How Universal Proxy Card Notices Work
Like all good and sound SEC regulations, the one on Universal Proxy Cards (UPC) calls for some new notices - to shareholders, from the company, among activist investors, to the SEC, etc. etc.
The new UPC rule has some novel notice requirements for activists. Others are similar to existing notice processes. Complying with these should be straightforward. Yet, it's not hard to miss one or another of these, and then it's difficult and possibly fatal for a proxy contest. Best to know the notice structure and plan ahead well.
Here we explain how these notices work, as simply as we can. Citations below refer to sections, pages, and footnotes in the final regulation.
Notices serve two purposes
First, UPC means the company and activist (or activists) must present the same list of BoD nominees to shareholders. So, they need to exchange that information far enough ahead of a shareholder meeting to allow each to include all nominees. This is new and unique to the UPC.
Second, the activist needs to inform shareholders about its nominees, which might seem obvious. The particulars of the UPC rule makes it a little tricky. In short, the SEC requires an activist to handle an existing notice (proxy statement) in a new way.
You see, while the SEC requires all nominee names on the UPC, that's it. The rule doesn't require anything further, like biographical data. So, shareholders receive a company proxy statement with all the usual information, including glorious detail about the company nominees. They receive a company UPC listing those nominee names.
The company UPC will also list activist names, which of course is the point of this entire exercise. But, the company proxy statement won't provide any more information about the activist nominees. Just the names.
The SEC worries that if a company sends out a UPC with only the names of activist nominees, shareholders will look for, want and need, and regret missing information about those activist nominees. Thus, the company (and activist, this whole concept applies equally) proxy statement will include language referring shareholders to the activist proxy statement for that information. The company might state something like, "go find the activist's proxy statement for information about its nominees, whose names appear on our UPC since we're required to do that, but since the SEC doesn't require us to include any other information about those nominees, that's all you get."
The SEC further worries that shareholders won't have the activist nominee information in time. The company refers shareholders to the activist proxy statement. The SEC wants shareholders to have that statement with enough time to vote thoughtfully. So now there's a kind of new-and-improved notice provision for that. This is not strictly new, since activists send out proxy statements anyway.
Notice of nominees, between the company and activist
The activist goes first. It notifies the company of its nominees at least 60 days before the shareholder meeting.
(Ok, sure, it's actually 60 days before the anniversary date of last year's meeting.)
(There are provisions if the company didn't have a meeting the year before, or if the meeting date moves around more than about a month relative to last year's meeting (Sec. 14a-19(b)(1), p. 192), that happens seldom enough that we need not cover that right here.)
Some other things about the activist notice:
- The notice includes
- the names of the activist nominees
statement of activist's intent to solicit at least 67% of the votes
- Don't file this with the SEC, it's just a notice to the company, although an activist with 5% or more of the shares might also file a Form 13D
- A simple emailed letter or even just an email message should suffice
- If the activist files its proxy statement at least 60 days before the shareholder meeting, then that filing fulfills this requirement; this seldom happens
- Alas, the letter that complies with company advance notice terms does not by itself fulfill this requirement, although after an activist sends that, sending the UPC notice is relatively simple; with some additional language about the 67% the advance notice letter can likely constitute the needed UPC notice, too.
The SEC thinks this 60 day requirement should be easy to meet. Its economic analysis finds 99% of S&P 500 companies and 95% of Russell 3000 companies have advance notice provisions for BoD nominees (p. 29, fn 73). So, this notice becomes another letter that an activist needs to send to the company, with information it very likely already conveyed.
The company goes next. It sends a list of its nominees to the activist at least 50 days before the shareholder meeting. All other relevant terms of the activist notice, like how the notice period changes if the anniversary of the annual meeting changes or how filing a proxy statement can meet the requirement, apply equally.
Almost two months before a shareholder meeting should be enough time for an activist to put together a proper UPC with the names of the company nominees.
Notice of activist nominees, to shareholders
To assuage its worry about shareholders having information about activist nominees, the SEC now requires an activist to file its definitive proxy statement at least 25 days before the shareholder meeting.
This deadline is new. While the SEC requires activists to file proxy statements, it previously has not required doing so on any schedule.
Now the company goes first (specifically, if it wants the activist can wait for the company to file a proxy statement). If the company files its proxy statement within 30 days of the shareholder meeting, then the activist can comply by filing its proxy statement within 5 days after the company filing. Or, if the company files (for example) within 35 days before the shareholder meeting, then the activist can file after the company, say 30 days before the meeting, and still comply with this requirement. Note, this seldom happens, as companies typically file proxy materials more than a short four weeks before the shareholder meeting.
Even though the company goes first, an activist need not wait for the company. You can always file a definitive proxy whenever you like, even before the company. There might be advantages to filing early, too, see below.
This new deadline should not present a problem in most contests. Based on a sample of proxy contests from 2017-2020, 82% of activists filed proxy statements at least 25 days before the shareholder meeting (p. 45, fn 117).
What if someone misses a deadline?
The regulations don't say anything about consequences for late notices between activist and company. They are pretty clear about the 25 day proxy filing requirement.
If an activist misses the filing deadline for notice to the company, it seems the company can at least use the old proxy card listing only company nominees, rather than the new UPC. It's not clear whether that also means the activist cannot proceed with the proxy contest. In other words, while the activist can finish the solicitation, it will do so using only its own proxy card.
If the company misses the fling deadline for notice to the activist, it's really unclear. Maybe the activist need not include company nominees on its proxy card, while the company still must use a UPC with both company and activist nominees.
Suppose the activist fails to file its proxy at least 25 days out? Then it looks like the activist cannot finish the proxy contest: "If a dissident fails to file its definitive proxy statement by the new deadline prescribed, that failure would constitute a violation of Rule 14a-19 and the dissident would face the same liability as if it had violated any other proxy rules." (p. 47)
Tips for complying
An activist would be wise to get as far ahead of they company and other potential activists as it can.
Companies have a natural, long-standing advantage in soliciting shareholders. They can communicate with shareholders as early, often, and in whatever manner they want. So, an activist should put its nominees in front of shareholders as soon as possible. It wants shareholders to learn about the activist candidates when the company communicates about its nominees.
You'll want to get ahead of other activists, too. We expect multiple activist situations to become more frequent. At the very least you want shareholders to know about your candidates before they start to learn about others. Even better, early communication with shareholders might dissuade other activists from nominating candidates.
The 60 day notice and 25 day proxy filing deadline represent the latest dates. An activist can notify the company for UPC as soon as it notifies the company pursuant to advance notice terms, or even within the same notice. An activist can also file a proxy statement long before the 25 day deadline. Sure, you'll need to wait for the company to file its notice to distribute a UPC. Still, once you notify the company and file proxy materials, you can at least start to communicate with shareholders about your nominees.
As always, we're not attorneys and nothing here constitutes legal advice, so please consult with your favorite securities attorney.