Years ago, the DC Court’s decision to vacate the SEC’s Rule 14a-11 had me thinking of possible approaches under Rule 14a-8 but also working around the whole access issue. With regard to short slates, I wavered between “field agents” attending annual meetings with “proxy assignments” to allow more wide-spread vote splitting to consideration of amendments needed to SEC rules. These were the primary papers involved in my intellectual mash-up but now my back-burner project has been taken up by CII and the SEC-IAC. More on their efforts below.
- New Internet Technology Permits New Proxy Contest Techniques by Eugene F. Cowell III, Insights magazine, October 2001, which recounts first successful proxy contest using an Internet-based solicitation strategy by Travis Street Partners LLC at ICO, Inc. where they won three board seats. The piece explains revisions to SEC Rule 14a-12 and warns companies to expect to expect a whole new game. They willl need a well executed Internet-based defense to keep their seats.
- Investor Suffrage Movement by Glyn Holton, Financial Analysts Journal, Nov/Dec 2006. Holton proposes a proxy exchange that would allow shareowners to select anyone they like to exercise their voting rights. The costs of managerial capitalism including fraud, diversion of resources, cronyism, and just plain mediocrity—are incalculable. “Legislative responses like the Sarbanes–Oxley Act of 2002 do some good, but they also impose significant costs. Rather than reform managerial capitalism, a proxy exchange will eliminate it. It is a market-based solution that will work through the simple device of putting owners back in charge.”
- Proxy Contests in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy by Jeffrey N. Gordon, Columbia Law and Economics Working Paper No. 322, Draft of February 2008. Gordon argues that e-proxy, “notice and access,” is a game changer because dissident nominators “can choose to send Notices only to those shareholders who have not previously requested paper copies.” Distribution costs for solicitation can be brought into the $1,000 range. “Institutional investors and other shareholder activists should focus on working through the mechanics of waging short-slate proxy contests using e-proxy solicitations.”
- Never Mind Equal Access: Just Let Shareholders “Split Their Ticket” by Richard J. Grossman and J. Russel Denton, The M&A Lawyer, January 2009. Forget proxy access, the authors argue, the SEC can bring about a less controversial “shareholder democracy” by amending Rule 14a-4 to “require that once there is a bona fide election contest (i.e., a dissident group has disseminated a definitive proxy statement to shareholders and there are more nominees than board seats), both sides would be required to put each other’s nominees on their own proxy card, thereby allowing shareholders to select the director candidates of their choosing.” “Unlike an “equal access” rule, this possible rule change would not provide shareholders with access to a company’s proxy materials, or eliminate the need for a dissident to prepare and disseminate its own proxy materials, which would include all the required disclosures. Rather, it would simply standardize the rules by which shareholders can vote by proxy with the way shareholders can vote in person at a meeting.
As Grossman and Denton remind us, the reason we can’t split our ticket (i.e., vote for a combination of director candidates not reflected on either side’s individual proxy card) is because the proxy card dated last automatically revokes the prior card. Of course, that can be avoided by voting in person on manual ballots distributed at the shareholder meeting.
For retail shareholders, that means obtaining a legal proxy and for most shareowners now it means spending extra time and money to attend the meeting. Although this can be resolved through proxy assignments, so far it has been a cumbersome process that only the most dedicated shareowners are likely to participate in. Members of the United States Proxy Exchange (operations now suspended) undertook a successful series of proxy assignment “trials” in 2008. Developing, building out and implementing a more automated system of proxy assignments is an expensive option that I hope will eventually be taken for other reasons. Hopefully, that won’t be necessary so that we can split our votes.
Federal proxy rules were supposedly designed to replicate, as nearly as possible, an in-person shareholder meeting. Yet, SEC rules certainly fall short with respect to vote splitting. Shareholder advisory firms have been more likely endorse a short slate than a change in control slate. It seems plausible they would be even more prone to recommend shareholders split their vote if that were feasible, so split tickets should be popular if we ever get to implementation.
Since publication of the Grossman and Denton article, SEC staff have issued no-action letters that permit backers of short slates to vote for the nominees of another short slate if backers of the short slates represent they have not formed a “group” and have no intention of forming a “group” within the meaning of Reg 13D-G. Still, the rules of whose name can go onto what cards is complicated and could have easily been resolved with an amendment, such as that suggested by Grossman and Denton.
I originally concluded that it may be worth petitioning the SEC for such a change. In the meantime, I had hoped to do a bit of “private ordering.” A bylaw amendment requiring the current board’s card to reflect all bona fide candidates in short slate contests might eliminate many of the disclosure and liability issues that surrounded Rule 14a-11.
Now, however, CII and the SEC-IAC may be coming to the rescue. Of course, a rule change at the SEC will still take a lot of effort, even with their support.
Council of Institutional Investors
On July 23, 2013 the Policies Committee of CII approved a draft proposal for a Universal Proxy. Key, is addition of the following sentence to their current policy on director elections:
To facilitate the shareholder voting franchise, the opposing sides engaged in a contested election should utilize a proxy card naming all management-nominees and all shareholder-proponent nominees, providing every nominee equal prominence on the proxy card.
The draft goes on to note that circulation of a universal proxy in the 2012 contest involving Canadian Pacific suggests reform is “easier to implement than previously understood.”
Securities and Exchange Commission’s Investor Advisory Committee
On July 25, 2013 the SEC-IAC adopted a recommendation to the SEC that it Explore Universal Proxy Ballots as the subject of a rulemaking. Their recommendation reads as follows:
The Commission should explore relaxing the “bona fide nominee” rule embodied in Rule 14a-4(d)(1) promulgated in 1966 under Section 14 of the Securities Exchange Act of 1934 to provide proxy contestants with the option (but not the obligation) to use Universal Ballots in connection with short slate director nominations (in other words, where the candidates nominated by shareholders would, if elected, constitute a minority of the board of directors). In connection with that process, specific inquiry should be made as to whether all or only a portion of duly nominated candidates must or may appear on Universal Ballots.
The SEC-IAC adoption includes an informative write-up on the Commission’s thinking when adopting the current rules, which prohibit vote-splitting. The Commission acknowledged “the difficulty experienced by shareholders in gaining a voice in determining the composition of the board of directors,” but rejected “proposals to require the company to include shareholder nominees in the company’s proxy statement,” because that “would represent a substantial change in the Commission’s proxy rules.”
The Commission erred at that point. Congress granted the Commission authority over the corporate proxy process as a means of ensuring that it functions, “as nearly as possible, as a replacement for an actual in-person meeting of shareholders.” Congress did say to do so only if it is easy or convenient to do so or if the Commission doesn’t have to make substantial changes to proxy rules.
Conclusion
The fact that CII has taken up the issue means great minds will be working to bring about a universal proxy. That and the power of a group with combined assets exceeding $3 trillion, should bode well for progress. Of course, unlike corporations that seem to be able to write huge checks to the Chamber of Commerce for lobbyists to defend entrenched managers, the pension funds endowments and foundations that are the primary members of CII are bound by fiduciary duties to temper lobbying efforts.
However, the SEC is required by law to respond to recommendations made by SEC-IAC, so it is great to see the advisory committee advocating for a rulemaking change in the direction of a universal ballot. The combined focus of both of these organizations should lead to positive movement. We will be standing by ready to help shape any draft rule that develops. I feel the history of corporate governance in the making.
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