The Council of Institutional Investors (CII) filed a rulemaking petition with the Securities and Exchange Commission (SEC) asking that it amend its rules for contested elections so that “shareholders can vote for any combination of management and dissident nominees they wish to represent them.” I hope readers will join with me in sending e-mails in support of the petition to the SEC. Instructions on how to do so can be found at the bottom of this post.
This petition is a followup to action they took on July 23, 2013 when the Policies Committee of CII approved a draft proposal for a Universal Proxy. Key, was addition of the following sentence to their 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 went 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.”
CII’s initial draft was quickly followed by the SEC-IAC, which on July 25, 2013 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 included 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.
“Amending the rules so that each side in a contest can distribute ‘universal’ proxy cards listing all director nominees would give shareholders freedom of choice to vote for any candidate, regardless of his or her slate,” said CII Executive Director Ann Yerger in a Jan. 8 statement. “It would also ensure a fairer, less confusing and less cumbersome voting process.”
Such a change would give investors voting by proxy “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. Any additional costs to participants in proxy contest would be minimal.
Shareholders have extremely limited ability to vote nominees from different slates because the SEC’s 1966 “bona fide nominee” rule requires opposing sides in a proxy contest to obtain the consent of opposing candidates before they can list them. Usually at least one side refuses to give consent–a notable example being Target Corp. in 2009 in a contest with Pershing Square Capital Management–and both sides distribute separate proxy cards listing only their nominees. Shareholders can vote using only one card. If they want to “split their ticket” to vote for candidates from both slates they have to vote in person at the annual meeting, which is impractical and costly.
The SEC’s 1992 “short slate” rule provides a carve-out from the consent requirement when a shareholder nominates candidates representing a minority of the board. In such cases, dissidents can list their preferred combination of shareholder and management nominees. But the short slate rule does not allow for full “mix and match” capability.
“CII believes comprehensive reform is needed so that in a proxy fight, investors can vote for any combination of board candidates they believe will foster long-term shareholder value,” officials said in a statement.
At their September meeting in Chicago, CII’s general membership voted to formally amend the group’s corporate governance policies to support universal proxy cards.
CII Executive Director Ann Yerger said, “Amending the rules so that each side in a contest can distribute ‘universal’ proxy cards listing all director nominees would give shareholders freedom of choice to vote for any candidate, regardless of his or her slate. It would also ensure a fairer, less confusing and less cumbersome voting process.”
For additional background, see Vote Splitting: Are We Moving to a Universal Proxy?
- Use the Commission’s Internet comment form;
- Send an e-mail to [email protected]. Include File Number 4-672 in the subject line;
- Use the Federal eRulemaking Portal; or
- Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.
All submissions should refer to File Number 4-672. This file number should be included on the subject line if e-mail is used and that is the method I recommend. To avoid duplication or work at the SEC, use only one method. The Commission will post all comments on petitions on the Commission’s Internet website. Comments are also available in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC, 20549, on official business days between the hours of 10:00 am and 3:00 pm.
See my comment letter File Number 4-672.