By Cydney Posner
The Council of Institutional Investors has filed a petition for rulemaking asking the SEC to reform the proxy rules to "facilitate" the use of "universal proxies" in proxy contests. A universal proxy is a proxy card that would include a complete list of board candidates, allowing shareholders in contested elections "to vote for their preferred combination of shareholder and management nominees on a single proxy card." CII also asks the SEC to propose amendments that eliminate the requirement to obtain a nominee's consent to be named on a proxy card in contested elections. The effect, CII contends, would be to ensure "that investors voting by proxy have the same practical ability to vote their shares for their preferred mix of nominees that they would have if they attend a shareholder meeting in person."
Under the current system, unless there is a "short slate" contest (discussed below), shareholders cannot "split the ticket"; instead, in contested elections, each side has its own proxy card with no opportunity to "mix and match." As a result, shareholders voting by proxy are limited to supporting either the management slate using management's proxy card or the shareholder proponent's slate using the shareholder proponent's proxy card. One impediment to the use of a universal proxy is the "bona fide nominee" requirement of Rule 14a-4(d)(1), which requires that a nominee consent to be named in the proxy and, if elected, to serve as a director. CII contends that this rule is problematic because "[d]irectors nominated by an incumbent board have only very rarely consented to being named in a proxy statement issued by a shareholder seeking board representation. As a consequence, the practical effect of the bona fide nominee rule… is that a shareholder proponent could not offer shareholders the opportunity to ‘split their tickets' and vote for a combination of shareholder nominees and management nominees—even though shareholders would be able to vote such combinations if they voted in person." Moreover, state law typically "provides that the latest dated proxy revokes any previous proxy, [with the result that] shareholders generally only can submit one effective proxy in connection with a solicitation." CII observes that even the SEC has recognized that the bona fide nominee rule can "cut off shareholder voting rights." This concern has been echoed by the SEC's Investor Advisory Committee, which has also recommended that the SEC consider relaxing the bona fide nominee rule to some extent.
Under the "short slate" exception to the bona fide nominee rule, a shareholder not seeking majority control, i.e., who nominates a number of directors that, if elected, would constitute a minority of the board, may indicate on the shareholder's proxy card those management nominees for whom the shareholder will not vote. CII contends that there is "no sensible reason for the disparity in treatment that results from whether a shareholder is running a majority or minority slate of nominees." In the past, the SEC has maintained that a shareholder seeking a majority of the board should simply propose a full slate of nominees. CII argues that "a shareholder proponent seeking majority control may still want to keep certain directors, such as the chief executive officer, on the board because it believes that such directors are qualified and will complement its nominees. Furthermore, there is no reason why a shareholder's practical ability to exercise his or her full voting power should depend on how many people a party is nominating."
CII argues that, as a result of these rules, "shareholders remain unable to vote by proxy for the mix of shareholder nominees and management nominees who they believe would best comprise the board." Accordingly, CII, contends, the SEC should enfranchise shareholders by reforming the proxy rules to facilitate the use of universal proxies so "that the proxy process sensibly functions as a replacement for an actual in-person meeting of shareholders."