The amendments to Rule 14a-19 of the Securities Exchange Act of 1934 (the “universal proxy rules”) went into effect on September 1, 2022. As a result, now, in the context of a contested director election, the company and dissident stockholders are required to use a “universal proxy card," listing all director candidates. This permits stockholders to mix and match across nominees of the company and the dissident—which was previously only possible by voting in-person at the stockholders’ meeting. Below are key takeaways from select recent proxy contests and what we expect to see play-out as 2023 progresses.
Select Recent Proxy Contests: We highlight the following two completed campaigns, which both took place under the universal proxy rules:
- Capital Returns Management, LLC (“CRM”) sought two of seven board seats at Argo Group International Holdings, Ltd (“Argo”). On December 12, 2022, Argo issued a statement confirming that CRM had withdrawn its director nominations—just days before the December 15, 2022 annual stockholders’ meeting.
- Land & Buildings Investment Management (“L&B”) sought two of three board seats on Apartment Investment and Management Company’s (“AIMCO”) classified board. The proxy contest went all the way to AIMCO’s December 16, 2022 annual stockholders’ meeting, where L&B won one board seat. This was the first contested election taken through to a vote following the effectiveness of the universal proxy rules.
Proxy Contests Will Focus on Individual Directors (as Opposed to Slates): Stockholders are no longer choosing between full slates of nominees and their collective merit. Now, stockholders can easily split their votes among company nominees and dissident nominees, on a director-by-director basis—pitting a dissident’s best individual nominees against the company’s perceived “weakest” nominees.
- In the L&B proxy contest, stockholders showed that they understood they were no longer tied to one party’s full slate when voting via proxy card. L&B put forth two director nominees, but AIMCO stockholders elected only one of those nominees, voting out an AIMCO incumbent director who had served on the board for 18 years.
- As both CRM and L&B had only nominated short slates (i.e., fewer nominees than there were board seats up for election), the CRM and L&B proxy cards singled out the individual company nominees that they opposed. The cards listed out all director nominees as required, but also indicated clearly the company nominees that the dissident deemed acceptable and those that the dissident opposed. We expect dissidents going forward to take a similar approach.
This focus on individual directors illustrates how clear disclosure regarding the strengths and skills of each company nominee is more critical than ever.
Proxy Advisory Firms (Most Likely ISS) Will Split Recommendations: ISS has also suggested a greater focus on individual nominees’ qualifications, and has put the “weakest” candidates on notice. ISS’s guidance surrounding the universal proxy rules specifically mentions the potential for replacement of a “long-tenured, over boarded director who seems disengaged” with “a nominee who brings clearly-relevant skills to the board, or perhaps enhances diversity." Thus, we expect proxy advisory firms, particularly ISS, (when each deems warranted) to issue recommendations supporting a mix of company and dissident nominees.
- This was the case in L&B’s proxy contest against AIMCO. ISS split its recommendation—recommending for one of the two nominees of the dissident over one of the company nominees (identifying which company nominee it would swap out for which dissident nominee).
Proxy Advisory Firms’ Recommendations Will Continue to Be a Key Factor in Success: ISS’s guidance for assessing a dissident proxy campaign indicated that its two-prong framework would largely stay the same under the universal proxy regime: (1) is there a case for change and (2) if so, how much change? ISS did acknowledge that the universal proxy rules bring into sharper focus the second prong, as stockholders can now “more precisely adjust board composition” on an individual candidate basis—making it somewhat unsurprising that ISS split its recommendation in the L&B/AIMCO contest. AIMCO stockholders went on to elect the dissident nominee that ISS had recommended for over the company nominee that it had recommended against, in addition to the two company nominees that both ISS and Glass Lewis had recommended for. In the CRM/Argo contest, ISS stated that the dissident did not make a compelling case for change, and recommended that stockholders vote for all of the company’s nominees.
Glass Lewis, on the other hand, seems to take a more holistic view with respect to a dissident’s thesis for change. In both the L&B/AIMCO and CRM/Argo contests, Glass Lewis recommended in favor of all of the nominees of the respective companies. In the CRM/Argo contest, Glass Lewis stated in its proxy paper report that it is “reticent to recommend the removal of incumbent directors…unless certain issues are evident."
The outcomes of the L&B/AIMCO and CRM/Argo contests suggest that the recommendations of proxy advisory firms continue to be a key factor in determining who emerges successful in a proxy contest—the company or the dissident. In fact, shortly after ISS and Glass Lewis both recommended for all company nominees in CRM/Argo, CRM withdrew its director nominations—perhaps because it believed stockholders would generally vote in-line with the proxy advisory firms’ recommendations.
Serious Dissidents Won’t Cut Campaign Costs: Following the release of the universal proxy rules, there was much speculation over whether the rules would result in significantly cheaper proxy contests for all dissidents—because, among other reasons, dissidents are only required to solicit 67% of outstanding voting shares. However, recent examples indicate otherwise. In the L&B definitive proxy statement, L&B estimated that its cost of solicitation of proxies in connection with its proxy contest at AIMCO was approximately $1 million and that as of the date of the filing, its expenses were approximately $200,000. Compare this to two of L&B’s pre-universal proxy rule campaigns at other companies:
- In March of 2022, L&B disclosed in its definitive proxy statement that its estimated cost of solicitation in connection with its proxy contest at Ventas, Inc. was approximately $1.2 million and that at the time of the filing, its expenses were approximately $500,000.
- In April of 2018, L&B disclosed in its definitive proxy statement that its estimated cost of solicitation in connection with its proxy contest at Taubman Centers, Inc. was approximately $1.1 million and that at the time of the filing, its expenses were $100,000.
Of the three L&B campaigns discussed above, L&B won board representation in two of them (AIMCO and Taubman). While a pure “nuisance” dissident might behave differently, it appears that serious dissidents who are looking to win will spend amounts in-line with pre-universal proxy rule expenses.
Many Companies Have or Are Considering Amended Bylaw Provisions: Year-end 2022 saw a record high number of bylaw amendments made by companies in light of the universal proxy rules. Deal Point Data reported that 288 US companies made amendments to advance notice disclosure, eligibility requirements and timeliness requirements across November and December 2022, as compared to 13 companies that made changes to such provisions over the course of November and December 2021.
While some of these bylaw amendments seek to address ambiguity or close gaps created by the universal proxy rules (e.g., there is no stated enforcement mechanism in the event that a dissident does not comply with the rule’s 67% solicitation threshold), others seek to more generally strengthen the company’s defensive profile (e.g., requiring that a dissident request a director questionnaire from the company and include the completed questionnaire in its nomination notice or requiring that the dissident use a proxy card that is a color other than white (if the company has historically used a white card)). Companies should keep in mind that any such amendments should be implemented on a “clear day” and they should tread carefully when considering amendments that could be perceived as going far beyond the scope of what is required under the universal proxy rules.
- As of the date of this publication, there is a case pending in Delaware Chancery Court wherein a company (Masimo Corp.) was sued by a stockholder (Politan Capital Management LP) for adopting bylaw amendments the stockholder described as “perhaps the most preclusive advance notice bylaws in Delaware history” and that, among other things, would require any investment fund seeking to nominate a board candidate to disclose the identity and investment holdings of its limited partners. If the case goes to decision, it might provide further guidance on the court’s view of advance notice bylaw boundaries.
Look Out for Additional Guidance from the SEC: On December 6, 2022, the staff of the Securities and Exchange Commission (“SEC”) published three Compliance and Disclosure Interpretations (“CD&Is”) regarding the universal proxy rules, which set forth the staff’s positions that:
- If the company determines, in accordance with state or foreign law, that the dissident’s nominations do not comply with the company’s advance notice bylaw requirements, then the company can omit the dissident’s nominees from its proxy card.
- If a company excludes a dissident’s nominees from its proxy card due to the dissident’s failure to comply with the company’s advance notice bylaws and the dissident challenges this exclusion in court, then the company is required to disclose in its proxy statement certain information regarding the exclusion of the dissident’s nominees (the CD&I enumerates the specific information that must be disclosed).
- A dissident cannot conduct a solicitation simply by filing a proxy statement and relying exclusively on the company’s proxy card; the dissident must furnish its own proxy card in its solicitation. (Note: A dissident can use the Rule 14a-16 “notice and access” method, which requires the mailing of a notice of the internet availability of proxy materials and the posting of such materials on a website rather than printing and mailing a full set of materials.)