| Page Range | 79122-79186 | |
| FR Document | 2016-26349 |
[Federal Register Volume 81, Number 218 (Thursday, November 10, 2016)] [Proposed Rules] [Pages 79122-79186] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-26349] [[Page 79121]] Vol. 81 Thursday, No. 218 November 10, 2016 Part II Securities and Exchange Commission ----------------------------------------------------------------------- 17 CFR Part 240 Universal Proxy; Proposed Rule Federal Register / Vol. 81 , No. 218 / Thursday, November 10, 2016 / Proposed Rules [[Page 79122]] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 34-79164; IC-32339; File No. S7-24-16 ] RIN 3235-AL84 Universal Proxy AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. ----------------------------------------------------------------------- SUMMARY: We are proposing amendments to the federal proxy rules to require the use of universal proxies in all non-exempt solicitations in connection with contested elections of directors other than those involving registered investment companies and business development companies. Our proposal would require the use of universal proxies that include the names of both registrant and dissident nominees and thus allow shareholders to vote by proxy in a manner that more closely resembles how they can vote in person at a shareholder meeting. We further propose amendments to the form of proxy and proxy statement disclosure requirements to specify clearly the applicable voting options and voting standards in all director elections. DATES: Comments should be received on or before January 9, 2017. ADDRESSES: Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); Send an email to [email protected]. Please include File Number S7-24-16 on the subject line; or Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments. Paper Comments Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number S7-24-16. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549-1090 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the SEC's Web site. To ensure direct electronic receipt of such notifications, sign up through the ``Stay Connected'' option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Tiffany Posil, Special Counsel, or Christina Chalk, Senior Special Counsel, in the Office of Mergers and Acquisitions, at (202) 551-3440, or Steven G. Hearne, Senior Special Counsel, in the Office of Rulemaking, at (202) 551-3430, Division of Corporation Finance, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. SUPPLEMENTARY INFORMATION: We are proposing new Rule 14a-19 and amendments to Rules 14a-2,\1\ 14a-3,\2\ 14a-4,\3\ 14a-5,\4\ 14a-6,\5\ 14a-101 \6\ under the Securities Exchange Act of 1934 (``Exchange Act'').\7\ --------------------------------------------------------------------------- \1\ 17 CFR 240.14a-2. \2\ 17 CFR 240.14a-3. \3\ 17 CFR 240.14a-4. \4\ 17 CFR 240.14a-5. \5\ 17 CFR 240.14a-6. \6\ 17 CFR 240.14a-101. \7\ 15 U.S.C. 78a et seq. --------------------------------------------------------------------------- Table of Contents I. Introduction A. Background B. Current Proxy Voting Process in Contested Elections C. Recent Feedback on the Proxy Voting Process D. Need for Proposed Amendments II. Proposed Amendments A. Bona Fide Nominees and the Short Slate Rule 1. Revision to the Consent Required of a Bona Fide Nominee 2. Elimination of the Short Slate Rule 3. Solicitation Without a Competing Slate B. Use of Universal Proxies 1. Mandatory Use of Universal Proxies in Non-Exempt Solicitations in Contested Elections 2. Dissident's Notice of Intent To Solicit Proxies in Support of Nominees Other than the Registrant's Nominees 3. Registrant's Notice of Its Nominees 4. Minimum Solicitation Requirement for Dissidents 5. Dissemination of Proxy Materials 6. Form of the Universal Proxy 7. Timing of Universal Proxy Solicitation Process C. Additional Revisions 1. Director Election Voting Standards Disclosure and Voting Options D. Investment Companies III. General Request for Comment IV. Economic Analysis A. Background B. Baseline 1. Affected Parties 2. Contested Director Elections 3. Other Methods to Seek Change in Board Representation C. Broad Economic Considerations D. Discussion of Economic Effects 1. Effects on Shareholder Voting 2. Potential Effects on Costs of Contested Elections 3. Potential Effects on Outcomes of Contested Elections 4. Potential Effects on Incidence and Threat of Contested Elections 5. Specific Implementation Choices V. Paperwork Reduction Act A. Background B. Summary of Proposed Amendments' Impact on Collection of Information C. Estimate of Burdens D. Request for Comment VI. Small Business Regulatory Enforcement Fairness Act VII. Initial Regulatory Flexibility Act Analysis A. Reasons for, and Objectives of, the Proposed Action B. Legal Basis C. Small Entities Subject to the Proposed Rules D. Projected Reporting, Recordkeeping and Other Compliance Requirements E. Duplicative, Overlapping or Conflicting Federal Rules F. Significant Alternatives G. Solicitation of Comment VIII. Statutory Authority and Text of Proposed Rule Amendments I. Introduction A. Background A shareholder's ability to participate in the election of directors has been recognized as a fundamental part of state corporate law.\8\ State statutes require corporations to hold an annual meeting of shareholders for the purpose of electing directors.\9\ Today, few shareholders of companies with a class of securities registered under the Exchange Act attend a registrant's meeting to vote in person. Rather, the primary way for shareholders to learn [[Page 79123]] about matters to be decided on at a meeting and to vote on the election of directors is through the proxy process. --------------------------------------------------------------------------- \8\ See Preston v. Allison, 650 A.2d 646, 649 (Del. 1994); see also Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 659 (Del. Ch. 1988) (``The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.''). \9\ See, e.g., Model Bus. Corp. Act Sec. 7.01 (2008); Cal. Corp. Code Sec. 600(b) (2009); Del. Code. Ann. tit. 8, Sec. 211(b) (2009); N.Y. Bus. Corp. Law Sec. 602(b) (2009). --------------------------------------------------------------------------- While state law typically authorizes the use of proxies to permit shares to be voted without shareholders attending the meeting,\10\ parties soliciting proxy authority to vote Exchange Act-registered securities must comply with the federal proxy rules pursuant to Section 14 of the Exchange Act.\11\ Section 14 of the Exchange Act authorizes the Commission to establish rules and regulations governing the solicitation of any proxy or consent or authorization in respect of any security registered pursuant to Section 12 of the Exchange Act. Registrants with reporting obligations only under Exchange Act Section 15(d) and foreign private issuers are not subject to the federal proxy rules. The congressional report accompanying the Exchange Act stated that ``[f]air corporate suffrage is an important right that should attach to every equity security bought on a public exchange.'' \12\ The congressional committees recommending passage of Section 14(a) proposed that ``the solicitation and issuance of proxies be left to regulation by the Commission'' \13\ and explained that Section 14(a) would give the Commission the ``power to control the conditions under which proxies may be solicited with a view to preventing the recurrence of abuses which have frustrated the free exercise of the voting rights of stockholders.'' \14\ Regulation of the proxy process has been a core function of the Commission since its inception. In discussing the regulation of the proxy process, Chairman Ganson Purcell explained to a committee of the House of Representatives in 1943: ``The rights that we are endeavoring to assure to the stockholders are those rights that he has traditionally had under State law. . . .'' \15\ --------------------------------------------------------------------------- \10\ See, e.g., Del. Code Ann. tit. 8, Sec. 212. \11\ 15 U.S.C. 78n(a). \12\ H. R. Rep. No. 73-1383, 2d Sess., at 13 (1934). See also Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 381 (1970); J. I. Case Co. v. Borak, 377 U.S. 426, 431 (1964). The congressional report accompanying the Exchange Act further indicated that ``[i]nasmuch as only the exchanges make it possible for securities to be widely distributed among the investing public, it follows as a corollary that the use of the exchanges should involve a corresponding duty of according to shareholders fair suffrage.'' H. R. Rep. No. 73-1383, 2d Sess., at 14 (1934). \13\ S. Rep. No. 73-792, 2d Sess., at 12 (1934). \14\ H.R. Rep. No. 73-1383, 2d Sess., at 14 (1934). Courts have found that the relevant legislative history also demonstrates an ``intent to bolster the intelligent exercise of shareholder rights granted by state corporate law.'' Roosevelt v. E.I. Du Pont de Nemours & Co., 958 F.2d 416, 421 (D.C. Cir. 1992); see also Borak, 377 U.S. at 431. \15\ Securit[ies] and Exchange Commission Proxy Rules: Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 before the House Comm. on Interstate and Foreign Commerce, 78th Cong., 1st Sess. 172 (1943) (statement of SEC Chairman Ganson Purcell). --------------------------------------------------------------------------- Enhancing the ability of shareholders to exercise their right to elect directors through the proxy process has been the focus of numerous rule proposals, staff reports and comment letters over the years.\16\ In the 1990s, the Commission conducted an extensive examination of the effectiveness of the proxy voting process and its effect on corporate governance. This review resulted in amendments to the federal proxy rules that sought to reduce regulatory constraints on communication among shareholders and the effective exercise of shareholder voting rights.\17\ In the 2000s, the Commission focused on the shareholder franchise by seeking public input through roundtables \18\ and engaging in rulemaking relating to the inclusion of shareholder nominees for director in the registrant's proxy materials.\19\ The current approach to shareholder proposals under Rule 14a-8 permits proposals relating to bylaw amendments that would allow shareholder director nominees to be included in a registrant's proxy materials alongside the registrant's slate of director nominees. --------------------------------------------------------------------------- \16\ See, e.g., Reexamination of Rules Relating to Shareholder Communications, Shareholder Participation in the Corporate Electoral Process, and Corporate Governance Generally, Release No. 34-13482 (Apr. 28, 1977) [42 FR 23901 (May 11, 1977)]. See also Reexamination of Rules Relating to Shareholder Communications, Shareholder Participation in the Corporate Electoral Process, and Corporate Governance Generally, Release No. 34-13901 (Aug. 29, 1977) [42 FR 44860 (Sept. 7, 1977)]; Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors, U.S. Securities and Exchange Commission (July 15, 2003), available at https://www.sec.gov/news/studies/proxyrpt.htm, Security Holder Director Nominations; Release No. 34-48626 (Oct. 14, 2003) [68 FR 60784 (Oct. 23, 2003)] (proposing rules to require companies to include shareholder nominees in their proxy materials in the event a director receives over 35 percent withhold votes or a shareholder proposal requesting access receives more than 50 percent of the votes); Shareholder Proposals, Release No. 34-56160 (July 27, 2007) [72 FR 43466 (Aug. 3, 2007)] (proposing rules relating to the inclusion of bylaw amendments regarding nomination procedures and the inclusion of shareholder nominees in the registrant's proxy materials); and Proxy Disclosure and Solicitation Enhancements, Release No. 34-60280 (July 10, 2009) [74 FR 35076 (July 17, 2009)] (proposing to modify the short slate rule to make it available to a non-management soliciting person seeking authority to vote for nominees named in the registrant's or in any other person's proxy statement). \17\ See Regulation of Communications Among Shareholders, Release No. 34-30849 (June 23, 1992) [57 FR 29564 (July 2, 1992)] (``Short Slate Rule Revised Proposing Release'') and Regulation of Communications Among Shareholders, Release No. 34-31326 (Oct. 16, 1992) [57 FR 48276 (Oct. 22, 1992)] (``Short Slate Rule Adopting Release''). The amendments sought to address some of these concerns by establishing an exemption for persons not seeking proxy authority, establishing a safe harbor from the definition of solicitation for certain types of shareholder communications, and allowing dissident shareholders to seek proxy authority to vote for some of management's nominees when seeking minority representation on the board of directors. \18\ See, e.g., Roundtable on the Federal Proxy Rules and State Corporation Law (May 7, 2007) and Roundtable on Proxy Voting Mechanics (May 24, 2007). Materials related to the 2007 roundtables, including an archived broadcast and a transcript of the roundtable, are available online at https://www.sec.gov/spotlight/proxyprocess.htm. \19\ See, e.g., Facilitating Shareholder Director Nominations, Release No. 33-9046 (June 10, 2009) [74 FR 29024 (Jun. 18, 2009)] (proposing rules to require registrants to include shareholder nominees in a registrant's proxy materials); Facilitating Shareholder Director Nominations, Release. No. 33-9136 (Aug. 25, 2010) [75 FR 56668 (Sept. 16, 2010)] (adopting rules to require, under certain circumstances, a registrant's proxy materials to provide shareholders with information about, and the ability to vote for, shareholder nominees for director). In 2011, the U.S. Court of Appeals for the District of Columbia vacated the part of the 2010 rules that required, in certain circumstances, a registrant's proxy materials to provide shareholders with information about, and the ability to vote for, a shareholder's nominees for director. See Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011) (vacating Exchange Act Rule 14a-11). Contemporaneous amendments to Exchange Act Rule 14a-8 (17 CFR 240.14a-8) that permit bylaw amendments allowing shareholder nominees to be included in registrant proxy materials were not challenged in the litigation and remain in effect. --------------------------------------------------------------------------- Despite these initiatives, under the current proxy rules, shareholders voting by proxy in a contested election \20\ may not be able to replicate the vote they could cast if they voted in person at a shareholder meeting because the choices available to shareholders voting for directors through the proxy process are not the same as those available to shareholders voting in person at a shareholder meeting. Shareholders voting in person at a meeting may select among all of the duly nominated \21\ director candidates proposed for election by any party and vote for any combination of those candidates. Shareholders voting by proxy, however, are limited to the selection of candidates provided by the party soliciting the shareholder's proxy. Although the current proxy rules allow a soliciting party to provide shareholders with the full selection of nominees if all such [[Page 79124]] nominees have consented to being named on its proxy card, aspects of the current proxy rules \22\ and the parties' strategic interests typically result in limiting shareholders' choice to the slates of nominees chosen by the soliciting parties. Thus, shareholders voting by proxy are unable to make selections based solely on their preferences for particular candidates. As discussed in Section I.C. below, some shareholders have recently highlighted this limitation and requested Commission action.\23\ --------------------------------------------------------------------------- \20\ As used in this release, the term ``contested election'' refers to an election of directors where a registrant is soliciting proxies in support of nominees and a person or group of persons is soliciting proxies in support of director nominees other than the registrant's nominees. We recognize that a contested election can be defined in broader terms. \21\ A duly nominated director candidate is a candidate whose nomination satisfies the requirements of any applicable state or foreign law provision or a registrant's governing documents as they relate to director nominations. \22\ See infra Section I.B for a discussion of Rule 14a-4(d)(1), the bona fide nominee rule, and the definition of a bona fide nominee in Rule 14a-4(d)(4). \23\ See Letter from the Council of Institutional Investors (Jan. 8, 2014), available at https://www.sec.gov/rules/petitions/2014/petn4-672.pdf (requesting that the Commission eliminate the requirement to obtain a nominee's consent to be named on a proxy card in a contested election and allow shareholders to vote for their preferred combination of nominees on a single proxy card). See also Letter from the California Public Employees' Retirement System (Apr. 6, 2015), available at https://www.sec.gov/comments/4-681/4681-10.pdf (``We strongly believe that shareowners should have the ability to vote for any combination of director candidates in contested elections. . . . We believe that achieving this ideal requires the Commission to adopt necessary technical fixes to the bona fide nominee rule and adopt a mandatory universal proxy card.''). --------------------------------------------------------------------------- The changes to the federal proxy rules we propose today would allow a shareholder voting by proxy to choose among director nominees in an election contest in a manner that reflects as closely as possible the choice that could be made by voting in person at a shareholder meeting. To this end, we are proposing to require the use of a ``universal proxy,'' or a proxy card that includes the names of all duly nominated director candidates for whom proxies are solicited, for all non-exempt solicitations in contested elections.\24\ We believe that shareholders should be afforded the opportunity to fully exercise their vote for the director nominees they prefer. This concept--that the proxy voting process should mirror to the greatest extent possible the vote that a shareholder could achieve by attending the shareholders' meeting and voting in person--has guided our efforts in proposing these changes.\25\ We have looked to this concept because we believe that replicating the vote that could be achieved at a shareholder meeting is the most appropriate means to ensure that shareholders using the proxy process are able to fully and consistently exercise the ``fair corporate suffrage'' available to them under state corporate law and that Congress intended our proxy rules to effectuate.\26\ --------------------------------------------------------------------------- \24\ Although investment companies are subject to the federal proxy rules, the amendments that we are proposing today would not apply to investment companies registered under Section 8 of the Investment Company Act of 1940 or business development companies as defined by Section 2(a)(48) of the Investment Company Act of 1940. See infra Section II.D. \25\ We recognize that the proxy process may not be able to perfectly replicate the vote in a director election that can be achieved by attending a meeting and voting in person. For example, the proposed mandatory universal proxy system would not enable shareholders to vote by proxy on a director nomination presented from the floor of the meeting and not included in a proxy statement. However, this is a rare occurrence due to the prevalence of advance notice bylaw provisions and the low chance for success of nominations from the floor without soliciting proxies. We further note that the proposed universal proxy system does not seek to replicate the voting choices a shareholder would have on non- election proposals if voting in person at a shareholder meeting. The current proxy rules do not limit shareholders' exercise of their voting rights on non-election proposals to the same extent they limit the exercise of shareholders' rights on election proposals because parties can include another party's non-election proposal on the proxy card without such party's consent. As a result, our rulemaking efforts have focused on director election proposals. \26\ See supra notes 12 and 15. --------------------------------------------------------------------------- B. Current Proxy Voting Process in Contested Elections Shareholders that attend a meeting in person generally vote by casting a written ballot provided at the meeting that includes the names of all duly nominated candidates for the board of directors.\27\ Thus, in a contested election, shareholders attending the meeting in person and casting a written ballot can vote for the nominees of their choice from each party's slate of nominees, up to the specified number of board seats up for election. In contrast, in the proxy solicitation process for an election contest, the registrant's director nominees \28\ are typically presented as one slate in the registrant's proxy statement and proxy card, and the dissident's \29\ full or partial slate \30\ of nominees is presented in the dissident's proxy statement and proxy card. Unlike submitting ballots when a shareholder attends a meeting in person, a shareholder generally may not validly submit two separate proxy cards, even when the total number of nominees for which the two cards are marked does not exceed the number of directors being elected. In general, under state law, a later-dated proxy card revokes any earlier-dated one and invalidates the votes on the earlier-dated card.\31\ Shareholders voting by proxy are therefore effectively required to submit their votes on either the registrant's or the dissident's proxy card and cannot pick and choose from nominees on both cards. --------------------------------------------------------------------------- \27\ Based on the staff's conversations with parties frequently engaged in the tabulation of ballots for contested elections. \28\ We recognize that a registrant's board of directors (or a nominating committee it creates) commonly nominates directors for election to the board. For ease of reference, we refer to those nominees as ``registrant nominees'' throughout this release. \29\ The term ``dissident'' as used in this release refers to a soliciting person other than the registrant who is soliciting proxies in support of director nominees other than the registrant's nominees. \30\ ``Partial slate'' as used in this release refers to the nomination of a number of director candidates that is less than the number of directors being elected at the meeting. ``Full slate'' as used in this release refers to the nomination of a number of director candidates that is equal to the number of directors being elected at the meeting. \31\ See, e.g., Standard Power & Light Corp. v. Inv. Assocs., 51 A.2d 572, 608 (Del. 1947); Parshalle v. Roy, 567 A.2d 19, 23 (Del. Ch. 1989). See also R. Franklin Balotti, et al., Delaware Law of Corporations and Business Organizations, Sec. 7.20 (3d ed. 2015) (``Except in the case of irrevocable proxies, a subsequent proxy revokes a former proxy. In determining whether a proxy is subsequent, the date of execution controls.''). --------------------------------------------------------------------------- Additionally, shareholders voting by proxy are generally limited in their choice of nominees by Exchange Act Rule 14a-4(d)(1), the ``bona fide nominee rule,'' \32\ which provides that no proxy shall confer authority to vote for any person to any office for which a ``bona fide nominee is not named in the proxy statement.'' The term ``bona fide nominee'' is defined as a nominee who has ``consented to being named in the proxy statement and to serve if elected.'' \33\ Thus, in an election contest, one party may not include the other party's nominees on its proxy card unless the other party's nominees consent. In the staff's experience, such consent is rarely provided. Because contested elections are usually contentious, the nominees may refuse to consent to being included on the opposing party's card because of a perceived advantage to forcing shareholders to choose between the competing slates of nominees. A party's nominees may also refuse to consent to being named on the opposing party's proxy card because the nominees do not want to appear to support the opposing party's position or director nominees. As a result, shareholders are limited in their ability to vote for directors from both the registrant's and the dissident's slate. --------------------------------------------------------------------------- \32\ 17 CFR 240.14a-4(d)(1). \33\ 17 CFR 240.14a-4(d)(4). --------------------------------------------------------------------------- Moreover, since neither party is required to include the other party's nominees, even if a nominee consents to being named on the other party's proxy card, that other party can determine whether to include the nominee for strategic or other reasons. In the staff's experience, a party will seek to have its nominees included on the opposing party's proxy card when the party [[Page 79125]] believes its slate is at a disadvantage in the election contest. The party that appears to have an advantage in the contest then has no strategic incentive to include the other party's nominees on its proxy card.\34\ Thus, even though a mechanism exists where shareholders could receive a proxy card listing all of the nominees in a contested election, because competing parties rarely have an incentive to include the other party's nominees on their card, shareholders today are almost always required to choose between competing proxy cards. --------------------------------------------------------------------------- \34\ For example, when a proxy advisory firm recommends a vote for some, but not all, dissident nominees, in the absence of a universal proxy shareholders seeking to cast a vote for the recommended dissident nominees must use the dissident's proxy card. In that circumstance, a registrant may want to use a universal proxy to allow shareholders to vote for some registrant nominees while voting for some dissident nominees in accordance with the proxy advisory firm's recommendation. The dissident nominees, however, may have no incentive to consent to their inclusion on a universal proxy if they believe it is strategically advantageous to have shareholders choose between the two cards because it may result in shareholders voting on the dissident card and, as a result, more dissident nominees being elected. --------------------------------------------------------------------------- Currently, for shareholders to be assured that they can vote for the mix of registrant and dissident nominees that they choose (i.e., to ``split their vote''), they generally must attend the meeting in person and vote. Shareholders that hold their securities in street name are required to take the additional step of obtaining a legal proxy from their broker before they are permitted to vote at the meeting. We understand that in some close elections, proxy solicitors and parties to the contest have helped shareholders who hold a large stake in the registrant split their votes by arranging for an in-person representative to vote their shares at the meeting on the ballots used for in-person voting. Since the ballots provided at the meeting include the names of both registrant and dissident nominees, this arrangement allows those shareholders to choose from all duly nominated candidates.\35\ However, these options for splitting votes are either not made available to or are impractical for most other shareholders who are, therefore, more limited in their ability to vote for their preferred combination of director nominees. --------------------------------------------------------------------------- \35\ In those instances, the proxy solicitor creates a provisional ballot to reflect the split vote. We are also aware of instances where proxy solicitors have sought to facilitate vote splitting for some shareholders who hold a large stake in the registrant by instructing them to obtain a legal proxy and modify the registrant's proxy card to indicate their preferred combination of nominees by striking any registrant nominee they do not support and indicating the dissident nominee they wish to support. Parties to contested elections have questioned whether this approach is consistent with the current definition of a bona fide nominee in Rule 14a-4(d)(4). --------------------------------------------------------------------------- Rule 14a-4(d)(4), the ``short slate rule,'' was adopted in 1992 to permit a dissident seeking to elect a minority of the board to ``round out its slate'' by soliciting proxy authority to vote for some registrant nominees on the dissident's card. Prior to adopting this rule, shareholders voting using the proxy card of a dissident seeking to elect a partial slate were disenfranchised with respect to the remaining seats on the board, which served as a disincentive for shareholders to grant proxies to that dissident.\36\ As the Commission noted in adopting the short slate rule, the bona fide nominee rule ``has acted to prevent the form of proxy from being used to allow shareholders to exercise their state law right through the proxy process, and as a result, has both cut off shareholder rights and greatly disadvantaged shareholder nominees seeking minority representation on the board of directors.'' The Commission adopted the short slate rule to mitigate the disadvantage that dissidents faced when putting forth a partial slate of nominees.\37\ --------------------------------------------------------------------------- \36\ See Short Slate Rule Revised Proposing Release, at 29573 (noting that ``shareholders may be unwilling to execute a proxy that does not contain authority to vote for all seats up for election, absent cumulative voting, since the shareholder would not be exercising its full voting power.'') \37\ See Short Slate Rule Adopting Release. --------------------------------------------------------------------------- The short slate rule permits a dissident to indicate on its card that it intends to use its proxy authority to vote for the registrant nominees other than the nominees named on the card and thereby allows shareholders to vote for the registrant nominees other than those specified. The shareholder also is provided an opportunity to write in the names of any other registrant nominees with respect to which the shareholder withholds voting authority, although to do so, the shareholder must consult the registrant's soliciting materials in order to obtain the names of all registrant nominees. The short slate rule is available only in election contests in which the dissident is seeking to elect nominees that would constitute a minority of the board and it applies only to the dissident.\38\ In addition, the short slate rule permits the dissident, not the shareholder, to select which, if any, of the registrant nominees to vote for using the short slate proxy card. --------------------------------------------------------------------------- \38\ Registrants are not permitted to rely on the short slate rule to solicit authority to vote for some of the dissident's nominees. Theoretically, a registrant might wish to rely on the short slate rule if it was proposing a partial slate of nominees that would constitute a minority of the board. However, as a practical matter, such solicitations very rarely occur. --------------------------------------------------------------------------- As originally proposed, Rule 14a-4(d) would have permitted proponents to include the names of registrant nominees on the proponent proxy card.\39\ Commenters from the registrant community opposed the amendment, suggesting that including registrant nominees on the dissident's card could imply that the registrant nominees supported the dissident's position, that it would confuse shareholders, and that minority representation on the board would cause the board to be less effective. The Commission responded by adopting the current version of the short slate rule that permits the dissident to name the registrant nominees for whom the dissident will not vote. The Commission also stated that commenters' concerns that the election of dissident nominees to the board could hinder the board's effectiveness are arguments best made to the shareholders and determined in an election.\40\ In taking this measured step of adopting a modified short slate rule, the Commission noted the appeal of a universal proxy in permitting shareholders to exercise their vote in the same manner as at a shareholder meeting.\41\ --------------------------------------------------------------------------- \39\ See Short Slate Rule Revised Proposing Release. \40\ See Short Slate Rule Adopting Release, at 48288. \41\ Id. While neither proposing nor adopting a universal proxy, the Commission acknowledged that requiring a registrant to include dissident nominees in the registrant's proxy statement ``would represent a substantial change in the Commission's proxy rules.'' --------------------------------------------------------------------------- While the short slate rule provides the opportunity, in a contested election where a dissident is seeking election of a minority of the board, for a shareholder to use a proxy card to vote for all seats up for election, it does not provide that shareholder the opportunity to choose among all registrant and dissident nominees. To address this limitation, in recent years, proxy solicitors for registrants and dissidents have facilitated vote splitting to allow a few large shareholders to choose among all registrant and dissident nominees in a contested election. In addition, some commentators have suggested the possibility of requiring both parties to include each other's nominees on their own proxy cards.\42\ We believe it is [[Page 79126]] appropriate to now consider a more direct route for shareholders to exercise the same vote as they could if voting in person at a shareholder meeting. Revising our rules to facilitate the full exercise of the shareholder franchise would reduce the costs for shareholders to vote for their choice of director nominees and provide all shareholders of the company the same voting opportunities currently available to only certain shareholders. --------------------------------------------------------------------------- \42\ See, e.g., Richard J. Grossman & J. Russel Denton, Never Mind Equal Access: Just Let Shareholders ``Split Their Ticket'', The M&A Lawyer (Jan. 2009) (discussing the issue of shareholders seeking to split their votes and recommending requiring the use of a universal proxy card in bona fide election contests); Tom Ball, The Quest for Universal Ballots: Might Boards Benefit Too?, Deal Lawyers (Nov.-Dec. 2014), available at http://www.morrowco.com/wp-content/uploads/2015/01/Deal-Lawyers-article-on-Universal-Ballots-Nov-Dec-20141.pdf (suggesting universal proxy could have strategic benefits for registrants in certain situations). --------------------------------------------------------------------------- C. Recent Feedback on the Proxy Voting Process In 2013, the Commission's Investor Advisory Committee (``IAC'') \43\ recommended that we explore revising our proxy rules to provide proxy contestants with the option to use a universal proxy card in connection with short slate director nominations.\44\ In early 2014, we received a rulemaking petition (``Rulemaking Petition'') requesting that we require the use of a universal proxy that would allow shareholders to vote for their preferred combination of registrant and dissident nominees in contested director elections.\45\ In response to this feedback, the Commission staff undertook a review of the proxy rules and the Commission held a roundtable in February 2015 to explore ways to improve proxy voting, including through the adoption of universal proxies.\46\ --------------------------------------------------------------------------- \43\ The IAC was established in April 2012 pursuant to Section 911 of the Wall Street Reform and Consumer Protection Act [Pub. L. 111-203, sec. 911, 124 Stat. 1376, 1822 (2010)] (``Dodd-Frank Act'') to advise the Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the Investor Advisory Committee to submit findings and recommendations for review and consideration by the Commission. The IAC made its universal proxy card recommendation at its July 25, 2013 meeting. See Recommendations of the Investor Advisory Committee Regarding SEC Rulemaking to Explore Universal Proxy Ballots (Jul. 25, 2013), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/universal-proxy-recommendation-072613.pdf (``IAC Recommendation''). \44\ A ``short slate director nomination'' occurs where dissident nominees, if elected, would constitute a minority of the board of directors. See Rule 14a-4(d). \45\ See Letter from the Council of Institutional Investors (Jan. 8, 2014), available at http://www.sec.gov/rules/petitions/2014/petn4-672.pdf. The Rulemaking Petition requested that the Commission eliminate the requirement to obtain a nominee's consent to be named on a proxy card in a contested election and to allow shareholders to vote for their preferred combination of nominees on a single proxy card. \46\ See Proxy Voting Roundtable, U.S. Securities and Exchange Commission (Feb. 19, 2015), available at http://www.sec.gov/spotlight/proxy-voting-roundtable.shtml. --------------------------------------------------------------------------- The IAC has observed that many retail and institutional investors do not have the practical ability to attend shareholder meetings in person and vote by ballot, which would permit them to choose among all of the candidates who are duly nominated.\47\ The IAC recommended that the Commission explore revising the bona fide nominee rule to permit the use of universal proxies. In reaching this recommendation, the IAC noted that the effect of the bona fide nominee rule, in conjunction with state corporate law voting provisions, is that shareholders voting by proxy have no practical ability to vote for a combination of dissident nominees and registrant nominees, in contrast to shareholders' ability to pick among all of the duly nominated candidates when they vote in person at a meeting.\48\ --------------------------------------------------------------------------- \47\ See IAC Recommendation, at 1. \48\ See IAC Recommendation. In addition, the IAC recommended that the Commission explore whether all or only a portion of duly nominated candidates must or may appear on a universal proxy card. --------------------------------------------------------------------------- The Rulemaking Petition requested that the Commission amend the proxy rules to remove the requirement to obtain the consent of the opposition's nominees prior to including those nominees on a proxy card and require the use of a universal proxy that would allow shareholders to vote for their preferred combination of registrant and dissident nominees. The Rulemaking Petition contended that such amendments are necessary to fully enfranchise shareholders. It also noted that universal proxy cards would be less likely to confuse shareholders and less complex than proxy cards under the short slate rule, thus resulting in a less cumbersome voting process. At the February 2015 proxy voting roundtable,\49\ one panel addressed the current state of contested elections and whether changes should be made to the federal proxy rules to facilitate the use of universal proxy cards. The discussion focused on, among other things, whether universal proxies would increase the frequency of election contests or provide an advantage to one party or the other in a contested election. Some panelists stated that universal proxies would result in more contests; \50\ others stated that they could facilitate settlements or accommodations with dissidents before a contest arose resulting in fewer contests.\51\ Several panelists asserted that adopting universal proxy would more closely replicate the vote that could be made by voting in person at a shareholder meeting,\52\ while another asserted that such a change should not be made in a vacuum without more broadly addressing the proxy voting process.\53\ While panelists differed on many aspects of the universal proxy card, the fundamental concept that the proxy system should allow shareholders to vote by proxy as closely as possible to how they could vote in person at a shareholder meeting was generally acknowledged.\54\ --------------------------------------------------------------------------- \49\ See supra note 46. \50\ See, e.g., Unofficial Transcript of the Proxy Voting Roundtable (Feb. 19, 2015) (``Roundtable Transcript''), comments of David A. Katz, Partner, Wachtell, Lipton, Rosen & Katz LLP, at 41, Anne Simpson, Senior Portfolio Manager and Director of Global Governance, CalPERS, at 43 and Steve Wolosky, Partner, Olshan Frome & Wolosky, LLP, at 48-49, available at http://www.sec.gov/spotlight/proxy-voting-roundtable/proxy-voting-roundtable-transcript.txt. \51\ See, e.g., Roundtable Transcript, comments of Michelle Lowry, Professor, Drexel University, at 60 and Lisa M. Fairfax, Professor, George Washington University Law School, at 48. \52\ See, e.g., Roundtable Transcript, comments of Lisa M. Fairfax, Professor, George Washington University Law School, at 30 and Anne Simpson, Senior Portfolio Manager and Director of Global Governance, CalPERS, at 35-36, 73. \53\ See, e.g., Roundtable Transcript, comments of David A. Katz, Partner, Wachtell, Lipton, Rosen & Katz LLP, at 74. We note, however, that the panelist did not specify what other parts of the proxy system should be addressed. \54\ In a comment letter following the roundtable, one commenter reiterated its recommendation that the Commission propose rules to facilitate the use of universal proxies for contested elections, contending that such a change would enfranchise shareholders by permitting them to vote for the combination of nominees that they believe best serves their economic interest, lessen shareholder confusion concerning the proxy and lower shareholders' costs to vote. See Letter from the Council of Institutional Investors (Mar. 5, 2015), available at http://www.sec.gov/comments/4-681/4681-7.pdf. In contrast, another commenter suggested that mandating universal proxies would facilitate election contests that are disruptive to public companies and instead encouraged more robust communications between management and shareholders. See Letter from the Center for Capital Markets Competitiveness (Feb. 18, 2015), available at http://www.sec.gov/comments/4-681/4681-6.pdf. --------------------------------------------------------------------------- D. Need for Proposed Amendments We believe the proxy system should allow shareholders to achieve by proxy the vote they could cast in person at a shareholder meeting. We believe that the right to vote is of particular importance when shareholders are deciding among candidates in a contested election. While the Commission has taken some steps in the past to facilitate shareholders' ability to choose among the nominees in competing slates, such as through the adoption of the short slate rule, we are [[Page 79127]] concerned that the current proxy rules may not allow shareholders to fully exercise their voting rights. In particular, our rules may not permit shareholders to select their preferred combination of nominees through the proxy process, even though they could do so if they were to attend a shareholder meeting. In its review of proxy contests, the staff has become aware of parties engaging in practices to facilitate split voting for certain, typically large, shareholders.\55\ The staff has also observed other ``self-help'' measures intended to facilitate split voting, such as attempting to allow shareholders to ``write in'' their candidate of choice on a proxy card, or in the case of registrants that are at risk of losing a majority of the seats on the board, nominating less than the total number of directors up for election to effectively assure the election of some dissident nominees. We believe a universal proxy card would better enable shareholders to have their shares voted by proxy for their preferred candidates and eliminate the need for special accommodations to be made for shareholders outside the federal proxy process in order to be able to make such selections. We further believe that a universal proxy system would help to ensure that all shareholders of the company are consistently and uniformly afforded the ability to select the director candidates of their choice in contested elections. --------------------------------------------------------------------------- \55\ See supra note 35 and accompanying text. --------------------------------------------------------------------------- As a result, we are proposing to require the use of universal proxies in all non-exempt solicitations in connection with contested elections where a person or group of persons is soliciting proxies in support of director nominees other than the registrant's nominees. We are proposing this approach because our rationale for requiring the use of universal proxies--that the proxy voting process should allow as much as possible the voting choices that a shareholder would have when attending the meeting and voting in person--applies equally to all contested elections. We believe our rules should allow shareholders to select the combination of nominees that best aligns with their interests in any contested election. In proposing these changes, we are cognizant of concerns that have been raised that including one party's nominees on the other party's proxy card could cause shareholder confusion or imply that the soliciting party supports the other party's nominees. We believe that some of these concerns would be mitigated by the amendments we propose today, including the proposed requirement to clearly distinguish between the registrant and dissident nominees on the proxy card.\56\ To the extent that the proposed amendments do not fully alleviate these concerns, we believe they can be addressed through disclosure in the proxy statement. --------------------------------------------------------------------------- \56\ See proposed Rule 14a-19(e)(3). --------------------------------------------------------------------------- We are also mindful that some have expressed that dissident representation on a board could lead to a less effective board of directors due to dissension, loss of collegiality and fewer qualified persons being willing to serve. As explained in more detail in Section IV.D below, while the proposed amendments are expected to result in reduced costs for shareholders seeking to split their votes, it is unclear whether the amendments would affect the number of dissident nominees elected to the board.\57\ Similarly, it is unclear whether registrants would necessarily face an increased incidence of changes in board dynamics. If the proposed amendments result in additional dissident representation, it is difficult to predict whether such additional dissident representation would enhance or detract from board effectiveness and shareholder value.\58\ Similar concerns were expressed at the time the Commission adopted the short slate rule.\59\ As the Commission stated in adopting the short slate rule, arguments that the election of dissident nominees will hinder the board's effectiveness are best made to the shareholders for their consideration when making voting decisions and ``should not be a basis for imposing . . . regulatory barriers to the full exercise of the shareholder franchise.'' \60\ Nevertheless, we solicit comment on the possible positive or negative impact the amendments could have on board performance. In particular, we solicit data on the effect of the proposed amendments on both the number of proxy contests and the resulting effect, if any, on dissident or incumbent director representation on boards. For the reasons discussed throughout this release, we preliminarily believe that facilitating the full exercise of the shareholder franchise by a broader group of shareholders may justify mandating the use of universal proxies in contested elections. --------------------------------------------------------------------------- \57\ See infra Section IV.D.3 (discussing potential economic effects on outcomes of contested elections). \58\ See infra Section IV.C (discussing broad economic considerations). \59\ See Short Slate Rule Adopting Release. \60\ See Short Slate Rule Adopting Release, at 48288. --------------------------------------------------------------------------- II. Proposed Amendments Section 14 of the Exchange Act authorizes the Commission to establish rules and regulations governing the solicitation of any proxy or consent or authorization in respect of any security registered pursuant to the Exchange Act. In regulating the proxy process, we have sought to facilitate the rights shareholders have traditionally had under state law. We believe the current proxy rules could be improved to allow shareholders to more efficiently and fully exercise these rights in contested elections. To that end, we are proposing amendments to our proxy rules that would permit shareholders to vote by proxy for any combination of candidates for the board of directors, as they could if they attended the shareholder meeting in person and cast a written ballot.\61\ --------------------------------------------------------------------------- \61\ As discussed in Section II.D, the amendments we are proposing today to implement a mandatory universal proxy system would not apply to investment companies registered under Section 8 of the Investment Company Act of 1940 or business development companies as defined by Section 2(a)(48) of the Investment Company Act of 1940. --------------------------------------------------------------------------- In order to provide for the use of universal proxy cards in contested elections, we are proposing to amend the proxy rules to establish new procedures for the solicitation of proxies, the preparation and use of proxy cards and the dissemination of information about all director nominees in contested elections. Specifically, we are proposing amendments that would: Revise the consent required of a bona fide nominee; Eliminate the short slate rule; Require the use of universal proxy cards in all non-exempt solicitations in connection with contested elections; Require dissidents to provide registrants with notice of intent to solicit proxies in support of nominees other than the registrant's nominees and the names of those nominees; Require registrants to provide dissidents with notice of the names of the registrant's nominees; Prescribe a filing deadline for dissidents' definitive proxy statement; Require dissidents to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors; and Prescribe requirements for universal proxy cards. We also are proposing additional improvements to the proxy voting process by making changes to the form of proxy. Consistent with our goal of facilitating shareholder voting in [[Page 79128]] director elections, we are proposing additional amendments that would apply to all director elections. First, we are proposing to amend Rule 14a-4(b) to mandate that proxy cards include an ``against'' voting option when applicable state laws give effect to a vote against. We are similarly proposing amendments to require proxy cards to give shareholders the ability to ``abstain'' in an election where a majority voting standard is in effect. Finally, we are also proposing amendments to the proxy statement disclosure requirements to mandate disclosure about the effect of a ``withhold'' vote in an election. A. Bona Fide Nominees and the Short Slate Rule The current proxy rules limit the ability of parties in a contested election to include the names of all nominees on their proxy card. Exchange Act Rules 14a-4(d)(1) and 14a-4(d)(4) provide that no proxy may confer authority to vote for any nominee unless that nominee has consented to being named in the proxy statement and to serve if elected. As a result, a party in a contested election cannot include on its proxy card a nominee from the opposing party without the express authorization of that nominee, which is rarely provided. These proxy rules, along with state law rules regarding the effect of later-dated proxy cards, effectively create a system in which parties to a contested election distribute their own proxy cards that include only a subset of all director nominees. Ultimately, these limitations restrict the voting choices available to shareholders using the proxy process, as these shareholders are unable to use a proxy to vote for a combination of nominees of their choice. The Commission sought to address some of the concerns about shareholders' inability to split their vote between the registrant's and the dissident's proxy cards through the adoption of the short slate rule.\62\ The short slate rule permits a dissident seeking to elect a minority of the board to solicit authority to vote for some of the registrant's nominees on its proxy card. However, to comply with Rule 14a-4(d)(4), the dissident is only permitted to include on its proxy card the names of the registrant's nominees for whom it will not vote. While this rule provides shareholders with some additional choices in the proxy voting process, shareholders wishing to vote for nominees for all of the board seats up for election are still limited to voting by proxy for the combination of nominees that either the dissident or registrant chooses. Moreover, the short slate rule does not contemplate a registrant proposing a partial slate of nominees (or nominating less than the total number of directors to be elected), a tactic that may be advantageous for some registrants.\63\ --------------------------------------------------------------------------- \62\ See Short Slate Rule Adopting Release. \63\ See Ronald Barusch, Dealpolitick: Management Takes Page from Activist Playbook with ``Short Slates,'' Wall St. J. (July 31, 2014), available at http://blogs.wsj.com/moneybeat/2014/07/31/dealpolitik-management-takes-page-from-activists-playbook-with-short-slates/ (referencing a new trend among registrants that are at risk of losing a majority of the seats on the board in which the registrant nominates less than the total number of directors up for election to effectively assure the election of some dissident nominees). --------------------------------------------------------------------------- 1. Revision to the Consent Required of a Bona Fide Nominee To allow for proxy cards that reflect the complete choice of candidates for election, we are proposing amendments to Rule 14a-4(d) to change the definition of ``bona fide nominee'' \64\ for registrants other than investment companies registered under Section 8 of the Investment Company Act of 1940 (``funds'') and business development companies as defined by Section 2(a)(48) of the Investment Company Act of 1940 (``BDCs'').\65\ Proposed Rule 14a-4(d)(1)(i) would define a bona fide nominee as a person who has consented to being named in a proxy statement relating to the registrant's next meeting of shareholders at which directors are to be elected. This would effectively expand the scope of a nominee's consent to include consent to being named in any proxy statement for the applicable meeting. By changing the requirement that a person consent to being named in ``a'' proxy statement instead of being named in ``the'' proxy statement,\66\ parties in a contested election will be able to include all director nominees on their proxy cards, rather than only those nominees who have consented to being named on that particular party's proxy card.\67\ This change would remove a current impediment to a registrant or a dissident including the other party's nominees on its proxy card. --------------------------------------------------------------------------- \64\ See proposed Rule 14a-4(d)(1)(i). \65\ As discussed in Section II.D, the amendments we are proposing today to implement a mandatory universal proxy system would not apply to funds or BDCs. For purposes of the rules that apply to funds and BDCs, the definition of a bona fide nominee and the short slate rule in current Rule 14a-4(d)(4) would be retained in proposed Rule 14a-4(d)(1)(ii). \66\ We also are proposing a corresponding change from ``the'' proxy statement to ``a'' proxy statement in Rule 14a-4(c)(5). \67\ We are proposing these amendments at the same time we propose Rule 14a-19 that would require the use of universal proxies in non-exempt solicitations in all contested elections, assuming certain conditions are met. See infra Section II.B. We note, however, that the proposed amendments to the bona fide nominee rule could operate independently from the proposed requirement to use universal proxies. The proposed amendments to the bona fide nominee rule, standing alone, essentially would allow parties the option of providing a universal proxy or alternatively providing a proxy with just some of the opposing party's nominees. We request comment below about this approach, including whether there are additional changes we should make to our rules to better enable the amendments to Rule 14a-4(d) to operate independently. --------------------------------------------------------------------------- We are cognizant of the concerns that have been raised about allowing the parties in an election contest to include the other party's nominees on their proxy card. These include concerns that listing registrant nominees on a dissident's proxy card could imply that registrant nominees support the dissident and would serve with dissident nominees, if elected, and objections about nominees being forced to lend their name, stature and reputation to the election campaign of a person with whom the nominee did not choose to run.\68\ Similarly, there may be a question as to whether listing dissident nominees on a registrant's proxy card could lend credibility to the dissident nominees or imply that the registrant supports the dissident nominees. We believe, however, that these concerns would be mitigated by the proposed requirement to clearly distinguish between the registrant and dissident nominees on the proxy card \69\ and through disclosure in each party's proxy statement. We also believe the proposed presentation and formatting requirements coupled with the fact that all nominees would be included on the card help to minimize these concerns. In contrast to the presentation of nominees on a dissident's proxy card under the short slate rule where the dissident's partial slate of nominees is presented together with certain registrant nominees (albeit in an indirect manner), the nominees of each party would be grouped together and presented on a universal proxy card as a separate slate of the nominating party. As a result, we believe it would be less likely under a universal proxy system [[Page 79129]] that shareholders would reasonably conclude that the registrant's nominees support the dissident simply because the registrant's nominees are included on the dissident's proxy card. --------------------------------------------------------------------------- \68\ The Commission noted these and other concerns when adopting the short slate rule in 1992. See Short Slate Rule Adopting Release, at 48288. We believe these concerns would be especially acute if we were to amend only Rule 14a-4(d) to change the consent required of a bona fide nominee, because such an amendment would allow the parties to choose which of the other party's nominees to include on their proxy card. We recognize that such concerns could be mitigated by the proposed requirement to clearly distinguish between each party's nominees, and registrants could further mitigate these concerns through disclosures in their soliciting materials. We request comment below regarding other ways to address them. \69\ See proposed Rule 14a-19(e)(3). --------------------------------------------------------------------------- We also believe that some of these issues would be less acute with the implementation of a mandatory system for universal proxies in all contested elections. If mandatory use of universal proxies is implemented, we believe it would be increasingly unlikely that shareholders would conclude that the registrant's nominees support a dissident's campaign simply because the registrant's nominees are included on the dissident's proxy card. We also believe that these concerns can be addressed through disclosure in the proxy statement. Proposed Rule 14a-4(d)(1)(i) would retain the requirement that a nominee consent to serve, if elected. The consent requirement would continue to help ensure that a registrant or dissident does not nominate a person who has not consented to serve as a director of the registrant.\70\ As the Commission indicated when adopting the short slate rule, a proxy statement should disclose if any nominee has determined to serve only if its nominating party's slate is elected or to resign if one or more of the opposing party's nominees were elected to the board of directors.\71\ --------------------------------------------------------------------------- \70\ While the proposed amendments to Rule 14a-4(d)(1) to change the consent required of a bona fide nominee could operate independently from proposed Rule 14a-19, which would require the use of a universal proxy card, we are not proposing a change to the consent requirement without mandatory use of universal proxy cards in contested elections. See infra Section II.B for a discussion of mandatory use of universal proxies. \71\ See Short Slate Rule Adopting Release, at 48289 n.78. --------------------------------------------------------------------------- Request for Comment 1. We are proposing to amend Rule 14a-4(d)(1) to change the requirement that a nominee consent to being named in ``the'' proxy statement to require that the nominee consent to being named in ``a'' proxy statement for the next meeting at which directors are to be elected. This change would enable parties in a contested election to include all director nominees on their proxy card, including nominees of an opposing party. Should we amend the requirement as proposed? Why or why not? Could there be potential concerns with opposing parties naming nominees of the other party on their proxy card? Please explain. How can we address or mitigate any such concerns? 2. Should the proposed amendments to Rule 14a-4(d)(1) be adopted without proposed Rule 14a-19, which would require the mandatory use of universal proxies? \72\ Why or why not? If only the proposed amendments to Rule 14a-4(d)(1) were adopted and a party in a contested election had the option, but was not required, to include all director nominees on its proxy card, would proposed Rule 14a-4(d)(1) further the goal of effectively facilitating shareholders' ability to vote by proxy for director nominees as they could vote in person at a meeting? Why or why not? --------------------------------------------------------------------------- \72\ See infra Section II.B for a discussion of proposed Rule 14a-19 and the proposed mandatory universal proxy system. --------------------------------------------------------------------------- 3. If we were to adopt the proposed amendments to Rule 14a-4(d)(1) to permit the parties in an election contest to include the other party's nominees on their proxy card without mandating the use of universal proxies for all parties, are there other amendments that would need to be adopted to facilitate the operation of proposed Rule 14a-4(d)(1)? For example, should we permit parties to decide whether to include some or all of the opposing party's nominees? Should we instead require a party seeking to include names of an opposing party's nominees on its proxy card to include the names of all of the opposing party's nominees? Should we consider rules that would require a party opting to use a universal proxy to provide notice of its intent to use a universal proxy and the names of its nominees or require the other party to provide a list of its nominees to the party seeking to use a universal proxy? Would other amendments be necessary, such as the proposed amendments concerning the form and format of the proxy card or additional disclosure requirements? 4. Do the proposed amendments allow the soliciting parties in a contested election to adequately address the concerns raised about possible voter confusion arising from nominees of one party being placed on the proxy card of an opposing party or creating an implication that a party's nominees support the opposing party and would serve with the opposing party's nominees, if elected? Are there other ways that the amendments could address these concerns? For example, should we require a statement that inclusion of an opposing party's nominees on the proxy card should not be construed as an endorsement of the opposing party's views or nominees? 5. When adopting the short slate rule, the Commission indicated that the possibility that nominees may not serve if elected with one or more of the opposing party's nominees is best addressed through disclosure. Should we adopt an amendment requiring disclosure about the possibility that nominees may refuse to serve if elected with any of the opposing party's nominees? Should we require disclosure describing how the resulting vacancy can be filled under the registrant's governing documents and applicable state law? 6. Are there any additional disclosures that we should require in the proxy materials or on the proxy card or other steps we should take to address concerns with the proposed amendments to Rule 14a-4(d)(1) to permit opposing parties to name each other's director nominees on their proxy cards? 2. Elimination of the Short Slate Rule We are proposing revisions to Rule 14a-4(d) to eliminate the short slate rule for registrants other than funds and BDCs.\73\ The short slate rule was adopted to mitigate concerns about a dissident's inability to allow shareholders to vote on its proxy card for all board seats up for election when soliciting in support of a partial slate of nominees.\74\ Proposed Rule 14a-4(d)(1)(i) would permit a proxy to confer authority to vote for a nominee named on a proxy card if that nominee consented to being named in any proxy statement for the applicable meeting. Additionally, each party in a contested election would be required to include on its proxy card all candidates that have consented to being named on a proxy card for the applicable meeting.\75\ Thus, if a dissident solicits proxies in support of a partial slate of nominees, our proposed rules would permit shareholders to vote for any combination of registrant and dissident nominees in order to cast a vote for a full slate of directors. --------------------------------------------------------------------------- \73\ See supra note 65. \74\ See Short Slate Rule Adopting Release, at 48288. \75\ See infra Section II.B for a discussion of proposed Rule 14a-19. --------------------------------------------------------------------------- As a result, the short slate rule would no longer be necessary to accomplish its intended purpose. While the elimination of the short slate rule would take away the ability of a dissident to select the registrant nominees it prefers to round out its slate of nominees, the dissident still would have the ability to include recommendations for its preferred registrant nominees in its proxy materials. If the short slate rule is eliminated and mandatory universal proxy is adopted, shareholders would be able to select their preferred combination of nominees, including the registrant nominees, if any, when voting for directors using the dissident's proxy card. [[Page 79130]] Request for Comment 7. If we change the consent required of a bona fide nominee, as proposed, is there any reason the short slate rule, or a modified version of the rule, should be retained? If so, what circumstances would warrant the continued use of the short slate rule and should it be modified to enhance its utility? 8. While the short slate rule permits a dissident seeking to elect a minority of the board to solicit authority to vote for some of the registrant's nominees on its proxy card, the dissident is only permitted to include on its proxy card the names of the registrant's nominees for whom it will not vote. Should we consider modifying the short slate rule to enable a dissident soliciting in support of a slate that would constitute a minority of the board to round out its slate by soliciting authority to vote for the dissident's choice of registrant nominees whose names are included on the dissident's card instead of the current system of soliciting authority to vote for registrant nominees who are not named? 9. Should we retain the short slate rule but modify it to make it available to dissidents soliciting authority to vote for a slate of nominees that, if elected, would constitute a majority of the board of directors? 10. Should we retain the short slate rule but modify it to make it available to registrants as well as dissidents? A registrant can nominate less than the total number of directors up for election to ensure that some dissident nominees are elected. Should we make a modified short slate rule available to the registrant in that scenario? 11. Should we consider any modified version of the short slate rule instead of a universal proxy system? Would a modified version of the short slate rule further the goal of effectively facilitating shareholders' ability to vote by proxy for director nominees as they could vote in person at a meeting? Please explain. 3. Solicitation Without a Competing Slate While the impetus for proposing amendments to Rule 14a-4(d), as described above, is to address situations in which there are competing slates for the board of directors, we note that the proposed amendments would affect the conduct of proxy contests even when a proponent is not nominating its own candidates for the board of directors. A proponent might, for example, seek authority to vote ``against'' one or more (but fewer than all) of the registrant nominees. In that situation, the bona fide nominee rule currently would prevent the proponent from naming, and soliciting votes ``for,'' any of the other registrant nominees because they have not consented to being named in the proponent's proxy statement. Furthermore, the short slate rule is not available for a proponent's solicitation of authority to vote ``against'' one or more of the registrant nominees.\76\ --------------------------------------------------------------------------- \76\ While the short slate rule currently permits a proponent to seek authority to vote for registrant nominees when the proponent is nominating at least one candidate (so long as the proponent's candidate or candidates would constitute a minority of the board of directors), the rule does not address a situation where a proponent is seeking votes solely with respect to registrant nominees. See Rule 14a-4(d)(4). --------------------------------------------------------------------------- Another situation in which a proponent might seek to solicit proxies without nominating its own candidates would be where a proponent wants to solicit votes for its own proposal that is unrelated to director elections (e.g., a corporate governance proposal). While a proponent in that case might want to include the registrant nominees on its proxy card so that shareholders supporting its proposal would be able to use the proponent's proxy card also to vote in the election of directors, the bona fide nominee rule currently would not permit the proponent to include the names of registrant nominees and solicit votes ``for'' those individuals.\77\ --------------------------------------------------------------------------- \77\ While the proponent currently could include a proposal for the election of all of the registrant's nominees as a group without naming such nominees, the proponent still would have limited options in the way it could present this group on its proxy card without running afoul of the bona fide nominee rule (e.g., the proponent would not have the ability to present individual voting boxes for each of the registrant's nominees). --------------------------------------------------------------------------- In cases such as those described above, the proposed amendments to Rule 14a-4(d) would permit a proponent to solicit authority to vote on some or all of the named registrant nominees by providing that a person is a bona fide nominee as long as he or she consents to being named in ``a'' proxy statement for the next meeting at which directors are to be elected. We are not proposing to require proponents conducting a solicitation without a competing slate to include the names of all registrant nominees on their proxy cards. These campaigns do not implicate our rationale for requiring the use of universal proxy cards in contested elections since shareholders can fully exercise their vote for the director nominees they prefer by using the registrant's proxy card. In addition, we believe that permitting proponents to solicit authority to vote on some, but not all, of the registrant nominees is appropriate because such campaigns do not implicate concerns that have been raised about allowing the parties in an election contest to include the other party's nominees on their proxy card. Commenters on the short slate rule proposed in 1992 raised concerns that modification of the bona fide nominee rule to permit inclusion of registrant nominees on a dissident's proxy card would force a registrant nominee to lend his or her name, stature, or reputation to the election campaign of a person with whom he or she does not choose to run; create an implication that the registrant nominees support a proponent's solicitation and would serve alongside proponent nominees if elected; and potentially confuse shareholders.\78\ These concerns do not arise in the context of solicitations without a competing slate.\79\ In this situation, there is no solicitation that will result in a registrant nominee serving alongside proponent nominees and shareholders can fully exercise their vote for the director nominees that they prefer by using the registrant's proxy card. We also do not believe that there is a potential for shareholder confusion in this situation because there is only one set of names for persons nominated to the board of directors; however, we solicit comment on this point below.\80\ --------------------------------------------------------------------------- \78\ See Short Slate Rule Adopting Release, at 48288. \79\ But see supra Section II.A.1 and infra Section II.B.6 for a discussion of these concerns in the context of contested elections that would trigger proposed Rule 14a-19 and mandatory universal proxies. \80\ We also believe that these concerns could be less acute with the implementation of our proposed rules for mandatory use of universal proxies in all contested elections. If mandatory use of universal proxies is implemented, we believe it would be increasingly unlikely that shareholders could reasonably draw any implication that a registrant nominee supports a proponent's campaign with respect to the proponent's non-election proposal simply because the names of registrant nominees appear on the proponent's proxy card. --------------------------------------------------------------------------- Request for Comment 12. The proposed amendments to the bona fide nominee definition would permit proponents to include the names of some or all of the registrant's nominees on its proxy card even when the proponent is not nominating its own candidates. Should this be permitted? Why or why not? Are there additional or different changes that we should make to our rules that apply to a situation in which the proponent is not nominating its own candidates? For example, should we instead require those proponents to include the names of all registrant nominees? Why or why not? 13. Would the inclusion of registrant nominees on a proponent's proxy card when the proponent is not nominating its own candidates imply that the [[Page 79131]] registrant nominees support the proponent's proposal? Would the inclusion cause shareholder confusion? If so, does the ability to provide disclosure in a party's soliciting materials sufficiently address this implication or possible confusion? Are there additional disclosures or are there other changes that would avoid or mitigate this implication or confusion? Please provide specific suggestions. B. Use of Universal Proxies To update our proxy system to better facilitate shareholders' ability to vote for their choice of nominees, we also are proposing amendments to the federal proxy rules that would require each soliciting party in a contested election to distribute a universal proxy that includes the names of all candidates for election to the board of directors. The dissident in a contested election would be required to provide notice to the registrant of its intent to solicit proxies in support of director nominees, other than the registrant's nominees, and the names of those nominees, no later than 60 calendar days prior to the anniversary of the previous year's annual meeting date.\81\ Similarly, the registrant in a contested election would be required to notify the dissident of the names of the registrant's nominees no later than 50 calendar days prior to the anniversary of the previous year's annual meeting date.\82\ --------------------------------------------------------------------------- \81\ See proposed Rule 14a-19(a) and (b); infra Section II.B.2. In order to make shareholders aware of the notice deadline, we also are proposing to require registrants to disclose in their proxy statement the deadline for providing such notice for the registrant's next annual meeting. See proposed Rule 14a-5(e)(4). \82\ See proposed Rule 14a-19(d); infra Section II.B.3. --------------------------------------------------------------------------- In a contested election, after the dissident provides the above notice, it would be required to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors.\83\ We are additionally proposing that the dissident be required to file its definitive proxy statement with the Commission by the later of 25 calendar days prior to the meeting date or five calendar days after the date the registrant files its definitive proxy statement.\84\ To ensure that each party's nominees are presented in a clear and impartial manner, the proposed rules also would impose specific presentation and formatting requirements for all director election proposals on universal proxy cards.\85\ --------------------------------------------------------------------------- \83\ See proposed Rule 14a-19(a)(3); infra Section II.B.4. \84\ See proposed Rule 14a-19(a)(2); infra Section II.B.5. \85\ See proposed Rule 14a-19(e); infra Section II.B.6. --------------------------------------------------------------------------- 1. Mandatory Use of Universal Proxies in Non-Exempt Solicitations in Contested Elections We are proposing new Rule 14a-19(e) to require that proxy cards used in a non-exempt solicitation in connection with a contested election include the names of all duly nominated candidates for election to the board.\86\ Rule 14a-4(b)(2) currently requires that a form of proxy providing for the election of directors shall set forth the names of the persons nominated for election as directors, including certain shareholder nominees. Proposed Rule 14a-19(e), in conjunction with the proposed change to the consent required of a bona fide nominee discussed above, would require proxy cards used in contested elections to include the names of all nominees of the registrant, certain shareholders, and any dissident that has complied with proposed Rule 14a-19. We believe this change would better enable shareholders to vote for their preferred combination of nominees in a contested election of directors and would allow the proxy process to more closely replicate the voting choices available at a shareholder meeting. --------------------------------------------------------------------------- \86\ Proposed Rule 14a-19(e) would require that the proxy card include the names of all persons nominated for election by the registrant, any person or group of persons that has complied with Rule 14a-19, and any person whose nomination by a shareholder or shareholder group satisfies the requirements of an applicable state or foreign law provision or a registrant's governing documents as they relate to the inclusion of shareholder director nominees in the registrant's proxy materials. --------------------------------------------------------------------------- a. Mandatory Use of Universal Proxies We considered whether to propose the mandatory use of universal proxies or to allow each party to decide whether to use a universal proxy. We have received divergent recommendations on this issue and, as discussed below, in order to more effectively address the problem of shareholders' inability to vote by proxy for the combination of nominees of their choice, we have decided to propose a mandatory rule. The Rulemaking Petition recommended that the Commission require all duly nominated candidates be named in the universal proxy, noting that such requirement would ensure shareholders' ability to use either party's proxy card to vote for the combination of board candidates they prefer. The Rulemaking Petition also contended that simply repealing the consent required of a bona fide nominee might encourage parties to circulate semi-universal proxy cards featuring more, but not all, candidates.\87\ --------------------------------------------------------------------------- \87\ See Rulemaking Petition. --------------------------------------------------------------------------- In contrast, the IAC recommended a rule in which proxy contestants would have the option (but not the obligation) to use a universal proxy,\88\ allowing one or both parties in an election contest to choose whether to use a universal proxy card that includes the names of the other party's nominees. The IAC noted that such a rule could allow a party to decide which bona fide nominees to include on its proxy card to accompany its own nominees, particularly when parties found all or certain individuals on a competing slate to be particularly objectionable. The approach recommended by the IAC could also give the parties in an election contest latitude to use a universal proxy card if and when it suits their strategic needs.\89\ --------------------------------------------------------------------------- \88\ See IAC Recommendation. \89\ For example, if the registrant is concerned about a possible split recommendation from a proxy advisory firm, the registrant may opt to use a universal proxy to avoid the unintended consequences of a split vote recommendation. If a dissident is soliciting proxies in support of a full slate of nominees, a proxy advisory firm may decide that change is necessary on the board of directors, but not a change in the majority of directors, and recommend a split vote on the dissident's proxy card (e.g., vote ``for'' three of the dissident nominees and ``withhold'' on six). Since shareholders following this recommendation would use the dissident proxy card to cast their votes on the election of directors, this could result in more dissident nominees being elected, a consequence the registrant might seek to avoid by opting to use a universal proxy. Additionally, if a registrant is at risk of losing a majority of the seats on the board of directors, the registrant might opt to use a universal proxy to garner more votes for the registrant's nominees than would have been achieved if the shareholders were forced to choose between voting for the dissident's slate on the dissident's proxy card or the registrant's slate on the registrant's proxy card. --------------------------------------------------------------------------- We are proposing a mandatory system for universal proxies in contested elections because it best replicates how a shareholder could vote by attending a shareholder meeting in person and leaves all discretion in the voting decision to the shareholder. Requiring universal proxies in contested elections would permit shareholders to select the combination of nominees that best aligns with their interests instead of limiting shareholders' choice to a slate of candidates chosen by a party in the contest. A mandatory system for universal proxies also would mitigate potential shareholder confusion and logistical issues that may result from allowing the parties in a contested election to choose whether to use a universal proxy. For example, under the proposed mandatory system, shareholders would receive proxy cards that include the names of all nominees rather than proxy cards [[Page 79132]] with only some of the nominees from which to choose. The inclusion of all nominees on all proxy cards should reduce the confusion of competing and differing cards and mitigate concerns that including one party's nominees on an opposing party's card could imply that those nominees support the opposing party. Further, a mandatory system would reduce the likelihood that the proxy card would be used as a tactical tool in the proxy contest. In contrast, under an optional system, if a soliciting person believed that it could receive more support for its slate by adding just one or two nominees from the other slate, it might solicit with a proxy card that only included those nominees. Similarly, a soliciting person under an optional system might decide not to use a universal card if it perceived an advantage in forcing a choice between the two competing slates. Both of these situations would limit shareholder voting options, which would be counter to the intended purpose of this rulemaking to facilitate shareholders' ability to vote for their preferred combination of director nominees as they could in person at a meeting. The mandatory system we are proposing would apply uniformly to all soliciting parties and to all election contests \90\ to prevent soliciting parties from selectively using universal proxies for tactical purposes. --------------------------------------------------------------------------- \90\ As discussed in Section II.D infra, the amendments we are proposing today to implement a mandatory universal proxy system would not apply to funds or BDCs. --------------------------------------------------------------------------- Shareholders seeking to have director nominees included in a registrant's proxy materials pursuant to state or foreign law provisions or a registrant's governing documents, such as the ``proxy access'' bylaws that some registrants have recently adopted,\91\ must comply with those requirements. Nominees included in a registrant's proxy materials in this way are commonly referred to as ``proxy access nominees.'' Because a mandatory universal proxy system may provide a less costly means for shareholders or their nominees to gain a form of access to a registrant's proxy card, some may view a universal proxy system as a substitute for proxy access bylaw provisions. However, we believe that the proposed mandatory universal proxy system differs in significant respects from proxy access because it would not provide shareholders or their nominees with access to a registrant's proxy materials in the same manner and extent provided by proxy access bylaws. --------------------------------------------------------------------------- \91\ See Sullivan & Cromwell LLP, Proxy Access: Developments in Market Practice, at 2 (Apr. 8, 2016), available at https://www.sullcrom.com/siteFiles/Publications/SC_Publication_Proxy_Access__Developments_in_Market_Practice.pdf (``S&C April Report'') (stating that 200 public companies had adopted some form of proxy access since the 2015 proxy season, compared to 15 companies prior to 2015). --------------------------------------------------------------------------- Proxy access bylaws commonly require the registrant to include in its proxy statement the names of the nominating shareholder's nominees, disclosure required by Schedule 14A about the nominating shareholder and its nominees, and a statement provided by the nominating shareholder in support of its nominees' election to the board.\92\ Nominating shareholders complying with proxy access bylaws are not required to prepare and file their own preliminary and definitive proxy statements, disseminate any proxy material or solicit any shareholders, while information about their nominees, including in many cases the nominating shareholder's own statement about its nominees, is included in the registrant's proxy materials and provided to shareholders along with the registrant's proxy card listing the names of the nominating shareholder's nominees. --------------------------------------------------------------------------- \92\ See, e.g., S&C April Report, at A-1 to A-8 (including a sample form of proxy access bylaw that reflects recent developments in market practice). If a registrant is required to include a proxy access nominee in its proxy materials pursuant to a proxy access bylaw, Item 7(f) of Schedule 14A would require the registrant to include in its proxy statement the disclosure required from the nominating shareholder under Item 6 of Schedule 14N about the nominating shareholder and the proxy access nominee. Nominating shareholders complying with proxy access bylaws must provide notice to the registrant on a Schedule 14N of their intent to have a nominee included in the registrant's proxy materials pursuant to the registrant's proxy access bylaw by the deadline set forth in Rule 14a-18 and file that notice with the Commission on the date first transmitted to the registrant. 17 CFR 240.14a-18. --------------------------------------------------------------------------- In contrast, the proposed mandatory universal proxy system would require only that the registrant include the names of the dissident nominees on its proxy card.\93\ The registrant's proxy card would clearly distinguish those nominees from the registrant's nominees.\94\ No other disclosure about the dissident's nominees would be required by the registrant. For example, the registrant's proxy materials would not be required to include detailed information about the dissident or its nominees. Nor would the registrant be required to include any statements by the dissident in support of its nominees' election. Rather, the registrant would only be required to include a statement in its proxy statement directing shareholders to refer to the dissident's proxy statement for information required by Schedule 14A about the dissident's nominees.\95\ The dissident would be wholly responsible for disseminating information about its nominees to shareholders and soliciting proxies in support of its nominees. As a result, the dissident would need to undertake the time, effort and cost of preparing and filing a preliminary proxy statement, completing the staff review process, preparing and filing a definitive proxy statement by the deadline imposed by proposed Rule 14a-19,\96\ and soliciting the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors.\97\ Thus, the dissident's ``access'' in the proposed mandatory universal proxy system would be limited to the listing of nominee names on the proxy card and would be accompanied by the obligation to solicit on behalf of its own nominees. --------------------------------------------------------------------------- \93\ See proposed Rule 14a-19(e)(1); infra Section II.B.6. \94\ See proposed Rule 14a-19(e)(3); infra Section II.B.6. \95\ See proposed Item 7(h) of Regulation 14A. As discussed in more detail in Section II.B.5.b infra, to provide shareholders with access to information about all nominees when they receive a universal proxy card, we are proposing a requirement that each party in a contested election refer shareholders to the other party's proxy statement for information about the other party's nominees and explain that shareholders can access the other party's proxy statement for free on the Commission's Web site. Registrants subject to election contests today routinely refer to the dissident, the dissident's nominees and the dissident's proxy materials in their proxy statements likely on the basis that the existence of alternative nominees is a material fact. See 17 CFR 240.14a-9. For example, based on a review of 72 proxy contests that the staff identified as involving competing slates of director nominees in calendar years 2014 and 2015, see infra note 115, the staff found that in 68 contests (or 94 percent of the contests), registrants identified the dissident in their proxy statements. As for the four contests where the registrants did not identify the dissidents, either the parties reached a settlement before the annual meeting or the registrant did not file a proxy statement for the annual meeting because it was acquired in an intervening transaction. As a result, we do not expect the proposed requirement to result in meaningfully new disclosure for registrants. \96\ See proposed Rule 14a-19(a)(2); infra Section II.B.5.a. \97\ See proposed Rule 14a-19(a)(3); infra Section II.B.4. --------------------------------------------------------------------------- Request for Comment 14. Should we mandate the use of universal proxies in contested elections, as proposed? Does such a requirement more effectively replicate in-person attendance at a shareholder meeting than the current proxy system? Are there additional changes we should make to our proxy rules to facilitate shareholders' ability to vote by proxy in the same manner they could vote in person at a meeting? 15. Our proposal applies to all companies with a class of securities registered under Section 12 of the [[Page 79133]] Exchange Act but would not apply to funds and BDCs. Should we exclude any other types of registrants, such as smaller reporting companies and/or emerging growth companies? Why or why not? 16. Would mandatory use of universal proxies impose additional costs on dissidents and/or registrants? If yes, please identify the costs and quantify them to the extent practicable. Would some of these costs be avoided under an optional system? If so, which ones and why? Would some of the benefits attributable to a mandatory system be reduced or eliminated under an optional system? If so, which ones and why? 17. Would a mandatory universal proxy system result in investor confusion, such as confusion regarding which party a nominee supports? Would the proposed requirement to clearly distinguish between registrant and dissident nominees on the proxy card avoid or mitigate that confusion? Are there additional rule changes that we should make in this regard? 18. Should we make the use of universal proxies optional rather than mandatory? Why or why not? Would an optional system further the goal of effectively facilitating shareholders' ability to vote by proxy for director nominees as they could vote in person at a meeting? If universal proxies were optional, we are interested in the views of both registrants and dissidents as to how frequently they would choose to use a universal proxy and why. Under what circumstances would one party choose to include the names of an opponent's nominees? Under an optional system, if one party opts to use a universal proxy, is the other party likely to follow suit? Would allowing for optional use of universal proxies result in confusion? 19. If we were to adopt an optional system, should we require a party opting to use a universal proxy to include all of the other party's nominees on its card or should we allow each party to select which nominees to include? If we do not require all nominees to be listed, would shareholders be confused by the contrasting proxy cards? Would such a system lead to the parties utilizing universal proxies only when it offers them a strategic advantage? 20. If we were to adopt an optional system, should both parties be permitted to decide whether to use a universal proxy card? If so, should this decision be made at the beginning of the contest before any proxy cards are distributed, or should a party be able to opt to use a universal proxy in the midst of a contest after it or the other party has distributed a conventional (non-universal) card? What, if any, of the other proposed amendments should we maintain in an optional system? For example, should we retain the proposed notice requirements and the dissident's definitive proxy statement filing deadline for universal proxy or some other variation of these proposed requirements? Should we retain the proposed amendments to the form of the universal proxy card? 21. Should we instead adopt a hybrid system in which the use of universal proxies in contested elections is mandatory for one party but optional for the other? Would such a system effectively facilitate shareholders' ability to vote by proxy for director nominees as they could vote in person at a meeting? Under a hybrid system, which party should be required to use the universal proxy? For example, should we require the use of a universal proxy by dissidents but make it optional for registrants? This type of hybrid system would permit shareholders to select their preferred combination of dissident and registrant nominees on the dissident's proxy card while still requiring a dissident to conduct an independent solicitation. However, only those shareholders that a dissident elects to solicit would receive a universal proxy unless the registrant opted to use a universal proxy. Should we require the party using the universal proxy in a hybrid system to furnish a proxy statement to all shareholders to ensure that every shareholder receives a universal proxy and can vote for their preferred combination of nominees as they could if attending the shareholder meeting in person? In a hybrid system, would it be necessary or helpful to require dissidents to provide notice of the names of their nominees to registrants as we have proposed for the mandatory universal proxy system? What other requirements would be needed in a hybrid system? Under a hybrid system in which one party is required to use a universal proxy, is the other party likely to follow suit and elect to provide a universal proxy as well? Would a hybrid system provide advantages to one party or the other in an election contest? If so, which party would it benefit and why? 22. If we do not adopt a mandatory system for universal proxies, how else could we enable shareholders to vote by proxy for their choice of nominees in a contested election? 23. Would mandatory use of universal proxies increase the frequency of contested elections? Why or why not? Would the optional use of universal proxies have a similar impact? Why or why not? 24. Would shareholders use mandatory universal proxy instead of a registrant's proxy access bylaw? Why or why not? What would be the implications of such use and should any additional rule changes be made in this regard? b. Use in Contested Elections We are proposing to apply the requirement to use universal proxies to all non-exempt solicitations in connection with contested elections where a person or group of persons is soliciting proxies in support of director nominees other than the registrant's nominees.\98\ We are proposing this approach because our rationale for requiring the use of universal proxies--that the proxy voting process should mirror as much as possible the vote that a shareholder could make by attending the meeting and voting in person--applies equally to all types of contested elections. We believe our rules should permit shareholders to select the combination of nominees that best aligns with their interests in any contested election, whether a dissident is soliciting proxies in support of a number of nominees that would constitute a minority or a majority of the board of directors. --------------------------------------------------------------------------- \98\ As discussed in Section II.D infra, the amendments we are proposing today to implement a mandatory universal proxy system would not apply to funds or BDCs. --------------------------------------------------------------------------- We recognize that there are differing views on the types of contests that warrant the use of universal proxies. For example, the IAC recommended the use of universal proxies only in connection with short slate director nominations, while the Rulemaking Petition recommended the use of universal proxies in all contested elections.\99\ We considered limiting the requirement to use universal proxies to contests where the election could not result in a change in a majority of the board of directors. We are aware that where a contest results in a change in a majority or all of the directors, there may be consequences beyond the resulting change in the board of directors. These may include triggering provisions in debt covenants and other material contracts and agreements. We also recognize that those who believe the use of universal proxies would increase the success of dissidents may contend that requiring universal proxies in all contests (including contests in which the election of a dissident's nominees would result in a change in a majority [[Page 79134]] of the directors) would likely increase the occurrence of these change- in-control consequences. However, we believe these change-in-control implications and any associated risks are better addressed through disclosure in the proxy statement (as is currently the case) rather than through federal proxy rules applicable to the solicitation process.\100\ --------------------------------------------------------------------------- \99\ See IAC Recommendation; Rulemaking Petition. \100\ We are unaware of any empirical studies providing direct evidence that requiring universal proxy cards would increase the incidence of the change-in-control consequences discussed here. --------------------------------------------------------------------------- The mandatory universal proxy system, as proposed, would not apply to an election of directors involving only registrant and proxy access nominees. Where proxy access nominees are included on the registrant's proxy card and there is no competing slate of dissident nominees, shareholders will already have access to a proxy that reflects all of their voting options for the election of directors. Therefore, we are not proposing that the requirements of the proposed universal proxy system would apply to such nominating shareholders.\101\ --------------------------------------------------------------------------- \101\ We are, however, proposing to require that the form of universal proxy to be used by registrants and dissidents also include any proxy access nominees. See proposed Rule 14a-19(e); infra Section II.B.6. --------------------------------------------------------------------------- We are proposing to apply the requirement to use a universal proxy only to solicitations that involve a contested election. In solicitations that do not involve a contested election, such as a ``vote no'' campaign (i.e., where a soliciting person is only soliciting ``withhold'' or ``against'' votes with respect to one or more of the registrant's nominees) or where a shareholder is only soliciting proxies in support of a shareholder proposal, there are no alternative director nominees. Those solicitations would not raise the same concerns that mandatory universal proxy is intended to address because the registrant's proxy card already provides shareholders with the ability to select their choice of nominees from all director candidates. Where the solicitation does not involve a contested election, a proponent's form of proxy would be governed by Rule 14a- 4(b)(2), as it is today. We note, however, that Rule 14a-4(b)(2), in conjunction with the proposed change to the consent required of a bona fide nominee discussed above,\102\ would allow a proponent to include the names of some or all registrant nominees on the proponent's proxy card, which is not explicitly contemplated by the current proxy rules. --------------------------------------------------------------------------- \102\ See proposed Rule 14a-4(d)(1)(i). --------------------------------------------------------------------------- Similarly, the mandatory universal proxy system, as proposed, would not apply to a dissident's consent solicitation \103\ to remove existing registrant directors and replace them with dissident nominees.\104\ We do not believe that universal proxy is needed for consent solicitations because a registrant contesting such a solicitation typically does so by soliciting revocations of the consents and not by presenting a competing slate.\105\ These solicitations, although related to the election of directors, do not raise the same concerns that mandatory universal proxy is intended to address because shareholders would have access to a consent card that reflects all of their voting options for the removal and appointment of directors to fill the vacancies, if any, created by the removal of directors. --------------------------------------------------------------------------- \103\ A consent solicitation involves the solicitation of written consents from shareholders to take action without a meeting. \104\ See proposed Rule 14a-19(g). \105\ We acknowledge that a registrant could solicit consents for a competing slate of nominees (e.g., the incumbent directors) when soliciting for revocations of consents in the event the dissident's removal proposal is successful. Based on the staff's observations, registrants rarely, if ever, do so. --------------------------------------------------------------------------- Request for Comment 25. Should we require the use of universal proxies in all contested elections, as proposed? Should we instead limit the use of universal proxies to contested elections in which a dissident is soliciting proxies in support of a slate that, if elected, would constitute a minority of the board of directors? If so, why should we differentiate between such contests? Should we instead limit the use of universal proxies in a different way? 26. As proposed, a universal proxy would be permitted, but not required, for other types of solicitations. Should we instead require the use of a universal proxy in solicitations that do not involve a contested election, such as a ``vote no'' campaign or where a shareholder is only soliciting proxies in support of a shareholder proposal? Why or why not? 27. Should we expressly exclude consent solicitations from the application of Rule 14a-19, as proposed? Are there any reasons why a universal proxy requirement should apply to consent solicitations? If so, please describe. c. Exempt Solicitations We are proposing that universal proxies be required only in non- exempt solicitations. Current Rule 14a-2(b) provides that certain provisions of Regulation 14A, including Rules 14a-3, 14a-4, 14a-5 and 14a-6,\106\ do not apply to the exempt solicitations described in Rule 14a-2(b).\107\ Our proposed amendments would revise Rule 14a-2(b) to specify that the requirements of proposed Rule 14a-19 similarly do not apply to exempt solicitations under Rule 14a-2(b). --------------------------------------------------------------------------- \106\ Rules 14a-3 through 14a-6 set forth the filing, delivery, information and presentation requirements for the proxy statement and form of proxy for solicitations subject to Regulation 14A. 17 CFR 240.14a-3--14a-6. \107\ Rule 14a-2(b) exempts certain solicitations from most of the proxy rules other than the antifraud provisions. 17 CFR 240.14a- 2(b). For example, Rule 14a-2(b)(1) exempts solicitations by any person who does not directly or indirectly seek authority to act as proxy and does not furnish or request a form of revocation, abstention, consent or revocation. Rule 14a-2(b)(2) exempts solicitations, other than on behalf of the registrant, where the aggregate number of persons solicited is not more than ten. These solicitations are exempted from the proxy rules because ``the best protection for shareholders and the marketplace is to identify those classes of solicitations that warrant application of the proxy statement disclosure requirement, and to foster the free and unrestrained expression of views by all other parties.'' See Short Slate Rule Adopting Release, at 48280. --------------------------------------------------------------------------- We propose that universal proxies be required only in contested elections where the dissident conducts a non-exempt solicitation that is subject to Rule 14a-12(c) \108\ through the use of a proxy statement and proxy card pursuant to Regulation 14A. Thus, the proposed amendments would not apply to solicitations in which a person does not seek authority to act as proxy and does not furnish or request a form of revocation, abstention, consent or revocation, which are exempt under Rule 14a-2(b)(1). Similarly, the proposed amendments would not apply to solicitations in which the person is not acting on behalf of the registrant and the aggregate number of persons solicited is not more than ten, which are exempt under Rule 14a-2(b)(2). --------------------------------------------------------------------------- \108\ Rule 14a-12(c) applies to ``[s]olicitations by any person or group of persons for the purpose of opposing a solicitation subject to this regulation by any other person or group of persons with respect to the election or removal of directors at any annual or special meeting of security holders.'' --------------------------------------------------------------------------- We are not proposing to require universal proxies in exempt solicitations because we do not believe exempt solicitations are an appropriate context for the universal proxy process. In a non-exempt solicitation in connection with a contested election, the parties may expend considerable time and effort and incur significant costs. This includes filing a proxy statement with the Commission that contains all required information about the director nominees and obtaining consent of the nominees to be named in the proxy statement and to serve if elected. In contrast, soliciting persons [[Page 79135]] conducting exempt solicitations are not required to file their proxy materials with the Commission and may expend little time and effort and incur limited costs. Accordingly, if we were to mandate the use of universal proxies when a dissident is conducting an exempt solicitation, the dissident could potentially capitalize on the registrant's solicitation while expending very little time and effort and incurring no costs itself. Moreover, shareholders would not be assured of having the benefit of the robust disclosure required under Regulation 14A, including disclosure about the dissident's nominees, when casting their vote using a universal proxy. Request for Comment 28. Should we limit the requirement to use universal proxies to non-exempt solicitations, as proposed? Should we instead require that universal proxies also be used in some or all exempt solicitations? For example, should universal proxies be required in contested elections where a dissident is conducting an exempt solicitation under Rule 14a- 2(b)(2)? If so, should the proposed rules be applied differently in the context of an exempt solicitation, such as requiring the dissident to use a universal proxy in its exempt solicitation while giving the registrant the option to use a universal proxy in its non-exempt solicitation? 2. Dissident's Notice of Intent To Solicit Proxies in Support of Nominees Other Than the Registrant's Nominees We are proposing to require the dissident to provide notice to the registrant of its intent to solicit proxies in support of director nominees other than the registrant's nominees.\109\ We believe that establishing a notice requirement is necessary to provide a definitive date by which the parties in a contested election will know that use of universal proxies has been triggered. For that reason, we are proposing a new notice requirement that would apply to any dissident who intends to conduct a non-exempt solicitation and solicit proxies in support of director nominees other than the registrant's nominees using its own proxy card. --------------------------------------------------------------------------- \109\ See proposed Rule 14a-19(a) and (b). --------------------------------------------------------------------------- Proposed Rule 14a-19 would require a dissident to provide the registrant with the names of the nominees for whom it intends to solicit proxies no later than 60 calendar days prior to the anniversary of the previous year's annual meeting date.\110\ If the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, proposed Rule 14a-19 would require that the dissident provide notice by the later of 60 calendar days prior to the date of the annual meeting or the tenth calendar day following the day on which public announcement of the date of the annual meeting is first made by the registrant. Proposed Rule 14a-19 would also require a dissident to indicate its intent to comply with the minimum solicitation threshold in proposed Rule 14a-19 \111\ by including in this notice a statement that it intends to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors.\112\ This statement would also serve to distinguish the notice under Rule 14a-19 from advance notice provided pursuant to the registrant's governing documents and to put the registrant on notice that the dissident intends to comply with the requirements of Rule 14a-19. Proposed Rule 14a-19 would not require a dissident to provide this notice to the registrant if the information required in the notice has been provided in a preliminary or definitive proxy statement filed by the dissident by the deadline imposed by proposed Rule 14a-19. Proposed Rule 14a-19 also would not require a dissident to file the notice with the Commission. --------------------------------------------------------------------------- \110\ The proposed rule also would require that a dissident promptly notify the registrant if any change occurs with respect to its intent to solicit proxies in support of its director nominees. See proposed Rule 14a-19(c). \111\ See infra Section II.B.4 for a discussion of the minimum solicitation requirement in proposed Rule 14a-19. \112\ We are also proposing to require similar disclosure in a dissident's proxy statement, which would be subject to the antifraud provisions in Rule 14a-9. See infra Section II.B.4. --------------------------------------------------------------------------- We are proposing 60 calendar days prior to the anniversary of the previous year's annual meeting date as the notice deadline because we believe it provides a definitive date far enough in advance of the meeting to give the parties sufficient time after the notice is provided to prepare a proxy statement and form of proxy in accordance with the universal proxy requirements.\113\ In addition, we believe 60 calendar days prior to the anniversary of the previous year's annual meeting date is not too far in advance of the meeting so as to impose a significant additional burden for most dissidents. Our proposed deadline for the notice is 30 calendar days later than the deadline found in most advance notice bylaws, which typically require notice to be delivered no earlier than 120 days and no later than 90 days prior to the first anniversary of the prior year's annual meeting.\114\ In fact, based on a review of the filings for the 72 contested elections initiated in 2014 and 2015, we estimate that dissidents provided some form of notice of their intent to nominate candidates for election to the board of directors 60 or more calendar days prior to the shareholder meeting date in 89 percent of the contests.\115\ --------------------------------------------------------------------------- \113\ For many registrants, the record date for determining shareholders entitled to notice of the meeting cannot be more than 60 days before the date of such meeting. See, e.g., Del. Code Ann. tit. 8, Sec. 213. Thus, as a practical matter, registrants very rarely file their definitive proxy statement prior to such date. \114\ See Sullivan & Cromwell LLP, Proxy Access Bylaw Developments and Trends, at 4 (Aug. 18, 2015), available at https://www.sullcrom.com/siteFiles/Publications/SC_Publication_Proxy_Access_Bylaw_Developments_and_Trends.pdf (``S&C August Report''); Wachtell, Lipton, Rosen & Katz, Nominating and Corporate Governance Committee Guide, at 22 (2015), available at http://www.wlrk.com/files/2015/NominatingandCorporateGovernanceCommitteeGuide2015.pdf. \115\ The sample (``contested elections sample'') is based on staff analysis of EDGAR filings for election contests with preliminary proxy statements filed in calendar years 2014 and 2015 other than election contests involving funds or BDCs. Staff has identified 72 proxy contests involving competing slates of director nominees during this time period. For calculations in relation to the meeting date, the data is based on 70 out of 72 identified proxy contests since the registrant did not hold an annual meeting for the election of directors in two cases. For purposes of determining the earliest date the dissident provided some form of notice of its intent to nominate candidates for election to the board, staff considered disclosure in the dissident's definitive additional soliciting materials filed under Rule 14a-12, disclosure in amendments to the dissident's Schedule 13D and disclosure in both the registrant's and dissident's proxy statements. --------------------------------------------------------------------------- A dissident's obligation to comply with the notice requirement under proposed Rule 14a-19 would be in addition to its obligation to comply with any applicable advance notice provision in the registrant's governing documents. In most cases, we do not anticipate that proposed Rule 14a-19 would impose a meaningful additional burden on a dissident since a dissident would generally have provided the names of its nominees by the proposed deadline to comply with a typical advance notice provision in a registrant's governing documents.\116\ While we acknowledge that proposed Rule 14a-19 would impose a notice requirement even in the case of registrants that do not have an advance notice provision in their governing documents, we believe the requirement is necessary so those [[Page 79136]] registrants receive notice of the names of a dissident's nominees in time to prepare a universal proxy card and file it with their preliminary proxy statement. --------------------------------------------------------------------------- \116\ According to a law firm report, 95 percent of the S&P 500 and 90 percent of the Russell 3000 had advance notice provisions at 2014 year-end. See WilmerHale, 2015 M&A Report, at 5 (2015), available at https://www.wilmerhale.com/uploadedFiles/Shared_Content/Editorial/Publications/Documents/2015-WilmerHale-MA-Report.pdf (citing www.SharkRepellent.net). --------------------------------------------------------------------------- In most instances,\117\ Rule 14a-19 would effectively preclude a dissident from launching an election contest less than 60 calendar days prior to the annual meeting even if the registrant's governing documents do not require advance notice by that date.\118\ We believe such late-breaking contests are infrequent \119\ and usually precluded by the prevalence of advance notice requirements in registrants' governing documents. Proposed Rule 14a-19 would not, however, preclude dissidents who are unable to meet the notice deadline from taking other actions to attempt to effectuate changes to the board, such as initiating a ``vote no'' campaign, conducting an exempt solicitation, or calling a special meeting (to the extent permitted under the registrant's bylaws) to remove existing directors and appoint their own nominees to fill the vacancies. --------------------------------------------------------------------------- \117\ Proposed Rule 14a-19 would not operate to preclude a dissident from launching an election contest less than 60 calendar days prior to the annual meeting date if the registrant did not hold an annual meeting during the previous year and announced the date of the upcoming annual meeting fewer than 70 calendar days prior to the meeting date. In that instance, a dissident could launch an election contest at any time prior to the tenth calendar day following the registrant's public announcement of the meeting date (e.g., if the registrant announced the date of the upcoming annual meeting 65 calendar days prior to the meeting date, the dissident could launch an election contest as late as the 55th calendar day prior to the meeting date). See proposed Rule 14a-19(b)(1). \118\ Proposed Rule 14a-19 would also effectively preclude a dissident from launching an election contest less than 60 calendar days prior to the annual meeting even if the registrant's board of directors has waived the advance notice deadline in the registrant's governing documents. \119\ Based on a review of the contested elections sample, see supra note 115, the staff found that dissidents provided notice of their intent to nominate director candidates fewer than 60 calendar days prior to the shareholder meeting date in 11 percent of the contests. --------------------------------------------------------------------------- It is possible that a dissident will provide notice of the names of its nominees under proposed Rule 14a-19 and later change its nominees. It is also possible that a dissident will provide the notice required under proposed Rule 14a-19 but take no further steps in the solicitation of proxies in support of director nominees, or take some additional steps but later change or abandon its solicitation efforts. As proposed, Rule 14a-19 would require a dissident to promptly notify the registrant of any change to the dissident's intent to comply with the minimum solicitation threshold in proposed Rule 14a-19 or with respect to the names of the dissident's nominees.\120\ Because a registrant may have disseminated a universal proxy card before discovering that the dissident has abandoned its solicitation,\121\ we are proposing to require the registrant to include disclosure in its proxy statement advising shareholders how it intends to treat proxy authority granted in favor of a dissident's nominees in the event the dissident abandons its solicitation or fails to comply with proposed Rule 14a-19.\122\ In those instances, the registrant could elect to disseminate a new, non-universal proxy card including only the names of the registrant's nominees. If there is a change in the dissident's nominees after the registrant has disseminated a universal proxy card, the registrant could elect, but would not be required, to disseminate a new universal proxy card reflecting the change in dissident nominees. --------------------------------------------------------------------------- \120\ See proposed Rule 14a-19(c). \121\ This could occur because a dissident is required to provide notice of its intent to solicit proxies to the registrant 60 days prior to the anniversary date of the previous year's annual meeting. If a registrant disseminates its proxy statement during the period of time between receiving the dissident's Rule 14a-19 notice and the dissident filing a preliminary proxy statement, a registrant would be required to include the names of the dissident's nominees on a universal proxy card. \122\ See proposed Item 21(c) to Schedule 14A. --------------------------------------------------------------------------- Request for Comment 29. Should we require a dissident to provide notice of its intent to solicit in advance of a shareholder meeting, as proposed? Would this requirement significantly hinder a dissident's ability to initiate a proxy contest? Why or why not? Does proposed Rule 14a-19 create logistical or timing issues not addressed in this release? 30. What percentage of companies with Section 12 registered securities have an advance notice provision in their governing documents today? What percentage of those companies that have an advance notice provision have a deadline of, or a submission window that ends, 90 days, 60 days, or another specified number of days prior to the upcoming annual meeting date or the first anniversary of the prior year's annual meeting? 31. Does the proposed requirement to identify a dissident's nominees 60 days in advance of a meeting sufficiently accommodate the interests of both dissidents and registrants? Should the notice be required more or fewer days in advance? Alternatively, would some other triggering event for filing the notice, such as within five days of the registrant filing its preliminary proxy statement, better provide appropriate notice? Would some other period of time be more appropriate? 32. If a registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, should we require a dissident to provide notice by the later of 60 calendar days prior to the date of the annual meeting or the tenth calendar day following the day on which public announcement of the date of such meeting is first made by the registrant, as proposed? Should we instead require registrants to file a Form 8-K within four business days of determining the anticipated meeting date to disclose the date by which a dissident must submit the required notice and require that such date be a reasonable time or a specified number of days before the registrant first files proxy materials with the Commission? Is there a more appropriate notice deadline we should use in situations in which a registrant did not hold an annual meeting during the previous year or the date of the meeting has changed by more than 30 calendar days from the previous year? 33. The proposed notice requirement would effectively prevent a dissident from launching an election contest less than 60 days before a meeting. Would some shorter or longer period be preferable? Should the proposed rule include an exception mechanism similar to Rule 14a-6(a) to allow a dissident to provide the notice required by proposed Rule 14a-19 after the 60 calendar day deadline in exceptional circumstances (e.g., where a court of competent jurisdiction enjoins the advance notice bylaws of the registrant)? Should we instead have the notice requirement be a condition of the use of universal proxies but also permit dissidents to launch a contest as they could today, without the ability to use universal proxy if they do not comply with the notice requirements? Why or why not? 34. What information should be required in a dissident's notice? Should any other information besides the names of a dissident's nominees and a dissident's statement that it intends to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors be required? For example, should a dissident be required to include biographical or other information that is required of director nominees under Regulation 14A for its nominees in the notice? [[Page 79137]] 35. Should we require a dissident to file the notice with the Commission? Should we require a dissident to file the notice with each national securities exchange upon which any class of securities of the registrant is listed and registered? Why or why not? 3. Registrant's Notice of Its Nominees We are proposing to require the registrant to notify the dissident of the names of its nominees unless the names have already been provided in a preliminary or definitive proxy statement filed by the registrant.\123\ Proposed Rule 14a-19(d) would require a registrant to provide the dissident with the names of the nominees for whom the registrant intends to solicit proxies no later than 50 calendar days prior to the anniversary of the previous year's annual meeting date. If the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, proposed Rule 14a-19(d) would require that the registrant provide notice no later than 50 calendar days prior to the date of the meeting. Proposed Rule 14a-19 would not require a registrant to file the notice with the Commission. --------------------------------------------------------------------------- \123\ See proposed Rule 14a-19(d). --------------------------------------------------------------------------- We believe it is appropriate to include notification deadlines in a mandatory universal proxy system to provide the parties with a definitive date by which they will have the names of all nominees to be included on the universal proxy card. Without the names of all nominees, the parties could not file their definitive proxy statements and universal proxy cards to begin soliciting shareholders. Absent such a requirement for registrants, dissidents could face an informational and timing disadvantage in the proposed universal proxy system. Registrants would know the names of dissident nominees no later than 60 days prior to the meeting \124\ while dissidents would not necessarily know the names of the registrant nominees until the registrant files its preliminary proxy statement, which is only required to be filed at least 10 calendar days prior to the date the definitive proxy statement is first sent to shareholders and may be filed much closer to the meeting date.\125\ In that case, dissidents would have to wait to file their definitive proxy statement and proxy card until the registrant filed its preliminary proxy statement with the names of the registrant nominees. --------------------------------------------------------------------------- \124\ Because the deadline under proposed Rule 14a-19(b)(1) is tied to the anniversary of the previous year's annual meeting date, 60 calendar days prior to the meeting date approximates the latest date on which registrants would know the names of dissident nominees. \125\ See proposed Rule 14a-19(b)(1); 17 CFR 240.14a-6(a). --------------------------------------------------------------------------- We believe a deadline that is 10 calendar days after the latest date the registrant would have received dissident's notice of nominees is appropriate because it provides a sufficient period of time for the registrant to consider the dissident's notice, finalize its nominees and respond with its own notice of nominees. Moreover, we believe the 50 calendar day deadline is appropriate for providing dissidents with timely access to the names of registrant nominees for purposes of preparing a universal proxy card. We acknowledge that a dissident could not file its definitive proxy statement and universal proxy card until the registrant has provided notice of the names of its nominees or otherwise filed a preliminary or definitive proxy statement including such names. Given the filing practices of soliciting parties in contested elections today, we do not believe this will be a practical hardship for dissidents because dissidents almost always file their definitive proxy statement after the registrant has filed a preliminary proxy statement and usually after the registrant has filed a definitive proxy statement.\126\ If the names of the registrant's nominees are not known when a dissident plans to file its preliminary proxy statement, the dissident could file its preliminary proxy statement, as planned, and include blank spaces for the names of the registrant's nominees on its preliminary universal proxy card. The dissident could not file its definitive proxy statement until at least 10 calendar days elapsed after the preliminary proxy statement filing.\127\ If the names of the registrant's nominees were still not known at that time, the dissident would have to wait until the names of the registrant's nominees were known before finalizing and filing its definitive proxy statement and universal proxy card. Based on a review of recent contested elections and the staff's experience, dissidents rarely file their definitive proxy statement more than 50 calendar days prior to the meeting date, which approximates the latest date on which registrants would be required to notify the dissident of the names of the registrant's nominees under the proposed rules.\128\ Thus, unless soliciting parties in contested elections alter their filing practices as a result of using the proposed universal proxy system, we would expect those circumstances to arise infrequently. We solicit comment on this point below. --------------------------------------------------------------------------- \126\ Based on the staff's review of the contested elections sample, see supra note 115, we estimate that dissidents filed their definitive proxy statement before the registrant filed its definitive proxy statement in 11 percent of the contests. We also estimate that a dissident filed its definitive proxy statement before the registrant filed its preliminary proxy statement (or definitive proxy statement in the instances where the registrant did not file a preliminary proxy statement) in just one instance (or 1 percent of the contests). \127\ See Rule 14a-6(a). In the staff's experience, a soliciting party will typically wait until it receives notice that the staff has no comments on the preliminary proxy statement before filing its definitive proxy statement. \128\ Because the deadline under proposed Rule 14a-19(d) is tied to the anniversary of the previous year's annual meeting date, 50 calendar days prior to the meeting date approximates the latest date on which registrants would be required to notify the dissident of the names of the registrant's nominees. Based on a review of the contested elections sample, see supra note 115, we estimate that dissidents filed their definitive proxy statement more than 50 calendar days prior to the shareholder meeting date in 7 percent of the contests. --------------------------------------------------------------------------- It is possible that a registrant could provide notice of the names of its nominees under proposed Rule 14a-19 and later change its nominees. As with the notice requirement for dissidents, proposed Rule 14a-19(d) would require a registrant to promptly notify the dissident of any change with respect to the names of the registrant's nominees. If there is a change in the registrant's nominees after the dissident has disseminated a universal proxy card, the dissident could elect, but would not be required, to disseminate a new universal proxy card reflecting the change in registrant nominees. Request for Comment 36. Should we require a registrant to notify the dissident of the names of registrant nominees, as proposed? Would the proposed notice requirement for registrants affect the process by which a board of directors nominates candidates? If so, how? Is the proposed notice requirement for registrants inconsistent with any state or foreign law provision? 37. Should any other information besides the names of the registrant's nominees be required? 38. Is 50 calendar days prior to the anniversary of the previous year's annual meeting date an appropriate deadline for the notice of the registrant's director nominees? Should we require a longer or shorter period of time? Why or why not? Should the deadline for registrants be tied to the registrant's receipt of the dissident's notice? For example, should we instead adopt a deadline for registrants that is the later of 60 calendar days prior to the meeting or 10 calendar days following [[Page 79138]] registrant's receipt of dissident's notice pursuant to proposed Rule 14a-19? Why or why not? 39. Would the proposed mandatory universal proxy system alter the filing practices of soliciting parties in contested elections? If so, how? Are there any changes that we should make to the proposed rules as a result? 40. Should we require registrants to file the notice with the Commission? For example, should a registrant be required to file a Form 8-K to disclose the names of its nominees when they are determined? Should we require registrants to file the notice with each national securities exchange upon which any class of securities of the registrant is listed and registered? Why or why not? 4. Minimum Solicitation Requirement for Dissidents Our current rules do not require a registrant or a dissident to solicit, or furnish a proxy statement to, a certain number or percentage of shareholders. Instead, our rules only require the parties to furnish a proxy statement to each person solicited.\129\ Proposed Rule 14a-19 would require dissidents in a contested election subject to Rule 14a-19 to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors.\130\ We estimate that in approximately 97 percent of recent proxy contests the dissident solicited a number of shareholders greater than would be required under the proposed minimum solicitation requirement.\131\ --------------------------------------------------------------------------- \129\ See 17 CFR 240.14a-3. \130\ We understand that proxy service providers can provide sufficient information for a dissident to determine how to meet the minimum threshold. The notion that a proponent's solicitation of a certain percentage of shareholders impacts the treatment of a proponent's proposal in the proxy voting process is not new. Rule 14a-4(c)(1) addresses a registrant's ability to exercise discretionary voting authority after it has received notice of a non-Rule 14a-8 proposal within the timeframe established by Rule 14a-4(c)(1). Rule 14a-4(c)(2) precludes a registrant from exercising discretionary authority on matters as to which it has received timely advance notice if the proponent provides the registrant, as part of that notice, with a statement that it intends to solicit the percentage of shareholder votes required to carry the proposal, followed with specified evidence that the stated percentage had actually been solicited. \131\ See infra Section IV.D.2.a. --------------------------------------------------------------------------- Without a minimum solicitation requirement, mandatory universal proxy could enable dissidents to capitalize on the registrant's solicitation efforts and relieve dissidents of the time and expense necessary to solicit sufficient support for its nominees to win a seat on the board of directors. The minimum solicitation requirement would preclude a dissident from triggering mandatory universal proxy for both parties unless the dissident intends to conduct an independent solicitation by distributing its own proxy statement and form of proxy. We are mindful of concerns that have been raised about the possibility that universal proxies would allow dissidents to have their nominees included on registrants' proxy cards, which would likely be disseminated to all shareholders of the company, without expending any of their own resources to get the names of their nominees in front of all shareholders of the company. We believe that the proposed minimum solicitation requirement would help address these concerns. We also believe that the nature of contested elections today, particularly when share ownership is widely dispersed, is such that dissidents would still need to engage in meaningful solicitation efforts in order to actually win a seat on the board of directors. We determined to propose a minimum solicitation requirement for dissidents to ensure that the registrant is required to include dissident nominees on its proxy card only when the dissident engages in a meaningful, non-exempt solicitation. We believe the threshold we are proposing--a majority of the voting power entitled to vote on the election of directors--strikes an appropriate balance of providing the utility of the mandatory universal proxy system for shareholders while precluding dissidents from capitalizing on the inclusion of dissident nominees on the registrant's universal proxy card without undertaking meaningful solicitation efforts. We also believe the threshold we are proposing would be easily measurable regardless of the applicable voting standard.\132\ --------------------------------------------------------------------------- \132\ While a plurality voting standard would apply in almost all contested elections, we understand that for a small percentage of registrants, a majority voting standard would apply in contested elections. --------------------------------------------------------------------------- Proposed Rule 14a-19 would also require a dissident to state in its proxy materials that it will solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors.\133\ Like any other statement made in the dissident's proxy materials, this statement would be subject to Rule 14a-9. --------------------------------------------------------------------------- \133\ See proposed Rule 14a-19(a)(3). --------------------------------------------------------------------------- A registrant is not required to solicit, or furnish a proxy statement to, a certain number or percentage of shareholders under our current rules. Consistent with our current rules, a registrant would be required only to furnish a proxy statement to each person solicited. Because Rule 14c-2 requires registrants to provide to all shareholders not solicited in connection with a shareholder meeting an information statement with the same information required in a proxy statement, registrants routinely satisfy their obligation under Rule 14c-2 by furnishing a proxy statement to all shareholders.\134\ For that reason, we are not proposing a minimum solicitation requirement for registrants in a contested election subject to proposed Rule 14a-19. --------------------------------------------------------------------------- \134\ 17 CFR 240.14c-2. Other requirements may result in a registrant's decision to furnish a proxy statement to all shareholders, such as national securities exchange listing requirements and meeting notice requirements under state law. --------------------------------------------------------------------------- Request for Comment 41. Should we require a dissident to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors, as proposed? Should we instead require a dissident to solicit the holders of shares representing at least a majority of the outstanding voting power? Why or why not? Should we instead require a dissident to solicit all shareholders? Why or why not? Should we consider alternative solicitation or other requirements for dissidents? If so, what other requirements should we consider? For example, should dissidents be required to make all proxy materials publicly accessible, free of charge, at an Internet Web site other than the Commission's EDGAR system? 42. We are not proposing amendments that would require a registrant to solicit a certain number or percentage of shareholders when a solicitation in connection with a contested election is made in accordance with proposed Rule 14a-19 because we understand that currently registrants generally disseminate the proxy statement to all shareholders. Would mandatory universal proxy alter a registrant's practice of generally disseminating the proxy statement to all shareholders? Should we include a minimum solicitation requirement for registrants? If so, what should the solicitation requirement be for registrants? 43. Should we include any additional requirements in the rules for dissidents concerning compliance with the minimum solicitation requirement? If so, what requirements should we include? For example, should we require a dissident to provide the registrant with a statement from the solicitor or other person with knowledge indicating that the dissident has taken the steps necessary to solicit [[Page 79139]] the holders of at least a majority of the voting power of shares entitled to vote on the election of directors? \135\ Why or why not? --------------------------------------------------------------------------- \135\ See, e.g., 17 CFR 240.14a-4(c)(2)(iii) (providing for notification to the registrant that the proponent took the steps necessary to deliver proxy materials to a sufficient number of holders to carry the proposal.). --------------------------------------------------------------------------- 44. Would dissidents have access to sufficient information to determine how to meet the minimum solicitation threshold? Why or why not? Could proxy service providers provide sufficient information for dissidents to determine how to meet the minimum threshold? Why or why not? 45. Under the proposed rules, a dissident could provide notice to the registrant pursuant to Rule 14a-19 intending to conduct a non- exempt solicitation under Regulation 14A and later determine to instead proceed with an exempt solicitation in support of the nominee(s) named in the Rule 14a-19 notice. Should we consider preventing a dissident that has provided notice to a registrant pursuant to proposed Rule 14a- 19 from later relying on the exemption set forth in Rule 14a-2(b)(2) to solicit in support of the nominee(s) named in the Rule 14a-19 notice? Why or why not? 5. Dissemination of Proxy Materials Under current proxy rules, the soliciting parties in a contested election are required to provide information about their nominees in a proxy statement on Schedule 14A. For example, Item 7 of Schedule 14A requires detailed disclosure about director nominees, including their names, ages, business experience for the last five years, and involvement during the past 10 years in certain types of judicial and administrative proceedings.\136\ Rule 14a-5(c) permits one soliciting party to refer to information in the other party's proxy statement to satisfy its own disclosure obligations under Schedule 14A, including those set forth in Item 7. With universal proxies, shareholders would have the ability to vote for their preferred nominees among all of the director candidates in a contested election upon receiving one party's proxy materials. In these circumstances, we believe it is important that shareholders have the ability to access disclosure about all nominees for whom they are asked to make a voting decision at that time. --------------------------------------------------------------------------- \136\ See 17 CFR 240.14a-101, Item 7. --------------------------------------------------------------------------- a. Dissident's Requirement To File Definitive Proxy Statement 25 Calendar Days Prior to Meeting Proposed Rule 14a-19 would require a dissident in a contested election to file its definitive proxy statement with the Commission by the later of 25 calendar days prior to the meeting date or five calendar days after the registrant files its definitive proxy statement, regardless of the proxy delivery method. As proposed, the five calendar day deadline would be triggered if the registrant files its definitive proxy statement fewer than 30 calendar days prior to the meeting date, in which case the dissident would be required to file its definitive proxy statement no later than five calendar days after the registrant files its definitive proxy statement. Proposed Rule 14a-19(e) would require the registrant and the dissident to include all director nominees on their proxy cards.\137\ Because shareholders may not otherwise have access to information about the dissident's nominees when they receive a universal proxy card from the registrant, we believe requiring the dissident to file its definitive proxy statement by the later of 25 calendar days prior to the meeting or five calendar days after the registrant files its definitive proxy statement is appropriate to help ensure that shareholders who receive a universal proxy will have access to information about all nominees a sufficient amount of time prior to the meeting.\138\ We recognize, however, that some shareholders could receive the registrant's proxy statement and submit their votes on the registrant's universal proxy card before the dissident's proxy statement is available. We believe the 25 calendar day deadline would provide those shareholders with sufficient time to access the dissident's proxy statement, once available, and submit a later-dated proxy to change their votes if preferred. --------------------------------------------------------------------------- \137\ See supra Section II.B.1. \138\ Since the dissident would only be required to solicit a majority of the voting power of shares entitled to vote on the election of directors, it is possible that some shareholders would not receive the dissident's proxy materials containing information about the dissident's nominees. However, as discussed in Section II.B.5.b infra, we are proposing to require that each party in a contested election include a statement in its proxy materials referring shareholders to the other party's proxy statement for information about the other party's nominees and explaining that shareholders can access the other party's proxy statement on the Commission's Web site. Because this required disclosure would be included in the registrant's proxy materials, which all shareholders would likely receive, the proposed rules would ensure that even those shareholders that do not receive the dissident's proxy materials would have access to information about the dissident's nominees. --------------------------------------------------------------------------- We acknowledge that dissidents that elect full set delivery in a contested election are not currently subject to a filing deadline for their proxy statement, and thus the proposed requirement would impose a new filing deadline for all such dissidents.\139\ While we do not believe the proposed filing deadline would impose a significant additional burden for most dissidents, some dissidents may be required to prepare their proxy statements earlier than they would otherwise. Based on a review of the contested elections initiated in 2014 and 2015, the staff found that dissidents filed their definitive proxy statement 25 or more calendar days prior to the shareholder meeting date in 75 percent of the contests.\140\ --------------------------------------------------------------------------- \139\ We understand from a proxy services provider that in the 35 proxy contests from June 30, 2015 through April 15, 2016, dissidents sent full sets of proxy materials to each of the shareholders solicited. Dissidents that elect notice-only delivery are currently required to make their proxy statement available by the later of 40 calendar days prior to the meeting date or 10 calendar days after the registrant files its definitive proxy statement. For such dissidents, the proposed filing deadline would provide five fewer days to furnish a proxy statement in cases in which the registrant files its definitive proxy statement within fewer than 30 calendar days of the meeting date, which we estimate occurred in 18 percent of recent contested elections. Based on the information provided by, and conversations with, a proxy services provider, we would not expect a dissident to elect notice-only delivery in a contested election. \140\ Based on staff analysis of the contested elections sample. See supra note 115. The data is based on 57 out of 72 identified proxy contests since the dissident did not file a definitive proxy statement in 15 cases. --------------------------------------------------------------------------- We are not proposing to require registrants to file definitive proxy statements by a specified deadline, because unlike dissidents, registrants have an incentive to file the definitive proxy statement and proxy card \141\ well in advance of the meeting date to ensure there is sufficient time to obtain proxies from the requisite number of shares to achieve a quorum for the meeting. We also note that where the registrant nominees are incumbent directors, shareholders will have access to information about those nominees from prior Commission filings before the registrant files and disseminates its definitive proxy statement. In addition, we note that based on a review of the 72 contested elections initiated in 2014 and 2015, the staff found that registrants filed their definitive proxy statement 25 or more calendar days prior to the [[Page 79140]] shareholder meeting date in over 95 percent of the contests.\142\ --------------------------------------------------------------------------- \141\ The definitive proxy statement, form of proxy and all other soliciting materials must be filed with the Commission no later than the date they are first sent or given to shareholders. 17 CFR 240.14a-6(b). \142\ Based on staff analysis of the contested elections sample. See supra note 115. --------------------------------------------------------------------------- We recognize that it is possible that a registrant would have prepared and disseminated its definitive proxy statement, including a universal proxy card, prior to the 25th calendar day before the meeting (i.e., the general deadline under proposed Rule 14a-19 for a dissident to file its definitive proxy statement with the Commission). If a registrant discovers after disseminating its definitive proxy statement with a universal proxy card that a dissident failed to file its definitive proxy statement 25 calendar days prior to the meeting (or five calendar days after the registrant files its definitive proxy statement),\143\ the registrant could elect to disseminate a new, non- universal proxy card including only the names of the registrant's nominees. Where a dissident fails to comply with Rule 14a-19, the proposed rules would not permit the dissident to continue with its solicitation under Regulation 14A. Because a registrant may disseminate a universal proxy card before discovering that a dissident is not proceeding with its solicitation, we are proposing to require the registrant to include disclosure in its proxy statement advising shareholders how it intends to treat proxy authority granted in favor of a dissident's nominees in the event the dissident abandons its solicitation or fails to comply with Regulation 14A.\144\ --------------------------------------------------------------------------- \143\ A dissident could meet the deadline for director nominations under the company's governing documents and the deadline for providing notice to the registrant under proposed Rule 14a-19 but fail to proceed with or later abandon its solicitation. This could happen for a number of reasons. For example, the dissident and the registrant may enter into a settlement agreement, the dissident may elect to discontinue its solicitation for another reason or the dissident may fail to comply with some aspect of proposed Rule 14a- 19. \144\ See proposed Item 21(c) to Schedule 14A. --------------------------------------------------------------------------- Request for Comment 46. Should we require dissidents to file their definitive proxy statement by the later of the 25th calendar day before the meeting or five calendar days after the registrant files its definitive proxy statement where the registrant files its definitive proxy statement fewer than 30 calendar days prior to the meeting date, as proposed? Why or why not? Does the proposed deadline provide sufficient time before the meeting for shareholders who are not solicited by the dissident to access information about the dissident's nominees in the dissident's definitive proxy statement through the Commission's Web site? 47. We are not proposing to require registrants to file definitive proxy statements by a specified deadline because we understand that, unlike dissidents, registrants have an incentive to file their definitive proxy statements well in advance of the meeting date to allow sufficient time to obtain proxies from the requisite number of shares to achieve a quorum for the meeting. Would mandatory universal proxy alter a registrant's practice regarding the timing of the filing of its definitive proxy statement? If so, how? Should we impose a definitive proxy statement filing deadline for registrants in contested elections? If so, what filing deadline would be appropriate for registrants? b. Access to Information About All Nominees Under our current rules, a registrant's or dissident's proxy statement on Schedule 14A is generally not required to include information about the other party's nominees and may be disseminated before the other party disseminates its proxy statement. As a result, shareholders presented with a universal proxy card would be asked to vote for nominees without necessarily having access to disclosure about those nominees. Mindful of the potential lack of information upon which shareholders may make a voting decision in such circumstances, we have considered how and from whom shareholders should receive information about the other party's nominees when faced with a voting decision in a contested election subject to mandatory universal proxy. We believe that each party should provide the information required by Schedule 14A for its nominees in its proxy materials as is done today. We also believe that Rule 14a-5(c) should continue to operate to permit parties to refer to the other party's proxy statement to satisfy its disclosure obligations about the other party's nominees. We are proposing changes to the proxy rules to require dissidents in a contested election to file a definitive proxy statement by the later of 25 calendar days prior to the meeting date or five calendar days after the registrant files its definitive proxy statement and to solicit at least a majority of the voting power of shares entitled to vote on the election of directors.\145\ Since the dissident would not be required to solicit all shareholders, it is possible that some shareholders would not receive the dissident's proxy materials containing information about the dissident's nominees. As a result, we are proposing a new Item 7(h) of Schedule 14A to require that each party in a contested election refer shareholders to the other party's proxy statement for information about the other party's nominees and explain that shareholders can access the other party's proxy statement for free on the Commission's Web site. Because this required disclosure would be included in the registrant's proxy materials, which all shareholders would likely receive, even those shareholders that do not receive the dissident's proxy materials would have access to information about the dissident's nominees. We are also proposing to revise Rule 14a-5(c) to permit the parties to refer to information that would be furnished in a filing of the other party to satisfy their disclosure obligations.\146\ Taken together, these proposed changes are intended to enable shareholders to access information with respect to all nominees when they receive a universal proxy card. --------------------------------------------------------------------------- \145\ See supra Sections II.B.4 and II.B.5.a. \146\ Currently, Rule 14a-5(c) permits parties to refer to information that has already been furnished in a filing of another party. We recognize one concern with permitting a future filing to satisfy a disclosure obligation is that it is possible that the information to be provided in the future filing would never be made available to shareholders. However, the definitive proxy statement filing deadline for dissidents in proposed Rule 14a-19 and the practical considerations that incentivize registrants to file their definitive proxy statements well in advance of the meeting date should help ensure that appropriate information about both parties' nominees is available to shareholders in a timely manner. --------------------------------------------------------------------------- We are also proposing changes to the definition of ``participant'' in Instruction 3 to Items 4 and 5 of Schedule 14A. Currently, Instruction 3(a)(ii) to Items 4 and 5 of Schedule 14A provides that any director nominee ``for whose election as a director proxies are solicited'' is a ``participant'' for purposes of the disclosure requirements of Schedule 14A. Without a revision, the Instruction would require that the nominees on a universal proxy card be considered ``participants'' in the opposing party's solicitation. As proposed, revised Instruction 3 would define ``participant'' separately for solicitations made by registrants and solicitations made by dissidents. As a result, even though all nominees would be included on the form of proxy, only the party's nominees would be considered ``participants'' in that party's solicitation. We are proposing this change because Item 5 of Schedule 14A requires specific disclosure about all ``participants'' in a contested election, including information about the existence of a criminal record, employment history, and securities holdings, information [[Page 79141]] which the opposing party in a proxy contest is unlikely to have. In addition, revising the definition of ``participant'' as proposed may help avoid the implication that nominees are responsible for information contained in the opposing party's proxy materials. Request for Comment 48. Should we adopt proposed Item 7(h) of Regulation 14A to require that each soliciting person in a contested election refer shareholders to the other party's proxy statement for information about the other party's nominees and explain that shareholders can access the other party's proxy statement for free on the Commission's Web site, as proposed? Is this statement sufficient to inform shareholders how to access information about the parties' nominees such that shareholders can make an informed voting decision when they have only received a proxy statement and universal proxy card from one party? Should we require any additional information, such as instructions as to how to access proxy statements on the Commission's Web site or a hyperlink to that Web site? 49. Should we amend Rule 14a-5(c) to permit soliciting parties to refer to information that would be furnished in a filing of another soliciting party in order to satisfy their disclosure obligations, as proposed? Should we limit the ability to refer to a future filing of another soliciting person to solicitations in connection with contested elections? 50. Should we amend Instruction 3 to define ``participant,'' as proposed? Are there additional categories of people that should be included in the definition of ``participant'' for registrants or dissidents? Would the amendment to Instruction 3, as proposed, make it sufficiently clear that nominees are not responsible for information contained in the opposing party's proxy materials? Are there other steps we should take to make this clear? 6. Form of the Universal Proxy We are proposing the use of separate universal proxy cards in which each party in a contested election distributes its own proxy card that includes the names of both parties' nominees and designates its own representatives as proxy holders to exercise the vote pursuant to the proxy.\147\ The use of separate proxy cards would not represent a change from how proxies are solicited in contested elections today. We are proposing to retain this aspect of the proxy rules and process because we believe parties prefer to design their own proxy cards (subject to the proposed presentation and formatting requirements in proposed Rule 14a-19) in a manner they deem appropriate. Additionally, separate proxy cards also give each party control over the dissemination of its proxy card and insight into the preliminary results of the solicitation before the meeting.\148\ Finally, permitting each party to control its own proxies avoids empowering only one party to exercise discretionary authority on those matters for which a choice is not specified and on any of the matters specified in Rule 14a-4(c).\149\ The proposed presentation and formatting requirements would require that universal proxy cards provide clear instructions to permit shareholders to effectively vote their shares for the director nominees they prefer through the proxy process and to help ensure that proxies are exercised in accordance with the choices specified by the shareholders on the proxy cards. --------------------------------------------------------------------------- \147\ The Rulemaking Petition recommended that we preserve the current practice of each party circulating its own proxy card and proxy statement. See supra note 45. \148\ When each party disseminates its own proxy card, each party has insight into the preliminary results of the solicitation prior to the meeting, as each party is in possession of the proxies it has received from shareholders solicited. \149\ Discretionary voting authority may be conferred under Rule 14a-4(c) for certain ministerial acts such as approving the minutes of a prior meeting, voting on certain shareholder proposals unknown to the registrant before circulation of the proxy statement, and voting on shareholder proposals properly omitted from the proxy statement. --------------------------------------------------------------------------- Rule 14a-4 governs the form of the proxy card and requires, among other things, that the proxy card: Indicate in bold-face type whether or not it is solicited on behalf of the registrant's board of directors or, if solicited on behalf of some other person, the identity of such person; \150\ --------------------------------------------------------------------------- \150\ See 17 CFR 240.14a-4(a)(1). --------------------------------------------------------------------------- provide a basis for shareholders to instruct separately \151\ and with specificity how the proxy holders must vote on the election of directors \152\ and on non-election proposals; \153\ and --------------------------------------------------------------------------- \151\ See 17 CFR 240.14a-4(a)(3). \152\ See 17 CFR 240.14a-4(b)(2) \153\ See 17 CFR 240.14a-4(b)(1). --------------------------------------------------------------------------- if providing for the election of directors, set forth the names of the nominees \154\ and permit shareholders to withhold voting authority from each nominee.\155\ --------------------------------------------------------------------------- \154\ See supra Section II.A and discussion of the bona fide nominee rule for an explanation as to why the named nominees rarely include the dissident nominees. \155\ See 17 CFR 240.14a-4(b)(2). The proxy card may confer discretionary proxy voting authority on matters as to which the shareholder does not specify a choice provided that the card states in bold-face type how the proxy holder intends to vote the shares represented by the proxy in each such case.\156\ The proxy card may also confer discretionary proxy voting authority on matters not included on the registrant's proxy card.\157\ --------------------------------------------------------------------------- \156\ See 17 CFR 240.14a-4(b)(1). \157\ See 17 CFR 240.14a-4(c). --------------------------------------------------------------------------- To help ensure that universal proxies clearly and fairly present information so that shareholders can effectively exercise their voting rights, proposed Rule 14a-19(e) would include the following presentation and formatting requirements for all universal proxy cards used in contested elections: The proxy card must clearly distinguish between registrant nominees, dissident nominees, and any proxy access nominees; \158\ --------------------------------------------------------------------------- \158\ See proposed Rule 14a-19(e)(3). --------------------------------------------------------------------------- Within each group of nominees, the nominees must be listed in alphabetical order by last name on the proxy card; \159\ --------------------------------------------------------------------------- \159\ See proposed Rule 14a-19(e)(4). Although the order must be alphabetical by last name, the format need not be last name first. --------------------------------------------------------------------------- The same font type, style and size must be used to present all nominees on the proxy card; \160\ --------------------------------------------------------------------------- \160\ See proposed Rule 14a-19(e)(5). --------------------------------------------------------------------------- The proxy card must prominently disclose the maximum number of nominees for which authority to vote can be granted; \161\ and --------------------------------------------------------------------------- \161\ See proposed Rule 14a-19(e)(6). --------------------------------------------------------------------------- The proxy card must prominently disclose the treatment and effect of a proxy executed in a manner that grants authority to vote for more nominees than the number of directors being elected, in a manner that grants authority to vote for fewer nominees than the number of directors being elected, or in a manner that does not grant authority to vote with respect to any nominees.\162\ --------------------------------------------------------------------------- \162\ See proposed Rule 14a-19(e)(7). The requirements we are proposing would not limit a party's ability to include its voting recommendation with respect to some or all of the nominees on the proxy card. Any such language would, however, be subject to Rule 14a-9. Where both parties have proposed a full slate of nominees and there are no proxy access nominees, we are also proposing that the proxy card may provide the ability to vote for all dissident nominees as a group and all registrant nominees as a group.\163\ Where proxy access nominees will be included on the proxy card or where a dissident or a registrant is proposing a partial slate, neither [[Page 79142]] proxy card would be permitted to provide the option to vote for any nominees as a group.\164\ When there are proxy access nominees included on the card, we believe it is not appropriate to provide the ability to vote for nominees as a group because it may make it easier to vote for all registrant nominees or for all dissident nominees than to vote for the proxy access nominee in addition to some registrant or some dissident nominees.\165\ When the dissident or the registrant is nominating anything less than a full slate of candidates, we also believe it is not appropriate to provide the ability to vote for nominees as a group because providing the ability to vote for a partial slate of nominees as a group could result in shareholders inadvertently voting for less than the number of seats up for election or in possible over voting. Finally, proposed Rule 14a-19 would require that universal proxy cards provide a means for shareholders to grant authority to vote ``for'' the nominees set forth on the card.\166\ --------------------------------------------------------------------------- \163\ See proposed Rule 14a-19(f). We anticipate, and the proposed rules would not prohibit, that registrants and dissidents will continue the practice of distinguishing their respective proxy cards by distributing them with a distinctive color. \164\ See proposed Rule 14a-19(f). \165\ See also Facilitating Shareholder Director Nominations, Release No. 33-9046 (June 10, 2009)[74 FR 29024 (June 18, 2009)] at 29049 (proposing the group voting provision in Rule 14a-4(b) and stating that providing shareholders with the option to vote for the registrant's nominees as a group where the registrant's proxy card includes shareholder nominees ``would not be appropriate . . . as grouping the company's nominees may make it easier to vote for all of the company's nominees than to vote for the shareholder nominees in addition to some of the company nominees.''); Facilitating Shareholder Director Nominations, Release No. 33-9136 (Aug. 25, 2010) [75 FR 56668 (Sept. 16, 2010)] at 56724 (indicating that doing so ``would result in an advantage to the management nominees and would be inconsistent with an impartial approach''). \166\ See proposed Rule 14a-19(e)(2). Currently, Rule 14a-4(b) does not require that a soliciting person include a means to vote ``for'' director nominees on the proxy card. --------------------------------------------------------------------------- A proxy card must present the names so that shareholders are able to distinguish the registrant's and the dissident's nominees on the face of the proxy card. For example, a proxy card could list each party's nominees in a separate column. In that circumstance, a proxy access nominee also would have to be clearly distinguished, such as by listing in a separate column. Similarly, if multiple dissidents are soliciting proxies in support of separate slates of director nominees, each slate must be clearly distinguished, such as by having its own designated column. While we are proposing to require that the nominees are clearly distinguished, we are not proposing to direct where to place the groups of nominees on the card or to prohibit the parties from listing their group of nominees first. We considered providing more flexibility in the proposed rule about font type, style and size and the order in which nominees should be listed. However, we were concerned that without specific guidance, some presentations of nominees on a universal proxy card could be confusing or misleading. We also are sensitive to concerns that have been raised about the possibility that a universal proxy card would cause shareholders to be confused as to whether a particular nominee supports the opposing party.\167\ In order to address these concerns, we are proposing certain limitations on the presentation and format of the card and requiring that certain information be prominently disclosed. --------------------------------------------------------------------------- \167\ See Short Slate Rule Adopting Release, at 48288. --------------------------------------------------------------------------- We considered proposing that the registrant distribute a single universal proxy card that would include the names of the registrant's nominees and the dissident's nominees, as well as all other proposals to be considered at the meeting. However, a single universal proxy card would grant proxy authority solely to representatives designated by the registrant. While a single universal proxy card could result in a more streamlined and potentially less confusing process, a universal proxy card solely in the control of the registrant could potentially provide the registrant with an advantage over procedural issues surrounding the vote.\168\ Additionally, the distribution of a proxy statement by a dissident without an associated proxy card could place the dissident at a disadvantage. --------------------------------------------------------------------------- \168\ Rule 14a-4(e) provides that the proxy statement or form of proxy shall provide that the shares represented by the proxy will be voted in accordance with the specifications made by the person solicited. As a result of the grant of proxy authority, the registrant-designated proxy holders would be entitled to exercise any discretionary authority conferred with respect to matters for which a choice is not specified by the shareholders pursuant to Rule 14a-4(b)(1) and with respect to the matters specified in Rule 14a- 4(c). --------------------------------------------------------------------------- Finally, we considered proposing that the registrant and dissident distribute an identical card, with the only difference being the persons given proxy authority on the card. An identical card providing proxy authority to different parties could be confusing to shareholders, who might think it did not matter which card was signed and returned. Additionally, the practical issue of having a dissident and a registrant agree on the presentation of nominees on a single card could make this alternative problematic. For example, the parties may disagree on whose nominees should be listed first. This disagreement could be addressed by simply requiring that all nominees be placed in alphabetical order, but that approach would make it more difficult for a shareholder who wished to vote for the entire slate of one party. Based on these considerations, we determined to propose the use of separate universal proxy cards subject to the additional proposed rules on the form of proxy discussed above. Request for Comment 51. We are proposing presentation and formatting requirements for all universal proxy cards used in contested elections, including requiring that the card clearly distinguish between registrant, dissident and proxy access nominees, that such nominees be listed alphabetically by last name, and that the same font type, style and size be used. Are these requirements for the proxy card appropriate or should we permit greater flexibility for parties to tailor the format of the card as they choose? Should we impose additional presentation and formatting requirements, such as requiring that nominees be grouped in columns to more clearly distinguish between groups of nominees? Is it sufficient to simply require that the proxy card clearly distinguish between nominees without specifying additional requirements? Should we permit, within the proposed categories of nominees, further sub- categorization of nominees? 52. Should we require that nominees be listed alphabetically by last name, as proposed? Why or why not? Should we instead permit or require nominees to be listed in a random order within the groups of nominees? Should we instead permit or require the parties to specify in their notice of nominees to the other party how they prefer their own nominees to be listed within their group of nominees? 53. Should we require that the proxy card prominently disclose the maximum number of nominees that can be voted upon and the effect of over-voting or under-voting, as proposed? Is this disclosure sufficient for shareholders to understand the implications? How else can we address these issues, including mitigating any risk of over-voting with universal proxies? 54. Should the universal proxy card provide the ability for a shareholder to vote for all of a soliciting person's nominees as a group only where both parties have proposed a full slate of nominees, as proposed? Should group voting be permitted where one party has proposed a partial slate? Should we additionally permit group voting where a shareholder director nominee is [[Page 79143]] included in the registrant's proxy material pursuant to proxy access provisions in the registrant's governing documents or applicable state or foreign law? Would group voting in such circumstances create an unfair advantage for the registrant or other party providing a full slate? 55. Could the use of a universal proxy card lead to shareholder confusion? If so, do the proposed formatting requirements help to reduce any shareholder confusion? Are there other requirements the proxy rules should include or other steps we should take to help reduce such confusion? 56. Are there any concerns with the ability of proxy service providers to effectively implement the choices made on universal proxies? Are there any concerns with the ability of proxy service providers to prepare and distribute universal proxy cards or the associated voting instruction forms? For example, would the proposed rules lengthen proxy cards in contested elections such that placing all nominees on one card would be impracticable? Are there ways that our proxy rules can address such concerns? For example, should the proxy rules require that director nominees be listed in columns on universal proxies? 57. Should the proposed rules be more prescriptive? For example, should we require both parties' universal proxy cards to be mirror images of each other, except for the individuals to whom proxy authority is granted? 58. Should we instead mandate the use of a single universal proxy card? If so, who should be responsible for compiling and disseminating the single proxy card? 59. Under the current proxy rules, each party in a contested election determines whether and how to include the other party's non- election proposal(s) on its proxy card and the proposed amendments would not change this practice. Should we make any changes in how matters other than the election of directors are presented on a universal proxy card? For example, should the revised rules address how shareholder proposals and other matters to be voted on at the meeting should be presented on a universal proxy card as well? If a universal proxy card is used for the election of directors, should the parties be permitted to exclude other proposals to be voted on at the meeting? 60. Would it be helpful if we included a sample universal proxy card in the adopting release? Why or why not? 7. Timing of Universal Proxy Solicitation Process The timing of the process for soliciting universal proxies generally would operate as follows: ------------------------------------------------------------------------ Due date Action required ------------------------------------------------------------------------ No later than 60 calendar days before Dissident must provide notice the anniversary of the previous year's to the registrant of its annual meeting date or, if the intent to solicit the holders registrant did not hold an annual of at least a majority of the meeting during the previous year, or voting power of shares if the date of the meeting has changed entitled to vote on the by more than 30 calendar days from the election of directors in previous year, by the later of 60 support of director nominees calendar days prior to the date of the other than the registrant's annual meeting or the tenth calendar nominees and include the names day following the day on which public of those nominees. announcement of the date of the annual meeting is first made by the registrant. [proposed Rule 14a- 19(b)(1)]. No later than 50 calendar days before Registrant must notify the the anniversary of the previous year's dissident of the names of the annual meeting date or, if the registrant's nominees. registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, no later than 50 calendar days prior to the date of the annual meeting. [proposed Rule 14a- 19(d)]. No later than 20 business days before Registrant must conduct broker the record date for the meeting. searches to determine the [current Rule 14a-13]. number of copies of proxy materials necessary to supply such material to beneficial owners. By the later of 25 calendar days before Dissident must file its the meeting date or five calendar days definitive proxy statement after the registrant files its with the Commission. definitive proxy statement. [proposed Rule 14a-19(a)(2)]. ------------------------------------------------------------------------ C. Additional Revisions 1. Director Election Voting Standards Disclosure and Voting Options We are proposing additional amendments to the form of proxy and disclosure requirements with respect to voting options and voting standards that would apply to all director elections.\169\ First, we are proposing to amend Rule 14a-4(b) to: (1) Mandate the inclusion of an ``against'' voting option in lieu of a ``withhold authority to vote'' option on the form of proxy for the election of directors where there is a legal effect to such a vote; and (2) provide shareholders that neither support nor oppose a director nominee an opportunity to ``abstain'' (rather than ``withhold authority to vote'') in a director election governed by a majority voting standard.\170\ Second, we are proposing amendments to Item 21(b) of Schedule 14A to expressly require the disclosure of the effect of a ``withhold'' vote. --------------------------------------------------------------------------- \169\ The proposed amendments to the form of proxy and disclosure requirements with respect to voting options discussed in this section would apply to funds and BDCs. \170\ See proposed Rule 14a-4(b)(4). --------------------------------------------------------------------------- The voting standard for director elections is established under state law and a registrant's governing documents. Director nominees are generally elected under either a plurality voting standard or a majority voting standard. Under the plurality voting standard, the director nominee receiving the highest number of votes for a given seat is elected. As a result, a director nominee in an uncontested election only needs a single vote in favor of his or her election to be elected. In recent years, however, many public companies have moved toward two other voting standards in director elections--``plurality plus'' and majority voting.\171\ Under a ``plurality plus'' voting standard, an incumbent director agrees in advance to resign if he or she receives more votes withheld than votes in favor of his or her re-election. The remaining directors then determine, in [[Page 79144]] their discretion, whether to accept or reject an incumbent director's resignation. Under a majority voting standard, director nominees are elected only if, depending on the specific version of the standard used by the registrant, they receive affirmative votes from: (i) A majority of the votes cast; or (ii) a majority of shares present and entitled to vote.\172\ --------------------------------------------------------------------------- \171\ See, e.g., Institutional Shareholder Services, Preliminary 2015 U.S. Postseason Review, at 4 (July 30, 2015), available at http://www.issgovernance.com/file/publications/1_preliminary-2015-proxy-season-review-united-states.pdf (noting that only seven percent of S&P 500 firms had a majority voting standard in 2004, as compared to almost 90 percent of S&P 500 firms having a majority voting standard for uncontested director elections in 2015). \172\ Companies often couple the use of a majority voting standard with a director resignation policy to address the ``holdover'' director rule found in state law. Under that rule, an incumbent director who does not receive the requisite votes may remain in office until the earlier of the successor's election or the incumbent director's resignation or removal. See e.g., Del. Code Ann. tit. 8, Sec. 141(b). --------------------------------------------------------------------------- While the federal proxy rules do not govern the voting standard used in director elections, they do set forth the requirements for the form of proxy used in the election and the disclosure of the voting procedures for the election. Notably, Rule 14a-4(b)(2) requires the form of proxy to provide a means to withhold authority to vote for each nominee. Accordingly, the voting options under a plurality voting standard are ``for'' and ``withhold,'' with no ``against'' voting option. If applicable state law gives legal effect to votes cast against a director nominee (i.e., under a majority voting standard), then the rule currently provides that the registrant should provide a means for shareholders to vote against a nominee ``in lieu of, or in addition to,'' providing a means to withhold authority to vote. Item 21(b) of Schedule 14A currently calls for disclosure of the ``method'' by which votes will be counted, including ``the treatment and effect of abstentions and broker non-votes'' \173\ under applicable state law and the registrant's governing documents.\174\ --------------------------------------------------------------------------- \173\ A ``broker non-vote'' occurs when a broker, bank, or another intermediary holding shares in ``street name'' for a client returns a proxy card, but provides no instructions as to how the shares should be voted on a particular matter due to the lack of voting instructions from the client and the inability to exercise discretionary voting authority on the matter. \174\ See 17 CFR 240.14a-101, Item 21(b). --------------------------------------------------------------------------- Recently, the Commission became aware of concerns that some company proxy statements had ambiguities and inaccuracies in their disclosures about voting standards in director elections.\175\ In light of these concerns, staff in the Division of Corporation Finance and the Division of Economic and Risk Analysis assessed the proxy statement voting standard disclosure provided by a broad set of companies. The staff found some ambiguities or inaccuracies, including: --------------------------------------------------------------------------- \175\ The Commission received two rulemaking petitions in which, among other things, the petitioners expressed concerns about the voting options in director elections and suggested that the Commission revise Rule 14a-4(b)(2) to reflect the growing use of majority voting standards in director elections. See Letter from United Brotherhood of Carpenters and Joiners of America (Mar. 10, 2015), available at https://www.sec.gov/rules/petitions/2015/petn4-630-supp.pdf (``Carpenters letter''); Letter from the Council of Institutional Investors (June 12, 2015), available at https://www.sec.gov/rules/petitions/2015/petn4-686.pdf (``CII letter''). --------------------------------------------------------------------------- The failure to include an ``against'' option on the form of proxy when a majority voting standard is used; the mistaken use of the ``against'' option on a form of proxy when there was a plurality voting standard, where the only appropriate alternative for voting was ``withhold''; and incorrect statements that ``withhold'' votes are counted in determining election outcomes. In light of these observations, we are proposing to amend Rule 14a- 4(b) to mandate the inclusion of an ``against'' voting option on the form of proxy used in elections where such votes have a legal effect.\176\ Under the proposal, if state law gives legal effect to votes cast against a nominee (which is the case under a majority voting standard), the form of proxy must include the options to vote ``against'' the nominee and to ``abstain'' from voting. As these voting options would be ``in lieu'' of a ``withhold'' voting option, the proposed amendment would eliminate the current ability to provide a ``withhold'' voting option on the form of proxy when an ``against'' vote has legal effect. Further, we are proposing to amend Item 21(b) of Schedule 14A so that it expressly requires disclosure in the proxy statement about the treatment and effect of a ``withhold'' vote in a director election. We believe that these proposed changes, if adopted, would provide shareholders with a better understanding of the effect of their ``withhold'' votes on the outcome of the election. In addition, some have recommended that the Commission amend Rule 14a-4(b)(2) to eliminate the ``withhold'' option under a plurality voting standard and replace it with an ``abstain'' option so that shareholders are aware that such votes do not legally affect the outcome of the election.\177\ While we are not proposing such a change, we are soliciting comment on this recommendation. --------------------------------------------------------------------------- \176\ See proposed Rule 14a-4(b)(4). \177\ See Carpenters letter, supra note 175. --------------------------------------------------------------------------- Finally, we are proposing to delete the phrase ``the method by which votes will be counted'' from Item 21(b) of Schedule 14A. In light of the existing language contained in the Item, combined with the proposed amendment discussed above, we believe such phrase would be superfluous as the effect and treatment of all the possible voting options presented to shareholders for each matter would be disclosed in the proxy statement. However, we are soliciting comment as to whether such language is still needed for a specific purpose or scenario not covered by the proposed changes to Item 21(b). Request for Comment 61. We are proposing to amend Rule 14a-4(b) to require the form of proxy for a director election governed by a majority voting standard to include a means for shareholders to vote ``against'' each nominee and a means for shareholders to ``abstain'' from voting in lieu of providing a means to ``withhold authority to vote.'' Should we eliminate the ``withhold'' voting option under a majority voting standard for director elections, as proposed? Should we eliminate the ``withhold'' voting option for contested elections subject to proposed Rule 14a-19 (i.e., where universal proxies are required)? Why or why not? If we do not adopt a mandatory system for universal proxies, as proposed, should we prohibit the ``withhold'' voting option for contested elections? Why or why not? 62. Some commenters have expressed concerns that shareholders may not understand that a ``withhold'' vote has no legal effect under a plurality voting standard. Should the Commission replace the ``withhold'' voting option under a plurality voting standard with ``abstain?'' Do parties view an ``abstention'' differently than a ``withhold'' vote? Is there any relevant legal effect under state law of an abstention as compared to a vote withholding proxy authority when directors are elected by plurality vote? Would there be other consequences under state law or a registrant's governing documents if we were to implement such a change (e.g., would this change affect quorum requirements)? 63. We are proposing to delete the phrase ``the method by which votes will be counted'' from Item 21 of Schedule 14A. Is the language needed for a specific purpose or scenario that is not covered by the proposed amendment to Item 21(b)? Is there any other reason to retain it? D. Investment Companies Investment companies registered under Section 8 of the Investment Company Act of 1940 (``funds'') and business development companies (``BDCs'') \178\ are typically organized as [[Page 79145]] trusts, corporations or limited partnerships under state laws, and like operating companies, have boards of directors that are elected by shareholders.\179\ Although these entities are subject to the federal proxy rules,\180\ the amendments that we are proposing today relating to the use of a universal proxy would not apply to funds and BDCs. Rather, funds and BDCs would remain subject to the federal proxy rules currently in effect.\181\ --------------------------------------------------------------------------- \178\ BDCs are a category of closed-end investment companies that are not registered under the Investment Company Act, but are subject to certain provisions of that Act. See Sections 2(a)(48) and 54-65 of the Investment Company Act. \179\ In addition to state law provisions applicable to funds, BDCs and operating companies, the Investment Company Act provides a number of requirements with respect to the election, composition, and duties of a fund's and BDC's board of directors. For example, Section 16(a) provides that at least a majority of a fund's board must have been elected by shareholders at any given time and that existing directors may fill a vacancy without calling a shareholders' meeting, provided that immediately after the vacancy is filled at least two-thirds of the directors have been elected by shareholders. See also Sections 10(a) and 56(a) of the Investment Company Act (requiring at least 40 percent of a fund's (and a majority of a BDC's) board to not be ``interested persons'' as such term is defined in Section 2(a)(19) of the Investment Company Act). \180\ Funds are required to comply with the proxy rules under the Exchange Act when soliciting proxies, including proxies relating to the election of directors. See 17 CFR 270.20a-1 (requiring funds to comply with regulations adopted pursuant to Section 14(a) of the Exchange Act that would be applicable to a proxy solicitation if it were made in respect of a security registered pursuant to Section 12 of the Exchange Act). See also Section 20(a) of the Investment Company Act. BDCs are subject to the federal proxy rules because such companies have a class of securities registered under Section 12 of Exchange Act. See Section 14(a) of the Exchange Act and Section 54(a) of the Investment Company Act. \181\ For purposes of the rules that apply to funds and BDCs, the definition of a bona fide nominee and the short slate rule in current Rule 14a-4(d)(4) would be retained in proposed Rule 14a- 4(d)(1)(ii). --------------------------------------------------------------------------- Based upon information available to us, shareholders generally have not sought split-ticket voting in contested elections involving funds and BDCs.\182\ Most investment companies are structured as open-end management investment companies, or ``open-end funds,''\183\ and contested elections at open-end funds are rare.\184\ Open-end funds are generally not required to hold annual shareholder meetings pursuant to the state laws under which they are organized.\185\ Furthermore, there is no opportunity to potentially profit from a difference in the market price of open-end fund shares and net asset value (``NAV'') because open-end fund shares (other than those issued by exchange-traded funds) are not traded (i.e., there is no market price) and may be redeemed at NAV.\186\ Shares issued by exchange-traded funds organized as open-end funds generally trade at or near NAV due to the arbitrage activities of market participants.\187\ --------------------------------------------------------------------------- \182\ We note that to date only operating company shareholders, and not fund or BDC shareholders, have called for the use of a universal proxy. See supra Section I.C. (describing recent feedback regarding the proxy voting process, particularly the Rulemaking Petition and Commission roundtable). As we discuss below in the Economic Analysis, staff is not aware of any director election contests involving open-end management investment companies since the year 2000. Of the 11 director election contests identified by staff that involved closed-end management investment companies and BDCs in calendar years 2014 and 2015, 10 involved dissidents who sought a majority of the board or ran a full slate of nominees, while the remaining contest was a short-slate contest. See infra Section IV, notes 366-367 and accompanying text. \183\ At the end of 2015, over 98 percent of investment company aggregate net assets were held by mutual funds and exchange-traded funds (``ETFs''), the two predominant forms of open-end funds. See Investment Company Institute, 2016 Investment Company Institute Fact Book, at 9, Fig. 1.1 (56th ed. 2016) (``2016 ICI Fact Book''), available at https://www.ici.org/pdf/2016_factbook.pdf. An open-end management investment company is an investment company, other than a unit investment trust or face-amount certificate company, that offers for sale or has outstanding any redeemable security of which it is the issuer. See Sections 4 and 5(a)(1) of the Investment Company Act. \184\ See supra note 182. \185\ The three most common forms of organization for investment companies are Delaware statutory trusts, Massachusetts business trusts, and Maryland corporations. See 2016 ICI Fact Book, at 246, Fig. A.1 (finding that 91 percent of mutual funds use one of these three forms of organization). The respective Delaware and Maryland state statutes, and Massachusetts common law relating to business trusts, do not require annual shareholder meetings. See, e.g., Delaware Statutory Trust Act, Del. Code Ann. title 12, Sec. Sec. 3801-3826. \186\ See Section 2(a)(32) of the Investment Company Act (defining ``redeemable security'' as ``any security, other than short-term paper, under the terms of which the holder, upon its presentation to the issuer or to a person designated by the issuer, is entitled (whether absolutely or only out of surplus) to receive approximately his proportionate share of the issuer's current net assets, or the cash equivalent thereof''). \187\ These market participants include authorized participants, market makers and institutional investors. --------------------------------------------------------------------------- Registered closed-end management investment companies (``closed-end funds'') \188\ and BDCs, on the other hand, are typically required by the rules of the securities exchanges on which their shares are listed to hold annual shareholder meetings.\189\ Contested director elections are more common for exchange-listed closed-end funds and BDCs (compared to open-end funds) because their shares often trade at prices that are less than, or at a ``discount'' to, the fund or BDC's NAV per share, thereby providing an incentive for dissidents to pursue actions that reduce or eliminate this difference.\190\ Historically, dissidents in election contests for exchange-listed closed-end funds and BDCs generally have not sought split-ticket voting.\191\ Instead, they have sought to reduce or eliminate the discount to NAV either by gaining control of the board of directors or terminating the fund's advisory contract and subsequently replacing the fund's investment adviser.\192\ --------------------------------------------------------------------------- \188\ A closed-end management investment company is a management company other than an open-end management company. See Sections 4 and 5(a)(2) of the Investment Company Act. \189\ See, e.g., NYSE Listed Company Manual Sec. 302.00, available at http://nysemanual.nyse.com/LCM/Sections/. \190\ See Matthew E. Souther, The Effects of Takeover Defenses: Evidence from Closed-End Funds, J. of Fin. Econ., at 4 (forthcoming), available at http://ssrn.com/abstract=2729874 (discussing recent closed-end fund proxy contests); Michael Bradley et al., Activist Arbitrage: A Study of Open-Ending Attempts of Closed-End Funds, 95 J. Fin. Econ. 1, 2 (2010). \191\ See supra note 182. \192\ A dissident can profit from the discount if the fund or BDC is converted to an open-end format or liquidated, or if the fund or BDC purchases the dissident's shares at a price equal to or near NAV. --------------------------------------------------------------------------- The Investment Company Act supplements state law by providing specific rights to shareholders to approve certain fundamental features of the fund, which also could impact shareholders' current use of split-ticket voting and the potential impact of the proposed amendments if required for funds and BDCs. For example, the Investment Company Act requires that shareholders approve certain operational matters relating to funds and BDCs.\193\ Shareholders of funds and BDCs also must approve advisory contracts and material amendments to such contracts,\194\ and ratify or reject the [[Page 79146]] selection of the independent public accountant.\195\ --------------------------------------------------------------------------- \193\ Fund shareholders are required to approve: (1) A change to the fund's sub-classification as an open-end or closed-end fund, or a change from a diversified company to a non-diversified company; (2) a change in policies contained in the registration statement related to borrowing money, issuing senior securities, underwriting securities issued by other persons, purchasing or selling real estate or commodities or making loans to other persons, except in accordance with the policy in its registration statement; (3) a deviation from a stated policy with respect to concentration of investments in an industry or industries, from any investment policy which is changeable only by shareholder vote, or from any stated fundamental policy pursuant to Section 8(b)(3) of the Investment Company Act; and (4) a change in the nature of the fund's business so as to cease to be an investment company. See Sections 8(b)(3) and 13(a) of the Investment Company Act. BDC shareholders are required to approve a change in the nature of the BDC's business that would cause it to cease to be, or withdraw its election as, a BDC. See Section 58 of the Investment Company Act. In addition, a BDC may issue shares priced below NAV if such sale is approved by both holders of a majority of its voting securities and holders of a majority of its voting securities who are not affiliated persons of the BDC. See Section 63(2) of the Investment Company Act. \194\ See Sections 15(a) and 59 of the Investment Company Act. A shareholder may also bring an action against the fund's investment adviser for breach of fiduciary duty with respect to receipt of compensation for services or payments of a material nature paid by such company. See Section 36(b) of the Investment Company Act. \195\ See Sections 32(a)(2) and 59 of the Investment Company Act. But see Rule 32a-4 under the Investment Company Act (providing a conditional exemption from the requirement in Section 32(a)(2)). --------------------------------------------------------------------------- We also acknowledge that investment companies that are part of larger complexes generally have board governance structures that may be disrupted by split-ticket voting. Investment companies sharing the same investment adviser and other service providers are typically part of complexes that utilize either a ``unitary'' board structure where a single board oversees every fund in the complex, or ``cluster'' boards consisting of two or more separate boards that each oversee a different set of funds in the complex.\196\ This structure enables a set of directors to, for example, oversee common operational matters across multiple funds in the complex (e.g., hiring and retention of service providers, valuation of portfolio investments, and general compliance).\197\ To the extent that split-ticket voting results in a disruption to a complex's unitary or cluster board structure (i.e., a dissident nominee is elected to a particular board but would not also serve on other boards in the complex), the efficiencies of such board structure may be reduced. --------------------------------------------------------------------------- \196\ In a survey conducted by the ICI, as of 2014, 86 percent of fund complexes employed a unitary board structure and 14 percent of fund complexes employed a cluster board structure. See Investment Company Institute, Overview of Fund Governance Practices, 1994-2014, at 5 (2015), available at https://www.idc.org/pdf/pub_15_fund_governance.pdf. We are also aware that among fund complexes that use cluster boards there are different reasons for particular clusters of funds with their own set of directors. For example, in some cases, the cluster or grouping of funds may be the deliberate result of investment or distribution considerations. In others, the clusters may be the result of previous mergers of different fund complexes. Independent Directors Council Task Force Report, Director Oversight of Multiple Funds, at 2 (May 2005), available at https://www.idc.org/pdf/ppr_idc_multiple_funds.pdf. \197\ See, e.g., Independent Directors Council Task Force Report, Director Oversight of Multiple Funds, at 3-6 (May 2005), available at https://www.idc.org/pdf/ppr_idc_multiple_funds.pdf (stating that board oversight of multiple funds provides efficiencies relating to (1) issues faced by directors under the common regulatory structure that applies to all funds, (2) the complex's common personnel and service providers, (3) complex-wide oversight mechanisms applicable across the complex, and (4) enhanced board knowledge and expertise, along with increased authority and influence). --------------------------------------------------------------------------- We recognize, however, that the boards of such entities, like the boards of operating companies, have significant responsibilities in protecting shareholder interests, such as the approval of advisory contracts and fees, and that shareholders have an interest in the governance of these entities. We also recognize that the considerations discussed above do not diminish the importance of the rights that are granted to fund and BDC shareholders under state law and the Investment Company Act, which generally distinguish them from operating companies.\198\ Nevertheless, we are not proposing to extend the universal proxy requirements to funds and BDCs at this time. We are, instead, requesting comment and data in this release to further inform us as we consider whether the use of universal proxies should be required in proxy contests for the election of directors at funds or BDCs in the future. --------------------------------------------------------------------------- \198\ In addition to voting rights provided under state law, the Investment Company Act provides specific rights to shareholders to approve certain fundamental features of the fund or BDC. See, e.g., Sections 8(b)(3), 13(a), 58, and 63(2) (approval of certain operational matters); 15(a) and 59 (approval of advisory contracts and amendments thereto); and 32(a)(2) and 59 (ratification or rejection of the selection of the independent public accountant). --------------------------------------------------------------------------- Request for Comment 64. To what extent do investment companies generally, and open-end funds, closed-end funds and BDCs in particular, experience contested elections under the current proxy rules? Please provide any data to the extent available. To what extent do shareholders of investment companies engage in split-ticket voting? To what extent is split-ticket voting by certain shareholders facilitated by proxy solicitors and parties to the contested election? Please provide any data to the extent available. 65. We are not proposing to require investment companies to use universal proxies at this time. Should the use of universal proxies be mandatory as applied to investment companies generally, or should their use be mandatory only with respect to certain types of investment companies (e.g., only to open-end funds or only to closed-end funds or only BDCs)? Why or why not? Should any aspects of the proposed universal proxy system be modified to account for the unique characteristics of investment companies? If so, what modifications should be made? Would a universal proxy system affect funds and BDCs differently than operating companies? If so, how? How would a universal proxy system affect unitary or cluster boards? 66. Alternatively, should the use of universal proxies be optional as applied to investment companies generally, or should their use be optional only with respect to certain types of investment companies (e.g., only to open-end funds or only to closed-end funds or only BDCs)? Why or why not? Instead, should a hybrid system be applied to investment companies generally, or only with respect to certain types of investment companies (e.g., only to open-end funds or only to closed-end funds or only to BDCs) where the use of universal proxies in contested elections is mandatory for one party but optional for another? Why or why not? We are interested in the views of both investment companies and shareholders as to how frequently they would choose to use a universal proxy under a mandatory, optional or hybrid approach and why. 67. Would the frequency of contested elections increase or decrease for investment companies under a universal proxy system and why? Please provide any data to the extent available. Would the frequency of contested elections vary depending on whether an investment company is an open-end fund, closed-end fund, or BDC, and why? Would the frequency vary depending on whether the use of universal proxies is under a mandatory, optional, or hybrid approach? Why or why not? 68. To what extent do investment companies generally, and open-end funds, closed-end funds and BDCs in particular, experience exempt solicitations under the current proxy rules? Please provide any data to the extent available. Should investment companies generally, and open- end funds, closed-end funds and BDCs in particular, be required to use universal proxies in non-exempt solicitations only, or in some or all exempt solicitations? Why or why not? 69. To what extent do investment companies generally, and open-end funds, closed-end funds and BDCs in particular, have bylaws that contain advance notice provisions? Please provide any data to the extent available. Should special rules regarding notice apply for investment companies that do not regularly hold annual meetings (i.e., open-end funds)? For example, should such investment companies be required to provide a specific date by which a dissident must provide the investment company with the names of the nominees for whom it intends to solicit proxies? If so, how should such date be provided to investors? For example, should an investment company be required to disclose the date via disclosure on its Web site or via a press release? Would that disclosure be sufficient, or should such date also be provided in a filing made with the Commission (e.g., in the investment company's annual or semi-annual report to shareholders, a report on Form N-CSR, etc.)? Although funds generally are [[Page 79147]] not required to file reports on Form 8-K, should they be required to file a report on Form 8-K providing the notice date? Should funds instead be permitted to provide this disclosure in a different manner? If so, what manner of disclosure would be appropriate? III. General Request for Comment We request and encourage any interested person to submit comments regarding the proposed rule amendments, specific issues discussed in this release, and other matters that may have an effect on the proposed rules. We request comment from the point of view of registrants, shareholders and other market participants. We note that comments are of particular assistance to us if accompanied by supporting data and analysis of the issues addressed in those comments, particularly quantitative information as to the costs and benefits. If alternatives to the proposals are suggested, supporting data and analysis and quantitative information as to the costs and benefits of those alternatives are of particular assistance. Commenters are urged to be as specific as possible. Request for Comment 70. We preliminarily believe that universal proxy cards are not needed for special meetings of shareholders because historically shareholders have not been presented with an opportunity to vote on competing slates of nominees at special meetings. Therefore, we are not proposing to require universal proxy cards at a special meeting of shareholders. Should they be required at a special meeting? Why or why not? 71. We are proposing to mandate the use of universal proxy cards to allow shareholders to vote by proxy in a manner that more closely resembles how they can vote in person at a shareholders' meeting based on our belief that replicating the vote that could be achieved at the meeting facilitates the ``fair corporate suffrage'' that Congress intended our proxy rules to effectuate. Are there reasons our rules should not seek to replicate the vote that could be achieved at a shareholder meeting in this manner? Would replicating the vote that could be achieved at a shareholder meeting appropriately ensure that shareholders using the proxy process are able to fully and consistently exercise their state law voting rights? Are there other means to achieve this objective? 72. If a dissident provides a notice of intent to solicit proxies in support of nominees other than the registrant's nominees but fails to fulfill other requirements, such as filing a definitive proxy statement or the minimum solicitation requirement, should there be consequences for the dissident? If so, what should those consequences be and in what circumstances should they apply? Should the dissident be deemed ineligible to use universal proxy for a period of time in the future? 73. Would our proposed rules affect retail investors differently than institutional investors? \199\ If so, how? --------------------------------------------------------------------------- \199\ See infra notes 289-290. --------------------------------------------------------------------------- 74. Does mandating a universal proxy card give rise to any conflicts or other concerns under state law? Would those concerns exist if we were instead to permit but not mandate a universal proxy card? For example, many state laws permit cumulative voting for directors. Are there any concerns relating to cumulative voting under the proposed universal proxy system? 75. Does the proposed universal proxy system give rise to any conflicts or other concerns under existing stock exchange rules? IV. Economic Analysis A. Background As discussed above, we are proposing amendments to our proxy rules to address concerns over the inability of shareholders using the proxy system to vote for the combination of candidates of their choice in a contested election. The amendments would apply to contested elections at registrants that are subject to our proxy rules other than funds and BDCs. To allow for the inclusion of all candidates on a proxy card, we are proposing to amend Rule 14a-4(d)(4) such that each party to a contest need not seek consent from the nominees of the other party to include them on its card. The proposed amendments would also require the use of a universal proxy in all contested elections with competing slates of director nominees. Under these amendments, each party in such a contest would continue to use its own proxy card to solicit \200\ votes for its director candidates. However, in contrast to current requirements, each proxy card would be required to include all candidates nominated by the registrant, by a dissident in the proxy contest, or by another party under a provision of state or foreign law or a company's governing documents. --------------------------------------------------------------------------- \200\ See 17 CFR 240.14a-1(l) for definitions of the terms ``solicit'' and ``solicitation.'' Parties to a contested election may use a variety of approaches to request that a shareholder authorize them to cast the shareholder's votes at the shareholder meeting. --------------------------------------------------------------------------- We are proposing these amendments to allow shareholders voting by proxy to choose among director nominees in an election contest in a manner that more closely reflects the choice that could be made by voting in person at a shareholder meeting. Shareholders voting in person in a contested election with competing slates of nominees are able to choose among all of the duly nominated candidates. In contrast, because of the bona fide nominee rule and state law provisions regarding the submission of multiple proxies,\201\ currently shareholders voting by proxy are typically limited to voting only for registrant nominees or voting only for the dissident's nominees (or, in the case of certain short slate elections, for the dissident's nominees and certain registrant nominees chosen by the dissident).\202\ If shareholders wish to vote for a combination of nominees across the two slates, they generally must do so in person by attending or sending a representative to the shareholder meeting and incurring the costs of doing so. In some cases, parties such as proxy solicitors may make arrangements for one or more individuals to attend a meeting on behalf of certain shareholders in order to facilitate split-ticket voting. However, many shareholders, particularly retail shareholders or those who do not hold a large stake in the registrant, might not be willing or able to bear the costs of voting in person and may not have access to other arrangements. These shareholders may, therefore, not be able to vote for their preferred selection of candidates. --------------------------------------------------------------------------- \201\ As discussed above, the bona fide nominee rule currently only allows a party to include a nominee of its opponent on its own proxy card if that nominee has consented to being named on that party's proxy card, which, in practice, generally prevents either party from including nominees of its opponent on its proxy card. Also, under state law, a later-dated proxy card generally invalidates any earlier-dated proxy card, effectively limiting a shareholder to voting on a single proxy card. \202\ Though our economic analysis focuses on contests between a registrant and a single dissident for ease of exposition, we believe that the economic effects discussed below would also apply to contests involving more than one dissident. Election contests with more than one soliciting dissident are uncommon. For example, the staff has identified only one initiated proxy contest in 2015 that involved more than one dissident with separate slates of nominees. --------------------------------------------------------------------------- Universal proxies would allow shareholders to vote for any combination of nominees when voting their shares by proxy in advance of the meeting, which we understand is generally the way in which the vast majority of shares are voted.\203\ For shareholders who would otherwise incur incremental costs to vote for a [[Page 79148]] combination of candidates that could not be voted for by proxy, such as by attending the meeting in person, universal proxies would result in direct cost savings. Universal proxies would also enable shareholders who want to split their vote but would not choose to incur additional costs to be able to vote for their preferred combination of nominees to do so without incurring additional costs. --------------------------------------------------------------------------- \203\ We do not have data that would allow us to quantify the proportion of votes submitted by proxy relative to the proportion submitted in person at a shareholder meeting. We request such data below. --------------------------------------------------------------------------- The proposed amendments would require each party soliciting for a competing slate in an election of directors to provide shareholders with a universal proxy card that includes the names of all duly- nominated candidates. Though the parties would be required to include the names of all parties' nominees on their proxy cards, they would not be required to provide background information about their opponents' nominees in their proxy statements.\204\ Under the proposal, registrants and dissidents would be required to use universal proxies in all contested elections with competing slates of nominees.\205\ Universal proxies would not be required in the case of exempt solicitations \206\ or in cases in which shareholders would not have the ability to affirmatively vote for both dissident and registrant nominees at the meeting.\207\ In the case of solicitations that do not present competing director nominees, such as those that involve the solicitation of votes against certain nominees or for proposals that do not relate to director nominees, the proposed amendments would provide proponents with the flexibility to include the names of some or all of the registrant nominees on their proxy cards and solicit votes for (or against) those individuals but would not require them to do so. --------------------------------------------------------------------------- \204\ The proposed mandatory universal proxy system differs in this and other respects from proxy access. See supra Section II.B.1.a. \205\ See supra note 20. \206\ Exempt solicitations, such as solicitations in which the person is not acting on behalf of the registrant and the aggregate number of persons solicited is not more than ten, are discussed in Section IV.B.3 infra. \207\ For example, the proposed amendments would not require universal proxies in cases where shareholders are presented with proposals to remove incumbent directors and replace them with dissident nominees (rather than the ability to affirmatively vote for dissident or registrant nominees), as is generally the case when a dissident uses a special meeting to try to obtain board seats for its candidates. The proposed amendments would also not require universal proxies in the case of ``vote no'' campaigns (the solicitation of votes against certain registrant nominees) or for proposals that do not relate to director nominees. Special meeting contests and ``vote no'' campaigns are discussed further in Section IV.B.3. infra. --------------------------------------------------------------------------- The nomination and election of directors by shareholders represents a fundamental governance mechanism that can mitigate conflicts of interest between shareholders and management. While the most direct effect of the proposed amendments would be to permit shareholders greater choice when voting by proxy in contested director elections, the proposed amendments may also have broader impacts on corporate governance and the relationship between shareholders and management. For reasons discussed below,\208\ it is difficult to predict the likely extent or direction of these broader potential effects, but we cannot rule out the possibility that they could be significant.\209\ For example, enabling split-ticket voting could lead to a greater number of boards that are composed of a mix of registrant-nominated \210\ and dissident-nominated directors, which may affect the effectiveness of boards, either positively or negatively. Additionally, mandating the use of universal proxies by registrants as well as dissidents--which, in practice, would likely result in the names of dissident nominees being disseminated via registrant proxy cards to all shareholders--may provide potential dissidents with a new means of generating publicity for alternative nominees or for the broader concerns behind a contest at a relatively low cost, which could change the nature of interactions between potential dissidents and management. These and other potential effects, as well as possible mitigating factors, are discussed in detail below. --------------------------------------------------------------------------- \208\ See Section IV.D. \209\ We are unaware of any empirical studies that find that universal proxies would have significant effects on corporate governance and the relationship between shareholders and management. One study finds that a universal proxy is unlikely to lead to more proxy contests or to greater success by special interest groups. See Scott Hirst, Universal Proxies, working paper (Aug. 24, 2016), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2805136 (``Hirst study''). However, we note that this study relies on several critical assumptions that might not be reliable. See infra note 317. \210\ For ease of exposition, we refer throughout this economic analysis to the nominees of the board or its nominating committee as the nominees of the registrant and, in total, as the registrant slate. See supra note 28. --------------------------------------------------------------------------- The proposed amendments would impose certain other related requirements in the case of contested elections with competing slates of nominees. In order to provide advance notice of the requirement to use a universal proxy, the proposed amendments would require that dissidents in all such contested elections provide the names of the nominees for whom they intend to solicit proxies to registrants no later than 60 days before the anniversary of the previous year's annual meeting date, and that registrants provide notice of their nominees to dissidents no later than 50 days before that anniversary date. To provide shareholders timely access to information about all nominees, a dissident would also be required to file its definitive proxy statement by the later of 25 days prior to the meeting or five days after the registrant files its definitive proxy statement. Additionally, under the proposed approach, dissidents in all contested elections with competing slates of nominees would be required to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors.\211\ --------------------------------------------------------------------------- \211\ Because a soliciting party is required to disseminate a definitive proxy statement to the shareholders being solicited (except in the case of an exempt solicitation), the proposed minimum solicitation requirement may affect the costs of engaging in contests for dissidents that would not otherwise have solicited the holders of shares representing a majority of the voting power in the election, as discussed in Section IV.D.2 infra. Proxy statement dissemination methods are discussed in Section IV.B.2. infra. --------------------------------------------------------------------------- Finally, the proposed amendments would impose certain presentation and formatting requirements for universal proxy cards to help ensure that the names of all parties' nominees and the total number of nominees for whom a shareholder can vote are clearly and fairly presented on the universal proxy card. Further, to address concerns about inaccuracies and ambiguous language in proxy statements and on proxy cards with respect to director elections in general, specifically with regard to how certain kinds of votes will be counted and the standards by which outcomes will be determined, we are proposing amendments that would specify how such information must be presented in proxy statements and on proxy cards.\212\ --------------------------------------------------------------------------- \212\ Two rulemaking petitions received by the Commission raised concerns about the quality of voting standard disclosure. See CII letter and Carpenters letter, supra note175. --------------------------------------------------------------------------- Exchange Act Section 3(f) requires us, when engaging in rulemaking that requires us to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of shareholders, whether the action will promote efficiency, competition and capital formation. Exchange Act Section 23(a)(2) requires us, when adopting rules under the Exchange Act, to consider the impact that any new rule would have on competition, and prohibits any rule that would impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. [[Page 79149]] The discussion below addresses the economic effects of the proposed amendments, including their anticipated costs and benefits, as well as the likely effects of the proposed amendments on efficiency, competition, and capital formation. We also analyze the potential costs and benefits of the principal alternatives to what is proposed. We request comment on all aspects of the costs and benefits of the proposed approach and of possible alternatives. We also request comment on any effects the proposed amendments or possible alternatives may have on efficiency, competition and capital formation. B. Baseline To assess the economic impact of the proposed amendments, we are using as our baseline the current state of the proxy process. Our baseline includes existing Commission rules, state laws, and corporate governing documents that jointly govern the ability to solicit proxies in support of director nominees other than the registrant nominees and the manner in which contested elections are conducted. This section discusses the parties involved in director election contests under the current legal framework, current proxy voting practices, and the means available to shareholders to influence the composition of boards of directors. 1. Affected Parties We consider the impact of the proposed amendments on shareholders, registrants, dissidents in contested elections (who are typically also shareholders), and directors. a. Shareholders Different types of shareholders exhibit different degrees of involvement in the proxy process. In particular, there are, on average, large differences in involvement by institutional investors compared to retail investors.\213\ Institutional and retail investors also face different levels of difficulty and resource constraints to vote for their preferred choices of nominees in contested director elections under current rules.\214\ As a result, the proposed amendments are likely to have a differential impact with respect to the costs of voting and feasible voting choices for these two types of shareholders. --------------------------------------------------------------------------- \213\ See Broadridge et al., Proxy Pulse 2015 Proxy Season Wrap- up (3d ed. 2015) (``Broadridge Proxy Pulse''), available at http://media.broadridge.com/documents/ProxyPulse-Third-Edition-2015.pdf. \214\ See infra Section IV.B.2.d for a discussion on different shareholders' current ability to arrange split-ticket voting. --------------------------------------------------------------------------- We estimate that the average (median) number of beneficial shareholder accounts for U.S. public companies is 30,011 (4,404).\215\ The number of accounts varies significantly by company market capitalization: The average (median) number of beneficial shareholder accounts is 3,208 (1,369) for companies with less than $300 million in market capitalization, 9,764 (5,678) for companies with between $300 million and $2 billion in market capitalization, 28,206 (15,530) for companies with between $2 billion and $10 billion in market capitalization, and 188,176 (63,607) for companies with market capitalization above $10 billion.\216\ Among all companies, we estimate that 91 percent of account holders are retail investors.\217\ For U.S. public companies that held their annual meetings in the main 2015 proxy season (i.e., between January 2015 and June 2015), a study by a proxy services provider found that retail investors held approximately 32 percent of shares held in brokerage accounts and institutional investors held 68 percent.\218\ The study also finds that the percentage of ownership by retail investors varies significantly with company size, and was estimated to be 72 percent in companies with less than $300 million in market capitalization, 35 percent in companies with between $300 million and $2 billion in market capitalization, 24 percent in companies with between $2 billion and $10 billion in market capitalization, and 28 percent in companies with market capitalization above $10 billion. --------------------------------------------------------------------------- \215\ Based on industry data provided by a proxy services provider. Note that an individual shareholder may have more than one account, so the number of beneficial shareholders likely is lower than the number of beneficial shareholder accounts. For the purpose of estimating costs related to distribution of proxy materials, the number of accounts is the more relevant number because dissemination costs such as intermediary and processing fees apply on a per account basis per NYSE Rule 451. The data is based on domestic companies that held shareholder meetings between July 1, 2014 and June 30, 2015, excluding meetings that involved proxy contests. \216\ Id. \217\ Id. \218\ See Broadridge Proxy Pulse, at 2. --------------------------------------------------------------------------- Retail and institutional shareholders exhibit very different voting behavior. In the main 2015 proxy season, while institutional investors voted 91 percent of their shares, retail investors only voted 28 percent of their shares.\219\ The voting propensity of retail investors does not vary significantly by the size of the registrant.\220\ In contrast, institutional investors vote a significantly smaller portion of their shares in registrants with less than $300 million in market capitalization (72 percent) than in larger registrants (91 to 93 percent),\221\ which may be a function of the types of institutions that invest in companies of different sizes. --------------------------------------------------------------------------- \219\ Id at 4. We acknowledge that the voting participation of retail shareholders in particular could increase in the case of a contested election, because of greater media coverage and expanded outreach efforts, but we do not currently have data that would allow us to separately estimate the degree of retail participation in contested elections. \220\ Id. \221\ Id. --------------------------------------------------------------------------- Retail and institutional investors may also have differential access to resources that can be expended in order to cast a vote, and may have different levels of incentive to expend such resources. In general, we expect retail investors to face greater resource constraints than institutional investors. Differences across shareholders in the ability to take advantage of different approaches to voting and in the resources expended on voting are discussed in more detail in Sections IV.B.2.d and IV.D.1 below. b. Registrants The proposed amendments would apply to all registrants that have a class of equity securities registered under Section 12 of the Exchange Act and are thereby subject to the federal proxy rules, but would not apply to funds and BDCs. The proposed amendments would not apply to foreign private issuers or companies with reporting obligations only under Section 15(d) of the Exchange Act, which are not subject to the federal proxy rules. We estimate that approximately 6,265 registrants would be subject to the proposed amendments (including approximately 4,198 Section 12(b) registrants and 2,067 Section 12(g) registrants).\222\ --------------------------------------------------------------------------- \222\ These estimates are based on staff review of EDGAR filings in calendar year 2015. --------------------------------------------------------------------------- There is substantial variation across registrants in characteristics such as director ownership, bylaws pertaining to director elections, and use of a dual-class share structure, that may affect the degree to which different registrants are affected by the proposed amendments. Incumbent Management Ownership We would expect that incumbent managers (senior executives and directors) would support the slate of directors nominated by the registrant rather than a slate nominated by outside dissidents, and vote accordingly either at the annual meeting or by proxy using [[Page 79150]] the registrant's card.\223\ The proposed amendments to the proxy rules are unlikely to change incumbent managers voting behavior in this regard. We therefore think the percentage of total voting power held by a registrant's incumbent management is likely to have an important effect on the potential impact of these amendments. --------------------------------------------------------------------------- \223\ Note that in the case of a dissident who is also an insider (such as an incumbent director), this may not be the case. --------------------------------------------------------------------------- Table 1 below reports estimates of the average combined vote ownership by incumbent managers for a broad sample of 3,911 potentially affected registrants, as well as for several size-related sub-samples of registrants: Those included in the S&P 500 index (``large-cap stocks''), in the S&P 400 index (``mid-cap stocks''), in the S&P 600 index (``small-cap stocks''), and outside the S&P 1500 index that is composed of these three indices (and which tend to be smaller than those registrants in the S&P 1500). The average (median) percentage is 15.1 percent (6.9 percent) for all registrants, and this percentage is greatest for registrants outside the S&P 1500 index. We also estimate the percentage of registrants for which incumbent managers hold a majority of the voting power. Overall, incumbent managers hold a majority of votes in 7.7 percent of registrants. This percentage ranges from 1.4 percent for S&P 500 registrants to 10.9 percent for non-S&P 1500 registrants. The data in Table 1 indicates that to the extent incumbent managers tend to vote for the registrant's slate of director nominees in contested elections, the impact of such votes is likely to be significant especially in the non-S&P 1500 category of smaller registrants. Table 1--Incumbent Management Vote Ownership of Registrants Subject to Proxy Rules \224\ ---------------------------------------------------------------------------------------------------------------- Incumbent management vote ownership (% of total voting power) ------------------------------------------------------------------------------- Percentage Mean 25th Median 75th with majority percentile percentile ownership ---------------------------------------------------------------------------------------------------------------- All registrants................. 15.1 2.4 6.9 20.3 7.7 S&P 500 registrants............. 4.4 0.5 1.1 2.9 1.4 S&P 400 registrants............. 6.9 1.4 2.5 5.4 3.2 S&P 600 registrants............. 9.7 2.6 4.9 10.4 2.7 Non-S&P 1500 registrants........ 19.7 4.5 11.6 27.9 10.9 ---------------------------------------------------------------------------------------------------------------- Governance Structure Registrants' governance characteristics may affect the incidence and outcomes of proxy contests currently as well as the effects, if any, of potential changes in the proxy rules on the incidence and outcomes of proxy contests. For example, some registrants have adopted a staggered board structure, in which only some directors are up for re-election in any given year. Because in the typical staggered board each director is only up for election once every three years, a staggered board prevents a majority of directors from being replaced via a shareholder vote in a single year. In addition, a staggered board makes it harder to replace a particular director in the years he or she is not up for election. Therefore, the presence of a staggered board would mitigate the impact on board composition of any proposed amendments to the proxy rules by prolonging the time over which any changes in board composition would occur. We estimate that approximately 43 percent of registrants have a staggered board.\225\ Similar to incumbent management ownership, this percentage varies substantially across market capitalization categories: Approximately 18 percent for S&P 500 registrants, 44 percent for S&P 400 registrants, 48 percent for S&P 600 registrants, and 47 percent for non-S&P 1500 registrants.\226\ --------------------------------------------------------------------------- \224\ Estimates based on staff analysis of director and senior executive vote ownership data from Institutional Shareholder Services Inc. (``ISS'') as of calendar year 2014. This data is available for 3,911 of the potentially affected registrants and may include ownership through options exercisable within 60 days. The sample represents approximately two-thirds of potentially affected registrants. It is our understanding that the registrants for which data is missing in the ISS database tend to be the smallest registrants in terms of market capitalization, and therefore the data presented may not be representative for these registrants. In particular, we believe it is likely that incumbent management ownership for this group of registrants is on average even greater than for the non-S&P 1500 registrants listed in Table 1. \225\ Estimates based on staff analysis of board characteristics data from ISS as of calendar year 2014. This data is available for 3,918 of the potentially affected registrants. \226\ Id. --------------------------------------------------------------------------- Cumulative voting may increase the ability of minority shareholders to elect a director and may therefore also be important to consider when evaluating the potential effects of the proposed amendments on proxy contests. Shareholders with cumulative voting rights are permitted to cast all of their votes for a single nominee for the board of directors when the company has multiple openings on its board.\227\ For this reason, in a contested election, cumulative voting would generally make it easier for at least one of the dissident's nominees to gather enough votes to be elected.\228\ We estimate that 4.9 percent of registrants have cumulative voting. This percentage also varies across market capitalization categories: Approximately 2.9 percent for S&P 500 registrants, 7.1 percent for S&P 400 registrants, 5.8 percent for S&P 600 registrants, and 4.7 percent for non-S&P 1500 registrants.\229\ --------------------------------------------------------------------------- \227\ For example, if the election is for four directors and a shareholder holds 500 shares (with one vote per share), under the straight voting method she could vote a maximum of 500 shares for each candidate. With cumulative voting, she could choose to allocate all 2,000 votes for one candidate, 1,000 each to two candidates, or otherwise divide the votes however she desired. \228\ See, e.g., David Ikenberry & Josef Lakonishok, Corporate Governance through the Proxy Contest: Evidence and Implications, 66 J. Bus. 405, 413 (1993), (finding that dissidents are successful in obtaining at least one seat in 41.3 percent of contests held under straight voting and that this increases to 71.9 percent in contests using cumulative voting). \229\ Estimates based on staff analysis of board characteristics data from ISS as of calendar year 2014. This data is available for 3,965 of the potentially affected registrants. We do not have ready access to this data for other registrants. --------------------------------------------------------------------------- Registrants' governing documents generally provide that one of two main standards be applied to the election of directors: Either a majority voting standard or a plurality voting standard. Under a majority voting standard, directors are elected only if they receive affirmative votes from a majority of the shares voting or present at the meeting, and shareholders can vote ``for'' each nominee, ``against'' each nominee, or ``abstain'' from voting their shares. In contrast, under a plurality voting standard, the nominees receiving the [[Page 79151]] greatest number of ``for'' votes are elected, and shareholders can withhold votes from specific nominees but cannot vote ``against'' any of them. We understand that even in those cases in which a majority standard is in place in director elections, registrants tend to have a carve-out in the bylaws (or charter) that applies a plurality standard in contested director elections. In the case of a majority voting standard in a contested election, there is a risk that some or all of the nominees receiving the highest relative shareholder support may still not win a majority of votes cast. This risk is especially high when nominees only appear on either the registrant's or the dissident's card, which is generally the case under the current proxy rules. Based on data that we have available for potentially affected S&P 1500 registrants, we estimate that approximately 55 percent have a majority standard in director elections, but also that in approximately 87 percent of cases in which a majority voting standard is in place, a plurality standard applies in the case of a contested election.\230\ --------------------------------------------------------------------------- \230\ Estimates based on staff analysis of governance data for S&P 1500 companies from ISS as of calendar year 2014. --------------------------------------------------------------------------- Another governance characteristic that can affect the impact of changes to the proxy system is the presence of multiple share classes. Some registrants have adopted a dual-class share structure, where one class of shares has greater voting rights than the other. In these regimes, insiders tend to hold shares with greater voting rights, effectively entrenching the control of the company in the hands of these insiders and reducing other shareholders' influence in matters formally put to a vote, including director elections.\231\ Thus, the proposed amendments to the proxy rules would be less likely to have an effect on voting outcomes in registrants with a dual-class share structure. We have access to data on the use of a dual-class structure for potentially affected S&P 1500 registrants and estimate that approximately 6 percent of these registrants have a dual-class share structure.\232\ --------------------------------------------------------------------------- \231\ See, e.g., Paul A. Gompers, Joy L. Ishii & Andrew Metrick, Extreme Governance: An Analysis of Dual-Class Firms in the United States, 23 Rev. Fin. Stud. 1051, 1056 (2009) (finding that for a sample of public U.S. dual-class companies between 1995-2002, 85 percent tend to have at least one untraded class of common stock, and that insiders on average own approximately 60 percent of the voting rights in dual-class companies, primarily through ownership of the class with superior voting rights). \232\ Estimates based on staff analysis of governance data for S&P 1500 companies from ISS as of calendar year 2014. We do not have ready access to this data for other registrants. --------------------------------------------------------------------------- c. Dissidents in Contested Elections The dissidents in contested elections are typically shareholders of the registrant, but may fit into one of several categories. A common category of dissidents is activist hedge funds that take a proactive approach to the companies in their investment portfolios by trying to influence the management and decision-making through various means, such as proxy contests. Dissidents may also be former insiders or employees of the registrant. A corporation may also contest the election of directors at a registrant when, for example, it is seeking to acquire the registrant but the registrant's current board does not approve of the transaction. In some cases, a group of dissatisfied shareholders other than activist hedge funds jointly contests an election. Section IV.B.2.a below provides further information about the relative frequency of different types of dissidents. d. Directors We note that reputational concerns may be an important consideration for directors and potential directors.\233\ Research has found that proxy contests may affect the reputation of incumbent directors, in that such contests appear to have a significant adverse effect on the number of other directorships they hold.\234\ Therefore, any changes to the proxy rules that would increase the likelihood of proxy contests at any given registrant could reduce the willingness of current and potential directors to be nominated to serve on the board in the future. --------------------------------------------------------------------------- \233\ See, e.g., Ronald Masulis & Shawn Mobbs, Independent Director Incentives: Where Do Talented Directors Spend Their Limited Time and Energy?, 111 J. Fin. Econ 406, 426 (Feb. 2014) (concluding that director reputation is a powerful incentive for independent directors). \234\ See Vyacheslav Fos & Margarita Tsoutsoura, Shareholder Democracy in Play: Career Consequences of Proxy Contests, 114 J. Fin. Econ. 316, 326 (2014) (finding that, following a proxy contest, all directors in the targeted company experience on average a significant decline in the number of their directorships, not only in the targeted company, but also in other, non-targeted companies). --------------------------------------------------------------------------- 2. Contested Director Elections A shareholder voting by proxy is generally limited to voting for either the registrant slate or the dissident slate (and, when used to round out a slate, certain registrant nominees chosen by the dissident).\235\ In contrast, a shareholder that attends an annual meeting may vote for any combination of registrant and dissident nominees. --------------------------------------------------------------------------- \235\ While it may be possible for a registrant to require a dissident's nominees to consent to be named on the registrant's card pursuant to the director questionnaires required under a registrant's advance notice bylaw provisions, the staff has seen this tactic used only in two contests in recent years, one of which did not ultimately proceed to a vote. This option is not available to the dissident. In addition, we are not aware of any recent cases where one party's nominees were included on the opposing party's proxy card based on their voluntary consent. --------------------------------------------------------------------------- a. Data Regarding Proxy Contests We identify 102 proxy contests \236\ that were initiated through the filing of preliminary proxy statements by dissidents in calendar years 2014 and 2015 (51 in 2014 and 51 in 2015) across all registrants subject to the proxy rules other than funds and BDCs.\237\ On a yearly basis, this number of contests is similar to the average yearly number of proxy contests since the middle of the 1990s that has been reported in past studies.\238\ Of the proxy contests identified in 2014 and 2015, we estimate that 72 (37 in 2014 and 35 in 2015) involved an election contest with competing slates of director nominees at an annual meeting of shareholders.\239\ In one case, there were two dissidents with separate slates of nominees. Approximately 26 percent (19 cases out of 72) of the contests with competing slates were contests for majority control of the board. This percentage is somewhat larger than the percentage documented by a study of contested [[Page 79152]] elections from 1994 to 2012, which found that approximately 22 percent of contested elections were for majority control.\240\ Most of the contests with competing slates were in smaller to midsize companies: Only four were S&P 500 companies and 46 were outside the S&P 1500. --------------------------------------------------------------------------- \236\ This total number of proxy contests includes all cases in which a proponent or dissident initiated a ``solicitation in opposition'' to the registrant, whether in relation to an election of directors or with respect to another issue. A solicitation in opposition includes (i) any solicitation opposing a proposal supported by the registrant; and (ii) any solicitation supporting a proposal that the registrant does not expressly support, other than a shareholder proposal included in the registrant's proxy material pursuant to Rule 14a-8. See 17 CFR 240.14a-6(a), Note 3. This total number of proxy contests does not include exempt solicitations which are discussed in Section IV.B.3. infra. \237\ Based on staff review of EDGAR filings in calendar years 2014 and 2015. \238\ See, e.g., Vyacheslav Fos, The Disciplinary Effects of Proxy Contests, Manag. Sci., at 1 (July 2015), (forthcoming), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1705707 (``Fos Study'') (estimating that the average number of proxy contests was 56 per year from 1994 through 2012). This rate of proxy contests is higher than in earlier years. See, e.g., Harold Mulherin & Annette Poulsen, Proxy Contests and Corporate Change: Implications for Shareholder Wealth, 47 J. Fin. Econ. 279, 287 (1998) (``Mulherin & Poulsen Study'') (estimating an average of 17 proxy contests per year from 1979 through 1994). \239\ The 30 proxy contests identified in 2014 and 2015 that did not represent election contests with competing slates of candidates at an annual meeting of shareholders include consent solicitations for the removal and election of directors at a special meeting, contests involving ``vote no'' campaigns, and proposals on issues other than director nominees. Special meeting elections and ``vote no'' campaigns are discussed in Section IV.B.3 infra. \240\ See Fos Study, at 11. --------------------------------------------------------------------------- A study of U.S. proxy contests from 1994-2012 found that targets of proxy contests have smaller market capitalization relative to other publicly traded companies, have lower ratios of market value to book value, and have had poor stock performance. Importantly for understanding the implications of the proposed amendments, companies subject to proxy contests were also found to have higher percentages of institutional and activist hedge fund ownership in comparison to non- targets.\241\ The same study also found that dissidents in proxy contests are most often activist hedge funds, followed by groups of shareholders, other corporations, and former insiders or employees.\242\ In particular, the study notes that the proportion of contests sponsored by activist hedge funds has increased from 38 percent in the 1994-2002 period to 70 percent in the 2003-2012 period.\243\ Our staff's review of the filings for the 72 proxy contests involving elections initiated in 2014 and 2015 found that activist investors (mainly hedge funds) were dissidents in more than 86 percent of the contests, whereas former or current insiders and employees or groups of shareholders made up the remainder of the dissidents. --------------------------------------------------------------------------- \241\ Id. at 19. We note that the sample in this study includes proxy contests concerning all issues and not just those involving contested director elections. However, director election contests constitute 88 percent of the sample. Id. at 37. \242\ Id. at 38 (finding that, for proxy contests including contested elections as well as a much smaller number of issue contests from 1994 to 2012, 57 percent of dissidents were activist hedge funds, 20 percent were groups of shareholders, 11 percent were corporations, and 11 percent were prior insiders and employees). \243\ Id. at 13. The study also notes that all the other categories of sponsors declined over the same time. In particular, corporations sponsored 20 percent of contests in the 1994-2002 period but only 5 percent in the 2003-2012 period. --------------------------------------------------------------------------- b. Notice, Solicitation, and Costs of Proxy Contests The Commission's proxy rules do not currently require dissidents to provide notice to registrants of their intention to solicit votes for their nominees. However, many registrants have advance notice bylaws that apply in proxy contests.\244\ For example, one common form of advance notice bylaw provision requires dissidents to provide notice of their intent to nominate candidates during the 30-day period ending no later than 90 days before the anniversary of the previous year's meeting date.\245\ Further, we understand that the latest date on which notice may be provided under advance notice bylaws generally ranges from 60 to 120 days before the anniversary of the meeting date.\246\ --------------------------------------------------------------------------- \244\ An advance notice bylaw can generally be waived by a registrant's board of directors at their discretion, though we do not have data that would allow us to determine the frequency with which such bylaws are waived. If not waived, such bylaws may also be challenged in court (such as in the case of ``inequitable circumstances''). See, e.g., AB Value Partners, L.P. v. Kreisler Mfg. Corp., No 10434-VCP, 2014 WL 7150465 (Del Ch. Dec. 16, 2015). \245\ See supra note 114. \246\ See, e.g., Kevin Douglas, Stephen Hinton & Eric Knox, Advance Notice Bylaws: The Current State of Second Generation Provisions, Deal Lawyers (July-Aug. 2011), at 15, 19 (finding that, in a review of 100 Delaware corporations that had amended their advance notice bylaws since 2008, including large-cap, mid-cap and small-cap companies, 80 percent of the surveyed bylaws had a window period of 30 days and, among those that had a window period of 30 days tied to the date of the previous year's meeting, 84 percent of those provide for a notice period of 90-120 days prior to the meeting, 9 percent provide for a notice period 60-90 days prior to the meeting and 7 percent provide for a notice period of 120-150 days prior to the meeting). --------------------------------------------------------------------------- Advance notice bylaws are common among registrants. For example, at the end of 2014, 95 percent of S&P 500 registrants had advance notice provisions, and 90 percent of the Russell 3000 had such provisions.\247\ Our staff's review of filings related to director election contests initiated in 2014 and 2015 found that approximately 88 percent of dissidents either announced or preliminarily communicated their intent to nominate directors at least 60 days before the annual meeting date. Further statistics on the distribution of the timing for initial announcements and filing of preliminary proxy statements are shown in Table 2 below. --------------------------------------------------------------------------- \247\ See supra note 116. \248\ Based on staff analysis of the contested elections sample. See supra note 115. Table 2--Timing of Initiation of Election Contests and Filing of Preliminary Proxy Statements Relative to Meeting Dates, in 2014-2015 \248\ -------------------------------------------------------------------------------------------------------------------------------------------------------- Percentage ------------------------------------------------ At least 45 At least 60 At least 90 Mean Median Min Max days days days -------------------------------------------------------------------------------------------------------------------------------------------------------- Days between first announcement or 94.3 88.6 62.9 107 93 29 213 communication of election contest intent and annual meeting date......... Days between dissident filing 71.4 44.3 10.0 60 56 23 203 preliminary proxy statement and annual meeting date........................... -------------------------------------------------------------------------------------------------------------------------------------------------------- While dissidents in proxy contests are required to make their proxy statements publicly available via the EDGAR system, they are not currently subject to any requirements as to how many shareholders they must solicit. When dissidents actively solicit shareholders they have the choice of sending shareholders a full package of proxy materials (``full set'') or sending only a one-page notice informing them of the online availability of proxy materials (``notice and access'' or ``notice-only''). We estimate that approximately 60 percent of dissidents solicited all shareholders in a sample of recent proxy contests.\249\ Among those recent contests in which dissidents did not solicit all shareholders, the median percentage of shares held by solicited shareholders was approximately 95 [[Page 79153]] percent of the outstanding voting shares of the registrant.\250\ We estimate that in approximately 97 percent of these proxy contests the dissident solicited shareholders representing more than 50 percent of the outstanding voting shares.\251\ Furthermore, dissidents in the contests discussed above sent full sets of proxy materials to each of the shareholders solicited.\252\ The use of the full set delivery method may be driven by findings that such solicitations are associated with a higher rate of voting than notice-only access solicitations.\253\ --------------------------------------------------------------------------- \249\ Based on industry data provided by a proxy services provider for a sample of 35 proxy contests from June 30, 2015, through April 15, 2016. \250\ Id. \251\ Id. \252\ Id. \253\ See, e.g., Broadridge, Analysis of Traditional and Notice & Access Issuers: Issuer Adoption, Distribution and Voting for Fiscal Year Ending June 30, 2013 (Oct. 2013), available at http://media.broadridge.com/documents/Broadridge-6-Yr-NA-Stats-Report-2013.pdf. --------------------------------------------------------------------------- In proxy contests, both registrants and dissidents incur costs of solicitation.\254\ These costs may include, for example, fees paid to proxy solicitors, expenditures for attorneys and public relations advisors, and printing and mailing costs. We understand that for registrants the costs of solicitation generally exceed the costs associated with a shareholder meeting in the absence of a contested election. Both dissidents and registrants are required to provide estimates of the costs of solicitation in their proxy statements. As shown in Table 3 below, based on a review of proxy contests initiated in 2014 and 2015, the median reported estimated total costs were approximately $800,000 for registrants and approximately $250,000 for dissidents. --------------------------------------------------------------------------- \254\ In some cases, dissidents may seek reimbursement of their expenses from registrants. Such potential reimbursement is governed by state law and is more likely in the case of a successful proxy contest. The proxy rules require dissidents to disclose whether reimbursement will be sought from the registrant, and, if so, whether the question of such reimbursement will be submitted to a vote of shareholders. See 17 CFR 240.14a-101, Item 4(b)(5). \255\ Based on staff analysis of EDGAR filings in calendar years 2014 and 2015. Table 3--Reported Estimates of Solicitation Expenses in Election Contests in 2014 and 2015 \255\ ---------------------------------------------------------------------------------------------------------------- Mean Median Minimum Maximum ---------------------------------------------------------------------------------------------------------------- Estimated Total Costs: Registrant (beyond usual costs)............. $2,092,096 $800,000 $25,000 $15,400,000 Dissident................................... 741,733 250,000 25,000 8,000,000 Estimated Fees Paid to Proxy Solicitor: Registrant (beyond usual costs)............. 296,016 100,000 6,500 2,000,000 Dissident................................... 188,687 100,000 10,000 1,485,895 ---------------------------------------------------------------------------------------------------------------- A study of the solicitation costs in proxy contests from 2006 to 2012 found that the total estimated solicitation costs reported by registrants ranged from approximately $20,000 to approximately $20 million, and that the estimated costs reported by registrants tended to increase with their market capitalization. In contests where costs were disclosed by both parties, the study found that the median estimates of total solicitation costs was $477,500 for registrants and $275,000 for dissidents.\256\ The largest recorded estimate of total solicitation costs for a dissident in this period was approximately $9 million.\257\ --------------------------------------------------------------------------- \256\ See Adam Kommel, Proxy Fight Fees and Costs Now Collected by SharkRepellent: MacKenzie Partners and Carl Icahn Involved in Largest Fights, SharkRepellent.net (Feb. 20, 2013), available at https://www.sharkrepellent.net/request?an=dt.getPage&st=undefined&pg=/pub/rs_20130220.html. \257\ Id. --------------------------------------------------------------------------- Beyond these estimated solicitation expenses, proxy contests may be associated with other indirect costs, such as the cost of management or dissident time spent in the process of conducting the contest and expenses associated with any discussions held between management and the dissident(s). We do not have data on these indirect costs. One study that considers the cost of earlier as well as later stages of engagement between management and activist hedge fund dissidents, which eventually culminate in a proxy contest, estimates that a campaign ending in a proxy contest has a total (direct and indirect) average cost to the dissident of approximately $10 million over the full period of engagement.\258\ --------------------------------------------------------------------------- \258\ See Nickolay Gantchev, The Costs of Shareholder Activism: Evidence from a Sequential Decision Model, 107 J. Fin. Econ. 610, 624 (2013). --------------------------------------------------------------------------- In addition to the typical proxy contests \259\ discussed above, on rare occasions, there have also been nominal contests, in which the dissidents incur little more than the basic required costs to pursue a contest. In particular, a dissident engaging in a nominal proxy contest would have to bear the cost of drafting proxy statements and undergoing the staff review and comment process for that filing. However, a dissident in a nominal contest would not be likely to expend resources on substantial solicitation, such as to disseminate its proxy materials through full set delivery to a substantial percentage of shareholders versus only to select shareholders, to hire the services of a proxy solicitor, or to engage in other broad outreach efforts, as would be the case in a typical proxy contest. Based on staff experience in administering the proxy rules, nominal contests are very rare, and the staff is unaware of any nominal contest that has resulted in the dissident gaining seats for its nominees. We do not have data that is well-suited for empirically identifying nominal contests, in part because dissidents do not always report estimates of their solicitation expenses in their proxy materials. --------------------------------------------------------------------------- \259\ For ease of reference, we use ``typical proxy contests'' to refer to contested elections of directors other than the nominal contests described below. --------------------------------------------------------------------------- c. Results of Proxy Contests A proxy contest may result in several possible outcomes. Our staff's review of 72 proxy contests initiated in 2014 and 2015 found that approximately 33 percent (24 contests) did not make it to a vote. In these cases, registrants may have settled by agreeing to nominate or appoint some number of the dissident's candidates to the board of directors or by making other concessions, the dissident may have chosen to withdraw in the absence of any concessions, or other events may have precluded a vote.\260\ Among the 48 proxy contests initiated in 2014 and 2015 that proceeded to a vote, dissidents were at least partially successful (i.e., achieved some board representation) in about 52 [[Page 79154]] percent (25) of these contests.\261\ In 21 of these contests, the end results was a ``mixed-board'' with directors elected from both slates. In four contests, the dissident's nominees were elected to fill all positions of the board. Between settlements and voted contests, dissidents achieved at least some board representation in half of the director election contests (36 out of 72). --------------------------------------------------------------------------- \260\ The percentage of director election contests initiated in 2014 and 2015 not proceeding to a vote is lower than what has been reported in previous research for earlier years. See, e.g., Fos Study, at 39 (finding that, for proxy contests including contested elections as well as a much smaller number of issue contests from 1994 to 2012, about 53 percent did not make it to a vote, where 25 percent were settled, 15 percent were withdrawn, 6 percent ended with a delisting or a takeover, and 7 percent did not make it to a vote for other reasons). \261\ The estimated percentage of voted director election proxy contests that lead to dissident board representation is consistent with previous research. See, e.g., Fos Study, at 13 (finding that for voted proxy contests including contested elections as well as a much smaller number of issue contests from 1994 to 2012, dissidents achieved at least one of their formal goals (i.e., obtaining board seats or passing proposals) in about half of the cases). --------------------------------------------------------------------------- Contests differ in the closeness of voting outcomes. Staff has analyzed the difference in votes between the elected director with the lowest number of votes and the nominee who came closest to being elected. Out of the 48 contests initiated in 2014 and 2015 that proceeded to a vote, registrants disclosed full voting results in Form 8-K filings in 38 contests. In these contests, the median director elected with the fewest votes received 57 percent more votes compared to the nominee with the next highest number of votes. The median difference in votes received between the director elected with the fewest votes and the nominee with the next highest number of votes as a percentage of total outstanding voting shares was approximately 16 percent, and more than 26 percent of the contests (10 out of 38) had a difference in votes received as a percentage of outstanding shares of five percent or less. In these same contests, the elected director who received the fewest votes received no more than 11.5 percent more votes than the non-elected nominee who received the greatest votes. We consider these to be close contests, in which a relatively small number of shareholders could have been determinative of the outcome. We are unaware of any nominal contest that has resulted in the dissident gaining seats for their nominees. Dissidents may nevertheless choose to initiate nominal contests to pursue goals other than changes in board composition, such as to publicize a particular issue or to encourage management to engage with the dissident. However, we do not have data that would allow us to measure success along those other dimensions. d. Split-Ticket Voting Shareholders have the option of voting a split ticket but can only do so by attending the shareholder meeting in person and voting their shares at that meeting. In practice, however, in-person meeting attendance may be limited due to cost and other logistical constraints, which is especially likely to be the case for small shareholders and retail investors.\262\ We understand that in certain elections, the parties to the contest and their agents (e.g., proxy solicitors) will help some shareholders ``split their ticket'' by arranging for an in- person representative to vote these shareholders' shares at the meeting on the ballots used for in-person voting. We do not have data on the number or characteristics of shareholders that are arranging to vote a split ticket through current practices, but our understanding is that these practices are more available to large shareholders than small ones. We solicit comment on the prevalence, availability, costs and benefits of these practices below. --------------------------------------------------------------------------- \262\ See, e.g., Rulemaking Petition (describing in-person attendance as ``generally an expensive and impractical proposition''). The burden of attending a meeting for the purpose of voting a split ticket may be significantly lower in the case of a virtual shareholder meeting but such online meetings are still relatively rare. Moreover, we are unaware of any proxy contest that has culminated in a virtual shareholder meeting. See, e.g., Jena McGregor, More Companies are Going Virtual for Their Annual Shareholder Meetings, Wash. Post (Mar. 17, 2015), available at https://www.washingtonpost.com/news/on-leadership/wp/2015/03/17/more-companies-are-going-virtual-for-their-annual-shareholder-meetings/ (finding that in 2011, 21 companies held virtual-only meetings using the primary provider of online shareholder meeting technology, and that this number grew to 53 in 2014.) --------------------------------------------------------------------------- For shareholders that do not have ready access to other arrangements, the decision of whether or not to attend a meeting or seek other arrangements for splitting their ticket is likely to depend on having the ability and resources to do so as well as having the incentive to incur the associated costs. To the extent an individual investor believes vote splitting is beneficial, the larger its ownership stake is, the greater the financial incentives to incur the current costs of arranging a split-ticket vote. However, beyond the direct financial incentives from a larger ownership stake, a large investor also has a voting impact commensurate with that stake, which increases the likelihood that its votes are determinative. This in turn, increases the large investor's incentives to arrange for vote splitting when deemed beneficial. We believe institutions are more likely than retail shareholders to have both the resources and the incentives to currently vote a split ticket (if they have the preference to do so). Because the incentive to arrange a split-ticket vote when such a vote is preferred is dependent on having both a sizable financial stake, in dollar terms, as well as significant voting influence, in percentage terms, we consider the distribution of both of these factors for institutional shareholders. We use data from Form 13F filings to estimate these distributions, which limits us to considering institutions required to report their holdings on Form 13F.\263\ Moreover, we only consider shares over which these institutions have voting authority in contested director elections. We do not have comparable data for other institutional shareholders or for retail shareholders. --------------------------------------------------------------------------- \263\ Non-exempt institutional investment managers that exercise investment discretion over $100 million or more in Section 13(f) securities are required to report their holdings on Form 13F with the Commission. --------------------------------------------------------------------------- Figure 1 shows the average percentage, across registrants, of the total outstanding shares held by institutions that each meet a given threshold of minimum voting power. The average percentage of the total outstanding shares is calculated across all registrants within different size categories. As in previous analyses, registrant size is approximated by reference to the S&P index. The data suggest that there is currently a substantial portion of outstanding shares for which the institutional holders may have enough voting power to give them the incentive to arrange split-ticket voting if preferred. For example, the average percentage of the total outstanding shares held by institutions that each have 0.5 percent or more of the total votes is around 27 percent for non-S&P 1500 registrants, 42 percent for S&P 600 registrants, 39 percent for S&P 400 registrants, and 33 percent for S&P 500 registrants. The large difference in ownership between S&P 600 and non-S&P 1500 registrants despite both groups being relatively small registrants is due to a smaller number of institutions holding stock (of any amount) in the non-S&P 1500 registrants. If we consider average total ownership by institutions that are larger block holders (individually owning 5 percent or more of shares) and therefore are more likely to be pivotal voters, the average percentage of the total outstanding shares held by these institutions is approximately 11 percent for both non-S&P 1500 and S&P 600 registrants, 7 percent for S&P 400 registrants, and 6 percent for S&P 500 registrants. Because we are only able to consider ownership by institutions required to report their holdings on Form 13F and that have voting authority over these holdings, these statistics represent an estimate of the lower [[Page 79155]] bound of the percentage of outstanding shares held by owners with possible incentives to currently arrange split-ticket voting. [GRAPHIC] [TIFF OMITTED] TP10NO16.000 Even a large voting stake in a company may not currently be enough to incent a shareholder to incur the costs of attending the annual meeting to vote a split ticket if the investment is low in dollar terms. Therefore we also consider the combined voting power by institutions that individually have a substantial dollar investment in a registrant. In particular, Figure 2 shows the average percentage, across registrants, of the total outstanding shares held by institutions that each meet a given threshold of minimum dollar stake in the registrant. For example, for institutional owners that hold stock worth $1 million or more in a given registrant, the average percentage of the total outstanding shares held by these institutions is around 50 percent for all registrants belonging to one of the S&P 1500 component indexes. By contrast, the corresponding average percentage of outstanding shares among non-S&P 1500 registrants is approximately 28 percent. If we instead consider only institutional owners that each hold stock worth $10 million or more, the average percentage of outstanding shares held by these institutions is 48 percent for S&P 500 registrants, 43 percent for S&P 400 registrants, 35 percent for S&P 600 registrants, and 18 percent for non-S&P 1500 registrants. Overall, the estimates in Figure 2 suggest that a substantial portion of shares in registrants are held by institutions that have a significant financial interest. This is particularly so for relatively larger registrants. --------------------------------------------------------------------------- \264\ The estimates in the figure are based on staff analysis of Form 13F filings related to potentially affected registrants (excluding registered investment companies) from the last available quarter of 2015 in the Thomson Reuters Form 13F database. The analysis reflects only holdings for which institutions have voting authority in contested director elections. --------------------------------------------------------------------------- [[Page 79156]] [GRAPHIC] [TIFF OMITTED] TP10NO16.001 3. Other Methods To Seek Change in Board Representation Beyond typical proxy contests culminating at annual meetings, we note that under the baseline there are a number of other methods shareholders currently can use to potentially affect changes to the composition of a board of directors. We broadly refer to these methods throughout this economic analysis as shareholder interventions. --------------------------------------------------------------------------- \265\ Id. Financial interest is estimated as the market value of all shares held by the individual institution in a specific registrant. For the average percentage of outstanding shares, we only considered holdings for which institutions had voting authority in contested director elections. --------------------------------------------------------------------------- First, a shareholder could make recommendations for director candidates directly to the nominating committee of the board. It is then generally left to the board's discretion whether or not such candidates are accepted for nomination. While we do not have direct evidence about the extent to which this approach is used or is effective, a board may be relatively more likely to nominate candidates recommended by a shareholder with a large stake in the registrant than candidates recommended by smaller shareholders because a large shareholder would have a greater interest in the oversight and strategic direction of the registrant and because a large shareholder might be perceived to be more likely to run a proxy contest absent registrant cooperation. Second, a dissident could call for a special meeting to try to replace all or some of a registrant's directors with the dissident's own candidates, to the extent permitted under the registrant's bylaws. Such an intervention would typically require a two-step process. Initially, the dissident would generally need to obtain the consent of shareholders representing a certain threshold of shares outstanding to call the meeting.\266\ Next, the dissident would put to a vote, either by proxy or in person at the special meeting, a proposal to remove certain directors and elect certain other nominees. Attempting to change the board in this manner at a special meeting is different from a contested election at an annual meeting because the issue put to a shareholder vote is the removal of specific incumbent directors and their replacement by specific dissident director candidates. This means that regardless of whether a shareholder votes by proxy or in person, there is no possibility for a shareholder to vote ``for'' a combination of dissident and registrant nominees because only the dissident proposes nominees (to fill the vacancies that would result from the removal of certain incumbent directors if the dissident's removal proposal is successful). In addition, because attempting to replace directors through a special meeting is subject to registrant bylaws and, if such bylaws are available, requires the dissident to first gather enough shareholder support to call the meeting, this alternative may be either unavailable or more burdensome for the dissident compared to initiating a proxy contest at an annual meeting. --------------------------------------------------------------------------- \266\ The criteria for how and when a special meeting can be called vary both by state law and corporate bylaws. --------------------------------------------------------------------------- Third, if the shareholder base of a registrant is significantly concentrated, a dissident may be able to pursue the election of alternative director nominees at the annual meeting through an exempt solicitation. Rule 14a-2(b)(2) provides that the rules generally applicable to dissident proxy solicitations do not apply where the total number of persons solicited is not more than ten. Thus, dissidents using this approach would be able to obtain proxies from up to 10 persons in support of their candidates, and may receive additional support for their candidates from shareholders attending [[Page 79157]] the meeting in person. Based on staff experience, we understand that this approach is used only infrequently. Fourth, some registrants have recently adopted proxy access bylaws that would allow certain qualifying shareholders to nominate a limited number of director candidates for inclusion in the registrant's proxy statement.\267\ We are unaware of any cases to date in which a proxy access bylaw has been used to nominate a candidate for the board. Using a proxy access bylaw differs from engaging in a proxy contest in several ways. In particular, while proponents of proxy access nominees could engage in some forms of shareholder outreach efforts, current proxy access bylaws typically restrict the proponents from soliciting votes on a separate proxy card.\268\ Proxy access candidates would be included on the registrant's proxy card, and information about those candidates would be included in the registrant's proxy statement. In contrast, dissidents engaged in proxy contests produce their own proxy materials and bear the cost of any solicitation in support of their nominees. Additionally, current bylaws generally limit the number of proxy access candidates to 20 or 25 percent of the board.\269\ Also, a proxy access bylaw generally only provides access to the proxy for shareholders meeting certain criteria.\270\ Thus, while relying on the provisions of a proxy access bylaw to nominate candidates is likely to involve lower solicitation costs than proxy contests (because, for example, the proxy access shareholder proponent does not produce or disseminate its own separate proxy statement), it also is more limited in its potential to change the composition of the board. We expect similar distinctions to apply in the case of state or foreign law provisions that provide shareholders a form of proxy access. --------------------------------------------------------------------------- \267\ See, e.g., S&C April Report, supra note 91 (stating that 200 public companies had adopted some form of proxy access since the 2015 proxy season, compared to 15 companies prior to 2015). \268\ See, e.g., Sidley Austin LLP, Proxy Access Momentum in 2016, at 19 (June 27, 2016), available at http://www.sidley.com/~/ media/update-pdfs/2016/06/final-proxy-access-client-update-june- 2016.pdf. \269\ See, e.g., S&C April Report, supra note 91. \270\ Under most current proxy access bylaws, the shareholder generally has to meet a passive holder requirement as well as specific share ownership thresholds and holding period requirements in order to qualify to use proxy access, with most bylaws requiring the shareholder using proxy access to have held either a three percent or five percent ownership stake for a three-year holding period. See, e.g., S&C April Report, supra note 91; S&C August Report, supra note 114. --------------------------------------------------------------------------- Other shareholder actions targeted at changes in board composition include withholding votes from (or voting against) directors in uncontested elections as well as waging formal ``vote no'' campaigns to encourage other shareholders to do so. Such campaigns are relatively low in cost but may have a more limited direct effect on boards than proxy contests or the use of proxy access bylaws because, while they can express shareholder dissatisfaction, such campaigns do not directly put forth alternative candidates for election. Nonetheless, such campaigns may have an effect on some registrants. One study of 112 formal ``vote no'' campaigns found that about 20 percent of ``vote no'' campaigns have achieved substantial voting support and ``vote no'' campaigns are associated with a CEO turnover rate of about 25 percent in the year after the campaign, or over three times the turnover rate for a sample of comparable registrants.\271\ --------------------------------------------------------------------------- \271\ See Diane Del Guercio, Laura Seery & Tracie Woidtke, Do Boards Pay Attention When Institutional Investor Activists ``Just Vote No''?, 90 J. Fin. Econ. 84, 85 (2008). --------------------------------------------------------------------------- Finally, shareholders may also seek a change in board composition by making nominations from the floor of a meeting, without soliciting proxies. However, we understand that such nominations are rare,\272\ and generally unlikely to succeed, given the applicability of advance notice bylaws and our understanding that most shareholders vote in advance of meetings via the proxy process. --------------------------------------------------------------------------- \272\ Based on the staff's discussions with independent inspectors of elections. --------------------------------------------------------------------------- C. Broad Economic Considerations The proposed amendments would change the proxy solicitation and voting process at registrants other than funds and BDCs to allow all shareholders of the company to use the proxy system to vote for their preferred combination of director candidates in a contested election. These changes are likely to improve the efficiency of the voting process in certain contested elections. It is possible that the proposed amendments could also affect the cost to registrants and dissidents of contested elections, and the outcomes and incidence of these elections. To the extent that such effects, if any, change the degree to which the risk of attracting a future proxy contest provides either discipline or a distraction to boards, the proposed amendments may affect managerial decision-making and the relationship between shareholders and management. Although the likelihood as well as the direction and extent of these effects is difficult to predict for reasons discussed below, we cannot rule out the possibility that any such effects could be significant. Our economic analysis of the proposed amendments reflects our consideration of a number of broad issues related to corporate governance and the proxy system. First, the design of the voting process, as a primary mechanism through which shareholders provide input into the composition of boards, can affect the amount of influence that shareholders exercise over the firms they own. Second, it is difficult to predict how the various parties involved in contested elections are likely to respond to any changes to the proxy process, complicating the evaluation of whether such changes would enhance or detract from board effectiveness and registrants' efficiency and competitiveness. Third, corporate governance involves a number of closely interrelated mechanisms, so any effects of contested elections may be either mitigated or magnified by changes in the use or effectiveness of other mechanisms. This section describes these issues in more detail and provides context for the discussion of potential economic effects that follows. The proposed amendments involve a fundamental aspect of corporate governance: The process by which directors for the boards of registrants are elected. Appropriate mechanisms to allow shareholder input into the nomination and election of directors can be important to maintaining the accountability of directors to shareholders.\273\ In turn, the accountability of directors to shareholders can play an important role in addressing the agency problems that arise from the separation of registrant ownership and control, especially when share ownership is widely dispersed. In particular, boards of directors can monitor, discipline and replace the officers of registrants, who have control over registrants' operations, on behalf of dispersed shareholders. Boards of directors can thereby play a key role in managing potential conflicts that may result from divergent interests between these officers and shareholders.\274\ The effectiveness of a board can be judged by its ability to adequately perform this monitoring role, and also by its performance across other dimensions, [[Page 79158]] such as its ability to provide valuable advice to the officers of the registrant.\275\ --------------------------------------------------------------------------- \273\ The nature of the mechanisms by which shareholders vote is affected by a number of different sources, including state law and a registrant's governing documents as well as Commission rules regarding the proxy process. \274\ See, e.g., Adolf Berle & Gardiner Means, The Modern Corporation and Private Property (1932). \275\ See, e.g., Renee Adams & Daniel Ferreira, A Theory of Friendly Boards, 62 J. Fin. 217 (2007) (theoretically exploring the interaction between the monitoring and the advisory role of boards, and how effectiveness in monitoring may or may not be related to effectiveness in advising). --------------------------------------------------------------------------- The selection of board members generally involves input from existing board members and from shareholders. Under most circumstances, the incumbent board nominates a slate of candidates to fill upcoming vacancies and shareholders vote on each of these candidates. The board's choice of nominees may reflect a number of factors, including board member preferences, information board members have learned about the registrant, board members' past experience, and recommendations from shareholders. In the case of a contested election, dissidents may nominate directors for shareholder consideration in addition to those nominated by the board. Shareholders then vote to determine which nominees are elected. The proxy system is the principal means by which shareholders in public companies exercise their voting rights. It is therefore important that this system functions efficiently and in a manner that adequately protects the interests of shareholders and does not impede them from exercising their rights under state law. Researchers have noted that details of the proxy process may affect the amount of influence that shareholders can exercise over the firms they own.\276\ Under current rules, and as discussed in Section IV.A above, shareholders who vote by proxy in a contested election often have a more constrained set of voting choices than shareholders who vote in person at the meeting. Alleviating these constraints could enhance the influence of shareholders on board composition by allowing all shareholders to cast votes in contested director elections that best reflect their preferences, thus facilitating the exercise of the rights that state law provides to shareholders. Furthermore, any changes in shareholder voting behavior, or other changes in the nature of the proxy process, could also have indirect effects on the nature of the relationship among shareholders, directors, and managers. --------------------------------------------------------------------------- \276\ See, e.g., Stuart L. Gillan & Jennifer E. Bethel, The Impact of the Institutional and Regulatory Environment on Shareholder Voting, 31 Fin. Manage. 29 (2002); Lucian A. Bebchuk, The Myth of the Shareholder Franchise, 93 Va. L. Rev. 675 (2007). --------------------------------------------------------------------------- It is difficult to predict whether any such changes would enhance or detract from board effectiveness and registrants' efficiency and competitiveness. Strong shareholder rights have been associated with higher firm valuations and better-developed equity markets.\277\ However, there are trade-offs between the degree of shareholder oversight and the level of director autonomy in managing the affairs of a registrant. For example, sufficient autonomy of the board and management may be important for fostering an environment focused on initiative, innovation and the registrant's long-term interests.\278\ Increasing the influence of shareholders may also empower specific groups of shareholders, who may use their increased influence to advance their own interests at the expense of other shareholders or who may advocate for changes for the benefit of all shareholders.\279\ It is therefore unclear what level of shareholder influence would maximize the efficiency and competiveness of registrants, and this optimal level of shareholder influence is likely to vary across registrants. Similarly, research is inconclusive as to what board structure and what combination of director types would maximize the effectiveness of a board, and the ideal board and governance structure likely varies across registrants.\280\ --------------------------------------------------------------------------- \277\ See, e.g., Paul A. Gompers, Joy L. Ishii & Andrew Metrick, Corporate Governance and Equity Prices, 118 Q. J. Econ. 107, 128 (2003); Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer & Robert Vishny, Investor Protection and Corporate Governance, 58 J. Fin. Econ. 3, 15 (2000). \278\ See, e.g., Jonathan Karpoff & Edward Rice, Organizational Form, Share Transferability, and Firm Performance, 24 J. Fin. Econ. 69 (1989); Philippe Aghion & Jean Tirole, Formal and Real Authority in Organizations, 105 J. Polit. Econ. 1 (1997). \279\ See, e.g., Jonathan B. Cohn, Stuart L. Gillan & Jay C. Hartzell, On Enhancing Shareholder Control: A (Dodd-) Frank Assessment of Proxy Access, 71 J. Fin. 1623, 1624 (2016), available at http://onlinelibrary.wiley.com/doi/10.1111/jofi.12402/full (providing evidence that proxy access, which the authors use as a measure of increased shareholder control, may be relatively more valuable at companies with activist shareholders but relatively less valuable at companies with greater ownership by labor-friendly shareholders). \280\ For a discussion of the inconclusiveness of existing research on what constitutes an optimal board structure, as well as how the observed variation in the structure and function of boards may be an appropriate response to the specific governance and operational issues faced by different companies, see, e.g., Ren[eacute]e B. Adams, Benjamin E. Hermalin & Michael S. Weisbach, The Role of Boards of Directors in Corporate Governance: a Conceptual Framework and Survey, 48 J. Econ. Lit. 58 (2010). --------------------------------------------------------------------------- It is also difficult to predict how the various participants involved in director elections may alter their behavior in reaction to any changes in the process by which directors are selected. Shareholders could change their voting behavior along many dimensions-- for example, they could become more or less likely to support registrant candidates, more or less likely to support dissident candidates, or more or less likely to support a combination of registrant and dissident candidates without consistently favoring either type of candidate. Director candidates may react by becoming more or less willing to be nominated based on reputational concerns. If the nature of elections were expected to change, registrants and dissidents may change the amount of resources they invest in elections or change their approach to negotiations. Because of the range of actions that any of the involved parties could choose, and the fact that other parties could change their own behavior in reaction to any such actions, the outcome of any changes to the election process is difficult to predict, although we have attempted to assess them to the extent possible in the discussion below. Finally, it is important to note that proxy contests represent one particular corporate governance mechanism that may substitute for or complement other governance mechanisms. In the case of substitute mechanisms, increasing the usefulness of one mechanism is likely to reduce the use of its substitute. For example, increasing the frequency of buses may reduce the likelihood that commuters drive. In the case of complementary mechanisms, increasing the usefulness of one mechanism is likely to increase the use of complementary mechanisms. For example, improving the quality of roads may increase the likelihood that commuters drive. Similarly, researchers have found that some governance mechanisms are substitutes for or complements to each other.\281\ As a result, changes affecting proxy contests may affect the efficacy and use of governance mechanisms that can substitute for or complement such contests. Adjustments in the degree to which different governance mechanisms are used are likely to reflect a new equilibrium in the relationship between shareholders and management.\282\ Such changes may either magnify or mitigate [[Page 79159]] any potential effects of changes in the nature of proxy contests. --------------------------------------------------------------------------- \281\ See, e.g., Stuart Gillan, Jay Hartzell & Laura Starks, Tradeoffs in Corporate Governance: Evidence from Board Structures and Charter Provisions, 1 Q. J. Fin. 667 (``Gillan, Hartzell & Starks Study'') (finding that certain governance mechanisms are substitutes); Martijn Cremers & Vinay Nair, Governance Mechanisms and Equity Prices, 60 J. Fin. 2859, 2862 (2005) (finding that certain governance mechanisms are complements). \282\ See, e.g., Gillan, Hartzell & Starks Study (discussing substitute and complementary governance mechanisms and how equilibrium governance choices may be determined given the interrelation among mechanisms). --------------------------------------------------------------------------- D. Discussion of Economic Effects The economic benefits and costs of the proposed amendments, including impacts on efficiency, competition and capital formation, are discussed below. For purpose of this economic analysis, we first address the effects of the proposed changes to the proxy process together as a package, including both benefits and costs. In particular, we discuss the anticipated effects of the proposed amendments on shareholder voting and then consider anticipated effects with respect to the costs, outcomes, incidence, and perceived threat of contested elections at registrants other than funds and BDCs. We then discuss the economic effects that can be attributed to specific implementation choices in the proposed amendments, to the extent possible, and the relative benefits and costs of the principal reasonable alternatives to these implementation choices. 1. Effects on Shareholder Voting By mandating the use of a universal proxy in contested elections, the proposed amendments would allow all shareholders to vote through the proxy system for the combination of director nominees of their choice. This change is expected to increase the efficiency with which shareholders vote in contested elections. In particular, universal proxies would result in benefits in the form of cost savings for shareholders who would otherwise expend time and resources to attend a shareholder meeting or otherwise arrange to vote for a combination of candidates that could not be voted for by proxy. Other shareholders may be newly able to vote for their most preferred candidates. That is, there may be shareholders who would vote for a combination of management and dissident candidates if a universal proxy were available but who do not currently do so because it is not feasible (and in particular cost-effective) to undertake such a vote. Also, with a universal proxy, some shareholders would be able to vote for dissident nominees despite not being solicited by the dissident or receiving the dissident's proxy card because they would be able to vote for those nominees using the registrant's proxy card. Shareholders voting by proxy are typically restricted to voting only for nominees chosen by one or the other of the parties to the contest. At least some investors have expressed dissatisfaction with these constraints on their ability to vote by proxy.\283\ We also note that proxy advisory services have often recommended voting for candidates that have appeared on different proxy cards in contested elections, leading to additional concern among shareholders as to how to cast such votes.\284\ Finally, we are aware that registrants and dissidents have creatively (but imperfectly) sought to facilitate vote- splitting in recent years, further demonstrating demand for a generally-applicable solution that would permit split-ticket voting by proxy.\285\ --------------------------------------------------------------------------- \283\ See, e.g., Rulemaking Petition; Roundtable Transcript, comments of Anne Simpson, Senior Portfolio Manager and Director of Global Governance, CalPERS, at 35-36. \284\ See, e.g., John Wilcox, Shareholder Nominations of Corporate Directors: Unintended Consequences and the Case for Reform of the U.S. Proxy System, Shareholder Access to the Corporate Ballot (Lucian Bebchuk ed. 2005). \285\ See, e.g., Richard J. Grossman & J. Russel Denton, Never Mind Equal Access: Just Let Shareholders ``Split Their Ticket'', The M&A Lawyer (Jan. 2009) (discussing a contest in which shareholders interested in splitting their votes were instructed to vote on both proxy cards, dating them with the same date, and adding a special notation that neither card was intended to invalidate the other, and noting a concern that such split votes could be challenged in court); Liz Hoffman, Tessera Proxy's Write-In Option Draws SEC's Eye, Law360 (May 20, 2013), available at http://www.law360.com/articles/442878/tessera-proxy-s-write-in-option-draws-sec-s-eye (discussing a contest in which the registrant included a write-in slot on its proxy card and instructed shareholders interested in splitting their votes to vote on its card and write in the names of dissident nominees, and noting that Commission staff objected to this approach on the basis that it would violate the bona fide nominee rule). --------------------------------------------------------------------------- Under the proposed amendments, shareholders who want to vote by proxy for a full complement of directors would no longer be limited to voting only for nominees chosen by the registrant or only for nominees chosen by the dissident.\286\ Also, the ability to vote for dissident nominees by proxy would no longer be limited to shareholders solicited by the dissident.\287\ Instead, all shareholders could use a universal proxy to vote for the combination of directors of their choice, as they are able to do in person at a shareholder meeting. --------------------------------------------------------------------------- \286\ Nominees ``chosen'' by the dissident may include certain registrant nominees. The short slate rule permits a dissident in certain circumstances to solicit votes for some of the registrant's nominees through the use of its proxy card where the dissident is not nominating enough director candidates to gain majority control of the board in the contest, thereby allowing shareholders using the dissident's proxy card to split their vote. However, shareholders voting on the dissident's proxy card would still be limited to voting for those registrant nominees selected by the dissident, rather than any registrant nominee of their choice. \287\ For shareholders not solicited by the dissident, while the registrant's universal proxy card would allow them to support dissident nominees, they would still need to seek out the dissident's proxy statement in the EDGAR system (as directed by the registrant's proxy statement) to obtain information about the dissident nominees. --------------------------------------------------------------------------- Although some shareholders are able to use existing approaches to implement split-ticket votes, such as by attending a shareholder meeting in person, these existing approaches are generally associated with costs beyond the usual costs of voting by proxy. These costs may include the time and expense required to obtain a legal proxy from one's broker (if required) and travel to and attend (or send a representative to attend) a meeting.\288\ Even when alternatives besides in-person voting are made available to some shareholders, taking advantage of such accommodations may entail costs. For example, in the case in which a proxy solicitor acting on behalf of a party to the contest arranges for an in-person representative for a large shareholder, this shareholder is likely to spend some incremental time contacting and coordinating with the proxy solicitor. While these costs may be minimal in some cases, any of the incremental time and resources currently expended to implement split-ticket votes would no longer be required in the case of universal proxies, resulting in greater efficiency in vote submission. We do not currently have data regarding how many shareholders implement split-ticket voting, to what extent the different approaches are used, and the degree of incremental costs borne to implement such votes, in order to estimate the potential cost savings. We request comment below on current voting practices, including data about costs to implement split-ticket voting. --------------------------------------------------------------------------- \288\ Shareholders with many different holdings may also face logistical constraints, in that annual meetings for different companies often overlap and it may therefore not be feasible to attend all such meetings in person. These logistical constraints can potentially be overcome at a cost. In particular, while proxy contests are relatively infrequent, to the extent that two registrants subject to proxy contests have meetings on the same date, or a shareholder has other reasons to prefer attending a conflicting meeting in person, shareholders may be able to arrange for a representative to attend one of these meetings on their behalf. --------------------------------------------------------------------------- We expect that institutional shareholders and large shareholders are relatively more likely than other shareholders to be able to implement a split-ticket vote using one of the existing approaches and would thus be more likely to experience cost savings under the proposed amendments. As discussed above, institutional shareholders hold a majority of the shares in U.S. public companies and are much more likely to vote than retail shareholders.\289\ We expect that shareholders with large stakes in the [[Page 79160]] registrant \290\ would also generally be more likely to vote than smaller shareholders because of the greater influence they may have on the outcome of the election and their greater economic interest in this outcome. For these same reasons, we expect that large shareholders that prefer to vote a split-ticket would have a particularly strong incentive to find a way to implement such a vote. Institutional and large shareholders may also be more likely to have access to the existing approaches for split-ticket voting. That is, they are more likely than other shareholders to have the resources required to vote in person, and may also be more likely to have access to any accommodations made to facilitate split-ticket voting, as when a party to the contest arranges for an in-person representative to attend a meeting on behalf of a shareholder. --------------------------------------------------------------------------- \289\ See infra Section IV.B.1. \290\ See Figure 1 and Figure 2 in Section IV.B.2 for the distribution of institutional holders by the size of their stakes in potentially affected registrants for which this data is available. --------------------------------------------------------------------------- The availability of universal proxies would also expand the voting alternatives of shareholders for whom it would not otherwise be practical or feasible to vote for their preferred combination of candidates. The existing approaches to implementing a split-ticket vote discussed above are likely to be cost prohibitive or unavailable to many shareholders, particularly retail shareholders and small shareholders. That is, shareholders that have a limited economic interest and voting power in the registrant may not have a sufficiently high financial incentive to bear the costs required to attend or send a representative to a meeting. Retail and small shareholders may be unable or unwilling to bear these costs, and may be unlikely to be proactively offered alternative accommodations (such as an in-person representative being arranged by a proxy solicitor). To the extent that such shareholders are interested in splitting their ticket, the availability of universal proxies would enable them to vote for the combination of directors of their choice and thus may result in a greater number of split-ticket votes than under the current system. In addition, because dissidents are not required to solicit all shareholders, many shareholders might not receive the dissident's proxy card and thus be able to vote for dissident candidates in a substantial fraction of proxy contests.\291\ In particular, smaller shareholders, such as those holding fewer than 1,000 shares in the registrant, are less likely to be solicited by dissidents.\292\ The proposed requirement that registrants, as well as dissidents, use universal proxies would allow shareholders who are not solicited by dissidents to nonetheless vote for some or all of the dissident nominees through the proxy process, by using the registrant's universal proxy card. --------------------------------------------------------------------------- \291\ Based on industry data provided by a proxy services provider for a sample of proxy contests from June 30, 2015 through April 15, 2016, we estimate that there are some shareholders that dissidents do not solicit in approximately 40 percent of contested elections, while all shareholders are solicited by dissidents in the remainder of contested elections. In contests in which fewer than all shareholders were solicited, only those accounts holding a number of shares of the registrant that exceeded a minimum threshold of shares were subject to solicitation by the dissident. \292\ Based on industry data provided by a proxy services provider for a sample of proxy contests from June 30, 2015 through April 15, 2016, in contests in which fewer than all shareholders were solicited, the shareholders to be solicited were chosen based on the size of their shareholdings. Specifically, only those accounts holding a number of shares of the registrant equal to or exceeding a minimum threshold were subject to solicitation by the dissident. The minimum threshold in these cases ranged from 100 to 1 million shares, but was most often between 500 and 1,000 shares. --------------------------------------------------------------------------- Thus, the proposed amendments would allow shareholders who would not currently find it practical or feasible to vote for their preferred candidates, by using a universal proxy, to split their ticket or support the dissident slate. We expect that retail and small shareholders are more likely than other shareholders to change the votes they would submit upon the availability of universal proxies because they currently have limited access to other means of voting a split-ticket and a lower likelihood of being solicited by dissidents. However, we also note that such shareholders may be less likely to vote in general.\293\ For these shareholders, the proposed amendments are not likely to result in direct cost savings, but would allow them to submit votes that better reflect their preferences. The indirect benefits or costs of their expanded voting options depend on whether such changes in voting behavior are widespread enough to change actual or expected election outcomes, and the nature of these changes in outcomes, as discussed below.\294\ --------------------------------------------------------------------------- \293\ Retail shareholders vote 28 percent of their shares on average, though their participation rate could be higher in the case of a contested election, because of factors such as increased media coverage, expanded outreach efforts, and greater shareholder interest in the contest. See supra Section IV.B.1. \294\ See infra Sections IV.D.3 and IV.D.4. --------------------------------------------------------------------------- There is also a possibility that universal proxies could lead some shareholders to be confused about their voting options and how to properly mark the proxy cards to accurately reflect their choices. This may give rise to minor costs to some shareholders in contested elections, particularly less sophisticated shareholders, if it increases the time required by these shareholders to mark and submit a proxy card. It may also increase the risk that some shareholders submit proxy cards that do not accurately reflect their intentions or that could be invalidated because they are improperly marked. However, we believe that the risk of any such confusion would be mitigated by the presentation and formatting requirements of the proposed amendments, as discussed in Section IV.D.5 below. 2. Potential Effects on Costs of Contested Elections The proposed amendments may directly impose minor costs on registrants and dissidents that engage in proxy contests, relative to the current costs that these parties bear in proxy contests.\295\ The proposed amendments may also have effects on the expected outcomes of contested elections that could result in either a net increase or net decrease in the total costs that either registrants or dissidents incur in contested elections, primarily because of strategic changes in discretionary solicitation expenditures. The extent and direction of such indirect changes in costs incurred are difficult to predict. We also consider the proposal's cost implications in the context of nominal contests, in which the dissidents incur little more than the basic required costs to pursue a contest, which are currently rare but could become more or less frequent under the proposed amendments. --------------------------------------------------------------------------- \295\ The potential direct cost savings resulting from the proposed amendments for certain shareholders are discussed in Section IV.D.1 supra. --------------------------------------------------------------------------- a. Typical Proxy Contests The total cost borne by a registrant or dissident in a typical proxy contest would generally include solicitation costs, such as basic proxy distribution and postage costs, expenditures on proxy solicitors, attorneys and public relations advisors, and any time spent by the parties or their staff on outreach efforts. The total cost to registrants would also reflect items such as any additional time spent by staff on determining and implementing a strategy in response to the contest and any costs of revising their proxy materials given the proxy contest. The total cost to dissidents would also reflect time spent by the dissident to pursue a contest, the cost to seek nominees and gain their consent to be nominated, and the cost of drafting a preliminary and definitive proxy [[Page 79161]] statement and undergoing the staff's review and comment process for those filings. These total costs are difficult to estimate because the components of these costs (other than estimated solicitation expenditures) are not specifically required to be disclosed and may vary significantly across contests. However, we note that many of the components of these costs are not likely to be affected by the proposed amendments. In much of the discussion that follows, we focus primarily on solicitation costs because we believe that these costs are most likely to be affected by the proposed amendments. We first consider the direct cost implications of the proposed amendments. For dissidents that would have engaged in typical proxy contests even in the absence of the proposed amendments, the proposed requirement to solicit shareholders representing at least a majority of the voting power entitled to vote on the election of directors may impose a small incremental cost in some infrequent cases. In most cases, however, we expect that this requirement should not result in a change in costs to dissidents or require any further action on their part. In particular, as noted in Section IV.B.2. above, we estimate that in approximately 97 percent of recent proxy contests the dissident solicited a number of shareholders that exceeded the threshold that would be required under the proposed solicitation requirement.\296\ For this reason, we believe that any dissidents who would not otherwise have initiated a contest but may decide to engage in a typical proxy contest as a result of the proposed amendments would also generally not bear any incremental costs as a direct result of the proposed solicitation requirement, though they likely would bear total solicitation costs comparable to those borne in other typical proxy contests (for which the median total solicitation cost was, as discussed above, $250,000 for dissidents initiating contests in 2015).\297\ Below, we separately discuss the potential cost implications for nominal proxy contests, which are different from typical proxy contests in that the dissidents incur little more than the minimum required cost to contest an election. --------------------------------------------------------------------------- \296\ See supra note 251 and accompanying text. \297\ See supra Section IV.B.2. --------------------------------------------------------------------------- Even in the infrequent cases in which dissidents in a typical proxy contest may currently not solicit shareholders holding a majority of the shares eligible to vote in the registrant, dissidents are likely to solicit shareholders holding a significant fraction of these shares in order to have a chance of winning any board seats.\298\ Within a sample of recent proxy contests, we estimate the number of accounts that one would have to solicit in order to meet the proposed solicitation requirement ranges from about 0.1 percent to 10 percent of the outstanding shareholder accounts, with the median number of accounts required equaling about one percent of the total shareholder accounts.\299\ Given that even those dissidents that would not currently meet the proposed solicitation requirement have still solicited shareholders representing a large fraction (though less than 50 percent) of the shares eligible to vote, as well as our understanding that the number of accounts required to reach a majority of the shares eligible to vote is generally expected to be a small fraction of the total accounts outstanding, we expect that the incremental cost of the solicitation requirement to a dissident, if any, should be minor relative to the total costs incurred by dissidents in proxy contests. --------------------------------------------------------------------------- \298\ Based on industry data provided by a proxy services provider for a sample of proxy contests from June 30, 2015 through April 15, 2016, the sole dissident in the sample of 35 contests that solicited less than a majority of the shareholders solicited accounts representing 31.5 percent of the outstanding shares. \299\ Based on industry data provided by a proxy services provider for a sample of proxy contests from June 30, 2015 through April 15, 2016. --------------------------------------------------------------------------- Specifically, in the infrequent case in which a dissident would otherwise have solicited shareholders representing a substantial fraction, but not a majority, of the shares eligible to vote, we preliminarily estimate that such a dissident would bear an incremental cost of approximately $1,000 if using the least expensive approach \300\ to expand solicitation to meet the proposed minimum solicitation requirement.\301\ The level of any such incremental cost would be driven by any shortfall in the number of shareholders that would otherwise be solicited compared to the number that would be required to be solicited to meet the proposed majority voting threshold. Factors that may affect this shortfall include the size of the dissident's own voting stake in the registrant and the demographics of the shareholder base, such as whether share ownership is widely dispersed or more concentrated in a given registrant. --------------------------------------------------------------------------- \300\ Staff assumed that the dissident would use the least expensive approach (i.e., notice and access delivery) to solicit additional accounts given that the dissident would not have chosen to solicit these accounts but for the proposed minimum solicitation requirement. To the extent that dissidents were to use an approach other than the least expensive approach to solicit additional shareholders to meet this requirement, their incremental costs would likely be higher than estimated here. Such approaches may include using full set rather than notice and access delivery, soliciting more than the minimum required number of shareholders, or incurring additional solicitation expenditures on phone calls or other forms of outreach. It is difficult to estimate how much more these approaches would cost than the least expensive approach because of the variety of approaches that could be used and because of the degree of variation in expenses such as postage and printing costs depending on the total size of the dissident's proxy materials. \301\ This estimate was derived by staff based on the NYSE Rule 451 fee schedule and industry data provided by a proxy services provider. In particular, staff based this estimate on the single case out of the 35 contests from June 30, 2015 through April 15, 2016 for which information was provided in which less than a majority of shareholders was solicited by the dissident. The required increase in expenses to solicit a majority of shareholders was estimated based on the number of additional accounts that would have to be solicited and the applicable fees under NYSE Rule 451 and postage costs for notice and access delivery. For the purpose of the nominee coordination fee, staff used information from other proxy contests for which information was provided (specifically focusing on those in which less than all shareholders were solicited) to interpolate the increase in the number of banks or brokers considered ``nominees'' under NYSE Rule 451 that might be involved at the higher solicitation level. The estimated incremental solicitation cost of approximately $1,000 includes nominee coordination fees of $22 for each of the additional nominees expected to be involved, plus basic processing fees, notice and access and preference management fees and postage totaling $1.57 (for suppressed accounts, such as those that have affirmatively consented to electronic delivery) to $1.70 (for other accounts) per additional account to be solicited. Staff assumed that half of the additional accounts to be solicited are suppressed and that none of these accounts requested full set delivery by prior consent or upon receipt of the notice (because such delivery requirements may apply to only a small fraction of accounts and is not expected to significantly affect the overall estimate of costs). Additional notice and access fees of $0.25 per account were assumed to be required for each account that was solicited prior to increasing the level of solicitation because of the use of notice and access delivery for some accounts. Given the number of accounts involved, no additional intermediary unit fees were expected to apply. This estimate does not include printing costs for the notice, for which we do not have relevant data to estimate these costs. We request comment on this estimate and data that could allow staff to obtain a more precise estimate below. --------------------------------------------------------------------------- In sum, we do not expect the proposed solicitation requirement to impose a large incremental cost burden on dissidents in typical proxy contests in which the dissident engages in substantial solicitation efforts. In the vast majority of cases, we expect dissidents that would have engaged in proxy contests even in the absence of the proposed amendments not to bear any incremental direct costs due to the solicitation requirement. Similarly, for dissidents that newly decide to engage in a typical proxy contest (as opposed to a nominal contest, discussed below) as a result of the proposed amendments, we do not expect the solicitation requirement to change the costs that [[Page 79162]] they would expect to bear relative to the costs of any other typical proxy contest. In the infrequent cases in which dissidents may be required to expand their solicitation in order to meet the proposed requirement, our estimate of an incremental cost of approximately $1,000 represents less than one percent of the median total solicitation cost reported in proxy statements by dissidents (which may include expenditures for proxy solicitors, attorneys and public relations advisors as well as the more basic proxy distribution fees and postage costs).\302\ --------------------------------------------------------------------------- \302\ The median total solicitation cost reported in proxy statements by dissidents in proxy contests in 2014 and 2015 is approximately $250,000, in line with the estimates in a study of such costs over a longer horizon. See supra Section IV.B.2. --------------------------------------------------------------------------- Registrants may also incur minor incremental costs in typical proxy contests as a direct result of the proposed amendments in order to implement the required changes to their proxy cards. For example, under the proposed amendments registrants must list dissident nominees on their proxy cards and provide disclosure about the consequences of voting for a greater or lesser number of nominees than available director positions. In addition, both registrants and dissidents may incur costs to make additional changes to their proxy statements in reaction to the proposed amendments, such as additional disclosures urging shareholders not to support their opponent's candidates using their card and expressing their views as to the importance of a unified, rather than a mixed, board. These costs are expected to be minimal in comparison to the total costs that registrants and dissidents bear in a typical proxy contest.\303\ --------------------------------------------------------------------------- \303\ See infra Section V for estimates for purposes of the Paperwork Reduction Act (``PRA'') of the incremental burden that may be required to prepare proxy materials under the proposed amendments. --------------------------------------------------------------------------- We next consider indirect effects of the proposed amendments on the costs of proxy contests. For both registrants and dissidents in typical proxy contests, other effects of the proposed amendments have the potential to result in more significant changes in costs than the effects related to revising proxy materials or the proposed solicitation requirement. This is because the greatest potential impact on the cost of proxy contests is likely related to strategic increases or decreases in discretionary solicitation efforts in response to any changes that the proposed amendments may bring about in the likelihood of the different potential outcomes of the contest. Changes in discretionary solicitation efforts may include increases or decreases in expenditures on proxy solicitors or the degree of outreach through phone calls or mailings to convince shareholders to vote for a party's candidates. In particular, while we estimate that the median total solicitation cost for dissidents in 2015 was approximately $250,000, we estimate that the median basic cost of soliciting shareholders, namely the proxy distribution fees and postage costs for the first mailing, was approximately $11,000.\304\ The large expenditures on solicitation beyond the basic costs of soliciting shareholders (a median incremental expenditure of over $239,000), demonstrate the potential for substantial increases or decreases in costs if a party were to change their approach to discretionary solicitation activities. However, it is difficult to predict the extent or direction of this potential effect because any changes in discretionary solicitation expenditures are highly dependent on the particular situation and the parties' own views as to how the proposed amendments would affect their likelihood of gaining or retaining seats and the potential impact of solicitation efforts.\305\ --------------------------------------------------------------------------- \304\ Our estimate of total solicitation costs is based on costs reported in proxy statements in 2014 and 2015. See supra Section IV.B.2. Our estimate of proxy distribution fees and postage costs is based on industry data provided by a proxy services provider for a sample of 35 proxy contests from June 30, 2015 through April 15, 2016, and excludes dissident printing costs (for which we do not have relevant data to estimate these costs). \305\ Effects on strategic discretionary expenditures, whether increases or decreases, are more likely in the case of what would otherwise be close contests. We estimate that approximately 26 percent of proxy contests in 2014 and 2015 were close. See supra Section IV.B.2. --------------------------------------------------------------------------- For example, registrants that expect that a universal proxy may otherwise result in more dissident nominees being elected may incur additional costs to increase outreach to shareholders in an effort to limit support for dissident nominees. Similarly, dissidents may increase solicitation expenditures in cases where they expect the use of universal proxies and any corresponding increase in split-ticket voting to result in more registrant nominees retaining seats than otherwise expected. At the same time, registrants or dissidents may reduce solicitation expenditures in cases in which they believe that any increased split-ticket voting related to universal proxies would result on average in more support for their own nominees, given that they may therefore be able to achieve the same expected outcome at a lower cost than in the absence of universal proxies. That said, such registrants or dissidents could alternatively decide to increase solicitation expenditures relative to what they would otherwise have spent if they think that they may actually be able to gain or retain more seats than would otherwise have been feasible. We solicit comment below from registrants and dissidents as to whether they anticipate that their solicitation costs would likely increase or decrease under the proposed amendments and why, including specific cost estimates. b. Nominal Proxy Contests The proposed amendments may also have implications for nominal contests, in which the dissidents incur little more than the basic required costs to pursue a contest. Despite the fact that there may be a low chance of succeeding in obtaining a board seat if a dissident does not undertake substantial solicitation efforts, such as through full set delivery, use of a proxy solicitor, and other outreach, as they would in a typical proxy contest, dissidents may nevertheless choose to initiate nominal contests to pursue goals other than changes in board composition. Such contests are currently rare \306\ but could become more or less attractive as a result of the proposed amendments, as discussed in Section IV.D.4.b. below. --------------------------------------------------------------------------- \306\ Based on staff experience. See supra Section IV.B.2.b. --------------------------------------------------------------------------- A dissident engaging in a nominal proxy contest currently must bear the cost of drafting a preliminary proxy statement and undergoing the staff's review and comment process for that filing. Under the proposed amendments, such a dissident would also be required to bear the cost of meeting the solicitation requirements of the proposed amendments. We preliminarily estimate that it may cost approximately $6,000 at a median-sized (based on the number of accounts in which its shares are held) registrant using the least expensive approach \307\ to meet the proposed minimum solicitation requirements through an intermediary,\308\ which is significantly [[Page 79163]] less than the total solicitation expenses incurred by a dissident in a typical proxy contest. As noted above in Section IV.B.2, reported proxy solicitation expenses for dissidents in recent contests range from $25,000 to $8 million, with a median of $250,000. These expenses substantially exceed the estimated cost of a nominal contest in part because a dissident in a typical proxy contest would generally incur higher proxy dissemination costs because of the use of full set delivery and the solicitation of a larger fraction of the shareholders entitled to vote, but also because of substantial additional expenditures on solicitation beyond the cost of proxy dissemination, such as the expense to hire a proxy solicitor to perform additional outreach. --------------------------------------------------------------------------- \307\ See supra note 300. \308\ The median-sized registrant was determined based on the number of beneficial accounts in which shares in the registrant are held. The cost estimate was derived by staff based on the NYSE Rule 451 fee schedule and industry data provided by a proxy services provider. The required cost to meet the proposed solicitation requirement was estimated based on the number of accounts that would have to be solicited and the applicable fees under NYSE Rule 451 and postage costs for notice and access delivery. Specifically, industry data provided by a proxy services provider indicates that there are approximately 4,500 total accounts at the median registrant. Since the shareholder base is likely composed of some large shareholders and many more small shareholders, staff assumed that two percent of these accounts, or a total of 90 accounts, would have to be solicited to reach a majority of the voting power. This assumption is consistent with the average shareholder concentration at the seven registrants with a total number of accounts between 3,000 and 5,000 that are included in the sample of contests for which we were provided industry data by a proxy services provider. Staff also assumed that the number of brokers and banks involved for the purpose of determination of the nominee coordination fee is equal to 45. The estimated solicitation cost of approximately $6,000 includes intermediary unit fees, which apply with a minimum of $5,000, plus nominee coordination fees of $22 per bank or broker considered a ``nominee'' under NYSE Rule 451, plus basic processing fees, notice and access and preference management fees and postage totaling $1.57 (for suppressed accounts, such as those that have affirmatively consented to electronic delivery) to $1.70 (for other accounts) per account. Staff assumed that half of the accounts in question are suppressed and that none of these accounts requested full set delivery by prior consent or upon receipt of the notice (because such delivery requirements may apply to only a small fraction of accounts and is not expected to significantly affect the overall estimate of costs). This estimate does not include printing costs for the notice, for which we do not have relevant data to estimate these costs. We request comment on this estimate and data that could allow staff to obtain a more precise estimate below. --------------------------------------------------------------------------- The basic required cost to contest an election at a given registrant may also be affected by the dissident's own voting stake in the registrant and the characteristics of the shareholder base, such as whether share ownership is widely dispersed or more concentrated in a given registrant. In particular, these costs may be substantially lower in cases where a dissident can meet the proposed solicitation requirement by disseminating materials on its own, without hiring a proxy services provider or similar intermediary, as in the case of a registrant with a very concentrated shareholder base and majority owners that are known and easily contacted. These costs would be substantially higher at registrants at which the total number of shareholder accounts that would be required to reach a majority of the shares entitled to vote is very high, as at registrants with highly dispersed ownership. To the extent that the proposed amendments may result in an increased incidence of nominal contests, we expect that registrants that are the subject of such additional contests would bear incremental costs. We expect these costs to be higher than in the case of current nominal contests, for which we believe that the costs borne by registrants are minimal, but significantly lower than in the case of a typical proxy contest. In particular, registrants may revise their proxy materials and increase their solicitation expenditures to explain the appearance of the names of dissident nominees on their proxy cards and urge shareholders not to support the dissident's nominees. However, we do not expect solicitation expenditures to rise as much as they would in the average typical proxy contest because the registrant, in its solicitation efforts, would not be competing with a dissident that is spending significant resources on solicitation. For these reasons, we estimate that the cost borne by a registrant facing a nominal proxy contest may be approximately $25,000, based on the lowest incremental solicitation cost reported by registrants in recent proxy contests.\309\ --------------------------------------------------------------------------- \309\ See supra Section IV.B.2. We request comment on this estimate below. --------------------------------------------------------------------------- 3. Potential Effects on Outcomes of Contested Elections By mandating the use of a universal proxy in contested elections, the proposed amendments would allow every shareholder to vote by proxy for the combination of directors of their choice. In addition to reducing costs for certain shareholders who would submit split ticket votes even in the absence of universal proxies, universal proxies may result in additional shareholders submitting split-ticket votes or, for those not solicited by dissidents, supporting the dissident slate or some dissident nominees. Such changes in voting behavior could be significant enough to affect election outcomes in the contests that would have occurred even in the absence of the proposed amendments, as well as to change the incentive to initiate contests.\310\ In particular, either more registrant nominees or more dissident nominees might be elected than under the baseline, where vote splitting is harder to achieve and some shareholders do not receive a proxy card that includes the dissident slate. Any resulting changes in board composition or changes in control of the board may impose costs and yield benefits for shareholders, registrants, and dissidents. However, these effects are uncertain because it is difficult to predict the extent or direction of any changes in voting behavior as a result of the proposed amendments and to evaluate whether any resulting changes in the members of the board will lead to more or less effective board oversight. --------------------------------------------------------------------------- \310\ The potential incidence of additional contests that would not have occurred in the absence of the proposed amendments is discussed in Section IV.D.4 infra. --------------------------------------------------------------------------- There may be elections in which universal proxies would result in changes to the percentage of the vote obtained by each director candidate, but in which the changes in vote totals would not be sufficient to change the ultimate election results. We preliminarily believe that this would be the likely outcome for the majority of contested elections that would have taken place in the absence of the proposed amendments. We estimate that approximately three-quarters of recent contests were not very close and would require shareholders holding significant voting power (greater than five percent) to change their voting behavior in order to lead to a different election result.\311\ We also note that the voting power represented by shareholders that may potentially change their voting behavior is limited due to the fact that some shareholders, particularly large shareholders, are currently able to send representatives to shareholder meetings or use other mechanisms to implement split-ticket votes when desired. We do not expect the votes submitted by these shareholders to change as a result of the proposed amendments. The extent to which other shareholders are interested in splitting their tickets or, for those not solicited by dissidents, in voting for the dissident slate, is unclear, particularly as the option has not generally been available to them (without additional cost) under the current rules.\312\ We solicit comment on this point below. --------------------------------------------------------------------------- \311\ Based on staff review of contested elections initiated in 2014 and 2015, votes representing greater than 5 percent of the total outstanding voting power would have to change in order to change the result in about 74 percent of the elections. Within that 74 percent, almost two-thirds of the elections would have required a change in votes representing greater than 20 percent of the outstanding voting power to result in a change in the election outcome. \312\ For example, it has been asserted that retail shareholders, when they vote, tend to support management. See, e.g., Neil Stewart, Retail Shareholders: Looking out for the Little Guy, IR Magazine (May 15, 2012), available at http://www.irmagazine.com/articles/shareholder-targeting-id/18761/retail-shareholders-looking-out-little-guy/ (stating that ``as a rule, retail investors tend to support management''); Mary Ann Cloyd, How Well Do You Know Your Shareholders?, Harvard Law School Forum on Corporate Governance and Financial Regulation Blog, June 18, 2013, available at https://corpgov.law.harvard.edu/2013/06/18/how-well-do-you-know-your-shareholders/ (stating that ``retail shareholders support management's voting recommendations at high rates''). In contrast, a recent survey of 801 retail investors found that the majority of these retail investors believe activists add long-term value, and may thus be more likely to support activists than generally thought. See Brunswick Group, A look at Retail Investors' Views of Shareholder Activism and Why it Matters (July 2015), available at https://www.brunswickgroup.com/media/597919/Brunswick-Group-Retail-Investors-Views-of-Shareholder-Activism-Summary-of-Results.pdf. --------------------------------------------------------------------------- [[Page 79164]] However, there may be contests in which universal proxies, by allowing additional shareholders to vote split tickets or vote the dissident slate, affect which director nominees are elected. In general, any changes in voting behavior due to universal proxies are most likely to affect election outcomes in those contests that would otherwise have been very close. In close contests, changes in even a small number of votes may affect which director nominees are elected. We estimate that in about one-fourth of recent election contests, the director elected with the fewest votes received no more than 11.5 percent more votes than the non-elected nominee with the most votes, and that the vote differential in these cases represented no more than five percent of the total outstanding voting power.\313\ In such cases, universal proxies may be more likely to affect the election outcome. We note that close contests may be more likely to occur at registrants with cumulative voting.\314\ --------------------------------------------------------------------------- \313\ See supra Section IV.B.2.c. \314\ Under cumulative voting, each shareholder is generally allowed to cast as many votes as there are nominees and may allocate more than one vote to certain nominees, which may lead to a more concentrated distribution of votes. In contrast, close contests may be relatively less likely at registrants with majority voting standards that do not revert to a plurality standard in the case of a contested election, or with high levels of incumbent board ownership. We estimate that approximately 5 percent of registrants have cumulative voting, approximately 7 percent of registrants have majority voting standards that do not revert to a plurality standard in a proxy contest, and approximately 8 percent of registrants have incumbent directors who together own a majority of the outstanding shares. See supra Section IV.B.1. --------------------------------------------------------------------------- A recent study uses an alternative approach to estimate the percentage of contests in which universal proxies may be more likely to affect the election outcome.\315\ This study estimates that it is possible that universal proxies would have led to different election outcomes in up to 22 percent of cases in a sample of proxy contests from 2008 through 2015.\316\ This statistic is comparable to our estimate that close contests may represent approximately one-fourth of recent contests. However, we note that the study makes several assumptions in arriving at this statistic, and it is unclear whether these assumptions can be relied upon.\317\ --------------------------------------------------------------------------- \315\ See Hirst study. \316\ See Hirst study, at 48 (finding that 17 out of 77 proxy contests examined may have had outcomes that were distorted as a result of barriers to split-ticket voting). \317\ For example, the estimates in this study are based on an assumption that facilitating split-ticket voting through the availability of universal proxies could only result in changes in votes that were otherwise marked as ``withheld'' from a candidate, while votes ``for'' any candidate would be assumed not to change. Also, the study assumes that the degree of increase in ``for'' votes for any given candidate upon facilitating split-ticket voting would be limited to the number of votes withheld from a single opposing candidate, while votes withheld from a different opposing candidate would be assumed not to switch to be in favor of this candidate. See Hirst study, at 35 n.96, 39 n. 105. We are unable to test the reliability of these assumptions because we do not have data that would allow us to predict how voting behavior might change with the availability of a universal proxy. --------------------------------------------------------------------------- To the extent that changes in voting behavior lead to different election outcomes, it is not clear how this would affect the composition of directors elected to the board. There may be either more registrant nominees or more dissident nominees elected to boards, or there may be no change, on average, in the types of nominees elected.\318\ Also, there may be either fewer changes in control or more changes in control, or there may be the same frequency of changes in control as under the baseline. The impact of forcing shareholders to choose between one proxy card or the other in an election contest depends on the dynamics of the particular contest. On the one hand, where dissatisfaction with current management is greater, shareholders who would otherwise prefer to split their vote may be more likely under the current proxy system to utilize the dissident's card and forego the opportunity to vote for some registrant nominees, to send the message that board change is needed. This choice will no longer be necessary under the proposed amendments, which may lead to a greater likelihood that one or more registrant nominees retain their seats. On the other hand, there also may be cases in which the registrant nominees would, in the absence of the proposed amendments, have retained all of their seats. Currently, we observe that registrant nominees retain all of the seats up for election in half of the contests that proceed to a vote.\319\ In such cases, an increase in split-ticket voting, as well as any incremental votes for the full dissident slate by shareholders not solicited by the dissident, may increase the likelihood of dissident nominees gaining one or more of those seats. --------------------------------------------------------------------------- \318\ One study finds that universal proxies are unlikely to overwhelmingly favor one side over the other, in that they may result in dissident nominees being elected in place of management nominees and management nominees being elected in place of dissident nominees at similar rates. See Hirst study. However, this conclusion is based on several critical assumptions about how shareholder behavior may change upon the availability of universal proxy, and we are unable to test the reliability of these assumptions. See supra note 317. \319\ See supra Section IV.B.2.c. --------------------------------------------------------------------------- Given some of these possible dynamics, we preliminarily believe that the election of mixed boards, or boards including registrant as well as dissident nominees, would be somewhat more likely under the proposed amendments than under the current proxy system. We estimate that approximately 40 percent of recent contests that proceeded to a vote resulted in a mixed board being elected.\320\ However, we cannot predict whether any increase in mixed boards would be the result of one or more registrant nominees retaining seats when a board composed of only dissident nominees would otherwise have been elected or one or more dissident nominees gaining seats when all registrant nominees would have retained their seats, nor can we predict how frequently such a mixed board would occur compared with under the current system.\321\ Also, we note that it is not necessarily the case that any such changes in outcomes would more accurately reflect shareholder preferences, even though these outcomes may be the product of removing constraints on the combination of nominees that shareholders can vote for, because of limitations in the way that voting rules can communicate preferences.\322\ --------------------------------------------------------------------------- \320\ Id. \321\ One study questions whether universal proxies would result in a substantial increase in mixed board outcomes, based on an analysis indicating that mixed board outcomes could increase by no more than approximately three percent of the contests studied. See Hirst study. However, this analysis and conclusion is based on several critical assumptions about how shareholder behavior may change upon the availability of universal proxies, and we are unable to test the reliability of these assumptions. See supra note 317. \322\ For example, consider a registrant with 100 voting shareholders, three director seats up for election, and a dissident with two nominees. Assume that 54 of the shareholders prefer to elect the dissident nominees but are indifferent about which registrant nominee retains the third seat. On a universal proxy, each of these shareholders therefore votes for one registrant nominee, with equal probability across the three registrant nominees. The remaining 46 prefer the full registrant slate. In this case, with a universal proxy, 54 votes would be earned by each of the dissident nominees, but 64 votes (46 plus one-third of 54 votes) would be earned by each of the registrant nominees, leading to the registrant slate winning the election even though a majority of shareholders prefer that the dissidents gain two seats. For further discussion of the limitations of voting rules, see, e.g., Kenneth Arrow, Social Choice and Individual Values (1st ed. 1951). --------------------------------------------------------------------------- [[Page 79165]] Universal proxies may therefore result in either an increase or decrease in changes in control of a board, and in either dissidents or management winning more seats on the board, or a change in voting percentages without a change in the board composition. We expect that dissidents and registrants would take these potential impacts into consideration in their approach to potential proxy contests. For example, as discussed in more detail in the following section, if the parties to a contest anticipate that changes in voting behavior associated with universal proxies may change the number of seats that they expect to win, these expectations may affect the likelihood that they enter into a settlement agreement that results in changes to the board or other concessions. Such changes to board composition and concessions may either enhance or reduce, or have no significant effect on, the efficiency and the competitiveness of registrants. It is also possible that parties would take measures to reduce the likelihood of changes in election outcomes. For example, proxy statements and other related communications could include additional disclosures intended to deter shareholders from voting split-tickets, such as emphasizing the importance of a unified board and clarifying whether some or all of one party's nominees might not agree to serve if their party does not hold a majority of board seats. Such disclosures might reduce the likelihood of split-ticket voting and limit any potential increase in mixed boards. Another potential tactical response may involve the adoption by registrants of additional defenses to shareholder interventions. For example, registrants might adopt director qualification bylaws or might limit the indemnification or committee membership of dissident-nominated directors.\323\ Such changes could limit the likelihood of dissident nominees being elected or limit their impact if they are elected. Similarly, if dissidents anticipate that the proposed amendments could result in fewer dissident nominees being elected, they may choose to rely more heavily on other types of interventions, such as soliciting consents to replace some board members with their own nominees at a special meeting. Also, dissidents interested in minority representation may nonetheless choose to run longer slates of candidates, to the extent it could increase the likelihood that at least some of their nominees are elected. --------------------------------------------------------------------------- \323\ See, e.g., J.W. Verret, Defending Against Shareholder Proxy Access: Delaware's Future Reviewing Company Defenses in the Era of Dodd-Frank, 36 J. Corp. Law 391, 404-06 (2011). --------------------------------------------------------------------------- While the measures discussed above would serve to blunt the effect of the proposed amendments on election outcomes, the effect of other potential responses may serve to magnify these effects. For example, the parties to a contested election may change what they spend on solicitation. Some parties may increase these expenditures in order to further capitalize on an advantage that they anticipate the proposed amendments would give them, or to mitigate a disadvantage they perceive. If so, that may result in a greater likelihood of the parties' candidates being selected. The composition of boards may also be affected by changes in the set of potential nominees that may result from effects that the proposed amendments could have on the incentives of directors. As discussed above, reputational concerns may be an important consideration for directors and potential directors, and research has found that proxy contests may have an adverse effect on a director's reputation.\324\ For this reason, some potential directors may be relatively less willing to be nominated if they believe that universal proxies would reduce the likelihood that they are elected to a seat or retain their seat on a board. While we do not have specific data that suggests the proposed amendments would result in an increase in the reluctance of directors to serve, and it is unclear whether any such reluctance would be more likely to affect more qualified or less qualified candidates, any incremental increase in the reluctance of directors to serve may affect the ability of registrants to recruit individuals with the different skill sets needed to compose an effective board. --------------------------------------------------------------------------- \324\ See supra Section IV.B.1.d. --------------------------------------------------------------------------- Overall, the proposed amendments may have some effect on the composition or control of boards. The effects of any such changes on board effectiveness or on registrant performance are difficult to predict. On the one hand, if more dissident nominees are elected or dissidents are more likely to gain control, it could result in greater efficiency and competitiveness to the extent dissident-nominated directors may be more effective monitors.\325\ On the other hand, if more registrant nominees retain their seats or are more likely to retain control, the board may be better able to focus on long-term value creation, because a lower risk of board turnover may reduce the risk that directors unduly focus on short-term metrics.\326\ Also, a lower chance of changes in control may reduce the risk that expensive change in control provisions in debt covenants and other material contracts and agreements are triggered.\327\ Universal proxies may lead to more mixed boards with directors from both parties than under the current proxy system, but it is unclear whether such boards would be more or less effective than more homogenous boards. Mixed boards may increase the effectiveness of boards, such as through a reduction of ``groupthink'' and benefits stemming from inclusion of directors with diverse backgrounds,\328\ particularly because shareholders voting on universal proxies would have the ability to vote for the combination of directors that they believe provides the best mix of backgrounds given the specific circumstances of the registrant. [[Page 79166]] However, mixed boards may also lead to more frequent internal conflicts and result in less efficient decision-making within boards.\329\ --------------------------------------------------------------------------- \325\ See, e.g., Ian Gow, Sa-Pyung Sean Shin & Suraj Srinivasan, Activist Directors: Determinants and Consequences, Harv. Bus. Sch. Working Paper No. 14-120 (June 2014), available at http://www.hbs.edu/faculty/Pages/item.aspx?num=47599 (finding that activist interventions that result in new directors being appointed to the board are associated with significant strategic and operational actions by firms, as well as with positive stock reactions and improved operating performance). \326\ See, e.g., Martijn Cremers, Lubomir P. Litov & Simone M. Sepe, Staggered Boards and Long-Term Firm Value, Revisited, working paper (Mar. 14, 2016), available at SSRN: http://ssrn.com/abstract=2364165 (providing evidence suggesting that a greater likelihood of longer director tenure can serve as a longer-term commitment device with positive effects on longer-term value creation). \327\ For example, one study found in its sample of debt issues that over half of the debt issued in 2012 contained change in control covenants that gave bondholders an option to require the issuer to offer to purchase all of the bonds (typically at 101 percent of their par value) if, at any time, the majority of the board of directors ceased to be those who were directors at the time of issuance or those whose election was approved by a majority of the continuing directors. See Frederick Bereskin & Helen Bowers, Poison Puts: Corporate Governance Structure or Mechanism for Shifting Risk?, working paper (Sept. 8, 2015), available at http://irrcinstitute.org/wp-content/uploads/2015/09/FINAL-Poison-Puts-Research-Sept-2015.pdf. Triggering such covenants, often referred to as ``proxy puts,'' can result in companies repurchasing their own debt at a loss as well as having to incur expenses to refinance with a new debt issue. Such covenants are more binding when they are of the ``dead hand'' variety, which prevents the board from approving dissident-nominated directors in order to avoid triggering the covenant. See F. William Reindel, Dead Hand Proxy Puts--What You Need To Know, Harvard Law School Forum on Corporate Governance and Financial Regulation Blog, June 10, 2015, available at https://corpgov.law.harvard.edu/2015/06/10/dead-hand-proxy-puts-what-you-need-to-know/. \328\ See, e.g., Jeffrey Coles, Naveen Daniel & Lalitha Naveen, Board Groupthink, working paper (2015), available at https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=AFA2016&paper_id=1137; David Carter, Betty Simkins & Gary Simpson, Corporate Governance, Board Diversity, and Firm Value, 38 Fin. Rev. 33 (2003). \329\ See, e.g., Anup Agrawal & Mark Chen, Boardroom Brawls: An Empirical Analysis of Disputes Involving Directors, working paper (2011), available at http://ssrn.com/abstract=1362143 (studying boardroom disputes that are disclosed upon directors resigning or declining to stand for re-election and finding that directors who are likely to be more independent of management are more likely to be involved in the dispute). --------------------------------------------------------------------------- 4. Potential Effects on Incidence and Threat of Contested Elections As discussed in Sections IV.D.2 and IV.D.3 above, the effects of the proposed amendments on the outcomes and costs to registrants and dissidents of contested elections are uncertain, but could be significant. In this section, we consider how any such effects of the proposed amendments may change the incentives of dissidents to initiate proxy contests and the manner in which registrants react to the possibility of a contested election (the perceived ``threat'' of a contest), even in the absence of a contest. We first consider the incidence and perceived threat of typical proxy contests, in which the dissident expends significant resources on solicitation. Then we consider the potential incidence or perceived threat of nominal contests in which dissidents, taking advantage of the proposed mandatory use of universal proxies, may engage in a proxy contest in which they invest significantly fewer resources than in a typical proxy contest.\330\ Any changes in the incidence of contested elections of these different types, or, even in the absence of a contest, in managerial decision-making or the relationship between shareholders and management as a result of the threat of such contests, may result in costs and benefits for shareholders, registrants, and dissidents. However, any such effects are uncertain because the extent and direction of the effects of the proposed amendments on the outcomes and costs of contested elections are unclear, because it is difficult to predict how different parties will respond to such effects, and because it is difficult to evaluate whether changes in the incidence or perceived threat of contests would have positive or negative effects on board or registrant performance. --------------------------------------------------------------------------- \330\ We also note that there may be effects on the incidence and threat of ``late-breaking'' proxy contests, or contests initiated close to the meeting date, because of the notice requirement and the proxy statement filing deadline prescribed by the proposed amendments. These timing requirements and their potential effects are discussed in more detail in Section IV.D.5 infra. --------------------------------------------------------------------------- a. Typical proxy contests Effects Related to Anticipated Changes In Outcomes Any effects on the expected outcomes of typical proxy contests may affect the incidence of such contests as well as the likelihood that a registrant makes changes (whether in board composition or with respect to other decisions) even in the absence of actual contests. The likely effects of universal proxies on the outcome of a typical contest depend on the dynamics of the particular contest. Thus, it is not clear whether, on average, the proposed amendments would increase or decrease the likelihood of changes in control or the number of board seats won by either party. On the one hand, a dissident who expects to gain more seats under the proposed amendments than under the baseline may have an increased incentive to initiate a typical proxy contest. This would particularly be the case for a dissident that expects a greater likelihood of gaining control of the board, and for whom majority control of the board would be required to institute the changes the dissident desires. On the other hand, a dissident who expects, under the proposed amendments, to gain fewer seats or face a lower likelihood of gaining control than under the baseline may have a decreased incentive to initiate a typical contest. If, under the proposed amendments, a registrant is expected to face a higher risk of losing seats or control of the board to dissident nominees, it is likely that a potential dissident could exercise greater influence over that registrant. Conversely, it is likely that the influence of potential dissidents would be reduced where a lower risk of losing seats or control to dissident nominees is expected under the proposed amendments. These changes in influence may derive from the outcomes of election contests or from negotiations with registrants in the course of, or in the absence of, a contest. In particular, registrants facing a greater threat of contests or a higher chance of losing seats (or control) if a contest were initiated may be more likely to enter into a settlement agreement with the dissident and may also be more likely to concede at earlier stages of engagement or to make changes in response to alternative interventions (such as ``vote no'' campaigns).\331\ Registrants facing a reduced threat of contests or a lower chance of losing seats (or control) if a contest were initiated may be less likely to enter into settlement agreements, to engage in negotiations at earlier stages, or to make changes in response to alternative interventions. --------------------------------------------------------------------------- \331\ See e.g., Roundtable Transcript, comment of Michelle Lowry, Professor, Drexel University at 60 and Lisa M. Fairfax, Professor, George Washington University Law School, at 48 (noting that universal proxies could facilitate settlements with or accommodations to dissidents before a contest arose). --------------------------------------------------------------------------- Thus, it is likely that any changes in expectations regarding the outcome of a potential contest would affect the degree of a dissident's influence relative to that of a registrant's incumbent board and management. It is difficult to generalize about the effects of the proposed amendments as they are very likely to depend on the dynamics of a particular contest (or potential contest). Also, it is not clear whether the actual incidence of contested elections would increase or decrease, because any change in a dissident's incentive to initiate contests may be accompanied by a change in the likelihood that a registrant makes earlier concessions to prevent a disagreement from proceeding to the stage of a proxy contest. Effects Related to Anticipated Changes in Costs While it is unclear whether the proposed amendments are likely to change the expected costs of typical proxy contests to registrants and dissidents, any such changes in the expected costs may also affect the incidence and perceived threat of such contests. In particular, a dissident that expects to achieve a similar outcome at a lower cost may have a greater incentive to initiate a typical proxy contest.\332\ Registrants that expect dissidents to face lower costs, or those registrants that expect to bear additional costs in the form of increased solicitation expenditures in a contested election, may have greater incentive to make concessions. In contrast, a [[Page 79167]] dissident that expects to incur additional solicitation expenses to achieve the same outcome may have a lower incentive to initiate a typical proxy contest, while registrants that expect dissidents to face higher costs, or registrants that expect to face lower costs in a contested election, may have a lower incentive to make concessions. --------------------------------------------------------------------------- \332\ It is possible that a significant reduction in the average cost to dissidents in typical proxy contests could have effects that reduce the incentive to initiate some contests. In particular, some studies have found that a high required cost of proxy contests may serve as a credible signal to other shareholders that the value that the dissident's slate of directors can bring to the registrant is high, or else the dissident would not be bearing the cost of a proxy contest. In an environment in which the average cost of a typical proxy contest is very low, the ability of dissidents to get support for their nominees may be decreased, as it may be more difficult and potentially more costly than otherwise for a dissident whose contest has strong merit to differentiate their contest from less worthy contests. See, e.g., John Pound, Proxy contests and the Efficiency of Shareholder Oversight, 20 J. Fin. Econ. 237 (1988); Utpal Bhattacharya, Communication Costs, Information Acquisition, and Voting Decisions in Proxy Contests, 10 Rev. Fin. Stud. 1065 (1997). --------------------------------------------------------------------------- Differential Effects Across Registrants To the extent that the incidence and perceived threat of typical proxy contests may change, certain registrants may be affected more than others. For example, relatively smaller to midsize registrants may be more affected because they are currently the most likely to be involved in proxy contests.\333\ Any marginal changes may therefore have the greatest impact on this group of registrants. However, more significant changes in the nature of proxy contests could also make it more attractive to target types of registrants that were infrequently the subject of proxy contests in the past. For example, to the extent that large registrants may currently be less likely to be targeted because of the greater resources they can expend to counter a dissident's solicitation efforts, a significant decrease in dissidents' costs or a large increase in their likelihood of success could lead to a higher threat or incidence of contests at such registrants. The governance structures of registrants are also likely to play a role in the impact of the proposed amendments. On the one hand, registrants with governance characteristics that may increase the potential impact of proxy contests, such as cumulative voting, may be more affected than others.\334\ On the other hand, registrants with governance characteristics that make them more difficult to target with certain kinds of election contests, such as those with high insider control, may be less affected by the proposed amendments.\335\ --------------------------------------------------------------------------- \333\ For example, staff estimates that only four of the 72 registrants involved in proxy contests in 2014 and 2015 were in the S&P 500 index. See supra Section IV.B.2.a. \334\ See supra note 228. \335\ See supra note 231. --------------------------------------------------------------------------- b. Nominal Proxy Contests The proposed amendments may also affect the incidence or perceived threat of nominal proxy contests, in which the dissidents incur little more than the basic costs required to engage in a contest and which are currently rare.\336\ The nature of nominal proxy contests may be affected by the proposed amendments in two key ways. First, the proposed solicitation requirement may increase the costs to dissidents of pursuing such contests. Dissidents in nominal contests would have to bear the cost required to draft a proxy statement and undergo staff review and comment process for that filing, as in the case of current nominal contests. However, under the proposal, such dissidents would also have to bear the costs required to meet the proposed solicitation requirement. We estimate that meeting the proposed solicitation requirement would cost approximately $6,000 at the median-sized (based on the number of accounts in which its shares are held) registrant, though this cost could be lower in cases in which the services of an intermediary are not required to meet the solicitation requirement (as in the case of registrants with highly concentrated ownership) or higher at registrants with a more dispersed shareholder base.\337\ As discussed above, while this required solicitation cost would be greater than the expenditure currently required in a nominal contest, the costs would remain substantially lower than the solicitation costs dissidents bear in typical proxy contests.\338\ --------------------------------------------------------------------------- \336\ See supra note 306. \337\ See supra Section IV.D.2.b. \338\ Id. --------------------------------------------------------------------------- Second, requiring that registrants use universal proxies would, in practice, allow dissidents in nominal contests to put the names of their director candidates in front of all shareholders, via the registrant's proxy card, without additional expense. This change could somewhat increase the likelihood that a dissident in a nominal contest succeeds in gaining seats for their nominees, though, as in the case of current nominal contests, dissidents may have a very limited chance of succeeding in gaining seats if they do not engage in meaningful independent soliciting efforts. Dissidents engaging in a nominal contest would not be required to meet the eligibility criteria that apply to other alternatives that would allow dissidents to include some form of information on the registrant's proxy card, such as the requirements of a proxy access bylaw, where available. Dissidents may therefore consider engaging in a nominal contest when they would not qualify to use alternatives such as proxy access or when these alternatives are not available. However, the information included in the registrant's proxy materials would likely be more limited in the case of a nominal contest (just a list of names) than these other alternatives. Based on staff experience, we expect that a dissident that solicits holders that represent at least a majority of voting power and files a preliminary and definitive proxy statement, without engaging in any other soliciting efforts, would generally have a very limited chance of having any of its nominees elected to the board despite their names being included on the registrant proxy card. The likelihood that a nominal contest results in dissident nominees winning seats may depend on many factors including the identity of dissident's nominees, their backgrounds and name recognition, the shareholders' level of dissatisfaction with the registrant, and the efforts of the registrant to dissuade shareholders from supporting dissidents' nominees.\339\ In general, we expect that engaging in a nominal contest would not be an attractive alternative for most potential dissidents that are truly interested in gaining board representation,\340\ particularly if other alternatives are feasible.\341\ --------------------------------------------------------------------------- \339\ While the registrant's universal proxy card would permit a vote for dissident nominees, its proxy statement can and likely would include disclosure arguing against such a vote. If the dissident does not counter with positive information about its nominees disseminated in a meaningful way to a significant percentage of shareholders, we expect that the dissident's odds of success in the solicitation would be low. \340\ We note that the Commission's 2007 amendments to the proxy rules allowing notice and access delivery of proxy statements decreased the minimum cost at which a proxy contest could be conducted through potentially reduced mailing costs, but did not seem to cause an increase in contested elections, which may be evidence of the importance of full set delivery and other solicitation expenditures in gathering support for dissident nominees. See, e.g., Fabio Saccone, E-Proxy Reform, Activism, and the Decline in Retail Shareholder Voting, The Conference Board Director Notes Working Paper No. DN-021 (Dec. 26, 2010), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1731362. For details on the 2007 amendments to the proxy rules, see Shareholder Choice Regarding Proxy Materials, Release No. 34-56135 (July 26, 2007) [72 FR 42222 (Aug. 1, 2007)]. \341\ These alternatives may include a typical proxy contest (with additional solicitation expenditures but also, potentially, with a higher chance of success) or use of a proxy access bylaw (if available and if the dissident is eligible to use proxy access). We are unaware of any cases in which such bylaws have been used to nominate directors to date. However, most proxy access bylaws would require a registrant to include information about the dissident nominees and a supporting statement from the dissident in its proxy materials and would not require the dissident to bear the costs and meet the requirements described above. That said, it is possible that dissidents interested in board representation but for whom additional expenditures are not feasible or justified, and for whom proxy access is unavailable, may consider a nominal proxy contest. --------------------------------------------------------------------------- Even if the chance of obtaining board representation through a nominal contest may be low, dissidents may be interested in other possible effects of such contests. In particular, introducing the names of alternative candidates onto [[Page 79168]] the registrant's proxy card may attract attention to the dissident and its agenda as shareholders, other market participants, proxy advisory services, analysts and journalists seek to understand why these candidates have been put forth and whether they deserve consideration. For example, shareholders who see the names may look up the dissident's proxy materials online to learn more about the candidates and why they are being nominated. Such attention could be used by the dissident to publicize a desired change or a particular issue,\342\ or to encourage management to engage with the dissident. However, it is unclear whether the inclusion of dissident nominees on the registrant's proxy card would significantly increase the publicity surrounding a nominal proxy contest. --------------------------------------------------------------------------- \342\ While the shareholder proposal process may be used to raise some such concerns, and would allow these concerns to be expressed more directly in the registrant's proxy statement, such proposals would also need to meet the requirements of Rule 14a-8. For example, proposals on certain topics, such as those pertaining to ordinary business matters, may be properly excluded by registrants from their proxy materials. See 17 CFR 240.Rule 14a- 8(i)(7). --------------------------------------------------------------------------- It is difficult to say whether and to what extent the possibility of such publicity would lead dissidents to more frequently initiate nominal contests, and similarly, whether the ability of dissidents to run such contests would influence the incentives of management to pursue changes in response to such dissidents. Preliminarily, we believe the likelihood of a significant increase in nominal contests would be mitigated by the new costs associated with the proposed solicitation requirements and the current availability to dissidents of other (potentially lower-cost) routes to obtaining publicity.\343\ Also, while nominal contests are currently rare, it is also possible that their incidence could decline further under the proposed amendments given the new costs imposed on such contests. In particular, dissidents that would otherwise pursue nominal contests might consider alternatives that would not trigger the proposed solicitation requirement, such as an exempt solicitation, or could choose not to take any such actions due to the higher costs imposed on nominal contests by the proposed amendments. --------------------------------------------------------------------------- \343\ For example, for a much lower cost, a dissident could send a letter to the board detailing its desired changes and file it as an attachment to a voluntary or required Schedule 13D filing, making it available to the public (though, unlike a registrant's universal proxy card, it would not be disseminated to shareholders). --------------------------------------------------------------------------- c. Effects of Any Changes in Incidence or Threat of Proxy Contests Overall, it is unclear whether the proposed amendments would result in an increase or decrease in the incidence or perceived threat of proxy contests, and thus a change in the level of engagement with and the influence of dissidents. However, to the extent that any of these factors is significantly affected, we cannot rule out the possibility that there may be significant effects on the efficiency and competitiveness of registrants. In particular, a change in the incidence or perceived threat of proxy contests either could result in more effective boards and improved registrant performance, or could interfere with the working of boards and managerial decision-making. There is some evidence that proxy contests may be beneficial to shareholders. For example, studies have found proxy contests to be associated with positive share price reactions.\344\ In this vein, some observers have argued that the low incidence of proxy contests is due to collective action problems related to the high costs of proxy contests \345\ and that a higher rate of proxy contests may be optimal.\346\ Any increase in engagement between management, dissidents, and shareholders that may result because of changes in the threat of proxy contests, such as discussions at earlier stages of a campaign or reactions to other types of shareholder interventions, could similarly be beneficial. Such engagement may improve the effectiveness of boards, may lead to value-enhancing changes, and may perhaps be a more efficient means to achieve such changes than expensive proxy contests. For example, one study found that an increased likelihood of being targeted with a proxy contest (even if an actual proxy contest does not materialize) is associated with changes in corporate policies that are followed by improved operating performance.\347\ In these ways, an increase in the incidence or perceived threat of proxy contests could represent a valuable disciplinary force for some boards. --------------------------------------------------------------------------- \344\ See, e.g., Yair Listokin, Corporate voting versus market price setting, 11 Am. L. & Econ. Rev. 608 (2009) (finding that, in a sample of proxy contests, close dissident victories were related to positive stock price impacts, while close management victories were related to negative stock price impacts); Mulherin & Poulsen Study, at 307 (finding that their sample of proxy contests was associated with shareholder value increases, particularly when the contests led to management turnover or acquisitions). See also Matthew Denes, Jonathan M. Karpoff & Victoria McWilliams, Thirty Years of Shareholder Activism: A Survey of Empirical Research, J. Corp. Fin. (forthcoming 2016), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2608085. \345\ That is, when a small group of shareholders must bear all of the costs of proxy contests while sharing in only a fraction of any benefits, with other shareholders absorbing the rest, the small group may be discouraged from initiating potentially value-enhancing proxy contests. \346\ See, e.g., Lucian A. Bebchuk, The Myth of the Shareholder Franchise, 93 Va. L. Rev. 675, 712 (2007); Bernard S. Black, Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520 (1990). \347\ See Fos Study, at 24-26. --------------------------------------------------------------------------- Conversely, an increase in the incidence and perceived threat of contests could also have a negative impact on the efficiency and competitiveness of registrants. For example, studies have found that proxy contests in which dissidents win one or more seats but there is no change in the incumbent management team and the registrant is not acquired are associated with underperformance in the years after the contest.\348\ These results are consistent with the idea that conflicts in the boardroom may have detrimental effects for shareholders. An increase in the perceived threat of proxy contests or in engagement with dissidents could also have negative implications. For example, some studies have found that boards that face a lower threat of being replaced because of poor short-term results may be better able to focus on long-term value creation.\349\ Studies have also found that increased dissident influence may be detrimental to the extent that managers make concessions or policy changes that are value-decreasing in order to deter activists.\350\ Thus, in some cases, an increase in the incidence or perceived threat of proxy contests could represent a costly distraction for boards and corporate officers. It is also possible that any increased incentive for companies to stay or go private rather than bear the threat of proxy contests could negatively affect capital formation.\351\ --------------------------------------------------------------------------- \348\ See, e.g., Mulherin & Poulsen Study, at 305-08; David Ikenberry & Josef Lakonishok, Corporate Governance Through the Proxy Contest: Evidence and Implications, 66 J. of Bus. 405, 424-25 (1993). \349\ See Martijn Cremers, Lubomir Litov & Simone Sepe, Staggered Boards and Long-Term Firm Value, Revisited, working paper (2016), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2364165; Martijn Cremers, Erasmo Giambona, Simone Sepe & Ye Wang, Hedge Fund Activism and Long-Term Firm Value, 17-20, working paper (Nov. 19, 2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2693231. \350\ See, e.g., John Matsusaka & Oguzhan Ozbas, A Theory of Shareholder Approval and Proposal Rights, U.S.C. CLEO, Working Paper No. C12-1 (Mar. 2016), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1984606. \351\ See, e.g., Geoff Colvin, Going Private: Take this Market and Shove it, Fortune Magazine (May 29, 2016), available at http://fortune.com/going-private/ (citing the avoidance of proxy contests as motivation for firms to go private). While it is possible that companies could have some incremental incentive to stay or go private, we believe it is unlikely that the proposed amendments would result in an increased incentive for registrants to relist or redomicile overseas, given that these changes alone would not be sufficient to avoid being subject to the U.S. proxy rules. For example, foreign issuers may be subject to the U.S. proxy rules unless they qualify as foreign private issuers under Exchange Act Rule 3b-4(c). In particular, a foreign registrant cannot qualify as a foreign private issuer if more than 50 percent of its securities are held by U.S. residents and at least one of the following applies: (i) A majority of the officers and directors are U.S. citizens or residents; (ii) more than 50 percent of the issuer's assets are located in the U.S.; or (iii) the issuer's business is principally administered in the U.S. --------------------------------------------------------------------------- [[Page 79169]] Given these competing factors, to the extent there is any change in the incidence and perceived threat of typical proxy contests, the effects are likely to vary from registrant to registrant, and it is difficult to predict the average effects of changes in the nature of proxy contests across all registrants. The possible effects of changes in the incidence or threat of nominal proxy contests are similarly unclear. To the extent that such contests have the potential to affect the results of director elections, the actual incidence or perceived threat of such contests may either increase director discipline or create a distraction for boards, as in the case of typical proxy contests. However, such contests may be used to attract attention in the interest of pursuing other changes. In some cases, drawing attention to particular issues in this way could lead to value- enhancing changes. In other cases, dissidents may use such contests to pursue idiosyncratic interests which may not be shared by other shareholders, in which case the average shareholder may be unlikely to benefit and yet likely bear the costs of registrants expending additional resources on solicitation in such contests. In these cases, the negotiations related to such contests or the perceived threat of such contests could also result in registrants making concessions to dissidents that may not be in the best interest of the average shareholder in order to reduce the costs of contending with such contests. Finally, the effects of any changes in proxy contests may be affected by managers and market participants altering their behavior in reaction to the proposed amendments. In particular, changes in the nature of proxy contests may increase or decrease the use of complementary or substitute governance mechanisms.\352\ For example, studies have found that a historical increase in proxy contests was associated with a decrease in hostile takeovers, in which an entity acquires control of a company against the wishes of the incumbent board by purchasing its stock, suggesting proxy contests and hostile takeovers may be substitute mechanisms for control challenges.\353\ In contrast, activist shareholders with large holdings in a particular registrant (or activist blockholders) who may be able to directly monitor and communicate with management, may represent a type of governance mechanism that can be a complement to proxy contests.\354\ For example, if activist blockholders are present, it may be easier to overcome collective action problems and initiate and win a proxy contest. Thus, any increase in the potential impact of proxy contests may be enhanced by the presence of activist blockholders. At the same time, if the potential impact of proxy contests increases, the incentive of registrants to engage with activist blockholders and make suggested improvements may increase, enhancing the monitoring value of activist blockholders.\355\ --------------------------------------------------------------------------- \352\ The concepts of complementary and substitute governance mechanisms are discussed in Section IV.C. supra. \353\ See, e.g., Fos Study, at 5-6, 26. \354\ See Section IV.B.1.b. for the frequency and size of institutional blockholdings among potentially affected registrants for which this data is available. \355\ For a broader review of issues concerning the role of blockholders in corporate governance, see Alex Edmans, Blockholders and Corporate Governance, 6 Ann. Rev. Fin. Econ. 23 (2014). --------------------------------------------------------------------------- Any effects that follow from increasing the incidence or perceived threat of proxy contests may be either mitigated or magnified by indirect effects on these substitute and complementary mechanisms. For example, any increase in the incidence of proxy contests could be offset by reductions in the use of substitute mechanisms such as takeovers.\356\ Alternatively, such an increase could be magnified by complementary mechanisms whose effectiveness and therefore usage may increase (such as by activists being more likely to acquire blockholdings) in an environment in which proxy contests are more frequent. Such interactions may have significant effects on the overall economic effects of the proposed amendments. However, because so many different governance mechanisms are closely interrelated, it is difficult to predict the extent and impact of such interactions. We solicit comment below on the likelihood of changes in the incidence and threats of proxy contests as a result of the proposed amendments and any corresponding effects, including effects on efficiency, competition, and capital formation. --------------------------------------------------------------------------- \356\ We note that proxy contests may also be a complementary mechanism for certain types of takeovers. In particular, proxy contests can facilitate some hostile takeovers by removing directors who oppose the transaction in question. See Mulherin & Poulsen Study, at 309. --------------------------------------------------------------------------- 5. Specific Implementation Choices In this section, we discuss, to the extent possible, any costs and benefits specifically attributable to individual aspects of the proposed amendments. We also discuss changes to the proxy voting process we considered that present significant implementation alternatives and their benefits and costs compared to the amendments as proposed. a. Bona Fide Nominees and the Short Slate Rule Revision to the Consent Required of a Bona Fide Nominee We propose to amend the definition of a bona fide nominee under Rule 14a-4(d)(4) for registrants other than funds and BDCs to include all director nominees that have consented to being named in any proxy statement, whether that of the registrant or that of a dissident, relating to the registrant's next meeting of shareholders at which directors are to be elected. The proposed amendment to the definition of a bona fide nominee would remove the impediment imposed by the current rule to including other parties' nominees on one's own proxy card. We preliminarily believe that this proposed amendment would, in and of itself, likely impose no direct cost on parties to contested elections because it would not require parties to change their slates of nominees or their proxy materials. However, revising Rule 14a-4(d)(4) is a prerequisite to any rule that would allow or require universal proxies. As such, all of the other costs and benefits discussed above, the details of which depend on the other implementation choices in this proposal, are conditional on this proposed amendment. Additionally, revising 14a- 4(d)(4) alone, without the other amendments we are proposing, would permit the optional use of universal proxies, an alternative we discuss below. Elimination of the Short Slate Rule We propose to eliminate the short slate rule, which currently permits a dissident seeking to elect a minority of the board and running a slate of nominees that is less than the number of directors being elected to round out its slate by soliciting authority to also vote for certain registrant nominees, for registrants other than funds and BDCs. The proposed elimination of the short slate rule potentially would impose costs on certain dissidents. Under the existing proxy rules, dissidents qualifying to use the short slate rule can [[Page 79170]] select the set of registrant nominees that they prefer to round out their slate. Eliminating this rule, and imposing a mandatory universal proxy, would take away this choice on the part of the dissident, reducing any related strategic advantage that the dissident may expect to gain, and would instead allow shareholders voting on the dissident proxy card to select the registrant nominees, if any, that they prefer. We have considered whether, as an alternative to the proposed approach, the proxy rules should instead be revised to treat contests that do not involve a potential change in the majority of the board differently from contests in which control of the board is at stake, as in the current short slate rule and as recommended by some observers.\357\ For example, we have considered an alternative approach that would not require the use of universal proxies in contests that may involve a potential change in a majority of the board. When a dissident is seeking a majority of seats on the board, electing a mixed board where a minority of seats would be held by dissident nominees may be inconsistent with the intentions and goals of both the dissident and the registrant. Not requiring universal proxy cards in such cases could reduce the likelihood of electing a mixed board when such an outcome is undesirable to both parties to the contest and could be disruptive. However, under this alternative, shareholders would continue to have more limited voting options when voting by proxy than when voting in person in contests that involve a potential change in a majority of the board. Furthermore, the risk of electing a mixed board when it would be disruptive or contrary to the goals of both parties to the contest could also be mitigated through disclosure emphasizing the importance of achieving (or retaining) majority control of the board and clarifying the willingness of each nominee to serve in the case control is not achieved. --------------------------------------------------------------------------- \357\ The IAC recommended that the Commission consider providing proxy contestants with the option to provide universal proxies in connection with short slate director nominations. The IAC did not make such a recommendation in the case of elections in which majority control of the board is at stake. See IAC Recommendation, at 2. --------------------------------------------------------------------------- Solicitations Without a Competing Slate Under existing rules, a party may solicit proxies without presenting a competing slate, such as when soliciting proxies against some or all of the registrant nominees (a ``vote no'' campaign) or when soliciting proxies in favor of one or more proposals on matters other than the current election of directors. The proposed amendments would permit, but not require, proponents conducting solicitations without a competing slate to also solicit authority with respect to some or all registrant nominees in their proxy statements and proxy cards. To the extent that the ability to include these candidates would allow shareholders to vote on the proponent's proxy card while still exercising their full voting rights, this change may result in somewhat increased support for proponents in solicitations without a competing slate. This potential increase in support may increase proponents' incentive to initiate such campaigns. As in the other contexts discussed above, it is difficult to predict to what extent proponents may increase the incidence of such campaigns, or to what degree the involved parties may react in other ways to the potential for somewhat higher support in solicitations without a competing slate. For example, any resulting increase in the frequency of such campaigns may be partially offset by accompanying changes in incentives for registrants to engage with proponents. Such interventions could also substitute, in some cases, for contested elections. It is unclear whether increased support for, or an increased incidence of, proponent initiatives would generally enhance or detract from the effectiveness of boards and the efficiency and competitiveness of registrants. An alternative to the proposed approach would be to require proponents conducting solicitations without a competing slate to include the names of all duly nominated director candidates on their proxy cards (unless they are soliciting votes against all registrant nominees). This approach may have limited effect in the case of a ``vote no'' campaign, because shareholders would already be able to vote ``for'' and ``against'' their choice of any registrant nominees by using the registrant proxy card. In contrast, in the case of a proponent that solicits in favor of a particular proposal, the registrant may choose to not include the proposal on its proxy card, in which case, shareholders voting on the proponent's proxy card would be disenfranchised under the baseline and similarly may be disenfranchised under the proposed approach unless the proponent chooses to include all director nominees on its proxy card. This alternative would remove the risk of such disenfranchisement with respect to voting for directors. However, the risk of such disenfranchisement under the proposed amendments is likely mitigated because we expect that such proponents would have the incentive to include the registrant nominees on their proxy card in order to increase the incentive for shareholders to use their card and would generally not have strategic reasons to exclude registrant nominees from their proxy card because of the lack of a competing slate. b. Use of Universal Proxies Mandatory Use of Universal Proxies in Non-Exempt Solicitations in Contested Elections The proposed amendments would require that universal proxies be used by each party--the registrant as well as the dissident--in any contested election with competing slates, regardless of the number of director seats being contested. This requirement would apply to all registrants that are subject to the proxy rules other than registered investment companies and BDCs. Mandatory vs. Optional Use of Universal Proxies Requiring both the registrant and the dissident in any contested election with competing slates to use universal proxies would enable all shareholders to vote for the combination of candidates of their choice in all such elections, whether they vote by proxy or in person at the meeting. Imposing this mandate on the registrant as well as the dissident may impose minor direct costs on both parties and may result in potentially significant, but uncertain, strategic advantages or disadvantages for these parties, leading to further costs and benefits for these parties and either benefits or costs for shareholders at large. Indeed, many of the potential effects discussed throughout this economic analysis are conditional on a mandatory universal proxy requirement. Mandating the use of universal proxies by registrants in particular may have certain significant implications. Specifically, this approach would make it possible for all shareholders voting by proxy, even those not solicited by the dissident, to vote for dissident nominees. Requiring registrants to use universal proxies would likely result in all shareholders receiving a proxy card that would allow them to vote for any combination of the full set of director nominees, more accurately reflecting the voting options available to shareholders at the meeting. However, requiring the names of the dissident nominees to appear on the registrant's proxy card would allow a form of access to the registrant's proxy materials without the eligibility criteria that accompany other [[Page 79171]] forms of access,\358\ and could result in an increased incidence of nominal contests that capitalize on this new channel for such access. As discussed in Section IV.D.4.b above, it is unclear to what extent any dissidents would choose such an approach and whether any such contests would be beneficial or detrimental. --------------------------------------------------------------------------- \358\ For example, proxy access bylaws, where available, apply certain eligibility criteria including an ownership threshold. --------------------------------------------------------------------------- We considered mandating the availability of universal proxy cards while allowing registrants and dissidents to initially disseminate a non-universal proxy card if they so choose. In particular, anyone soliciting a proxy in a contested election using a non-universal proxy card would be required to provide disclosure about the availability of a universal proxy card and to provide a universal proxy card upon request to any shareholder it solicited. Registrants and dissidents would still be subject to other requirements similar to the proposed amendments, such as the notice and filing requirements, in order to facilitate the effective use of universal proxies. Allowing the names of opponent nominees to be excluded from a party's original dissemination may allow both parties to the contest to reduce the degree of publicity that they provide to their opponent's nominees. This approach may therefore reduce the possibility of nominal contests that seek to capitalize on such publicity while still providing shareholders the ability to vote for their preferred combination of nominees by electing to receive a universal proxy card. This approach may also involve additional costs and logistical difficulties associated with maintaining multiple types of proxy cards and fulfilling shareholder requests for universal proxy cards in an efficient and equitable way. Further, we note that this approach would place some burden, although perhaps not particularly heavy, on shareholders to request a universal proxy card. There are two main alternatives to mandating that universal proxies be used by both parties to a contested election with competing slates. First, the use of universal proxies could be optional for all parties rather than mandatory. Second, there are hybrid approaches in which universal proxies would be mandatory for one party to the contest and optional for the other. Under an optional approach, which has been recommended by certain observers,\359\ whether or not a party chose to provide a universal proxy would depend on strategic considerations. Having the option rather than a requirement to use a universal proxy may benefit either registrants or dissidents, depending on the nature of individual contests. Optional universal proxies likely would be used by a contesting party, to the possible detriment of its opponent, when the party believes that including the names of the opponent's nominees on its own card would be in its best interest, but not otherwise. For example, a party that expects strong support for its opponent's nominees may prefer to include those nominees on its proxy card in order to increase the likelihood that shareholders use its card, since they would be able to do so without giving up the ability to support at least some of the opponent's nominees. Optional universal proxies may also mitigate the risk, relative to that under the proposed amendments, of electing a mixed board when such an outcome is inconsistent with the intentions of both the dissident and the registrant, because both parties may be less likely to use a universal proxy in such cases. This alternative may also reduce the likelihood of an increase in nominal contests because the registrant would control whether or not the names of dissident candidates were included on its proxy card. Finally, because allowing the optional use of universal proxy cards would necessarily entail removing the impediments to such proxies in the existing proxy rules, such an approach might facilitate the ``private ordering'' of a universal proxy requirement--that is, the ability of shareholders to request that individual registrants commit to a policy of using universal proxies in future contests through changes to their corporate governing documents--at only those registrants where shareholders believe mandatory universal proxies would be beneficial.\360\ --------------------------------------------------------------------------- \359\ See IAC Recommendation, at 2. \360\ The availability of such private ordering may depend on developments in state law. Also, if only a minority of shareholders is interested in splitting their votes, it may be difficult to obtain the support required to revise bylaws or other corporate governing documents to require universal proxies. --------------------------------------------------------------------------- However, under an optional approach it is likely that in many cases neither registrants nor dissidents would include their opponent's nominees on their proxies, in order to avoid diluting the potential support for their own nominees among those shareholders that use their proxy card. To the extent that contesting parties were further given the option to determine how many and which of their opponent's nominees to include, it is likely that the contesting parties would often include fewer than all of the duly-nominated candidates on their proxy cards, even when they did include some of their opponent's nominees. In any such cases, shareholders would continue to have more limited voting options when voting by proxy than when voting in person. Thus, we expect that an optional approach would result in inconsistent application and not fully achieve the goal of allowing shareholders the ability to vote by proxy for their preferred combination of director candidates, as they could at a shareholder meeting. Canada's system of optional universal proxies illustrates the potential limitations of an optional system. In Canada, a party to a contested election has the option, but is not required, to include some or all of its opponent's nominees on its own proxy card. There have been roughly 10 to 20 election-related proxy contests per year in Canada over the last decade,\361\ representing a significant fraction of the annual number of contests in the United States. However, we are aware of only five cases in which at least one party to a Canadian proxy contest that proceeded to a vote used a universal proxy,\362\ and one additional case in which at least one party to the contest included some, but not all, of its opponent's nominees on its proxy card.\363\ --------------------------------------------------------------------------- \361\ See Fasken Martineau DuMoulin LLP, Canadian Proxy Contest Study--2016 Update (2016), available at http://www.fasken.com/canadian-proxy-contest-study-2016-update/. \362\ This estimate includes only those cases that we are aware of in which at least one party included all of the registrant nominees and all of the dissident nominees on its proxy card. See, e.g., Boyd Erman, CP Vote Broke New Ground for Democracy, The Globe and Mail (May 30, 2012), available at http://www.theglobeandmail.com/report-on-business/streetwise/cp-vote-broke-new-ground-for-democracy/article4217586/ (reporting on one such case). \363\ We note that differences in rules and practices in Canada as compared to the United States limit our ability to draw direct inferences from the experience of Canada. See, e.g., Patricia Olasker & Alex Moore, Debunking the Myth: Why Activism is Tough in Canada, David Ward Philips & Vineberg (Mar. 2015), available at https://www.dwpv.com/~/media/Files/PDF_EN/2015/2015-04-14-Debunking- the-Myth-Why-Activism-is-Tough-in-Canada.ashx. --------------------------------------------------------------------------- In contrast, hybrid alternatives would require at least one party to a contest to use a universal proxy, potentially allowing a greater number of shareholders to split their ticket using a proxy compared to an optional approach. One hybrid alternative would be to require the dissident to use a universal proxy and allow registrants the option, but not the obligation, to include the dissident's nominees on its proxy card. This hybrid approach could be implemented with or without a notice requirement or a minimum [[Page 79172]] solicitation requirement. In this case, shareholders solicited by the dissident would be able to cast their votes by proxy for their choice of any combination of candidates. If the registrant chose not to use a universal proxy, those not solicited by the dissident would not be able to vote for dissident nominees or to split their vote across registrant and dissident nominees unless they attended the meeting or specifically requested the dissident's proxy card.\364\ --------------------------------------------------------------------------- \364\ Existing rules do not require the dissident in an election contest to solicit all shareholders; rather, the incentive to solicit comes from the dissident's motivation to run a successful election campaign. --------------------------------------------------------------------------- In comparison to the proposed amendments, this hybrid approach would prevent the incidence of nominal contests that seek to capitalize on the ability of dissidents to include the names of alternative director candidates in the registrant's proxy materials. Additionally, this approach may confer an advantage to the registrant in some cases. For example, if the dissident would otherwise have had a high chance of winning many seats in the election, requiring a universal proxy for the dissident but not the registrant could dilute support for the dissident nominees among those voting on the dissident's card, by providing other alternative candidates on the same card. The dissident would not have a corresponding opportunity to gain potential votes from the registrant's proxy card unless the registrant chose also to use a universal proxy. This effect may be mitigated to the extent that registrants may have a stronger incentive to use a universal proxy to attract more shareholders to use their card in situations in which the dissident is likely to draw high levels of support. It may also be mitigated by the possibility that shareholders prefer the dissident's universal card over the registrant's non-universal proxy card, which may result in some additional votes for dissident nominees. Finally, we note that the ability of dissidents to select whom they solicit may provide an advantage that could help to balance any advantage that registrants would gain under this approach. Another hybrid approach we considered would be to require registrants to use a universal proxy, while dissidents would be given the option, but not the obligation, to do so.\365\ This hybrid approach may more fully achieve the goal of allowing all shareholders to vote by proxy for their choice of candidates because, as a practical matter, the registrant likely would distribute a universal proxy card to all shareholders. However, in addition to the risk of conferring a slight advantage to one party in certain cases, as under the other hybrid alternative, this approach would also present a similar likelihood of increased nominal contests as under the proposed amendments due to the exposure gained by the dissident via the registrant's proxy card. --------------------------------------------------------------------------- \365\ Registrants with certain advance notice bylaw provisions may have the option of using a universal proxy card if they so choose. In particular, we are aware of two cases in which dissident nominees were required to consent to being included on the registrant's proxy card as part of the director questionnaire required under the registrant's advance notice bylaw provision. The dissident does not have such leverage over registrant nominees and in both cases, the registrant nominees did not consent to being named on the dissident's proxy card. --------------------------------------------------------------------------- Applicability of Mandatory Universal Proxies to Registered Investment Companies and Business Development Companies Because the proposed amendments would not apply to funds or BDCs, these registrants would remain subject to the federal proxy rules currently in effect. Therefore, we do not expect the proposed amendments to affect the current nature of director election contests among funds and BDCs. We currently observe very few director election proxy contests at open-end funds.\366\ By contrast, proxy contests do sometimes occur among closed-end funds and BDCs. As discussed previously in Section II.D, contests at closed-end funds and BDCs are generally driven by dissidents seeking to profit from reducing the discount of the fund's or BDC's share price relative to NAV.\367\ Staff analysis of proxy statement filings by dissidents in calendar years 2014 and 2015 found 11 contests at closed-end funds and BDCs and in only one contest did the dissident seek fewer seats than were up for election.\368\ In three out of the four cases where the dissidents successfully achieved board representation, all the dissidents' nominees were elected to the board.\369\ --------------------------------------------------------------------------- \366\ Staff is not aware of any director election contests in open end funds from the year 2000 to July 2016. \367\ See supra note 190 and accompanying text. \368\ Our analysis found three contests in 2014 and eight in 2015. Of those 11 contests, nine were at closed-end funds and two at BDCs. At 10 of the 11 contests dissidents were either seeking a majority of the board or seeking all of the board seats up for election. \369\ In the one case where the dissident did not get all its nominees appointed to the board, there was never a contested vote at the annual meeting as the dissident and the registrant negotiated a settlement prior to the meeting. In the settlement, the registrant agreed to add two of the dissident's four nominees to its own slate of nominees for a non-contested election at the annual meeting. --------------------------------------------------------------------------- We have considered, as an alternative, applying the proposed amendments to funds and BDCs, which would also enable shareholders of funds and BDCs to vote a split ticket in director election contests through the use of universal proxies. In principle, the same general types of potential costs savings and increase in voting alternatives could apply to shareholders of funds and BDCs as those we discussed previously in Section IV.D.1 for shareholders of operating companies. Nevertheless, we recognize that funds and BDCs have particular characteristics that could impact the economic effects of the proposed amendments. Below, we highlight differences between funds and BDCs on the one hand, and operating companies on the other, that suggest the economic effects of the proposed mandatory universal proxy system could be different for funds and BDCs. First, it is unclear whether there is a current demand for split- ticket voting among shareholders of funds and BDCs. In this regard, we note that petitioners seeking a universal proxy requirement have not specifically expressed a need for universal proxy cards at these types of registrants.\370\ Additionally, based on the observation above that contests for fewer than all seats up for election, or the election of some but not all dissident nominees, have been rare at funds and BDCs, we believe that shareholders in these registrants may have been less likely to seek split-ticket voting in contested elections. In addition, particular characteristics of funds and BDCs that they do not share with operating companies may affect the demand for split-ticket voting. For example, the types of changes pursued by dissidents at such registrants, such as converting a closed-end fund to an open-end fund, have tended to be binary in nature. As a result, we generally infer that shareholders siding with the dissident's view on one of these binary choices would be expected to vote the dissident's slate on the dissident's proxy card, as this would maximize the probability of the dissidents being able to carry out their proposed change. This is particularly true where the dissident nominates directors representing all of the seats up for election or a majority of the board--which occurs in the vast majority of cases--as this would give the dissident the power to enact the preferred fundamental change. This contrasts with our understanding of proxy contests for operating companies, where the types of changes pursued by [[Page 79173]] dissidents are often less binary in nature and may therefore cause dissidents to seek a minority of board seats. In particular, shareholders may in this case desire to vote a split ticket to express support for intermediate or compromise approaches between affecting the full scope of changes sought by the dissident and the status quo favored by the registrant. Thus, the effect of the proposed amendments for funds and BDCs could be different from the effect for operating companies, because funds and BDCs may experience a smaller number of non-binary contests where shareholders would desire to split their votes. --------------------------------------------------------------------------- \370\ See supra note 45. --------------------------------------------------------------------------- Second, the effects of the proposed amendments on the costs of contested elections may be different for funds and BDCs to the extent their shareholder base is different from that of operating companies. For example, a recent industry report shows that retail investors held approximately 89 percent of mutual fund assets in the United States,\371\ which is significantly larger than the corresponding ownership percentage that has been reported for operating companies.\372\ This data may indicate that ownership of funds and BDCs is more dispersed than ownership of operating companies, in which case any increase in solicitation costs from the proposed amendments may be greater for funds and BDCs. However, to the extent this is not the case and instead ownership is more concentrated at funds and BDCs than in operating companies, any increase in solicitation costs may be lower for funds and BDCs. --------------------------------------------------------------------------- \371\ See 2016 ICI Fact Book, at 29. \372\ See supra note 213. --------------------------------------------------------------------------- Third, the effect of the proposed amendments on voting outcomes may differ to the extent funds and BDCs have a different shareholder base than operating companies. For example, on the one hand, if funds and BDCs have a higher portion of shareholders who do not tend to vote their shares in proxy contests, there may be a more limited impact of universal proxy cards on voting outcomes. On the other hand, to the extent funds and BDCs have a higher portion of shareholders participating in voting that are currently unable to vote a split ticket, there may be a greater impact on voting outcomes. Fourth, specific features of the governance environment could make the effects of the proposed amendments on the outcomes of director election contests different for funds and BDCs compared to their effects for operating companies. For example, funds and BDCs that are part of larger complexes generally have unitary or cluster board structures that are not observed in operating companies. To the extent that an increase in split-ticket voting results in a greater rate of mixed boards, where some dissident nominees are elected together with some registrant nominees, such outcomes may impose more significant costs on funds and BDCs with unitary or cluster board structures. These companies could be required to make costly and potentially disruptive changes in the logistics of board meetings and the discussions held in such meetings to accommodate a mixed board in one fund out of the larger complex. We note, however, that an increased likelihood of mixed board outcomes could be beneficial for funds and BDCs to the extent a mixed board would result in more effective monitoring and less potential for conflicts of interests.\373\ --------------------------------------------------------------------------- \373\ Concerns related to the monitoring effectiveness of unitary board structures have been raised by industry observers. See, e.g., James Sterngold, Is Your Fund's Board Watching Out for You?, Wall St. J. (June 9, 2012) (stating that ``it's not uncommon for a board member to oversee 100 funds or more,'' and that ``for many critics, that's a prescription for overwhelmed and passive boards''). But, on the other hand, studies have found that unitary boards can be an effective governance mechanism. See, e.g., Sophie Xiaofei Kong & Dragon Yongjun Tang, Unitary Boards and Mutual fund Governance, 31 J. Fin. Res. 193 (2008) (finding that mutual funds with unitary boards are associated with lower fees, are more likely to pass the economies of scale benefits to investors, are less likely to be involved in trading scandals, and rank higher on stewardship). --------------------------------------------------------------------------- Finally, the effects of universal proxies on the incidence of contested director elections could be different for funds and BDCs. Shareholders of funds and BDCs have rights under the federal securities laws that are not available to shareholders of operating companies that could affect the incidence of contested director elections. Shareholders of funds and BDCs must vote to approve changes in certain operational matters and to approve advisory contracts and material amendments to such contracts.\374\ To the extent these shareholder rights enable shareholders to participate effectively in the governance of the entity, there may be lower incentives for potential dissidents to initiate director election contests at funds and BDCs compared to operating companies. As a consequence, depending on how the proposed amendments would change the relative attractiveness of contested elections for potential dissidents at funds and BDCs, there may be either a greater or lesser effect of the proposed amendments on the incidence of contests at these entities compared to operating companies. --------------------------------------------------------------------------- \374\ See supra notes 193-194. --------------------------------------------------------------------------- We also note that differences across open-end funds, closed-end funds, and BDCs, could lead to differential economic effects of universal proxies across these different types of investment companies. Historically, director elections generally happen less frequently among open-end funds compared to other registrants, including closed-end funds and BDCs,\375\ and therefore these types of funds provide dissidents with fewer opportunities to launch director election contests. In addition, dissatisfied shareholders of open-end funds can sell their shares at NAV and invest elsewhere, such as another open-end fund that is a close substitute in terms of its portfolio holdings. --------------------------------------------------------------------------- \375\ One reason for this is that many open-end funds are not required to hold annual meetings. See supra note 185 and accompanying text. --------------------------------------------------------------------------- In contrast, dissatisfied shareholders of closed-end funds and BDCs that are trading at a discount to NAV may be interested in encouraging actions that could move the share price closer to NAV, including actions that may be sought by dissidents in a proxy contest. We request comments in this release on whether, and if so, the extent to which investment companies, or different types of investment companies, would be differentially affected by a universal proxy requirement as well the other changes to the proxy rules contemplated in this release. We also request information and data that would help us understand and quantify differences in the likely economic effects of applying the proposed amendments to investment companies as compared to operating companies and to the different types of investment companies. Notice Requirements The proposed amendments would require that dissidents in all contested elections provide notice to registrants of their intention to solicit proxies in favor of other nominees, and the names of those nominees, no later than 60 calendar days prior to the anniversary of the previous year's annual meeting date.\376\ A notice to the registrant is necessary for the registrant to be able to include the names on the universal [[Page 79174]] proxy card it prepares and distributes to shareholders. Without providing such notice, a dissident would not be permitted to run a non- exempt solicitation in support of its director nominees. The proposed amendments would also require registrants to provide similar notice to dissidents no later than 50 days before the anniversary of the previous year's annual meeting date, in order to allow dissidents sufficient time to include the names of registrant nominees on the universal proxy card that they prepare and disseminate to shareholders. --------------------------------------------------------------------------- \376\ If the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, then the proposed amendments would require that notice must be provided no later than 60 calendar days prior to the date of the annual meeting or the tenth calendar day following the day on which public announcement of the date of the annual meeting is first made by the registrant, whichever is later. --------------------------------------------------------------------------- Because advance notice bylaws commonly require a similar amount of notice by dissidents seeking to nominate alternative candidates, the effect of the proposed notice requirement for dissidents may be limited.\377\ As discussed above, we understand that advance notice bylaws generally have deadlines ranging from 60 to 120 days before the meeting anniversary date.\378\ However, it is possible that some registrants have advance notice bylaws with later deadlines. Also, some registrants do not currently have such bylaws and it is possible that boards may waive the applicability of such bylaws.\379\ Further, relatively smaller registrants are somewhat less likely to have advance notice provisions than larger registrants, and proxy contests are more common among these relatively smaller registrants.\380\ The proposal would, in effect, replicate the primary effects of an advance notice bylaw applying to contested elections even at registrants that currently have no advance notice bylaw (or bylaws with later deadlines, to the extent these exist). --------------------------------------------------------------------------- \377\ It has been estimated that 95 percent of S&P 500 firms and 90 percent of Russell 3000 firms had an advance notice bylaw at the end of 2014. See supra Section IV.B.2. \378\ See supra note 246. \379\ See supra note 244. \380\ See supra Section IV.B.2. --------------------------------------------------------------------------- Although we believe that only a small fraction of registrants do not already have a comparable or stricter notice requirement, because the bylaws at different registrants may have been designed to reflect their individual circumstances, imposing this new requirement on all registrants may not be optimal. In particular, the proposal's notice requirements would impose a new constraint on dissidents in cases in which the same degree of notice was not otherwise required, potentially imposing some incremental costs on such dissidents. The proposal would also prevent the incidence (and eliminate the threat) of contests initiated later than the proposed notice deadline (``late-breaking'' proxy contests) at all registrants. As in the case of other potential effects of the proposed amendments on the incidence and perceived threat of contested elections, these effects of the proposed notice requirements may reduce either the degree of discipline or the risk of unproductive distraction for boards.\381\ --------------------------------------------------------------------------- \381\ See Section IV.D.4. --------------------------------------------------------------------------- To consider potential effects on late-breaking proxy contests, we reviewed the timing of recent proxy contests. As shown in Table 2 above, we estimate that dissidents filed their initial preliminary proxy statements on average 60 days before the annual meeting for contested elections initiated in 2014 and 2015.\382\ We also estimate that approximately 56 percent of these contested elections had an initial preliminary proxy statement filed by the dissident within 60 days of the meeting, which may represent late-breaking contests.\383\ While the filing of a preliminary proxy statement does not mark the earliest point at which a dissident initiates a proxy contest and finalizes a slate of nominees, it does provide a threshold date before which these actions must have occurred. We also considered the earliest date at which a dissident announced its intent to pursue a proxy contest in a regulatory filing. For those contests for which we have such information, we estimate that in approximately 11 percent of these contested elections the dissident announced its intent to pursue a proxy contest within 60 days of the meeting, which is another measure of potential late-breaking contests.\384\ Disclosing the intent to pursue a proxy contest is not the same as providing notice of the names of the dissident nominees, but it may mark a threshold date after which such notice could have been provided. --------------------------------------------------------------------------- \382\ See Section IV.B.2.b. \383\ Id. \384\ Id. --------------------------------------------------------------------------- We therefore cannot rule out that the proposed notice requirement may prevent some proxy contests that would otherwise have occurred. However, dissidents who might have initiated late-breaking contests may simply adjust their timetable to be compatible with the proposed notice requirement. Also, any effects of the proposed notice requirements on the incidence or threat of late-breaking contested elections may be offset somewhat by the ability of dissidents who are unable to meet the notice deadline to take other actions, such as initiating a ``vote no'' campaign, using an exempt solicitation,\385\ or calling a special meeting (to the extent possible under the bylaws) to remove existing directors and elect their own nominees, which may allow them to achieve similar goals with respect to changes to the board. --------------------------------------------------------------------------- \385\ In this case, the total number of persons solicited could be no more than 10. See Section IV.B.3. --------------------------------------------------------------------------- While advance notice bylaws currently apply to dissidents at many registrants, registrants are not currently subject to a requirement that they provide notice of their nominees to dissidents. Thus, the proposed notice requirement for registrants would represent a new obligation for registrants in contested elections. We estimate that 68 percent of registrants filed a preliminary proxy statement at least 50 days before the annual meeting for contested elections initiated in 2014 and 2015,\386\ so we expect that the majority of registrants will have a list of nominees ready by the proposed notice deadline. However, the proposed notice requirement may require some registrants to finalize their list of nominees somewhat earlier than they would otherwise. --------------------------------------------------------------------------- \386\ Based on staff review of EDGAR filings. --------------------------------------------------------------------------- Also, to the extent that a registrant might consider changing its selected nominees after providing notice and after the dissident thereby disseminates its definitive proxy materials (but perhaps before the registrant does so), the proposed notice requirement may provide registrants with an increased incentive not to make such changes because of the risk that votes for registrant nominees on the dissident card could be invalidated. Because the proposed notice requirement may require some registrants to finalize their nominees earlier than they would otherwise and may increase registrants' incentives not to change their nominees, there is a possibility that this requirement could have a detrimental effect on the quality of candidates that registrants nominate. However, the majority of registrants in recent contests filed a preliminary proxy statement at least 50 days before the meeting date, so the proposed notice deadline is close to the date by which registrants typically disclose their nominees. We therefore expect any such effects to generally be minor. We have also considered alternatives to the notice requirements included in the proposed amendments, such as earlier as well as later potential notice deadlines for dissidents. In these alternatives, we have assumed that the notice deadline for registrants would also be revised to be 10 days after the revised deadline for the dissident, to allow the registrant sufficient time to prepare its notice and list of nominees [[Page 79175]] in reaction to the receipt of a notice from a dissident. Under a later notice deadline, the risk of preventing late-breaking proxy contests that would otherwise have occurred, particularly at registrants without advance notice bylaws, would be reduced. For example, when considering a deadline of no later than 45 calendar days (as opposed to 60 calendar days, as proposed) prior to the anniversary of the previous year's annual meeting date, we found that in approximately 6 percent of contested elections initiated in 2014 and 2015 the dissident announced its intent to pursue a proxy contest within 45 days of the meeting (as compared to 11 percent within 60 days), and in 29 percent of these contests the dissident filed a preliminary proxy statement within 45 days of the meeting (as compared to 56 percent within 60 days). Additionally, a later deadline for registrants would reduce the likelihood that some registrants may have to finalize their nominees earlier than they would otherwise. For example, we estimate that in approximately 2 percent of contested elections initiated in 2014 and 2015, the registrant filed its preliminary proxy statement within the 35 days before the meeting (as compared to 32 percent within 50 days). However, a later deadline may increase the risk of confusion among shareholders and impose additional solicitation costs if the registrant's non-universal proxy card has already been disseminated and requires revision. In particular, we estimate that in 22 percent of contests initiated in 2014 and 2015, registrants filed a definitive proxy statement at least 45 days before the meeting.\387\ In contrast, we found no cases in this sample in which a registrant filed a definitive proxy statement earlier than 60 days before the meeting.\388\ --------------------------------------------------------------------------- \387\ Based on staff analysis of EDGAR filings. \388\ Id. --------------------------------------------------------------------------- An earlier deadline, such as 90 days prior to the anniversary of the prior year's meeting, would reduce the risk, relative to the proposal, of the potential confusion or costs related to notice being received after non-universal registrant proxy cards have already been disseminated. However, the risk that registrants will have distributed their proxy cards prior to the proposed 60-day deadline seems relatively low, and an earlier deadline may further preclude late- breaking contests beyond those prevented by the proposed deadline. For example, when considering a deadline of no later than 90 calendar days (as opposed to 60 calendar days, as proposed) prior to the anniversary of the previous year's annual meeting date, we found that in a significant percentage of contested elections initiated in 2014 and 2015, the dissident announced its intent to pursue a proxy contest or filed its preliminary proxy statement between 60 and 90 days prior to the meeting. Some of these contests may have been permitted under a 60- day deadline but excluded in the case of a 90-day deadline.\389\ Additionally, an earlier deadline for registrants would increase the likelihood that some registrants may have to finalize their nominees earlier than they would otherwise. For example, we estimate that in approximately 63 percent of contested elections initiated in 2014 and 2015, the registrant filed its preliminary proxy statement between 80 and 50 days before the meeting.\390\ --------------------------------------------------------------------------- \389\ Staff estimates that in 26 percent of contested elections initiated in 2014 and 2015, the dissident announced (in an EDGAR filing) its intent to pursue a proxy contest between 60 and 90 days prior to the meeting, and that in 34 percent of these contests the dissident filed a preliminary proxy statement between 60 and 90 days prior to the meeting. See Section IV.B.2.b. Neither the date on which intent to pursue a contest is announced nor that on which a preliminary proxy statement is filed need correspond to the date on which notice could have been provided in these contests, though they may provide some indication of the universe of contests that might have been affected by a particular notice deadline. \390\ Based on staff analysis of EDGAR filings. --------------------------------------------------------------------------- A further alternative would be to require universal proxies in cases where the dissident provides notice to the registrant, and not require them in cases where the dissident does not meet the notice deadline. Under this alternative, the dissident would be permitted to initiate a late-breaking proxy contest but, because of the risk of confusion if proxies have already been disseminated, would not trigger the use of universal proxies, while other contests (in which notice was provided) would require universal proxies. This alternative may raise similar concerns to those discussed above with respect to the optional use of universal proxies, in that there would still be some elections without universal proxies, and the dissident could strategically time its actions to avoid triggering universal proxies when it believes there is an advantage to doing so. We have also considered not requiring registrants to provide notice to dissidents of their nominees. In this case, dissidents would generally become aware of the registrant nominees when the registrant files its preliminary proxy statement, which is required to be filed at least 10 calendar days prior to the date the registrant's definitive proxy statement is first sent to shareholders, and would have to finalize their own proxy cards thereafter. This alternative would avoid imposing a new notice obligation on registrants, and may reduce the risk that such an obligation could marginally reduce the quality of registrant nominees in some cases. However, requiring that notice be provided by both parties to the contest would limit the possibility that registrants may gain a strategic advantage by learning about and being able to react to the dissident's slate of nominees significantly earlier than when the dissident may be informed of the registrant's slate. Minimum Solicitation Requirement for Dissidents The proposed amendments would apply certain solicitation requirements to all contested elections. In particular, dissidents would be required to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors. Currently, dissidents in an election contest can solicit as many or as few shareholders as they choose, while registrants routinely furnish a proxy statement to all shareholders. As discussed in detail above, we do not expect the minimum solicitation requirements to significantly increase the costs borne by dissidents in a typical proxy contest.\391\ In the majority of contests, dissidents already solicit all shareholders; in other contests, while dissidents do not solicit all shareholders, they generally solicit a number of shareholders beyond the required threshold.\392\ To the extent that there are some infrequent cases in which a dissident may not otherwise have solicited shareholders that represented a majority of the voting power of the registrant, we preliminarily estimate that the incremental costs of the proposed solicitation requirement beyond what such a dissident would be expected to spend in the absence of this requirement to be approximately $1,000, which represents a minor fraction of the total estimated costs of solicitation in a typical proxy contest.\393\ Because the vast majority of proxy contests would not be affected by the proposed solicitation requirement, and in the infrequent cases where there would be an effect this requirement would impose minor incremental costs to dissidents, we believe that the proposed solicitation requirement would not have significant effects on the costs of typical proxy contests. --------------------------------------------------------------------------- \391\ See Section IV.D.2. \392\ Id. \393\ Id. --------------------------------------------------------------------------- [[Page 79176]] Nevertheless, the proposed solicitation requirement would impose a cost on any dissidents that may try to capitalize on the ability to introduce the names of alternative candidates on the registrant's proxy card by running a nominal proxy contest, in which minimal resources are spent on solicitation. As discussed above, in addition to the existing cost of pursuing a nominal proxy contest, we estimate that it would cost approximately $6,000 at the median-sized (based on the number of accounts in which its shares are held) registrant to meet the proposed minimum solicitation requirements through an intermediary.\394\ We note that this estimate is higher than the incremental cost of $1,000 that we estimate could apply in the case of certain typical proxy contests because dissidents in nominal proxy contests currently expend minimal resources on solicitation. Therefore, the additional cost required to comply with the minimum solicitation requirement, beyond current expenditures in contests, is likely to represent a relatively larger incremental cost in the case of nominal contests. We expect that the proposed minimum solicitation requirements may to some degree deter dissidents from initiating nominal contests, as discussed in Section IV.D.4.b. above. --------------------------------------------------------------------------- \394\ Id. --------------------------------------------------------------------------- An alternative to the proposed solicitation requirements would be to require universal proxies without imposing any minimum solicitation requirement on dissidents. This approach would eliminate the risk that such a requirement would increase the cost to dissidents of running a typical proxy contest in some cases, such as where cumulative voting or other registrant characteristics could allow dissidents to gain board representation with more limited solicitation. However, without a minimum solicitation requirement, requiring registrants to use a universal proxy may increase the likelihood that dissidents engage in more nominal proxy contests. In particular, a dissident would be able to obtain exposure for its nominees on the registrant's proxy card without engaging in any meaningful solicitation at its own expense and without facing the limitations (such as on the number of nominees put forth) as well as the eligibility and procedural requirements of proxy access bylaws, where available, or (to the extent the dissident is concerned about a particular issue) the shareholder proposal process. While this may enable some beneficial contests that could otherwise be cost-prohibitive, it would also increase the risk of detrimental contests. That is, the ability of dissidents to introduce an alternative set of nominees to all shareholders without incurring meaningful solicitation expenditures may result in an increase in contests that are frivolous or that could be initiated in pursuit of certain idiosyncratic interests rather than shareholder value enhancement. Such contests could lead registrants to incur significant disclosure and solicitation expenses to advocate against the dissident's position and could distract management from critical business matters. There is also some chance that a frivolous contest could result in election outcomes which could disrupt the proper functioning of the board. Another alternative would be to require a different minimum level of solicitation for dissidents than what we have proposed. For example, we could require that dissidents solicit all shareholders. This approach may reduce the incidence of nominal contests that might not be in the interests of shareholders at large. As discussed above, we estimate the cost of using the least expensive approach to meet the proposed minimum solicitation requirement through an intermediary at the median-sized (based on the number of accounts in which its shares are held) registrant to be approximately $6,000.\395\ In contrast, we estimate that soliciting all shareholders at the median-sized registrant would cost approximately $14,500 when using the least expensive approach \396\ to solicit through an intermediary.\397\ However, a requirement that dissidents solicit all shareholders would also affect the cost to dissidents in more typical proxy contests. As discussed above, we understand that in 40 percent of recent proxy contests, dissidents solicited a number of shareholders fewer than all of the shareholders eligible to vote.\398\ We estimate that it would have cost dissidents in these contests approximately an additional $3,000 to $2.5 million, with a median of approximately $11,500 beyond the costs they already incurred, to increase their level of solicitation to include all shareholders if using the least expensive approach \399\ to expand solicitation.\400\ Thus, requiring dissidents to solicit all shareholders would increase the costs borne by dissidents in a large fraction of typical proxy contests and may prevent some value-enhancing contests from taking place. --------------------------------------------------------------------------- \395\ Id. \396\ See supra note 300. \397\ This estimate was derived by staff based on the NYSE Rule 451 fee schedule and industry data provided by a proxy services provider. See supra note 301 (providing assumptions for the estimation of the costs of solicitation at the median-sized registrant). In this case, staff estimated the costs of NYSE Rule 451 fees and postage for soliciting all 4,500 accounts at the median-sized registrant using notice and access delivery, and assumed that the number of brokers and banks involved for the purpose of determination of the nominee coordination fee is equal to 90. The estimated solicitation cost of approximately $14,500 includes intermediary unit fees, which apply with a minimum of $5,000, plus nominee coordination fees of $22 per bank or broker considered a ``nominee'' under NYSE Rule 451, plus basic processing fees, notice and access and preference management fees and postage totaling $1.57 (for suppressed accounts, such as those that have affirmatively consented to electronic delivery) to $1.70 (for other accounts) per account. We request comment on this estimate and data that could allow staff to obtain a more precise estimate below. \398\ See Section IV.B.2. \399\ See supra note 300. \400\ These estimates were derived by staff based on the NYSE Rule 451 fee schedule and industry data provided by a proxy services provider. In particular, the required increase in expenses to solicit all shareholders was estimated based on the number of additional accounts that would have to be solicited and the applicable fees under NYSE Rule 451 and postage costs for notice and access delivery. For the purpose of the nominee coordination fee, staff used information from other proxy contests for which information was provided (specifically focusing on those in which less than all shareholders were solicited) to interpolate the increase in the number of banks or brokers considered ``nominees'' under NYSE Rule 451 that might be involved at the higher solicitation level. The estimated incremental solicitation cost for each contest includes nominee coordination fees of $22 for each of the additional nominees expected to be involved, plus basic processing fees, notice and access and preference management fees and postage totaling $1.57 (for suppressed accounts, such as those that have affirmatively consented to electronic delivery) to $1.70 (for other accounts) per account for additional accounts solicited within the first 10,000 accounts solicited, and on a declining scale for additional accounts thereafter. Staff assumed that half of the additional accounts to be solicited are suppressed and that none of these accounts requested full set delivery by prior consent or upon receipt of the notice (because such delivery requirements may apply to only a small fraction of accounts and is not expected to significantly affect the overall estimate of costs). Additional notice and access fees of $0.25 per account for the first 10,000 accounts, and on a declining scale thereafter, were assumed to be required for each account that was solicited prior to increasing the level of solicitation because of the use of notice and access delivery for some accounts. The estimates also include incremental intermediary unit fees of $0.25 per account for each additional account above 20,000 accounts solicited. This estimate does not include printing costs for the notice, for which we do not have relevant data to estimate these costs. We request comment on these estimates and data that could allow staff to obtain more precise estimates below. --------------------------------------------------------------------------- We also considered requiring other possible levels of solicitation. In general, any solicitation requirement that imposes a very low cost on the dissident may increase the risks discussed above that are associated with permitting the dissident to obtain exposure for its nominees on the registrant's card with minimal expenditure of its own resources in the [[Page 79177]] solicitation, while a solicitation requirement that imposes a very high cost may deter value-enhancing proxy contests. Also, in any approach that requires the dissident to solicit less than all of the shareholders entitled to vote (such as under the proposed amendments) we note that any shareholders not solicited by the dissident would still see the names of the dissident's nominees on the registrant's proxy card but would have to seek out the dissident's proxy statement in the EDGAR system (as directed by the registrant's proxy statement) in order to learn about those nominees and make an informed voting decision. Dissemination of Proxy Materials We are proposing amendments to Rule 14a-19 that would require any dissident in a contested election to file a proxy statement by the later of 25 calendar days prior to the meeting date, or five calendar days after the date that the registrant files its definitive proxy statement, regardless of the choice of proxy delivery method. This requirement would help to ensure that all shareholders who receive a universal proxy, which will not be required to include complete information about the opposing party's nominees, will have access to information about all nominees. We do not expect this requirement to impose a substantial burden or constraint on dissidents given existing requirements and the notice requirement of the proposed amendments. In particular, dissidents that elect notice-only delivery are currently required to make their proxy statement available at the later of 40 calendar days prior to the meeting date or 10 calendar days after the registrant files its definitive proxy statement. For such dissidents, the proposed filing deadline would provide five fewer days to furnish a proxy statement in cases in which the registrant files its definitive proxy statement within fewer than 30 calendar days of the meeting date, which we estimate occurred in 20 percent of recent contested elections, and would not otherwise present an incremental timing constraint.\401\ Dissidents that elect full set delivery are not currently subject to any such requirement, and thus the proposed dissemination requirement would impose a new filing deadline for all such dissidents. Some dissidents may therefore be required to prepare their proxy statements earlier than they would otherwise. In particular, we estimate that dissidents filed a definitive proxy statement within 25 days of the meeting in 25 percent of recent contested elections.\402\ --------------------------------------------------------------------------- \401\ Based on staff review of contested elections initiated in 2014 and 2015. \402\ Id. --------------------------------------------------------------------------- In the absence of other requirements, the proposed filing deadline might prevent late-breaking proxy contests. However, because the proposed amendments separately require dissidents to provide notice of the contest and the names of their nominees by the 60th calendar day before the anniversary of the prior year's meeting (with alternative treatment for cases in which the meeting date has changed significantly since the prior year), we do not expect this requirement to impose a significant further limitation on late-breaking contests. Also, while the proposed filing deadline would require some dissidents to prepare their proxy statements earlier than they would otherwise, we do not expect this requirement to impose a substantial incremental constraint or burden in most cases. In particular, because of the proposed notice requirement, dissidents would generally have approximately one month to furnish a definitive proxy statement after having provided the names of their nominees to the registrant. We request comment on the effect of the proposed filing deadline on dissidents below. Alternatively, we have considered proposing an earlier filing deadline for dissidents. While an earlier filing deadline may reduce the risk that some shareholders receive the registrant's proxy statement and make their voting decisions before the dissident's proxy statement is available, such a deadline may also impose an incremental burden on dissidents and could prevent some late-breaking proxy contests beyond those prevented by the proposed notice requirement. Form of the Universal Proxy The proposed amendments specify certain presentation requirements for universal proxies, including that each party's slate of nominees be clearly distinguishable and that, within each slate, the names be listed in alphabetical order. Also, the form of the universal proxy would be required to prominently disclose the maximum number of candidates for whom a shareholder can properly grant authority to vote and the treatment of any proxy cards that indicate a greater or lesser number of ``for'' votes than this permitted number. We do not expect the presentation and formatting requirements to impose any significant direct costs on registrants or dissidents, though they may bear some indirect costs in the form of reduced flexibility to strategically design their proxy card. These presentation and formatting requirements are expected to mitigate the risk that shareholders receiving universal proxies may be confused about their voting choices and how to properly mark their card. For example, shareholders could otherwise be unsure about the total number of candidates for which they can grant authority to vote, or about which candidates are nominated by which party. Such confusion could increase the likelihood that some shareholders submit invalid proxies or submit proxies that do not reflect their intentions. This may be exacerbated in the case of nominees being put forth by multiple dissidents or when there are proxy access nominees as well as dissident and registrant nominees.\403\ --------------------------------------------------------------------------- \403\ See, e.g., Roundtable Transcript, comment of David Katz, Partner, Wachtell, Lipton, Rosen and Katz, at 42. --------------------------------------------------------------------------- In addition to preventing confusion, these presentation and formatting requirements may also promote the fair and equal presentation of all nominees on the proxy cards. In particular, these requirements would prevent registrants and dissidents from strategically choosing the font, style, sizing, and order of candidate names in ways that could create an advantage for their slate. For example, political science research has found that the order of placement of candidates' names on ballots can affect voting outcomes.\404\ --------------------------------------------------------------------------- \404\ See, e.g., Joanne Miller & Jon Krosnick, The Impact of Candidate Name Order on Election Outcomes, 62 Pub. Opinion Q. 291 (1998); David Brockington, A Low Information Theory of Ballot Position Effect, 25 Pol. Behav. 1 (2003); Jonathan G.S. Koppell & Jennifer A. Steen, The Effects of Ballot Placement on Election Outcomes, 66 J. Pol. 267 (2004). --------------------------------------------------------------------------- Alternatively, we could permit some additional flexibility with respect to how universal proxies are presented. For example, each party to the contest could be allowed to choose how to order the nominees, but only within its own slate. This approach may allow registrants and dissidents to order their own candidates in a way they believe would be most informative to shareholders, such as separately listing independent director nominees or by listing the nominees based on their skill sets. However, this approach runs the risk of generating some (perhaps limited) degree of confusion on the part of a shareholder who receives two proxy cards with candidates in different orders. While this risk could be mitigated by requiring that each party to the contest inform the other party as to [[Page 79178]] how to order its slate of candidates, such a requirement would introduce some incremental coordination costs to create consistent ordering across the registrant and dissident proxy cards. Another approach would be to allow all parties to the contest complete flexibility in the presentation of nominees on their universal proxy cards. This approach may benefit registrants or dissidents that would prefer to strategically design their proxy card to better inform shareholders or to increase their chances of success, regardless of whether such strategic formatting of proxy cards may represent an inefficient use of resources from the perspective of shareholders. For example, presenting the candidates from both parties in a single, alphabetically ordered list may increase the possibility of split- ticket votes.\405\ However, such an approach could be confusing for shareholders to the extent that each party's nominees were not readily identifiable as part of a particular slate or opponent nominees were de-emphasized (such as through font and sizing choices). --------------------------------------------------------------------------- \405\ See R. Darcy & Michael Marsh, Decision Heuristics: Ticket- Splitting and the Irish Voter, 13 Electoral Stud. 38 (1994) (concluding that the alphabetic ordering of candidates in Irish elections results in more split tickets relative to comparable elections in Malta and Australia, where candidates are grouped by parties). --------------------------------------------------------------------------- c. Additional Revisions The proposed amendments require certain disclosures with respect to voting options and voting standards in proxy statements. We expect that the costs to registrants of such additional disclosures would be minimal. To the extent that such disclosures reduce shareholder uncertainty or confusion as to the effect of their votes, the efficiency of the voting process may be improved. However, we do not anticipate significant changes in voting outcomes or corporate decisions as a result of these disclosures. Request for Comment Throughout this release, we have discussed the anticipated costs and benefits of the proposed amendments. We request and encourage any interested person to submit comments regarding the proposed amendments and all aspects of our analysis of the potential effects of the amendments. We request comment from the point of view of shareholders, registrants, dissidents, and other market participants. With regard to any comments, we note that such comments are particularly helpful to us if accompanied by quantified estimates or other detailed analysis and supporting data regarding the issues addressed in those comments. We also are interested in comments on the alternatives presented in this release as well as any additional alternatives to the proposed amendments that should be considered. 76. We request comment on the prevalence, availability, costs, and benefits of split-ticket voting. We request specific estimates of costs borne by shareholders to implement split-ticket votes in recent proxy contests, itemized by the source of the cost. In particular, please provide information about the costs involved in attending a shareholder meeting in person, arranging for an in-person representative at the meeting, and any other methods of voting a split ticket. We also request information about the number of instances in a year in which shareholders choose to vote a split ticket. 77. We request comment on the prevalence, availability, costs, and benefits of certain accommodations currently made to facilitate split- ticket voting, such as a party to a contest arranging for an in-person representative to cast votes for a shareholder at the shareholder meeting. Alternatively, are there changes that could more effectively facilitate alternative means of split-ticket voting (without attending the meeting) consistently being made available to shareholders? 78. We request specific estimates of costs experienced in recent proxy contests, for dissidents as well as registrants, itemized by the source of the cost. 79. We request specific statistics regarding the extent to which shares are currently voted in person at annual meetings rather than voted by proxy in advance of such meetings, and how this varies in the case of contested elections versus uncontested elections. 80. We request specific statistics regarding the frequency of proxy contests in which the dissident does not solicit at least a majority of the shares eligible to vote. 81. We request comment on our estimate of the cost to engage in a nominal proxy contest, the potential incremental cost imposed by the proposed solicitation requirement on certain other proxy contests, and other estimates made in this release. We also request data that would allow us to make more precise estimates, such as data identifying the share ownership structure (including beneficial shareholders as well as holders of record) at registrants of different sizes and data on printing costs (for notices and for full set proxy materials) for dissidents. 82. Would split-ticket voting increase as a result of the proposed amendments? Would the proposed amendments reduce the cost and inconvenience currently faced by shareholders who choose to vote a split-ticket, while not changing the rate of split-ticket voting? Or are there shareholders who would choose to vote a split-ticket in some cases but do not because of the current impediments to doing so? 83. To what extent are votes for the full dissident slate likely to increase as a result of including the dissident nominees on registrant proxy cards, as proposed? Would dissidents change the number of shareholders they solicit as a result of the proposed amendments? 84. Are some kinds of voting choices more likely to be affected by adoption of universal proxy? For example, are either full-slate votes for the registrant or full-slate votes for the dissident more likely to switch to a split-ticket vote? 85. Would removing constraints on shareholder voting choices through universal proxies result in election outcomes that better reflect shareholder preferences, or could there be unintended outcomes? That is, would changes in shareholder voting behavior due to the availability of universal ballots result in election outcomes that do not reflect overall shareholder preferences as well as the outcomes that would have occurred without universal ballots? If so, please explain. 86. Would the use of universal proxy cards lead to more mixed boards, including both management and dissident nominees? How and to what extent? What would be the effect of any such change, including any effects on efficiency, competition, and capital formation? Would any such increase in mixed boards be beneficial or detrimental, and why is that the case? 87. Would the use of universal proxy cards lead to an increase or decrease in the incidence of typical proxy contests (as opposed to the nominal contests discussed above)? How and to what extent? What would be the effects of any such change, including any effects on efficiency, competition, and capital formation? Would any such change in the incidence of proxy contests be beneficial or detrimental, and why is that the case? 88. Would requiring the use of universal proxies provide advantages or disadvantages to one party or the other in an election contest? Would the expected effects of mandating universal proxies lead to an increase or decrease in the threat of proxy contests or otherwise change the nature of the [[Page 79179]] relationship between registrants, dissidents, and shareholders, resulting in changes in managerial decision-making or registrant performance? How and to what extent? What would be the effects of any such change, including any effects on efficiency, competition, and capital formation? Would any such changes be beneficial or detrimental, and why is that the case? 89. Would the proposed amendments shift burdens to registrants in proxy contests? Would the proposed amendments result in nominal contests where the dissident does not expend resources on solicitation beyond the minimum required by the proposed amendments? Would dissidents be deterred from nominal contests by the cost of the proposed minimum solicitation requirement? Or is the magnitude of the cost such that it would not serve as a deterrent? What would be the effects of such contests, including any costs to registrants and any effects on efficiency, competition, and capital formation? Would nominal contests be beneficial or detrimental, and why is that the case? If we changed the proposed minimum solicitation requirements, such as to require solicitation of all shareholders, how would that affect the frequency of nominal contests? What would be the effect if instead we were to eliminate the proposed minimum solicitation requirements? 90. Would dissidents have a reasonable likelihood of gaining board representation under the proposed amendments if they did no more than the minimum required under the proposed amendments (i.e., solicitation, such as by notice and access, of holders of shares representing at least a majority of the voting power of shares entitled to vote)? If so, is this due to the ability of shareholders to vote for dissident nominees on the registrant's universal proxy card? Are there other reasons why dissidents may be likely to initiate nominal contests? 91. Would dissidents in typical proxy contests bear any incremental costs in order to comply with the minimum solicitation requirements of the proposed amendments? If so, please provide estimates of such costs. Would those incremental costs unduly deter proxy contests, and if so, to what extent? 92. What is the current prevalence and distribution of different types of advance notice bylaws? Would the proposed notice deadline of 60 calendar days prior to the anniversary of the previous year's annual meeting date create a new constraint on dissidents, relative to existing advance notice bylaws? If so, how and to what extent? What would the effect be if we were instead to adopt a different notice deadline, such as 90 or 45 days prior to the anniversary of the previous year's annual meeting date? 93. Would the proposed proxy statement filing deadline for dissidents of 25 calendar days prior to the meeting date or five days after the registrant files its definitive proxy statement be sufficient to provide shareholders with the information needed to submit an informed vote? Would the proposed filing deadline create a new constraint on dissidents? If so, how and to what extent? Would a different filing deadline be more appropriate? If so, what deadline should apply and why? 94. Are dissidents or registrants likely to change their solicitation expenditures under the proposed amendments? If so, how and to what extent? 95. Are dissidents or registrants likely to incur incremental costs other than solicitation expenditures under the proposed amendments? If so, please describe and quantify those costs, if possible. For example, would registrants or dissidents incur costs to add disclosures to their proxy statements in reaction to the proposed amendments, such as disclosures urging shareholders not to support their opponent's candidates using their card and expressing their views as to the importance of a homogenous, rather than a mixed, board? What would it cost to prepare such disclosures? 96. Would there be advantages or disadvantages to shareholders, registrants, or dissidents if registrants and dissidents were required to make universal proxy cards available on request, but were allowed to initially disseminate either a standard or a universal proxy card at their option? Would requiring shareholders to request a universal proxy card impose a burden on their ability to vote for the combination of director nominees of their choice? Would this approach be logistically feasible and cost-effective? In particular, how would the process of fulfilling shareholder requests be managed to ensure that shareholders electing a universal proxy card are provided with one in a timely manner? How would the cost of this process be borne by the different parties to the contest? Would electronic and logistical systems need to be changed to accommodate such an approach? Please provide detail on how this approach could be implemented and estimates of the associated costs where possible. 97. Would dissidents and registrants take actions in response to the proposed amendments to lessen or capitalize on any potential effects of the proposed amendments? If so, what actions would they take and why? 98. If registrants and dissidents were permitted, but not required, to use universal proxies, would registrants and/or dissidents choose to use universal proxies? To what extent? In what circumstances would universal proxies be likely to be used by registrants? In what circumstances would universal proxies be likely to be used by dissidents? If one party were to choose to use a universal proxy, would that decision prompt the opposing party also to use a universal proxy? 99. If registrants and dissidents were permitted, but not required, to include opponent nominees on their proxy cards, should we require that all duly-nominated candidates be included, or should we allow registrants and dissidents to select which opponent nominees they include? What would be the effects of allowing only some of the opponent's nominees to be included on a card? Would that give rise to confusion in the voting process? 100. If dissidents were required to use universal proxies, while registrants were permitted, but not required, to do so, would such an approach provide an advantage to registrants in proxy contests? How and to what extent? Would any such advantage be offset by the ability of dissidents to choose which and how many shareholders they solicit, in contrast to the general practice that registrants solicit all shareholders? Would such an approach provide an advantage to dissidents? How and why? 101. We request statistics on the governance characteristics of investment companies and data with respect to proxy contests at investment companies, including their stated goals and outcomes. We also request comment on the prevalence, availability, costs, and benefits of split-ticket voting in the case of proxy contests at investment companies, including information about the number of instances in which shareholders choose to vote a split ticket at such contests. 102. We request statistics on characteristics of the shareholder base for different types of investment companies, including the dispersion in ownership and the distribution of shareholders of different types (e.g., retail vs. institutional). We also request statistics regarding the costs of soliciting shareholders in different types of investment companies, including the estimated cost of soliciting all shareholders or shareholders that represent a majority of the voting rights. 103. What effect would the proposed amendments have on competition? [[Page 79180]] Would the proposed amendments put registrants subject to the proxy rules or particular types of registrants subject to the proxy rules at a competitive advantage or disadvantage? If so, what changes to the proposed requirements could mitigate any such impact? 104. What effect would the proposed amendments have on efficiency? Are there any positive or negative effects of the proposed amendments on efficiency that we have overlooked? How could the proposed amendments be changed to promote any positive effect or to mitigate any negative effect on efficiency? 105. What effect would the proposed amendments have on capital formation? How could the proposed amendments be changed to promote capital formation or to mitigate any negative effect on capital formation resulting from the amendments? V. Paperwork Reduction Act A. Background Certain provisions of our disclosure rules and forms applicable to registrants contain ``collection of information'' requirements within the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\406\ The Commission is submitting the proposed amendments to the Office of Management and Budget (``OMB'') for review in accordance with the PRA.\407\ The hours and costs associated with preparing, filing, and sending the schedules and forms constitute reporting and cost burdens imposed by each collection of information. An agency may not conduct or sponsor, and a person is not required to comply with, a collection of information requirement unless it displays a currently valid OMB control number. The titles for the affected collections of information are: --------------------------------------------------------------------------- \406\ 44 U.S.C. 3501 et seq. \407\ 44 U.S.C. 3507(d); 5 CFR 1320.11. --------------------------------------------------------------------------- (1) Regulation 14A (Commission Rules 14a-1 through 14a-21 and Schedule 14A) (OMB Control No. 3235-0059); and (2) Rule 20a-1 under the Investment Company Act of 1940, Solicitations of Proxies, Consents, and Authorizations (OMB Control No. 3235-0158). We adopted Regulation 14A pursuant to the Exchange Act and Rule 20a-1 pursuant to the Investment Company Act. These rules set forth disclosure requirements for proxy statements filed by soliciting parties to help investors make informed investment and voting decisions. Compliance with the information collection is mandatory. Responses to the information collection are not kept confidential and there is no mandatory retention period for the collections of information. B. Summary of Proposed Amendments' Impact on Collection of Information We are proposing to amend the proxy rules as they apply to operating companies to revise the consent required of a bona fide nominee, eliminate the short slate rule and add Rule 14a-19 to establish new procedures for the solicitation of proxies, the preparation and use of proxy cards and the dissemination of information about all director nominees in contested elections.\408\ The proposed amendments would affect the collection of information requirements of soliciting parties by requiring the use of a universal proxy card in all non-exempt solicitations in connection with contested elections, prescribing requirements for universal proxy cards, and requiring all parties to add a reference to the other party's proxy statement for information about the other party's nominees and explain that shareholders can access the other party's proxy statement on the Commission's Web site. The proposed amendments would additionally require dissidents in such election contests to provide a notice of intent to solicit and a list of their nominees to the registrant and eliminate the ability of dissidents to round out their slate with registrant nominees through use of the short slate rule. The proposed amendments would additionally prescribe filing deadlines for a dissident's definitive proxy statement and require dissidents to solicit at least a majority of the voting power of shares entitled to vote on the election of directors; however, we do not believe that these requirements will affect the reporting and cost burden associated with the collection of information.\409\ --------------------------------------------------------------------------- \408\ We are not proposing to amend the proxy rules for investment companies and BDCs and the discussion in this section does not relate to those entities. See supra Section II.D. \409\ Our current proxy rules do not prescribe minimum solicitation requirements for either registrants or dissidents; however, as discussed in Section II.B.4 supra, customary practice has been for soliciting parties to solicit more than a majority of shareholders because either, in the case of a registrant, they wish to meet notice, informational and quorum requirements for the annual meeting, or, in the case of a dissident, such solicitation is necessary in order to successfully wage a proxy contest. Based on staff analysis of the industry data provided by a proxy services provider for 35 proxy contests between June 30, 2015 and April 15, 2016, less than a majority of shareholders was solicited by a dissident in only a single proxy contest in that sample. In that instance, we estimate that the proposed amendments would have resulted in incremental solicitation expenses (exclusive of printing costs) to the dissident of approximately $1,000 if the least expensive approach to soliciting through an intermediary had been used to solicit the required additional number of shareholders. See supra notes 300-301. It is possible that the proposed amendments may change the number and type of proxy contests, including a possible increase in nominal contests in which dissidents spend little more than the basic required costs to pursue a contest. We preliminarily estimate that, for a nominal proxy contest, it may cost approximately $6,000 at a median-sized registrant using the least expensive approach to meet the proposed minimum solicitation requirements through an intermediary. See supra notes 307-308. Because we are unable to predict how the proposed amendments may impact the number and type of election contests, and in light of current solicitation practices, for PRA purposes, we are not estimating that the majority solicitation requirement for dissidents would increase the reporting and cost burden associated with Regulation 14A. However, we solicit comment on this point and request data to help us estimate any such increase for PRA purposes. --------------------------------------------------------------------------- We are also proposing amendments to the proxy rules relating to all director elections to: Specify that the proxy card must include an ``against'' voting option when applicable state law gives effect to a vote ``against''; require proxy cards to give shareholders the ability to ``abstain'' in an election where a majority voting standard is in effect; and mandate disclosure about the effect of a ``withhold'' vote in an election. The proposed amendments requiring the appropriate use of an ``against,'' ``abstain'' or ``withhold'' voting option should better enable soliciting parties to properly seek and authorize the appropriate voting option for shareholders. We arrived at the estimates discussed below by reviewing our burden estimates for similar disclosure. We believe that the proposed amendments regarding the use of a universal proxy card, required notices and related disclosure would result in only a small amount of additional required disclosure and the addition of only a limited amount of material (the names of duly nominated director candidates for which the soliciting party has complied with Rule 14a-19 on proxy cards). The application of these amendments would be limited to contested elections. In addition, we believe that the additional disclosure and changes to the proxy card relating to the appropriate use of ``against,'' ``abstain'' or ``withhold'' voting options would similarly result in only a small incremental increase in the required disclosure; however, the changes would apply to proxy materials in all director elections, not just contested elections. C. Estimate of Burdens We derived our new burden hour and cost estimates by estimating the total [[Page 79181]] amount of time it would take to prepare and review the required disclosures called for by the proposed rules. This estimate represents the average burden for all soliciting parties, both large and small. In deriving our estimates, we recognize that the burdens will likely vary among soliciting parties. We believe that some soliciting parties will experience costs in excess of this average in the first year of compliance with the amendments and some parties may experience less than the average costs. As discussed more fully in Section IV.D.4. above, it is unclear whether the proposed amendments would result in an increase or decrease in the number of election contests, and we therefore estimate no change in the number of proxy statement filings as a result of the proposed amendments. We estimate that the average incremental burden for a registrant to prepare a universal proxy card in a contested election and include the required disclosure would be two hours. We similarly estimate that the average incremental burden for a dissident to prepare a universal proxy card in a contested election and include the required disclosure would be two hours. We additionally estimate that the average incremental burden for a dissident and registrant to prepare the notice to the opposing party containing the names of its nominees in a contested election would be approximately one hour. Thus, we estimate that the total incremental burden for Schedule 14A would increase by three hours per election contest for registrants and three hours per election contest for other soliciting parties.\410\ For purposes of the PRA, we estimate there would be 36 annual election contests per year,\411\ resulting in 216 additional total incremental burden hours (6 hours x 36 election contests) under Schedule 14A as a result of proposed Rule 14a-19 and the related amendments. --------------------------------------------------------------------------- \410\ There may be a range of burdens by soliciting parties as they determine exactly how to present the proxy card and the language of the required disclosure; however, we estimate the burdens described above as the average burden for soliciting parties. \411\ We do not estimate that there would be additional election contests as a result of the proposed amendments. We estimate approximately 36 election contests per year based on the average of actual proxy contests for elections of directors in 2014 (37) and 2015 (35). --------------------------------------------------------------------------- We estimate that the additional disclosure and changes to the proxy card relating to the appropriate use of ``against,'' ``abstain'' or ``withhold'' voting options in proxy materials for all director elections would be considerably less than one hour for each proxy statement and card relating to an election of directors. Unlike the proposed amendments relating to election contests, these proposed amendments would apply to all director elections, including director elections for funds and BDCs. The disclosure and changes to the proxy card are being proposed to require registrants to clarify existing standards, and many of the descriptions and standards, once revised, are not likely to require significant revision from year to year. We estimate that these changes would result in an average of 10 minutes of additional burden per response.\412\ For purposes of the PRA, we estimate the proposed changes would result in 931 hours of additional total incremental burden under Schedule 14A (10 minutes x 5,586 proxy statements) and 185 hours of total incremental burden under Rule 20a-1 (10 minutes x 1,108 filings). --------------------------------------------------------------------------- \412\ We estimate that the incremental burden for the proposed disclosure and changes to the proxy card would increase by 20 minutes in the first year and then be reduced to five minutes in years two and three, resulting in a three year average of an increased 10 minute burden per response. --------------------------------------------------------------------------- These estimates include the time and cost of preparing disclosure that has been appropriately reviewed, including, as applicable, by management, in-house counsel, outside counsel and members of the board of directors. This burden would be added to the current burden for Regulation 14A and Rule 20a-1, as applicable. For proxy statements under Regulation 14A, we estimate that 75 percent of the burden of preparation is carried internally and that 25 percent of the burden of preparation is carried by outside professionals retained at an average cost of $400 per hour. The portion of the burden carried by outside professionals is reflected as a cost, while the portion of the burden carried internally is reflected in hours. We estimate a similar allocation between internal burden hours and outside professional costs with respect to the PRA burden for Rule 20a-1. As a result of the estimates discussed above, we estimate for purposes of the PRA that the total incremental burden on all soliciting parties of the proposed amendments under Regulation 14A would be 860 hours for internal time (1,147 total incremental burden hours x 75 percent) and $114,700 (1,147 total incremental burden hours x 25 percent x $400) for the services of outside professionals. We further estimate for purposes of the PRA that the total incremental burden on all soliciting parties of the proposed amendments under Rule 20a-1 would be 138.75 hours for internal time (185 total incremental burden hours x 75 percent) and $18,500 (185 total incremental burden hours x 25 percent x $400) for the services of outside professionals. A summary of the proposed changes is included in the table below. Table 1--Calculation of Incremental PRA Burden Estimates ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Current Proposed Current Increase in Proposed annual annual Current Increase in Proposed professional professional professional responses responses burden hours burden hours burden hours costs costs costs (A) (B) (C) (D) (E) = C + D (F) (G) = F + G ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Schedule 14A.................................................... 5,586 5,586 546,814 860 547,674 $72,908,472 $114,700 $73,023,172 Rule 20a-1...................................................... 1,108 1,108 94,180 139 94,319 33,240,000 18,500 33,258,500 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ D. Request for Comment Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comments in order to: Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; Evaluate the accuracy of our assumptions and estimate of the burden of the proposed collections of information; Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; Evaluate whether there are ways to minimize the burden of the collections of information on those who respond, including through the use of automated collection techniques or other forms of information technology; and Evaluate whether the proposed amendments would have any effects on [[Page 79182]] any other collections of information not previously identified in this section. Any member of the public may direct to us any comments about the accuracy of these burden estimates and any suggestions for reducing these burdens. Persons submitting comments on the collection of information requirements should direct the comments to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and send a copy to Brent J. Fields, Secretary, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090, with reference to File No. S7-24-16. Requests for materials submitted to OMB by the Commission with regard to the collection of information should be in writing, refer to File No. S7- 24-16, and be submitted to the U.S. Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE., Washington, DC 20549-2736. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this proposed rule. Consequently, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. VI. Small Business Regulatory Enforcement Fairness Act For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 (``SBREFA''),\413\ the Commission must advise OMB as to whether a proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule is considered ``major'' where, if adopted, it results or is likely to result in: --------------------------------------------------------------------------- \413\ Public Law 104-121, Tit. II, 110 Stat. 857 (1996). --------------------------------------------------------------------------- An annual effect on the economy of $100 million or more (either in the form of an increase or a decrease); a major increase in costs or prices for consumers or individual industries; or significant adverse effects on competition, investment or innovation. If a rule is ``major,'' its effectiveness will generally be delayed for 60 days pending congressional review. We request comment on whether our proposed amendments would be a ``major rule'' for purposes of SBREFA. We solicit comment and empirical data on: The potential effect on the U.S. economy on an annual basis; any potential increase in costs or prices for consumers or individual industries; and any potential effect on competition, investment or innovation. We request those submitting comments to provide empirical data and other factual support for their views to the extent possible. VII. Initial Regulatory Flexibility Act Analysis The Regulatory Flexibility Act \414\ requires us, in promulgating rules under Section 553 of the Administrative Procedure Act,\415\ to consider the impact of those rules on small entities. The Commission has prepared this Initial Regulatory Flexibility Act Analysis in accordance with 5 U.S.C. 603. This Initial Regulatory Flexibility Act Analysis relates to proposed amendments to Exchange Act Rules 14a-2, 14a-3, 14a-4, 14a-5, 14a-6, and 14a-101 and proposed new Exchange Act Rule 14a-19. --------------------------------------------------------------------------- \414\ 5 U.S.C. 601 et seq. \415\ 5 U.S.C. 553. --------------------------------------------------------------------------- A. Reasons for, and Objectives of, the Proposed Action In a contested election today, the choices available to shareholders voting for directors through the proxy process are not the same as those available to shareholders voting in person at a shareholder meeting. Shareholders voting in person at a meeting may select among all of the duly nominated director candidates proposed for election by any party in an election contest and vote for any combination of those candidates. Shareholders voting by proxy, however, generally are limited to the selection of candidates provided by the party soliciting the shareholder's proxy. In 2013, the IAC recommended that we explore revising our proxy rules to provide proxy contestants with the option to use a universal proxy card in connection with short slate director nominations.\416\ A 2014 rulemaking petition requested that we require the use of a universal proxy to allow shareholders to vote for their preferred combination of registrant and dissident nominees in contested director elections.\417\ The Commission held a roundtable in February 2015 to explore ways to improve proxy voting, including through the adoption of universal proxies. As a result of these recommendations and our review of the proxy rules, we are proposing amendments that would allow a shareholder voting by proxy to choose among director nominees in an election contest in a manner that more closely reflects the choice that could be made by voting in person at a shareholder meeting. To this end, we are proposing to amend the proxy rules to: --------------------------------------------------------------------------- \416\ See IAC Recommendation. \417\ See Rulemaking Petition. --------------------------------------------------------------------------- Revise the consent required of a bona fide nominee; eliminate the short slate rule; and require the use of universal proxy cards in all non-exempt solicitations in connection with contested elections and prescribe requirements for universal proxy cards including notice, filing and solicitation requirements. We have also considered and are proposing additional improvements to the proxy voting process by making changes to the form of proxy. These changes would apply to all director elections and would require disclosure regarding the effect of shareholder action to vote ``against,'' ``withhold'' or ``abstain'' and that the appropriate voting option be listed on the proxy card. B. Legal Basis We are proposing the rule amendments pursuant to Sections 14 and 23(a) of the Exchange Act. C. Small Entities Subject to the Proposed Rules The proposed amendments would affect small entities that file proxy statements under the Exchange Act. For purposes of the Regulatory Flexibility Act, under our rules, an issuer of securities, other than an investment company,\418\ is a ``small business'' or ``small organization'' if it had total assets of $5 million or less on the last day of its most recent fiscal year.\419\ We estimate that there are approximately 692 issuers that are required to file with the Commission, other than investment companies, that may be considered small entities.\420\ --------------------------------------------------------------------------- \418\ An investment company is a small entity if, together with other investment companies in the same group of related investment companies, it has net assets of $50 million or less as of the end of its most recent fiscal year. 17 CFR 270.0-10(a). The staff estimates that, as of December 2015, approximately 129 funds and approximately 34 BDCs are small entities. As discussed in Section II.D. supra, we are not proposing that the amendments to change the consent required of a bona fide nominee, to eliminate the short slate rule or to require the use of a universal proxy card apply to investment companies. The only proposed amendments that would potentially affect small entities that are investment companies are the amendments that would apply to all director elections and require disclosure regarding the effect of shareholder action to vote ``against,'' ``withhold'' or ``abstain.'' \419\ 17 CFR 240.0-10(a). The Regulatory Flexibility Act defines ``small entity'' to mean ``small business,'' ``small organization,'' or ``small governmental jurisdiction.'' 5 U.S.C. 601(6). \420\ The estimate is based on staff review of Form 10-K filings in 2015 by registrants that have a class of equity securities registered under Section 12 of the Exchange Act. --------------------------------------------------------------------------- [[Page 79183]] The proposed amendments to the federal proxy rules establishing new procedures for use of a universal proxy card only would affect small entities engaged in a contested election. Based on a review of contested elections from 2014 and 2015, we are not aware of any \421\ contested elections involving small entities during that time period. While we anticipate that these proposed amendments may affect some small entities in the future, due to the small size of the entities and the higher concentration of ownership in smaller entities,\422\ we do not expect many such entities would be affected. Additionally, we are proposing to amend the procedures and disclosure applicable to director elections generally requiring clear disclosure about the effect of shareholder action to vote ``against,'' ``withhold'' or ``abstain'' and require that the appropriate voting option be listed on the proxy card. We expect these changes would affect small entities when those entities solicit proxies in a director election contest and when drafting applicable disclosure relating to voting standards in all director elections. --------------------------------------------------------------------------- \421\ A staff review of 72 Form 10-K filings for registrants involved in director election contests that were initiated through the filing of preliminary proxy statements by dissidents in calendar years 2014 and 2015 revealed that none of these registrants had total assets of $5 million or less on the last day of the fiscal year prior to the contest. \422\ See supra Table 1 in Section VI.B.1.b. showing increasing concentration of ownership by management as registrant market capitalization decreases. --------------------------------------------------------------------------- D. Projected Reporting, Recordkeeping and Other Compliance Requirements The proposed amendments to the proxy rules would: Revise the consent required of a bona fide nominee; eliminate the short slate rule; require the use of universal proxy cards in all non-exempt solicitations in connection with contested elections and prescribe requirements for universal proxy cards including notice, filing and solicitation requirements; and require disclosure regarding the effect of shareholder action to vote ``against,'' ``withhold'' or ``abstain'' and that the appropriate voting option be listed on the proxy card. The proposed changes in reporting requirements for soliciting parties are outlined in detail above. We do not believe the proposed amendments would impose significant recordkeeping requirements. E. Duplicative, Overlapping or Conflicting Federal Rules We believe that there are no federal rules that duplicate, overlap or conflict with the proposed amendments. F. Significant Alternatives The Regulatory Flexibility Act directs us to consider alternatives that would accomplish our stated objectives, while minimizing any significant adverse impact on small entities. Pursuant to Section 3(a) of the Regulatory Flexibility Act,\423\ we considered certain types of alternatives, including: (1) The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation or simplification of compliance and reporting requirements under the rule for small entities; (3) the use of performance rather than design standards; and (4) an exemption from coverage of the rule, or any part of the rule, for small entities. --------------------------------------------------------------------------- \423\ 5 U.S.C. 603(c). --------------------------------------------------------------------------- We considered a variety of alternatives to achieve our regulatory objective to allow a shareholder voting by proxy to choose among director nominees in an election contest in a manner that reflects as closely as possible the choice that could be made by voting in person at a shareholder meeting. In the alternative, we considered making the use of universal proxies optional for all parties or establishing a hybrid approach where use of a universal proxy would be mandatory for only one party.\424\ We have not proposed these alternative approaches in this rulemaking because we do not believe they meet the regulatory objective as well as the proposal; they do not replicate the choice that could be made by voting in person at a shareholder meeting as effectively as the proposed amendments. --------------------------------------------------------------------------- \424\ See supra Section IV.D.5.b. --------------------------------------------------------------------------- The current proxy rules relating to election contests and the proxy rules generally do not impose different standards or requirements based on the size of the registrant or dissident. These rules contain both performance and design standards in order to achieve appropriate disclosure in the proxy voting process under the Exchange Act.\425\ The proposed amendments require very limited additional disclosure by either the registrant or the dissident, but do impose additional filing and solicitation requirements on dissidents and an obligation on both parties in an election contest to include the other side's nominees on their respective proxy cards and to notify the other party of the names of their respective director nominees. We believe that the proposed amendments effectively meet the regulatory objective to permit shareholders voting by proxy in an election contest to reflect their choices as they could if voting in person at a shareholder meeting. We believe the proposed amendments are equally appropriate for parties of all sizes seeking to engage in an election contest because they are intended to facilitate shareholder enfranchisement, which does not depend on the size of the soliciting party. For that reason, we are not proposing differing compliance or reporting requirements or timetables for small entities, or an exception for small entities. However we seek comment on whether and how the proposed amendments could be modified to provide differing compliance or reporting requirements or timetables for small entities and whether such separate requirements would be appropriate. Additionally, we request comment on whether we should exempt small entities (either registrants or dissidents) from the proposed amendments. --------------------------------------------------------------------------- \425\ For example, the proxy rules include filing deadlines and some required specific disclosure. However, Schedule 14A generally permits parties to craft their disclosure as they deem appropriate. --------------------------------------------------------------------------- Similarly, we believe that the proposed amendments do not need further clarification, consolidation, or simplification for small entities, although we solicit comment on how the proposed amendments could be revised to reduce the burden on small entities. We also note that, as with the current proxy rules, the proposed requirements include both performance and design standards. In particular, the proposed universal proxy card is subject to certain presentation and formatting requirements but there is flexibility as to the exact design of the card within those parameters. We solicit comment as to whether there are additional aspects of the proposed amendments for which performance standards would be appropriate. G. Solicitation of Comment We encourage the submission of comments with respect to any aspect of this Initial Regulatory Flexibility Analysis. In particular, we request comments regarding: How the proposed amendments can achieve their objective while lowering the burden on small entities; the number of small entities that may be affected by the proposed amendments; [[Page 79184]] the existence or nature of the potential impact of the proposed amendments on small entities discussed in the analysis; and how to quantify the impact of the proposed amendments. Respondents are asked to describe the nature of any impact and provide empirical data supporting the extent of the impact. We will consider such comments in the preparation of the Final Regulatory Flexibility Analysis, if the proposed amendments are adopted, and will place those comments in the same public file as comments on the proposed amendments themselves. VIII. Statutory Authority and Text of Proposed Rule Amendments The amendments contained in this release are being proposed under the authority set forth in Sections 14 and 23(a) of the Exchange Act. List of Subjects in 17 CFR Part 240 Reporting and recordkeeping requirements, Securities. Text of the Proposed Amendments For the reasons set out above, the Commission proposes to amend 17 CFR part 240 as follows: PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 0 1. The general authority citation for part 240 continues to read, in part, as follows: Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted. * * * * * 0 2. Amend Sec. 240.14a-2 by revising paragraph (b) introductory text to read as follows: Sec. 240.14a-2 Solicitations to which Sec. 240.14a-3 to Sec. 240.14a-15 apply. * * * * * (b) Sections 240.14a-3 to 240.14a-6 (other than paragraphs 14a-6(g) and 14a-6(p)), Sec. 240.14a-8, Sec. 240.14a-10, Sec. Sec. 240.14a-12 to 240.14a-15 and Sec. 240.14a-19 do not apply to the following: * * * * * Sec. 240.14a-3 [Amended] 0 3. Amend Sec. 240.14a-3 as follows: 0 a. In paragraph (a)(3)(i) remove the period at the end of the paragraph and add in its place ``; or''; 0 b. In paragraph (a)(3)(ii) remove the semi-colon and add a period in its place. 0 4. Amend Sec. 240.14a-4 as follows: 0 a. Revise paragraph (b)(2); 0 b. Remove Instruction 1 and 2 to paragraph (b)(2); 0 c. Redesignate paragraph (b)(3) as paragraph (b)(5); 0 d. Add new paragraphs (b)(3) and (4); 0 e. Add Instruction to paragraphs (b)(2), (3), and (4); 0 f. Revise paragraphs (c)(5) and (d)(1); 0 g. Amend (d)(3) by adding a comma before ``or'' at the end of the paragraph; and 0 h. Revise paragraph (d)(4). The revisions and additions read as follows: Sec. 240.14a-4 Requirements as to proxy. * * * * * (b) * * * (2) A form of proxy that provides for the election of directors shall set forth the names of persons nominated for election as directors, including any person whose nomination by a shareholder or shareholder group satisfies the requirements of Sec. 240.14a-11, an applicable state or foreign law provision, or a registrant's governing documents as they relate to the inclusion of shareholder director nominees in the registrant's proxy materials. (3) Except as otherwise provided in Sec. 240.14a-19, a form of proxy that provides for the election of directors may provide a means for the security holder to grant authority to vote for the nominees set forth, as a group, provided that there is a similar means for the security holder to withhold authority to vote for such group of nominees. Any such form of proxy which is executed by the security holder in such manner as not to withhold authority to vote for the election of any nominee shall be deemed to grant such authority, provided that the form of proxy so states in bold-face type. Means to grant authority to vote for any nominees as a group or to withhold authority for any nominees as a group may not be provided if the form of proxy includes one or more shareholder nominees in accordance with Sec. 240.14a-11, an applicable state or foreign law provision, or a registrant's governing documents as they relate to the inclusion of shareholder director nominees in the registrant's proxy materials. (4) When applicable state law gives legal effect to votes cast against a nominee, then in lieu of providing a means for security holders to withhold authority to vote, the form of proxy shall provide a means for security holders to vote against each nominee and a means for security holders to abstain from voting. When applicable state law does not give legal effect to votes cast against a nominee, such form of proxy shall clearly provide any of the following means for security holders to withhold authority to vote for each nominee: (i) A box opposite the name of each nominee which may be marked to indicate that authority to vote for such nominee is withheld; or (ii) An instruction in bold-face type which indicates that the security holder may withhold authority to vote for any nominee by lining through or otherwise striking out the name of any nominee; or (iii) Designated blank spaces in which the security holder may enter the names of nominees with respect to whom the security holder chooses to withhold authority to vote; or (iv) Any other similar means, provided that clear instructions are furnished indicating how the security holder may withhold authority to vote for any nominee. Instruction to paragraphs (b)(2), (3), and (4). These paragraphs do not apply in the case of a merger, consolidation or other plan if the election of directors is an integral part of the plan. * * * * * (c) * * * (5) The election of any person to any office for which a bona fide nominee is named in a proxy statement and such nominee is unable to serve or for good cause will not serve. * * * * * (d) * * * (1) To vote for the election of any person to any office for which a bona fide nominee is not named in the proxy statement, (i) A person shall not be deemed to be a bona fide nominee and shall not be named as such unless the person has consented to being named in a proxy statement relating to the registrant's next annual meeting of shareholders at which directors are to be elected (or a special meeting in lieu of such meeting) and to serve if elected. (ii) Notwithstanding paragraph (d)(1)(i) of this section, if the registrant is an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development company as defined by section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), a person shall not [[Page 79185]] be deemed to be a bona fide nominee and shall not be named as such unless the person has consented to being named in the proxy statement and to serve if elected. Provided, however, that nothing in this Sec. 240.14a-4 shall prevent any person soliciting in support of nominees who, if elected, would constitute a minority of the board of directors of an investment company registered under the Investment Company Act of 1940 or a business development company as defined by section 2(a)(48) of the Investment Company Act of 1940, from seeking authority to vote for nominees named in the registrant's proxy statement, so long as the soliciting party: (A) Seeks authority to vote in the aggregate for the number of director positions then subject to election; (B) Represents that it will vote for all the registrant nominees, other than those registrant nominees specified by the soliciting party; (C) Provides the security holder an opportunity to withhold authority with respect to any other registrant nominee by writing the name of that nominee on the form of proxy; and (D) States on the form of proxy and in the proxy statement that there is no assurance that the registrant's nominees will serve if elected with any of the soliciting party's nominees. * * * * * (4) To consent to or authorize any action other than the action proposed to be taken in the proxy statement, or matters referred to in paragraph (c) of this section. * * * * * 0 5. Amend Sec. 240.14a-5 as follows: 0 a. Revise paragraph (c); 0 b. In paragraph (e)(2) remove the ``and'' at the end of the paragraph; 0 c. In paragraph (e)(3) remove the period and add ``; and'' in its place; and 0 d. Add paragraph (e)(4). The revisions and addition read as follows: Sec. 240.14a-5 Presentation of information in proxy statement. * * * * * (c) Any information contained in any other proxy soliciting material which has been or will be furnished to each person solicited in connection with the same meeting or subject matter may be omitted from the proxy statement, if a clear reference is made to the particular document containing such information. * * * * * (e) * * * (4) The deadline for providing notice of a solicitation of proxies in support of director nominees other than the registrant's nominees pursuant to Sec. 240.14a-19 for the registrant's next annual meeting unless the registrant is an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development company as defined by section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)). * * * * * 0 6. Amend Sec. 240.14a-6 by revising NOTE 3 TO PARAGRAPH (a) to read as follows: Sec. 240.14a-6 Filing requirements. * * * * * (a) * * * Note 3 to Paragraph (a): Solicitation in Opposition. For purposes of the exclusion from filing preliminary proxy material, a ``solicitation in opposition'' includes: (a) Any solicitation opposing a proposal supported by the registrant; (b) any solicitation supporting a proposal that the registrant does not expressly support, other than a security holder proposal included in the registrant's proxy material pursuant to Sec. 240.14a-8; and (c) any solicitation subject to Sec. 240.14a-19. The inclusion of a security holder proposal in the registrant's proxy material pursuant to Sec. 240.14a-8 does not constitute a ``solicitation in opposition,'' even if the registrant opposes the proposal and/or includes a statement in opposition to the proposal. The inclusion of a shareholder nominee in the registrant's proxy materials pursuant to Sec. 240.14a-11, an applicable state or foreign law provision, or a registrant's governing documents as they relate to the inclusion of shareholder director nominees in the registrant's proxy materials does not constitute a ``solicitation in opposition'' for purposes of Sec. 240.14a-6(a), even if the registrant opposes the shareholder nominee and solicits against the shareholder nominee and in favor of a registrant nominee. * * * * * 0 7. Add Sec. 240.14a-19 to read as follows: Sec. 240.14a-19 Solicitation of proxies in support of director nominees other than the registrant's nominees. (a) No person may solicit proxies in support of director nominees other than the registrant's nominees unless such person: (1) Provides notice to the registrant in accordance with paragraph (b) of this section unless the information required by paragraph (b) of this section has been provided in a preliminary or definitive proxy statement previously filed by such person; (2) Files a definitive proxy statement with the Commission in accordance with Sec. 240.14a-6(b) by the later of: (i) 25 calendar days prior to the security holder meeting date; or (ii) Five (5) calendar days after the date that the registrant files its definitive proxy statement; and (3) Solicits the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors and includes a statement to that effect in the proxy statement or form of proxy. (b) The notice shall: (1) Be postmarked or transmitted electronically to the registrant at its principal executive office no later than 60 calendar days prior to the anniversary of the previous year's annual meeting date, except that, if the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, then notice must be provided by the later of 60 calendar days prior to the date of the annual meeting or the 10th calendar day following the day on which public announcement of the date of the annual meeting is first made by the registrant; (2) Include the names of all nominees for whom such person intends to solicit proxies; and (3) Include a statement that such person intends to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors in support of director nominees other than the registrant's nominees. (c) If any change occurs with respect to such person's intent to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors in support of director nominees other than the registrant's nominees or with respect to the names of such person's nominees, such person shall notify the registrant promptly. (d) A registrant shall notify the person conducting a proxy solicitation subject to this section of the names of all nominees for whom the registrant intends to solicit proxies unless the names have been provided in a preliminary or definitive proxy statement previously filed by the registrant. The notice shall be postmarked or transmitted electronically no later than 50 calendar days prior to the anniversary of the previous year's annual meeting date, except that, if the registrant did not hold an annual meeting during the previous year, or if the date of the meeting has changed by more than 30 calendar days from the previous year, then notice must be provided no later than 50 calendar days prior to the date of the annual meeting. If any change occurs with respect to the names of the registrant's [[Page 79186]] nominees, the registrant shall notify the person conducting a proxy solicitation subject to this section promptly. Instruction to paragraphs (b)(1) and (d). Where the deadline falls on a Saturday, Sunday or holiday, the deadline will be treated as the first business day following the Saturday, Sunday or holiday. (e) Notwithstanding the provisions of Sec. 240.14a-4(b)(2), if any person is conducting a proxy solicitation subject to this section, the form of proxy of the registrant and the form of proxy of any person soliciting proxies pursuant to this section shall: (1) Set forth the names of all persons nominated for election by the registrant and by any person or group of persons that has complied with this section and the name of any person whose nomination by a shareholder or shareholder group satisfies the requirements of an applicable state or foreign law provision or a registrant's governing documents as they relate to the inclusion of shareholder director nominees in the registrant's proxy materials; (2) Provide a means for the security holder to grant authority to vote for the nominees set forth; (3) Clearly distinguish between the nominees of the registrant, the nominees of the person or group of persons that has complied with this section and the nominees of any shareholder or shareholder group whose nominees are included in a registrant's proxy materials pursuant to the requirements of an applicable state or foreign law provision or a registrant's governing documents; (4) Within each group of nominees referred to in paragraph (e)(3) of this section, list nominees in alphabetical order by last name; (5) Use the same font type, style and size for all nominees; (6) Prominently disclose the maximum number of nominees for which authority to vote can be granted; and (7) Prominently disclose the treatment and effect of a proxy executed in a manner that grants authority to vote for the election of fewer or more nominees than the number of directors being elected and the treatment and effect of a proxy executed in a manner that does not grant authority to vote with respect to any nominees. (f) If any person is conducting a proxy solicitation subject to this section, the form of proxy of the registrant and the form of proxy of any person soliciting proxies pursuant to this section may provide a means for the security holder to grant authority to vote for the nominees of the registrant set forth, as a group, and a means for the security holder to grant authority to vote for the nominees of any other soliciting person set forth, as a group, provided that there is a similar means for the security holder to withhold authority to vote for such groups of nominees unless the number of nominees of the registrant or of any other soliciting person is less than the number of directors being elected. Means to grant authority to vote for any nominees as a group or to withhold authority for any nominees as a group may not be provided if the form of proxy includes one or more shareholder nominees in accordance with an applicable state or foreign law provision or a registrant's governing documents as they relate to the inclusion of shareholder director nominees in the registrant's proxy materials. (g) This section shall not apply to: (1) A consent solicitation; or (2) A solicitation in connection with an election of directors at an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development company as defined by section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)). 0 9. Amend Sec. 240.14a-101 as follows: 0 a. Revise Instruction 3(a)(i) and (ii) to Item 4; 0 b. Add Item 7(h); and 0 c. In Item 21, revise paragraph (b) and add paragraph (c). The revisions and addition read as follows: Sec. 240.14a-101 Schedule 14A. Information required in proxy statement. * * * * * Item 4. Persons Making the Solicitation * * * Instructions. * * * 3. For purposes of this Item 4 and Item 5 of this Schedule 14A: (a) * * * (i) In the case of a solicitation made on behalf of the registrant, the registrant, each director of the registrant and each of the registrant's nominees for election as a director; (ii) In the case of a solicitation made otherwise than on behalf of the registrant, each of the soliciting person's nominees for election as a director; * * * * * Item 7. Directors and executive officers. * * * * * * * * (h) If a person is conducting a solicitation that is subject to Sec. 240.14a-19, the registrant must include in its proxy statement a statement directing shareholders to refer to any other soliciting person's proxy statement for information required by Item 7 of this Schedule 14A with regard to such person's nominee or nominees and a soliciting person other than the registrant must include in its proxy statement a statement directing shareholders to refer to the registrant's or other soliciting person's proxy statement for information required by Item 7 of this Schedule 14A with regard to the registrant's or other soliciting person's nominee or nominees. The statement must explain to shareholders that they can access the other soliciting person's proxy statement, and any other relevant documents, for free on the Commission's Web site. * * * * * Item 21. Voting Procedures. * * * * * * * * (b) Disclose the treatment and effect under applicable state law and registrant charter and bylaw provisions of abstentions, broker non- votes and, to the extent applicable, a security holder's withholding of authority to vote for a nominee in an election of directors. (c) When applicable, disclose how the soliciting person intends to treat proxy authority granted in favor of any other soliciting person's nominees if such other soliciting person abandons its solicitation or fails to comply with Sec. 240.14a-19. * * * * * By the Commission. Dated: October 26, 2016. Brent J. Fields, Secretary. [FR Doc. 2016-26349 Filed 11-9-16; 8:45 am] BILLING CODE 8011-01-P
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Proposed rule. | |
| Dates | Comments should be received on or before January 9, 2017. | |
| Contact | Tiffany Posil, Special Counsel, or Christina Chalk, Senior Special Counsel, in the Office of Mergers and Acquisitions, at (202) 551-3440, or Steven G. Hearne, Senior Special Counsel, in the Office of Rulemaking, at (202) 551-3430, Division of Corporation Finance, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. | |
| FR Citation | 81 FR 79122 | |
| RIN Number | 3235-AL84 | |
| CFR Associated | Reporting and Recordkeeping Requirements and Securities |