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What Should Investors Know About
Universal Proxy Cards?

Well, a few significant things:

You can wait a few months to focus, but not too long. The new universal proxy card (UPC) rules apply to director elections after August 31, 2022:
  • all shareholders will begin to see UPCs in late summer at the earliest
  • activist investors nominating directors will need to plan a little sooner, say in June 2022 for shareholder meetings in September 2022, to comply with new filing deadlines.

The rules are mandatory and apply only to the proxy card:
  • all contested director elections must use a UPC
  • other proxy materials remain largely unchanged, except for wording that refers to UPCs.

Activist investors now must solicit proxies from shareholders representing a minimum of 67% of the outstanding shares. The rules do not make clear what "solicit" means, though, so you might satisfy this in a few ways.

Activist investors can likely reduce proxy solicitation costs by using only the issuer's UPC. The rules appear to not require an activist to have its own proxy card. Activists that do so may lose some access to monitoring shareholder voting real-time, though.

Most observers think this is a pretty big deal. UPCs will likely increase significantly the number of proxy contests, since it makes it easier to solicit proxies. We don't know whether this will also increase the number of activist investor nominees winning BoD elections. It seems inevitable that with more proxy contests, we'll also see more activist investors prevailing.

Below we detail these changes and explain strategies for working with them. Experienced activist investors probably know the detail, and might skip to the strategy. Others will want to keep reading.

Who has the blue card??

Earlier this month, the SEC adopted long-awaited rules about UPCs. The SEC worked on this for many years, and first proposed these regulations in 2016 (we wrote about UPCs in 2015). Essentially, investors and companies will each include identical content in proxy cards. Specifically, both activist and issuer proxy cards will list all director nominees, from the issuer and investors.

Today, a company and an activist each send their own proxy card, listing only their director nominees. This confuses shareholders greatly. Individual and even institutional shareholders can't keep straight the company and activist nominees. Among other odd consequences, each proxy card has a specific color, like blue or gold, so shareholders know which ones belong to the company and to the activist. Negotiating with the company about who uses which color on a proxy card is always a highlight of a proxy contest...

More importantly, it means a shareholder cannot vote by proxy for candidates from among both the issuer and activist nominees. If a shareholder wants to split votes between them, they literally cannot support their preferred, specific combination.

Yet, a shareholder can do so if they attend a shareholder meeting in person. At the actual meeting, ballots include all nominees. Thus the precise rationale for the new rules: currently, voting by proxy does not provide for the same rights and opportunities as voting in person. The SEC seeks to make the two as equivalent as possible. The new UPC rule essentially achieves this (except for snacks and swag).

Going forward, the issuer includes the activist nominees on their proxy card, and the activist similarly includes the issuer nominees. For this to occur, they must exchange information about nominees in a timely way. The rules set forth a process with some deadlines:
  • the activist must notify the company of the activist's nominees at least 60 days before the shareholder meeting
  • the company must similarly notify the activist of the company's nominees at least 50 days before the meeting
  • the activist must also file its proxy statement at least 25 days before the meeting, or 5 days after the company files its proxy statement.

Alas, these deadlines add to, rather than replace, advance notice deadlines that companies typically impose on director nominations. Thankfully, under the new rules an activist that complies with company advance notice deadlines will usually also comply with the new UPC notice deadlines.

The rules also prescribe how proxy cards look, and how proxy materials refer to them. They have specific formatting standards by which issuers and activists present all nominees fairly. Each of the company and activist also will include language in the UPC and also their proxy materials that directs shareholders to the other's proxy materials for information about the other's nominees. Otherwise, proxy materials won't change - a company need not include information about an activist's nominees in the company's proxy materials.

Also, this should be obvious by now, but: UPCs apply only to director elections. Anything else that ends up on a shareholder meeting agenda, and thus a proxy card, would not change. This includes precatory shareholder proposals, bylaw amendments, and anything else that receives a vote at a shareholder meeting.

Finally, the rules apply to both annual and special shareholder meetings.

Strategy for UPCs

We can think of two questions to consider in using UPCs. These pertain to meeting the 67% threshold and whether to use only the company UPC.

Soliciting 67%
For activist investors, the most significant and possibly onerous element of the rules arises from the new requirement to solicit shareholders representing voting power of at least 67% of the outstanding shares. Until now, an activist could solicit as many or few shareholders as they wish. Sure, many activists would plan and budget for soliciting all shareholders, or as many shareholders as possible, and easily hit the 67% level. But, it's not required.

So until now, you could begin to solicit major institutions, see how that went, and decide how much further to go. Or, you could solicit only the institutions necessary to prevail in the director election. That could amount to as low as, say, 25% of the outstanding shares, depending on the expected participation and voting standard.

Now, an activist investor must meet that 67% level. Specifically, you must notify the company that you "intend" to so solicit. (We note the rule does not define "intend", so if you end up soliciting less than 67%, it's not clear how the company would prove you did not so intend, but anyway...) This could mean sending proxy materials and cards to a lot of individual shareholders that an activist might otherwise skip.

The rules also do not define "solicit". The SEC specifically avoids the subject:

...the adopted not mandate a specific method of furnishing the proxy materials. A dissident may choose to use the less costly e-proxy delivery method (i.e., the “notice and access” method of mailing a notice of internet availability and posting the proxy materials on a website) should it wish.

We now can imagine a minimalist proxy solicitation, in which an activist:
  • files basic proxy materials in the usual way with the SEC
  • relies on materials that appear only in EDGAR at the SEC website
  • sends a notice postcard or maybe email message to the number of shareholders needed to meet the 67% level.
The postcard or message makes all proxy materials available online, including your UPC. You need to determine how minimalist you want - what proxy solicitation steps you want to undertake to both comply with this requirement at a reasonable cost, and also meet your goals for attracting votes for your slate.

Company or activist's own UPC
An activist should also consider whether to send your own UPC, or rely only on the company's. The new rules appear to allow you to decide simply to not create your own UPC. As far as we can tell, based on our read of the rules (we are not attorneys, and this is of course not legal advice), the rules appear to not have any requirement that you use your own proxy card.

If so, an activist can instead use the company proxy card, which lists all nominees from both the company and the activist. The company UPC and proxy materials will direct shareholders to your proxy materials for information about activist nominees, including any website or similar online resource.

An activist that uses only the company UPC will save money in proxy solicitation. You won't draft, file, produce, transmit, track, collect, and tabulate proxy cards. However, you then rely on the company to do this, and lose the ability to track proxies as shareholders submit them. An activist might want to see who has and has not voted, and use that information to allocate resources in persuading undecided shareholders to support your nominees.

There are other situations and details worth considering. These include multiple activist investor slates, for which UPCs will need to show all nominees from all parties, including the company and each investor. It's sure to get interesting this way.

In any event, UPCs represent a significant advance in shareholder rights, and could make a difference in a proxy contest in the coming years.
You can find other useful resources at the TAI website, including our research on "Effective Activism", our white paper with the basics on activist investing, and our guides on exempt solicitationconsent solicitation, and special shareholder meetings.
For further information, or to discuss a specific turnaround situation, please contact:

Michael R. Levin