Implications of the SEC’s Universal Proxy Card Rules

In October 2016, the SEC proposed amendments to the federal proxy rules that would require universal proxies in connection with a contested election of directors. The proposal would require the use of proxy cards that include the names of both board and dissident nominees and thus allow shareholders to vote by proxy in a manner that more closely resembles how they vote in person. The SEC’s stated goals are part of a broader set of sweeping proposals to allow shareholders “fair corporate suffrage.”

Boards need to understand how the rules will change the process of soliciting proxies for the annual meeting. Some directors may object to being forced to lend their name to the election campaign of a dissident. This concern may be mitigated by the proposed requirement to clearly distinguish between types of nominees and through disclosure in the respective party’s proxy statements.

The company’s voting standards for director elections may be impacted by use of a universal card. Companies with pure majority voting standards (no application of plurality in the event of a contested election) are more likely to have a failed election.

Universal proxy cards may exacerbate this issue by enabling fragmented voting selections among a larger combined slate (company and dissident), reducing the probability that any candidate receives a majority of votes cast. Accordingly, cumulative voting combined with universal proxies may lead to unexpected cooperation between shareholders and informal pooling of votes to drive certain outcomes.