^{This reprinted article first was published on the Harvard Law School Forum on Corporate Governance on February 28, 2023.}

Last year, the Securities and Exchange Commission’s universal proxy rule took effect. Prior to the rule’s adoption, companies and dissident shareholders sent separate proxy cards listing only their own slate of nominees for board of directors. It was difficult for shareholders to mix and match management and dissident nominees unless they attended a company’s annual meeting in person. Under the universal proxy rule, companies and dissidents are now required to use a universal proxy card that lists all of the nominees from both sides. The rule is triggered when a dissident solicits 67% of a company’s shareholders and complies with nomination procedures included in a company’s bylaws. As a result of the rule, shareholders can select the nominees they favor regardless of who nominated them.

At the time that universal proxy was first proposed, there was robust debate about how the rule would affect proxy contests. Some predicted that universal proxy would have no meaningful impact on the overall process or results. Others predicted a major increase in the number of proxy fights due to a (mis)perception that the rule would reduce costs, as well as expectations that shareholders groups would have more leverage than had been the case in the past.

We need not relitigate those debates now, but the early returns suggest a ripple, rather than a wave resulting from the rule. At a minimum, it appears that the predictions regarding a reduction in cost were not supported. Although dissidents can use the less expense notice and access method of distribution, they generally prefer to send full packages to get their materials in the hands of other investors. In addition, the bulk of proxy contest costs remain tied to outside advisers such as bankers and lawyers. From what we can tell, legal and banking fees continue to rise, notwithstanding the hopes of the most optimistic prognosticators.

To date there have only been a handful of proxy contests that have used the new universal proxy rule. Those contests have not been meaningfully different than contests waged in the past:

• Argo Group International – Argo and an activist group, Capital Returns Master (CRM), both used universal proxy, where CRM nominated two nominees for Argo’s seven-member Board. CRM withdrew its nominees after ISS and Glass Lewis recommended in favor of Argo’s nominees.
• Apartment Investment and Management Co. (AIV) – AIV and an activist group, Land & Buildings Investment Management (L&B), both used universal proxy, where L&B nominated two directors for three open seats on AIV’s ten-member Board. Glass Lewis recommended in favor of AIV’s three nominees, while ISS recommended in favor of one of L&B’s nominees, resulting in one of the L&B nominees being successfully elected to the Board.
• AIM Immunotech (AIM) – An activist group calling itself the AIM Stockholder Full Value Committee attempted to use universal proxy at AIM. The activist’s efforts were contested by AIM on the basis that they did not comply with its advance notice by-law requirements. AIM successfully defended its approach in the Delaware Court of Chancery, which rejected the activist group’s demands that AIM accept the activist’s nomination to the Board.
• Diffusion Pharmaceuticals – Diffusion and the activist group, LifeSci Special Opportunities Master Fund Ltd (LifeSci), both used universal proxy, where LifeSci had nominated a full slate of directors to the Diffusion Board. After rounds of filings, LifeSci and Diffusion entered into a settlement prior to the relevant meeting, under which Diffusion agreed to appoint one of the LifeSci nominees to the Board if it did not complete a transaction as defined in the agreement prior to July 2023.
• The Walt Disney Company – The Trian Group invoked the universal proxy rule and launched a proxy contest against the Walt Disney Company in early 2023, but withdrew the contest following actions taken by the Walt Disney Company. This would have been the largest use of the universal proxy rule since the rule was adopted.

So, as of this writing there have been 5 universal proxy contests as we enter the heart of the proxy season. Not exactly a tsunami.

One of the interesting developments from the universal proxy contests to date relates to how proxies and voting instruction forms (VIFs) are collected.

Shareholders fall into two categories: record shareholders and beneficial owners. A “record” or “registered” shareholder is a shareholder that holds an issuer’s shares directly and is listed in the issuer’s records. Alternatively, a shareholder may hold shares as a “beneficial owner” or a “street name holder,” which means that it holds shares through a broker or a bank. In turn, this broker or bank is generally the record holder of those shares held on behalf of its beneficial owner clients. Consequently, it is typically the broker or bank that is entitled to vote the shares held on behalf of its beneficial owner clients.

In light of this structure, Rules 14b-1 and 14b-2 under the Securities Exchange Act of 1934 require a bank or broker to distribute to their beneficial owner clients any proxy soliciting materials received from an issuer or any other soliciting person. In addition, New York Stock Exchange Rules 451 and 452, as well as FINRA Rule 2251, require banks and brokers to distribute these materials and prescribe specific rules governing how banks and brokers do so.

A VIF is how a broker or bank collects voting instructions from its beneficial owner clients under these rules. As described by the SEC, a VIF “allows a beneficial owner to instruct his or her broker or other securities intermediary how to vote their shares at company meetings.” The bank or broker collects VIFs and then casts a vote according to the aggregated VIF instructions. Voting instructions are collected through paper, or through telephone, Internet, or mobile device voting platforms.

Historically VIFs have closely followed the structure of proxy cards, although at times differences have developed due to differences between proxy cards and VIFs. For example, proxy cards are governed by state law, which generally provides companies with increasingly broad latitude in how these cards are structured and designed, subject principally to disclosures and a bias against disenfranchisement.

In contrast, VIFs are principally a communication mechanism between a beneficial owner and the bank or broker through which the beneficial owner holds shares. There are basically only a handful of rules that govern how VIFs operate. Rule 14a-2(a)(1) under the Exchange Act is the main rule that applies to VIFs and its prescriptions are limited. It exempts the distribution of proxy materials by banks, brokers and other entities from the bulk of the proxy rules if they:

• Receive no compensation other than the reimbursement of expenses;
• Distribute the soliciting material furnished to them to the beneficial owners being solicited; and
• Impartially instruct the person solicited as to how to transmit the proxy to the person who is originally soliciting it, or request voting instructions.

This last bullet point provides the regulatory underpinnings for VIFs. Other than Rule 14a-2, the primary rules governing the preparation and distribution of VIFs are NYSE Rules 451 and 452 and FINRA Rule 2251.

Although it did not proceed to completion, the proxy contest launched by the Trian Group with respect to Disney led to new SEC guidance regarding VIFs that could meaningfully impact future proxy contests. Specifically, the staff of the SEC’s Division of Corporation Finance has taken the position that:

• a voting instruction form should mirror the proxy card to the furthest extent possible, including with respect to the instructions relating to signed, but unmarked cards, partially marked proxy cards and overmarked proxy cards, and
• a soliciting party can include the instructions of their choosing so long as the disclosure in the proxy statement, proxy card and voting instruction form are clear to investors.

The SEC took this position in response to a new approach to proxies and VIFs advocated for by the Trian Group. Specifically:

• Unmarked but Signed Proxies and Voting Instructions – Trian Group took the position that unmarked proxy cards and VIFs should be instructed as “FOR” their nominee to the Board and “WITHHOLD” on all of the nominees recommended by The Walt Disney Company.
• Overmarked Voting Instructions – Trian Group took the position that overmarked proxy cards and VIFs (where a shareholder votes “FOR” more directors than available seats) should be marked “FOR” their nominee to the Board, “FOR” the 10 unopposed management nominees and “WITHHOLD” on the one opposed management nominee.
• Partially Marked Voting Instructions – Voting instructions were to be executed exactly as cast i.e., whichever Director nominees get a “FOR” vote will be marked as a “FOR” and the remaining nominees will be marked as “WITHHOLD”

The key to this new approach is disclosure. From the SEC’s perspective, these and similar changes are acceptable under the proxy rules as long as the soliciting party is clear regarding these outcomes.

Broadridge has made changes to its systems to accommodate the new guidance from the SEC and was prepared to follow these instructions and similar instructions from Disney. Ultimately the contest went away before these changes were tested in practice.

Although Broadridge was able to accommodate the changes in the Disney/Trian contest, the new position from the SEC is meaningfully different from how Broadridge and soliciting parties have addressed this issue in the past. Historically, for solicitations that did not involve the use of a universal proxy, Broadridge has followed the guidance from the NYSE with respect to signed, but unmarked proxy cards and VIFs, i.e., completing them in accordance with management’s recommendation.

Similarly, for partially marked proxies and VIFs, Broadridge has historically submitted the instructions as cast, e.g., if the beneficial owner only votes for one item on the proxy, that is how Broadridge has submitted the instructions. Under the new guidance however, a soliciting party could direct tabulators and proxy service providers to cast partially marked proxies and VIFs to vote for all of their candidates and none of the opposition candidates, even if the shareholder intended to abstain from the director election proposals. Similarly, a shareholder that only intended to vote for a non-management nominee could have their vote cast for their selected nominees and the management nominees, even if that was not their desire.

The big change resulting from the new SEC guidance most directly impacts how Broadridge processes overmarked VIFs (e.g., voting for 12 nominees when there are only 11 seats that are up for re-election).Historically Broadridge has pulled out overmarked VIFs and sent them to the relevant bank or broker for further instruction from the relevant investor. Now, instead of sending such forms for further instructions, the SEC guidance requires that firms rewrite overmarked VIFs to follow the instructions from the soliciting party regarding such votes. This means, as was the case in the Trian/Disney contest, that an overmarked card could be voted in favor of the soliciting party’s candidates to the Board with withhold votes for the other side’s candidates.

One might wonder what this portends for proxy contests based on past practice. There, the news is good. As a starting matter, investors voting online can’t overvote, and we are updating our systems to ensure that they can’t undervote either. This means that the proposed changes should not impact voting by institutional investors, which typically represent 70% or more of shares entitled to vote and who largely vote online using the voting tools provided by ISS, Glass Lewis and Broadridge. This also helps for online voting by retail investors, which typically represent 20-25% of shares entitled to vote a proxy. Excluding online voting, we are left principally with the 5-6% of shares that are voted using paper VIFs.

The pool gets even smaller – of the 5-6% of shares that are voted through paper VIFs, a very small percentage – typically less than 0.05% of shares – include overmarks. Those are the VIFs that are most impacted by the new SEC guidance.

This early into the proxy season, it would be a mistake to make grand predictions regarding the future of universal proxy. Nevertheless, the contests to date, as well as the new guidance from the SEC, suggest that the future of proxy solicitations may be meaningfully different from what they have been in the past.

The changes will not be limited to how proxies and VIFs are drafted. Recognizing the growing importance of retail investors in these contests, we’ve invested considerable time and resources into increasing the ability of retail investors to participate in proxy solicitations.

• ProxyVote App. Last year we implemented changes in our online voting app, ProxyVote, that allow shareholders to establish voting preferences regarding how they want to vote with respect to the election of directors, ratification of auditors and other matters. These changes are intended to make retail voting more similar to institutional voting, where institutional investors are allowed to establish advanced voting instructions with their proxy voting service provider. Unfortunately, due to legacy guidance from the SEC, retail investors must review these preferences and click “submit” before they are submitted for voting, a step that is not required for institutional investors.
• Pass-Through Voting. In addition to the changes to the ProxyVote app, last year we worked with a number of leading asset managers to create pass-through voting, which allows an institutional investor to solicit the views of its retail investors with respect to their voting policies, and in some cases, specific items being presented at a company’s annual meeting of shareholders. Although we remain in the early stages of implementing pass-through voting solutions, we are optimistic that the tool will result in more investor engagement and allow asset managers to solicit more information from their investors as they make voting decisions on behalf of fund investors.
• End-to-End Vote Confirmation. Finally, there is end-to-end vote confirmation. Last year Broadridge was part of an industry working group that established new protocols resulting in nearly 2,400 companies having end-to-end vote confirmation available at their annual meetings of shareholders. In end-to-end vote confirmation, an investor is provided with information that confirms that their voting instructions or votes were included in the final tabulation. This is one of the main areas for improvement identified by the SEC in its 2010 proxy plumbing release and in the 2018 proxy plumbing roundtable. We are proud to say that we were able to confirm 99.95% of votes cast in the 2022 proxy season. As we look forward, we hope to build on the successes from last year to cover all annual meetings, as well as proxy contests.

With just a few months behind us, there has already been considerable change resulting from the universal proxy rule in the form of new SEC interpretive guidance. We will continue to monitor developments this season and beyond as we assess the impact of the universal proxy rule on the frequency and nature of proxy contests. Notwithstanding the ongoing evolution in proxy solicitations resulting from the universal proxy rule, we are excited and optimistic about the ways in which we can continue to enhance the proxy voting system to best serve investors and companies alike.