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Securities Regulation and Corporate Governance > Posts > Division of Corporation Finance Issues Interpretive Guidance on the SEC’s Universal Proxy Rules
Division of Corporation Finance Issues Interpretive Guidance on the SEC’s Universal Proxy Rules

On August 31, 2022, the universal proxy rules adopted late last year by the Securities and Exchange Commission (the “SEC") will become effective.  As discussed in our previous client alert, the rules require proxy cards distributed by both public companies and nominating shareholders in contested director elections to include both sides' director nominees, such that shareholders casting their vote can “mix-and-match" nominees from each of the company's and the dissident's slate of director nominees.  

In connection with the upcoming effectiveness of the rules, on August 25, 2022, the staff of the Division of Corporation Finance of the SEC (the “Staff") issued three new Compliance and Disclosure Interpretations (“C&DIs") focused on the mechanics associated with implementing these rules in practice.

The new C&DIs address the following issues related to the universal proxy rules:

1.       When a dissident shareholder provides the company with notice of the names of its director nominees (as required by Rule 14a-19(b)), the notice can only include the names of nominees the dissident actually intends to nominate (see C&DI Proxy Rules and Schedules 14A/14C, Question 139.01);​

2.       In a contested director election where there is more than one dissident slate, the company is obligated to inform each of the dissident shareholders the names of both its own and the other dissident shareholder's director nominees (see C&DI Proxy Rules and Schedules 14A/14C, Question 139.02); and

3.       If a company's advance notice bylaw provision imposes an earlier deadline than the 60-day deadline in Rule 14a-19(b)(1) and requires all of the information required under Rule 14a-19, the company's proxy statement only needs to disclose such earlier deadline; however, if Rule 14a-19(b) requires information that is not required by the advance notice bylaw, then the company's proxy statement must clearly inform potential dissidents that they must also comply with the additional requirements of Rule 14a-19(b) (see C&DI Proxy Rules and Schedules 14A/14C, Question 139.03).

1. Dissident can only include Names of Director Nominees for whom it Intends to Solicit Proxies.

Under Question 139.01, the Staff confirms that a dissident shareholder can only include in the Rule 14a-19(b) notice the names of nominees for whom it intends to solicit proxies.  The purpose of the Rule 14a-19(b) notice requirement is to provide a definitive date by which the parties in a contested election will have the names of all nominees permitting the compilation of a universal proxy card.  The Staff notes that knowingly submitting the names of more nominees than there are seats up for election, with the intention of finalizing the actual slate of nominees afterwards, would defeat such purpose.  However, recognizing that a dissident may need to change its slate of nominees after the notice deadline for other valid reasons (e.g., a nominee withdraws from the slate or the company increases the number of director seats up for election), the Staff will not object if a dissident includes the names of alternate director nominees in the notice so long as they are  clearly identified as such.  The Staff goes on to make clear the same notice requirements, and the potential for alternate director nominees, applies to the company as well.  In most cases, companies do not line up alternate nominees in advance, and thus providing notice of alternate nominees is less likely to become an issue for the company.

We understand the Staff's guidance on this issue is primarily directed at the frowned-upon practice engaged in by certain dissident shareholders who list more nominees than there are open seats for election.  In such cases the dissident shareholders place brackets around the names of all their nominees at the early stages, only to finalize their list of nominees (with brackets removed) when filing a definitive proxy statement.  This interpretive guidance is intended to restrict such gamesmanship engaged in by dissidents.   

2. Company is Obligated to Inform Each Dissident of All Director Nominees.

Under Question 139.02, the Staff states that, even though not expressly addressed by Rule 14a-19, in a contested director election where more than one dissident shareholder intends to present a slate of director nominees, the company should inform each dissident of the names of all director nominees in the election contest.  The Staff believes that the company is best positioned to notify all parties of the slates submitted by the dissidents as the company alone receives Rule 14a-19(b) notices from all dissident shareholders.  

3. Earlier Notice Deadline Imposed by Advance Notice Bylaw Provision is Allowed.

Rule 14a-19(b)(1) requires a dissident in an election contest to send notice of its director nominees generally no later than 60 days before the anniversary of the prior year's annual meeting of the company.  However, it is not unusual for a company's advance notice bylaw provision to impose an earlier notice deadline.  The Staff notes that because Rule 14a-19(b)(1) establishes a minimum, and not a maximum, notice period for a dissident to inform the company of its intent to present its slate, an earlier notice deadline imposed by a company's advance notice bylaw provision is allowed and the company need only to disclose the earlier advance notice bylaw deadline (not the Rule 14a-19(b)(1)'s later deadline) in its proxy statement provided that its advance notice bylaw requires dissidents to provide all of the information required under Rule 14a-19.  In the event there is information required by Rule 14a-19(b) that is not required in the notice pursuant to the advance notice bylaw provision (e.g., the intent to solicit at least 67% of the votes), the proxy statement must clearly state the need for a dissident shareholder to comply with the additional requirements of Rule 14a-19(b).

We would like to thank Maggie Zhang (corporate associate in Gibson Dunn's Orange County office) for her detailed analysis and summary of the Staff's C&DIs on Rule 14a-19.

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