Multiple Activist Muddle
For all of its considerable virtues, the new Universal Proxy Card (UPC) rule says nothing about proxy contests with multiple activist investors.
We see a couple or so of those situations in a given year. These rarely get as far as an actual proxy contest. For a moment it looked like it might happen at Kohl's this year, with Macellum Advisors and Engine Capital both involved. Engine did not nominate any candidates, leaving the campaign to Macellum.
When this occurs, prepare for confusion and disputes. The rule is silent on the critical elements of how the UPC will apply to proxy contests with more than one activist investor. Without further guidance from the SEC, companies and activists may handle these situations in dramatically different ways.
We see three such critical elements:
- The proxy card contents and format
- Notifications among the activists and the company
- Reference in proxy statements to information about director nominees.
The discussion below refers to sections and pages in the final rule.
The rule sets forth in detail how proxy cards of the company and activist will list all nominees from both (Section II.G, p. 51). The card will distinguish clearly between nominees from the company and the activist. The rule even specifies that the card will list proxy access nominees separately from others.
This part does not say how the card should list nominees from different activists. We could assume each activist's card should list nominees from other activists, in addition to the company nominees. At least, that's the spirit of the rule, in which each card presents essentially the same information. Still, it's not stated and not specifically required by the rule.
The terms about notifications (Section II.B, p. 25) are also silent about how to handle multiple activists. They require an activist to notify the company of its nominees 60 days before the shareholder meeting. The company similarly notifies the activist of its nominees 50 days before the shareholder meeting (Section II.C, p. 31). In this way, the company and the activist exchange nominee information and prepare identical proxy cards listing all the candidates.
However, the rule does not provide a process for one activist to notify others, or even to learn their identity. It also does not require the company to notify all activists (if more than one) of all nominees. Again, in the spirit of the rule we could assume the company would notify all activists of all nominees received from everyone at the same time it notifies the activists of the company nominees. But, again, it's not stated that way, and not required.
The rule also requires proxy materials to direct shareholders appropriately so they can learn about all nominees (Section II.F, p. 48). It's a longstanding proxy solicitation regulatory principle that a company's or activist's proxy materials need not provide any information about the other's director candidates. So, a company and an activist can and almost always will provide information only about its own nominees.
Yet, the SEC reasons if shareholders receive a proxy card listing all nominees, it makes sense that shareholders should have some way to learn about all of them. Thus, the new rule requires the company and the activist to refer to the other's proxy statement to learn more. While the company (or activist) still need not provide information about an activist's (or company's) nominees, it must make clear where shareholders can find that information. The SEC expects that such communication will at a minimum refer shareholders to the SEC filings of the company and the activist at the EDGAR archive.
It's not clear how this would work for multiple activists. It seems straightforward that the company proxy materials will refer shareholders to each of multiple activists' proxy materials, similar to how it would do so for a single activist. It would also make sense that one activist would also refer shareholders to other activists' materials in the same way it refers them to the company's. Again, the rule is silent, and it's not required.
Confusion and disputes
We can easily envision situations in which a company wishes to comply strictly with the SEC rule. If the SEC doesn't require something, then (conveniently!) it won't do it.
It might notify each activist only of the company's nominees, since that's all the rule requires. Each activist would then have an incomplete proxy card.
Or, a company may list all activist candidates together, alphabetically as the rule prescribes. This will likely confuse shareholders, and perhaps prompt them to vote for company nominees.
We can also envision situations in which one activist wishes to avoid ceding any advantage to another activist. Then, one activist might want to not list director nominees from another. Or, one activist might refer shareholders to proxy materials only for the company, and not for other activists.
This is just a start. Resourceful companies (and activists) can no doubt think of other ways that creative interpretation of the new rule will confound multiple activists that nominate director candidates at a company.
The SEC clearly anticipated complications, such as the need to list proxy access candidates separately from others. Yet, the SEC appears to have considered only the case that a single activist would undertake a proxy contest at a company. Throughout, the rule language typically refers frequently to "both" parties (company, a single activist) or the "two" slates (company and a single activist).
Common sense and good faith compliance with the spirit of the rule suggest companies and activists would handle this gap in the rule fairly and transparently. A company would treat all activists equally, and each activist will handle others in the same way that they would handle the company.
Still, many companies and activists would prefer clear, comprehensive language from the SEC. It beats relying on common sense assumptions and good faith from companies and activists that don't often trust one another under the best of circumstances.