. election contest that went to a meeting since 2016 where a universal proxy card was used,” said Wolosky, who represents activists in proxy battles.

While the proxy contests between the Rice brothers and EQT and Sandridge Energy and Carl Icahn were the only contests that used universal proxy cards since 2016, there were plenty of cases where activists applied for them. Legion Partners applied for one at Genesco in its current campaign at the footwear retailer, Ancora Advisors pushed for the use of one earlier this year at Blucora, and Macellum Advisors requested its use at Big Lots in 2020. In 2015, Trian Partners requested one in its failed proxy contest at DuPont.

“Since the use of a universal proxy is currently almost always a negotiated outcome, this situation really only arises when both sides think they will benefit to some degree from a universal proxy,” Dave Whissel from Spotlight Advisors told Activist Insight Online in an interview. As a result, universal proxies are used sparingly because situations where each side would benefit equally are rare.

In favor

From the responses that came in on the June 7 deadline, activists were more positive about the proposed change to the proxy voting system. “In general, the consensus is that universal proxies make it easier for an activist to win seats, but less likely there will be a change in control of the board,” said Whissel. However, the real-life example of the Rice brothers’ proxy fight at EQT in 2018, where the dissidents managed to get all their nominees onto the board while using a universal proxy card, suggests that the likely impact of a mandated universal proxy card would be unpredictable in practice.

“Allowing shareholders to vote for their preferred combination of duly nominated director candidates will help shareholders exercise the rights they have under state corporate law in the same manner as if they attended a shareholder meeting,” said Elliott Management in its response.

Under the current regulations, an investor will only be guaranteed a cross-slate vote if they attend a meeting which might be a difficult thing to do for some. “Many investors, particularly small investors for whom the costs of attending a meeting and going through the process of a legal proxy request are prohibitive, are thus effectively denied the right to vote for the directors of their choice,” Institutional Shareholder Services highlighted in its response to the SEC.

By forcing shareholders to limit their choices to nominees available on either the management slate or the dissident slate, the current system gives shareholders a “sub-optimal” way to exercise their “fundamental right of a shareowner,” the proxy advisory firm claimed.

Against

Defense lawyers argue the mandated universal proxy card could give shareholders freedom to abuse the system. Law firm Sidley Austin characterized the proposal as “proxy access on steroids,” noting that a dissident shareholder faces almost no limitations in replacing the entire board of directors. To combat this, Sidley suggested there be a minimum and continuous ownership clause in the rule – that a shareholder has continuously held at least 3% of the total voting power for at least three years, similarly to proxy access.

Some think the proposal may disenfranchise shareholders while favoring activist shareholders who may be driven by self-interest. “We believe that the proposed rules will not adequately address [the SEC’s] intended goal, and instead will likely disenfranchise shareholders and create greater ‘investor confusion’ through information inequities and potentially misleading proxy cards that are not truly universal,” the Business Roundtable, a non-profit association of company CEOs, said in its response to the rule change.

Another criticism was that the proposed rules will likely increase the number and frequency of proxy contests and impede the ability of corporate directors to make long-term, value-driven decisions.

While activists generally love the idea of a universal proxy card, they raised concerns about some of the proposed rules. A sub-clause specifies that the dissident must provide the registrant with the names of its nominees no later than 60 days before the anniversary of the prior year’s annual meeting, but the company would not have to provide its list of nominees to the dissident until 50 days before.

“This would always allow the company to finalize its proxy statement first and would structurally prevent a dissident from being able to print and mail its proxy materials until… the company [files] a proxy statement with the [SEC] or providing notice, up to 10 days after the dissident’s notice,” said Elliott.

Olshan and Elliott both noted in their comment letters that this could give companies an unfair advantage, with the latter suggesting “same time obligations” should be enforced for dissidents and companies. The activist noted this “structural advantage for companies” should be removed in the final rule.