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By Yin Wilczek
Feb. 19 — Panelists at the SEC's Feb. 19 proxy voting roundtable clashed over whether the commission should require universal ballots, with a corporate representative and attorneys arguing that they would be costly and lead to more proxy fights.
On the other hand, institutional investor representatives said universal ballots would level the playing field for investors who can't attend shareholder meetings and who have to vote by proxy.
However, there was general agreement that should the Securities and Exchange Commission mandate universal proxy cards, the implementation details will be critical.
The commission also appears similarly divided on the issue. Commissioners Kara Stein and Luis Aguilar suggested that current proxy rules may limit shareholder rights.
For his part, Commissioner Daniel Gallagher said he would try to keep an “open mind” but “there's a lot going on right now in this area,” including that shareholder activists are “becoming louder and more assertive by the day.”
Commissioner Michael Piwowar said he was “particularly interested” in hearing a “clear articulation” of the problem that universal ballots are intended to address. He also wanted to know what potential impacts such ballots would have on board performance and shareholder value.
Under current state and federal requirements, investors voting by proxy—unlike investors who attend meetings in person—cannot “split their ticket” by picking and choosing between candidates on the management slate and those supported by shareholder proponents.
A universal proxy card would allow shareholders to choose among all eligible director candidates.
The SEC mulled universal ballots more than 20 years ago, but recent events have brought the issue again to the forefront. For one, the Council of Institutional Investors petitioned the SEC in January 2014 to amend its proxy voting rules to eliminate the requirement to obtain a nominee's consent to be named on a proxy card in contested elections and to allow shareholders to vote for their preferred combination of shareholder and management nominees on a single card.
The SEC also is mulling a more limited recommendation by its Investor Advisory Committee—issued in July 2013—that the agency provide proxy contestants with the choice of using universal ballots in connection with short slate director nominations.
During the Feb. 19 panel, David Katz, a New York-based partner at Wachtell, Lipton, Rosen & Katz LLP, argued that universal ballots would significantly lower the costs for someone to run in a director election and potentially lead to activists fielding more candidates in a bid to seize board control. Katz also voiced concerns about the costs to the system of such an approach, and possible unintended consequences, such as investor confusion.
“If we jump in with both feet” on universal ballots without considering all these issues, “we may end up with a much worse result and further empower many of the activists and the results” that they seek, Katz said.
Steve Wolosky, a New York-based partner at Olshan, Frome & Wolosky LLP, agreed that allowing universal ballots will lead to more proxy contests. Wolosky noted that 85 to 90 percent of situations where shareholders seek to nominate a director candidate are settled annually, while 10 to 15 percent go to a shareholder vote. “I think at the end of the day you'll probably have more contests that go to a vote than less” with universal ballots, he said.
In a pre-roundtable comment to the SEC, the U.S. Chamber of Commerce similarly said that universal ballots will increase “the frequency and ease of proxy fights”.
Sarah Teslik, senior vice president at Apache Corp.—the only issuer on the panel—noted that there were about 1,000 proxy contests last year, and in 74 percent activists obtained partially what they wanted. “It doesn’t strike me that we have an absence of activism right now and need commission help in having more of it,” she said.
Teslik also said that virtually every issue that was addressed in a vote could have been addressed between the company and the shareholders in simple engagement without a contest. She also suggested that there are things the SEC can do that are simpler and less expensive to solve the problem of shareholder voting. For example, she urged the SEC to require shareholder proponents to disclose in their supporting statements whether they first called the company to discuss the matter proposed. “It’s about as cheap as you get,” she said. “It’s only disclosure; it’s one sentence.”
Moreover, Teslik argued that a shareholder-centered approach is not necessarily the appropriate path for companies. She said that every place in which Apache now successfully operates was initially unpopular with its shareholders. Ultimately, U.S. companies must be free to innovate and compete on the global stage, she said.
However, Anne Simpson, senior portfolio manager and director of Global Governance at the California Public Employees' Retirement System, countered that it is in the best interests of shareholders and companies to have a competent, diverse and independent board. To achieve that, the SEC must facilitate, “not frustrate,” the important exercise of shareholder rights. “We need a system that works without that physical presence” where shareholders must be present to vote for the full slate of candidates, she said.
The whole purpose of the discussion is to “level the playing field” and ensure that shareholders voting by proxy have the same rights as if they attended the meeting, Simpson added. “All we're doing here is ironing out a wrinkle.”
Charles Penner, chief legal officer at investment manager JANA Partners LLC, disputed that universal ballots would lead to “a huge flood of new entrants” in the activist space. The basic barriers to entry, including time and resources, still operate, he said.
Penner also disputed that shareholder activism harms companies or pushes them toward short-termism. “All the evidence supports” that companies are more productive and shareholders benefit over sustained periods as a result of shareholder activism, he said.
Drexel University Professor Michelle Lowry added that waging an activist campaign is very expensive, and universal proxy cards may not have that much impact on the costs.
Meanwhile, Frederick Alexander, counsel at Morris, Nichols, Arsht & Tunnell LLP in Wilmington, Del. and author of Bloomberg BNA's portfolio on Delaware law, suggested that enabling—but not mandating—universal ballots may be a better way to go. He noted that proxy access “quickly is coming to an equilibrium.” Similarly, rather than requiring a one-size-fits-all for universal proxy cards, private ordering could be a way of addressing some of the concerns raised by corporate representatives, he said.
One issue that is in question is whether there even is agreement on what constitutes a universal ballot. At the panel, Michele Anderson, chief of the SEC Division of Corporation Finance's Office of Mergers and Acquisitions, suggested that a universal ballot is just one proxy card on which every candidate is listed. However, she noted that others have recommended that each side send out its own version of a universal ballot.
In other discussions, the panelists suggested that should the SEC require universal ballots, the mechanics of the new requirements will be very important.
Okapi Partners President and Chief Executive Officer Bruce Goldfarb noted that name placement, how the votes are tabulated, what goes on the voting instruction form and how you choose who wins during an over-vote are key issues that must be decided ahead of time.
Wolosky agreed, adding that the commission must implement “uniform rules that apply to all proxy contests” and that don't give one party an advantage over the other.
To contact the reporter on this story: Yin Wilczek in Washington at email@example.com
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