The 67% Solution
The upcoming Universal Proxy Card (UPC) presents activist investors with only one potentially significant new burden: solicit two-thirds of the shares in a proxy contest at a portfolio company. Everything else in the new rule, including the new proxy card format and contents and the notice schedule, is largely immaterial to investors.
A close read of the rule and the supporting economic analysis suggests activists can handle this new requirement easily. Almost all proxy contests already hit the 67% level, probably because it means soliciting a surprisingly small number of shareholders. And, an activist with an appetite for pushing legal and regulatory boundaries might even get by with soliciting less than 67%, depending on how we interpret "intend" and "solicit".
Here, we plunge into the origin and rationale for this requirement, analyze its impact on activists, and set forth some possible questions about compliance. We refer to sections, pages and footnotes in the final rule.
The 67% Solution
Where did the SEC get this idea? From companies worried that UPC "potentially expos[es] registrants to frivolous proxy contests." (p. 37). It
...ensure[s] that ... dissidents must still engage in meaningful independent solicitation efforts in order to have their director nominees elected. Current proxy rules do not obligate a dissident to solicit any number of shareholders or percentage of voting power ... The Proposed Rules were based on the premise that, while registrants would have to include dissident nominees on their universal proxy card, dissidents would be subject to a new requirement to solicit a minimum percentage of voting power. The concept of a minimum solicitation threshold for dissidents remains central to the universal proxy requirement... (p. 34)
If companies need to include activist nominees on a proxy card, then activists need to solicit a minimum number of the company's shareholders.
Also, the original proposed rule provided for a 50% level. The final regulation increased it to 67%, "in response to comment[s] that [50%] would insufficiently deter the potential for “freeriding” of dissident nominees on the registrant’s proxy card." (p. 37).
Some Detail on the Rule
The text of the rule requires an activist to solicit shareholders that own at least 67% of the shares, and say so in its proxy materials. The activist must
[solicit] the holders of shares representing at least 67% of the voting power of shares entitled to vote ... and include a statement to that effect in the proxy statement or form of proxy. (Section 14a-19(a)(3), p. 191)
An activist must also notify the company of its intent to so solicit, when it notifies the company of the activist's nominees. The notice must:
[i]nclude a statement [the activist] intends to solicit the holders of shares representing at least 67% of the voting power of shares entitled to vote on the election of directors... (Section 14a-19(b)(3), p. 192.)
If the activist changes its mind, then it needs to tell the company that, too:
If any change occurs with respect to [an activist's] intent to solicit the holders of shares representing at least 67% of the voting power of shares ... or with respect to the names of such person’s nominees, such person shall notify the registrant promptly. (Section 14a-19(c), p. 192)
Intent seems important here.
Activists Already Solicit 67%, Because It's Not That Many
In almost all proxy contests, activists already exceed the 67% solicitation level easily. The SEC estimates 52% of activists solicit all shareholders, based on a sample of 31 proxy contests in 2018 and 2019 (p. 85, fn 220). In the other 48%, activists solicited only 20% of the shareholders and still reached 95% of the outstanding shares (p. 86, fn 223). In a separate sample of 35 proxy contests, from an earlier version of the rule proposed in 2016, only two activists solicited less than 67% of the shares (p. 106, fn 260).
What about the 48% of activists that choose to solicit less than all shareholders? They do so effectively because in most companies, 67% is not that many. The SEC estimates at the median, 1.4% of shareholders hold 67% of the shares (p. 106, fn 260).
They convert this to number of shareholders, ranging from under 50 to over 500, depending on the company size (Table 1):
Based on SEC analysis of data from a proxy services provider (p. 112, fn 273)