More SEC Updates on Universal Proxy, in Time for the Holiday!
What better way to relax over Thanksgiving than with some helpful guidance from the SEC about the universal proxy card (UPC)? We dig into voting mechanics over dinner, and debate shareholder intent over pumpkin and apple pie. Instead of falling asleep due to overeating, we'll do so after contemplating the arcane mechanics of discretionary authority.
Last week the SEC issued its third round of interpretations, or C&DIs, about UPC. Scroll down to Section 139 of the release for all nine of the interpretations it has issued, including the three new ones (139.07-09)
This series of three new C&DIs covers a novel voting situation under UPC, of "overvotes". Rather than explaining each C&DI, we review that situation and show how the SEC guides activists and companies.
Under- and Overvotes
We've long known about undervotes, when a shareholder votes for fewer BoD candidates than there are BoD seats available. This happens often in uncontested elections. For example, in a BoD election with ten seats and ten incumbents, a shareholder might vote for only seven people, either deliberately or inadvertently. This leaves three undervotes.
Overvotes is new, and specific to UPC. It occurs when a shareholder votes for more candidates than the BoD has available seats. In our example, it would happen in a BoD election with ten seats, with ten incumbents and (say) five activist nominees. If a shareholder votes for all ten incumbents and all five activist nominees, there are five overvotes. Use any combination you please: vote for seven incumbents and four activist nominees, or eleven total, means one overrate. This always happens by accident, since companies and activists state clearly the most votes a shareholder can cast.
It's new to UPC because before, each of the company and activist had its own proxy card, listing only its own candidates. The company would list ten incumbents for ten BoD seats, and a shareholder could not vote for more than the ten incumbents - that's all they saw. The activist would list five nominees for ten BoD seats, and similarly, a shareholder could vote for no more than the five nominees, the only ones listed on the activist proxy card.
Of course, undervotes can also happen under UPC. In our example, with ten incumbents and five activist candidates for a ten-person BoD, a shareholder that votes for six incumbents and two activist candidates, or eight total, leaves two undervotes.
Companies (and Activists) Get a Little Cute
Companies and activists wanted to use these under-and overvotes to their respective advantage.
Does an undervote allow the company or activist to cast the undervoted seats the way the company or activist wants? After all, the shareholder was silent on those seats, so maybe that allows the company or activist to complete the ballot for the shareholder. In our example, with two undervotes between the company and activist, can the company or activist decide who gets those two votes?
Similarly, does an overvote make the shareholder's proxy card invalid? If so, does that mean the company or activist can vote those shares how they want?
Companies and activists were all over the place on this. The proxy rules require them to state how they would vote shares in these situations. Some said they would vote the undervoted shares. Some would throw out the card and vote it how they wanted, as if shareholder didn't vote at all. Others said they would not count the overvoted proxy card, or maybe count only the votes for incumbents.
SEC Creates Clarity
The SEC settled all this succinctly. Both under- and overvotes express a shareholder's voting intent. Undervotes mean a shareholder wanted to support only whom they voted for. Even if inadvertent, the company or activist can't assume so. Thus, companies and activists cannot complete the vote for the shareholder (Question 139.08).
Overvotes also express shareholder intent, however sloppy. A company or activist cannot substitute their discretionary judgement here, either. So, overvoted cards don't count (Question 139.07).
For good measure, the SEC explains how to handle a truly blank proxy card. In other words, suppose a shareholder signs it, but doesn't specify votes for any directors? The SEC reiterates a company or activist can vote using their discretionary authority (Question 139.09).
The SEC mentions companies and activists can contact shareholders to rectify these situations, calling it a "helpful practice." We mentioned this before, in the context of a proxy solicitor calling a shareholder to electioneer an already-completed proxy card.
Finally, it's worth noting that we're creating clarity and solving problems for situations that occur much less often than before. Most shareholders, and almost all institutional investors, execute proxies and cast votes online. Online voting interfaces prevent overvoting, and send multiple alerts for undervoting.
Have a happy Thanksgiving, everyone, full of family, friends, and food, but not SEC regulatory interpretations.
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