A universal proxy card, listing both company and activist nominees on a single proxy card, will be mandatory for shareholder meetings with contested director elections occurring after August 31, 2022. This will allow shareholders to “split the ticket,” making their own ad hoc selection of board members. By contrast, under the current proxy rules, holders voting by proxy card (rather than in person) must vote for the entire slate proposed by the company or by the activist.

Unlike the now eliminated (and very rarely used) “proxy access” Rule 14a-11, which allowed activists access to the company’s proxy only if they held three percent of the company’s outstanding shares for 3 years, there are no minimum shareholdings or holding periods required to take advantage of the universal proxy rules.

The activist is not required to nominate a full slate of directors to have its nominees included on the universal proxy card, making it possible for activists to place just one or two “special interest” directors on the universal proxy; accordingly, the new rules will eliminate the existing short-slate rule, which allows an activist to place management nominees on the activist’s proxy card to round out its slate when the activist is nominating a minority of directors. (Notably, the short-slate rule does not give the activist the right to place its nominees on the company proxy card.)

The procedural requirements imposed upon activists are not onerous and generally follow the timing found in many advance notice bylaws. The activist must provide notice to the company of the activist’s nominees not less than 60 days prior to the anniversary of the prior year’s annual meeting (or, in certain circumstances, 10 days after the first public announcement of the meeting).  In practice, properly drafted advance notice provisions in a company’s bylaws will include many more requirements regarding notice, but the timing of the notice will need to conform to the SEC’s new rules.  The activist must file a definitive proxy statement 25 days prior to the shareholder meeting or, if later, 5 days after the company files its definitive proxy statement.

Additionally, an activist seeking to include nominees on the universal proxy card must solicit proxies from holders of at least 67% of the outstanding shares. However, the rules are explicit that an activist may take advantage of the “notice and access” mailing method in soliciting these proxies. As a result, instead of incurring the expense of printing and mailing a definitive proxy statement, the activist need only mail a post card to holders of at least 67% of the outstanding shares, directing them to the online version of the activist’s proxy materials (including the activist’s definitive proxy statement). The company, by contrast, will be certain to continue to mail its proxy statement, distributing the universal proxy card to all shareholders in the process.

There does not appear to be any limitation on the number of activists who can take advantage of this rule in a single election – meaning that this low-cost option could result in a proxy card with more than two separate slates (which may be full slates or short slates).[1]

The SEC’s concurrent decision to propose amendments to proxy advisor rules – which amendments, if ultimately adopted, will make it harder to companies to fight back against recommendations against their directors – only heightens challenges to companies seeking to control the composition of their board.

The new rules will likely produce a very significant change in how activists, including underfunded, special interest activists, will run their campaigns. Management will recognize when negotiating with shareholders (including very small shareholders that had traditionally limited themselves to making 14a-8 shareholder proposals) that the ability to elect one or more directors to the board is within reach of many. All that is required is compliance with advance notice provisions, electronically filing a proxy statement, mailing a postcard to shareholders, and getting ISS and Glass Lewis on-side – not necessarily a tall task. Particularly if “issue” activists take advantage of these rules and are able to recruit proxy advisors to their cause, the results could be quite disruptive.

[1] One can only hope that the SEC does not next introduce a ranked-choice voting system.