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Statement on the Proposed Rule to Require the Use of Universal Proxies

Commissioner Kara M. Stein

Oct. 26, 2016

Good morning.  I would like to thank the staff for all of their hard work leading up to this proposal.  The team spent a lot of time listening to and considering a variety of views regarding the issue of universal proxy.  In particular, I would like to thank Tiffany Posil, Tina Chalk and Michele Anderson in the Office of Mergers & Acquisitions and Tara Bhandari of DERA. 

When enacted, the Securities Exchange Act of 1934 created the foundational principles we rely on for maintaining robust and efficient capital markets in the United States.  In the report accompanying the Exchange Act, Congress made clear that [“f]air corporate suffrage is an important right that should attach to every equity security bought on a public exchange.”[1] Today’s proposal addresses corporate suffrage in practice and how it has developed.  This proposal would update our rules to better safeguard the effective exercise of shareholder voting.

In particular, today’s proposed rule would require the use of universal proxy cards in all contested elections of directors, other than solicitations that are exempt under our rules.[2]  In an increasingly global world, the goal of this rule is to better replicate for shareholders who vote by proxy the voting choices that they would have if they attended a meeting in person.

Specifically, the proposal seeks to correct an anomalous feature in existing Commission rules that limits voter choice based on whether a shareholder physically attends a meeting or votes by proxy.[3] Under current rules, shareholders who physically attend a shareholder meeting can receive a universal ballot.  This ballot allows shareholders to pick and choose from among a complete list of all the nominees running for the Board of Directors.  This ballot includes both the board nominees recommended by company management and the board nominees who have been recommended by other shareholders. 

In contrast, shareholders who do not attend a meeting in person, but who vote by proxy, are limited to choosing from either a slate of the company’s nominees or a slate of the non-management nominees.  In other words, they generally cannot pick and choose among candidates in the same way as a shareholder can who attends a meeting in person.  This odd result is due in part to restrictions imposed by the bona fide nominee rule.[4]  This rule specifies that one side in a proxy contest may only put the names on its proxy card of persons who have consented to be named in its proxy statement.  Perhaps not surprisingly, in a contested election, this rarely happens.  Some amendments to the bona fide nominee rule have attempted to broaden the scope of candidates that a voter can choose from.  However, such alternatives tend to fall short because they do not provide the full range of choices that a voter would have if she attended the meeting in person.[5]

Today’s proposal recognizes that few shareholders can dedicate the time and resources necessary to attend a company’s meeting in person and that, in the modern marketplace, most voting is done by proxy.  This proposal requires a modest change to address this reality.  As proposed, each party in a contest still would bear the costs associated with filing its own proxy statement, and with conducting its own independent solicitation.  The main difference would be in the form of the proxy card attached to the proxy statement.  Subject to certain notice, filing, form, and content requirements, today’s proposal would require each side in a contest for the first time to provide a universal proxy card listing all the candidates up for election.

In addition, this proposal seeks to amend Commission rules to require that proxy cards include an “against” voting option when state laws give effect to such a vote “against.”[6]  Also, the amendments propose including an “abstain” voting option where majority voting standards are in effect.  Finally, the rules propose to require disclosure in the proxy statement to further clarify the effect of a “withhold” vote in an election.[7] 

These are important steps toward modernizing and updating our rules.  I look forward to receiving feedback on this proposal from issuers, investors and all other interested parties.  Thank you.

 

[1] H. R. Rep. No. 73-1383, 2d Sess., at 13-14 (1934). 

[2] Exempt solicitations, which are specified in Exchange Act Rule 14a-2(b), are excepted from certain of the requirements of Regulation 14A.  For example, Rule 14a-2(b)(2) exempts solicitations, other than on behalf of the registrant, where the aggregate number of persons solicited is not more than ten.  The exempt solicitations outlined in the rule are generally excepted from the rules governing the filing, delivery, information and presentation requirements of solicitation material.  The proposed rule would clarify that the universal proxy rules would not apply to exempt solicitations.  In addition, the proposed rules would exclude solicitations in contested elections of directors involving registered investment companies and business development companies.

[3] Generally, a “proxy” refers to the person appointed or authorized to act for another, particularly with respect to a vote.  See also Exchange Act Rule 14a-1(f) 17 CFR 240-14a-1(f)(defining the term “proxy” as used in Regulation 14A).

[4]See 17 C.F.R. 240.14a-4(d).

[5]See Regulation of Communications Among Shareholders, Release No. 34-31326 (Oct. 16, 1992), 57 FR 48276 (Oct. 22, 1992)(outlining generally the “short slate” rule, which allows shareholders to vote for the minority slate listed on a dissident’s proxy card while providing proxy authority to fill remaining slots with management nominees not specifically named on the dissident’s proxy card).

[6]Specifically, the amendment would affect Exchange Act Rule 14a-4(b).

[7]See Universal Proxy Proposing Release (Oct. 26, 2016) at Section II.C.1