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One Card or Two?
Last week the SEC issued another series of comments about universal proxy card (UPC). Its Compliance Disclosures and Interpretations (CD&Is) answer questions from investors, companies, and shareholders about its rules.
One of these (139.06) caught our attention, about whether the UPC rule allows an activist to rely solely on a company proxy card. The answer to this somewhat arcane and technical question has interesting implications for proxy contest costs and tactics.
We considered this question previously, without the benefit of this latest SEC view. Then, we suggested an activist with an appetite for pushing regulatory boundaries could indeed use only the company proxy card. While the SEC's current CD&I likely discourages this, a limited yet meaningful version of using the company proxy card remains possible.
This idea appears to have occurred to others, since the SEC likely received multiple inquires about it. If it's important enough for the SEC to publish a CD&I, it's worth considering here.
What is "solicit"?
As we should know by now, the UPC rule requires the activist and the company to send fundamentally similar proxy cards. If both cards have the same information, why even have both? The cost to
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design
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file
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print, program
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transmit
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track
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follow-up
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collect
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tabulate, and
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submit
proxy cards can add up fast. Maybe let's save some money and send only one? Since the company has to send theirs, let's use that one.
Actually, the rule is silent as to whether the activist needs to send a proxy card at all. Specifically, it does not define "solicit". The rule by itself seems to allow an activist to so rely on the company proxy card. That silence likely helped the SEC decide to promulgate a CD&I on the subject.
Solicit likely means "have", not necessarily "send"
Earlier, we posited other SEC rules might bear on this question:
We note other terms within Section 14A of the proxy solicitation rules may require an activist to at least file a UPC with the SEC as part of the preliminary proxy filing process. These other terms may allow an activist to stop there, and not necessarily do anything further beyond that filing.
Now, the CD&I provides (a little) further detail about how this should work (our emphasis in bold):
[The rule] requires each...party in a [proxy] contest to use a universal proxy card that includes the names of all director candidates... [It] further requires [an activist] to solicit holders of at least 67% of the voting power of shares... [An activist] would fail to comply ... if it does not furnish its own universal proxy cards to holders of at least 67% of the voting power through permitted methods of delivering proxy materials (such as the Rule 14a-16 “notice and access” method).
The SEC suggests an activist must "use" a UPC. It connects the need to "solicit" 67% of the shares with the need to "furnish" a proxy card to those shareholders. However, the rule fails to define these terms any further. (While we're at it, in classic regulatory-speak, it works in an obscure double-negative, so the activist fails to comply if it does not send a proxy card to the 67% of owners.) The need to "furnish" a proxy card seems most relevant.
It strikes us an activist can comply by creating a proxy card and making it available to shareholders, say on the SEC's EDGAR filing system. In other words, steps 1.-2. above. An activist would use “notice and access” to comply with the 67% requirement, and stop there.
Nothing in the UPC rule, the new CD&I, or the other proxy solicitation rules appears to require anything further. Much of the cost of soliciting proxies entails steps 3.-9., so this would lower costs significantly.
Allowed or Sensible?
Whether it's a good idea to use the company proxy card in this way is a different question. As we observe above, an activist can surely save some money this way. Yet, it relinquishes two things: tracking proxies, and electioneering shareholders that already voted.
An activist that collects its own proxy cards can see who has not voted. This way, it can concentrate solicitation only on forgetful or reluctant shareholders.
An activist also can seek to persuade shareholders that do vote to change votes. If an activist collects proxy cards, then it can see how a shareholder might have split its votes between the company and the activist. We noted before that it can thus electioneer that shareholder.
An activist must consider this trade-off: spend more on solicitation to influence votes, or spend less and let the company do that.
Of course, nothing here is legal advice, so consult with your favorite securities attorney for further interpretation of "use", "solicit", "furnish", and other fun subjects within the rule.
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