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Universal Proxy Predictions

We've noted these in various forms and places over the past few months, since we first addressed universal proxy card in February. We consolidate them here after many discussions with investors, companies, and advisors, all eager to know what to expect as the September 1, 2022 effective date approaches.

It could take a year or two to learn know how right (or wrong) we are. We all need to figure out how to navigate the new regulation, which could take some time and trial-and-error.

The SEC will do more work:


More proxy contests. The UPC rule prompts activists to think about proxy contests more cost-effectively. The SEC essentially shows how activists can spend less on proxy contests, using notice-and-access and targeting larger shareholders. Or course, these are old ideas that activists could always pursue, so the new rule by itself doesn't lower proxy contest cost significantly. UPC has mainly highlighted these ideas, along with now allowing an activist to use only the company proxy card and avoid some proxy solicitation expense.

Lower (perceived) cost leads to greater demand - for proxy contests. ESG proponents that contentedly submit precatory proposals have begun work on director nominations. Smaller investors or even individuals see the opportunity to nominate a candidate based on owning but a single share a mere few months before the annual shareholder meeting. Larger, established activist investors care more about the strategic implications (below) than cost.

Larger activist director slates. Continuous voting under UPC means a given level of shareholder support for an activist slate should translate to an equivalent number of BoD seats, as we've shown with our BoD election strategy model. Today, most activists nominate a relatively small number of directors, typically three or fewer. Through diligent research into the shareholder base and thoughtful candidate selection an activist can productively nominate more than just a couple of candidates. It may take a few director elections and a year or more for activists to figure this out. 

More successful activist proxy contests. Activists that nominate the "correct" number of the right candidates and solicit proxies resourcefully under UPC should expect to win most or even all of the BoD seats they seek. In response, companies will seek earlier settlements for more than token BoD representation.

The "correct" number is critical! An activist that expects a plurality or even a majority of the votes can aim for significant representation. An activist that expects even a meaningful minority can win seats, while they win nothing under the current binary voting structure. Activists must select the number and qualifications of candidates with care. As the election strategy model shows, nominating more candidates than shareholders support leads to losing all of them.

More multiple activist situations. With more proxy contests from more and smaller activists, inevitably more than one investor will look at the same company. We predict only a few of these in the first year, as activists and the SEC sort out how all this works. Smart activists will begin early, and get ahead of smaller activists to reach shareholders.

More personal contests. We and others note how UPC encourages shareholders to compare individual company and activist nominees, beyond comparing company and activist plans. Proxy contests will delve deeply into company incumbent and activist nominee qualifications. Proxy contests can already become contentious, so it should get interesting as they get increasingly personal, too.

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You can find other useful resources at the TAI website, including our research on "Effective Activism", our white paper with the basics on activist investing, and our guides on exempt solicitationconsent solicitation, and special shareholder meetings.
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For further information, or to discuss a specific turnaround situation, please contact:

Michael R. Levin