By Patrick Gadson, Partner, Vinson & Elkins
After six years of starts and stops, the Securities and Exchange Commission has voted to adopt new rules ushering in universal proxy cards in contested director elections.
Now, with the rules set to go into effect this August, parties on both sides of the argument may discover that the impact will be surprisingly modest, yet the noise and rhetoric will be anything but. There will be more shareholder challenges and proxy fights, but in the end, most of the challenges will fail and the balance of power between activists and managements may look a lot like it does today.
Before we explain why, it is worth taking a minute to look at the rule itself.
How the rules will work
Right now, generally speaking shareholders voting by proxy in contested director elections cannot vote for a combination of director nominees from competing slates the way they could if they voted in person at a shareholder meeting. Under the new regime, a universal proxy card must include all director nominees presented by management and shareholders.
In a statement he gave in November 2021 when the rules were passed, SEC Chair Gary Gensler said, “They will put investors voting in person and by proxy on equal footing.’’ Gensler hailed the change as critical for shareholder democracy.
Should we expect more proxy fights
Dissident shareholders will almost certainly be more inclined to exercise their right to challenge management for a simple reason: it will be a lot cheaper to do so. Today mounting a challenge can easily cost an activist group $500,000 or more. With universal proxy cards the cost will drop significantly. In effect, the barriers to entry will be lower.
The expected proliferation of challenges will create headaches for management. Companies will have to spend more time and resources anticipating, preparing and responding to activist overtures. Even just separating the serious challenges from the less serious will be time consuming. A long list of corporate actors– C-suite executives, board members, investor relations officers, and a slew of legal, financial and communications advisors—will need to be playing offense constantly to fend off potential attacks and possible damage to a company’s reputation.
But mounting a challenge to management and pulling off a successful challenge are two very different things.
Why the challenges face hurdles
A key hurdle for the new dissidents will be recruiting slates of directors to sign on to their causes. For years, even well-established activists have many times struggled to identify qualified board candidates. The pool of potential board members is already small and many strong candidates already serve on multiple boards, sometimes earning the “overboarded” moniker from the all-powerful proxy advisors.
For the new cadre of activists, attracting this talent will be like competing against the University of Alabama and the University of Georgia for prize football recruits. The odds will be slim.
Also, just because it may be easier to run a proxy contest doesn’t mean you can. The capital still required to build a position, the resources of the activist and focus required of the portfolio management team, the daily machinations and non-stop rollercoaster, lawsuits on top of lawsuits, and other unpredictable variables are not for the faint of heart, especially for those who have not been through this process many times before. There is a reason shareholder activism has only been successfully practiced by a select few, and universal ballots won’t change that for new dissident shareholders.
For brand name activists, the calculus will be somewhat different. For them, the new rules of the game likely won’t matter very much. The cost of soliciting votes for this group isn’t very large when compared to the assets they manage. More importantly, by the time these activists are ready to mount a campaign to wrest control from management, many have already made a strong case that the business is underperforming and have built broad support for their campaigns. Taking the next steps–finding a slate of directors and winning the backing of proxy advisors—is something they have done time and again.
Still, a few things seem clear. Activist investing is here to stay. It has been building momentum for years, helped by a friendly regulatory climate, a track record of success, growing support from traditional investors like mutual funds and the emergence of the importance of new issues, such as ESG, that give challengers more tools to use as leverage.
Universal proxy cards will certainly create more challenges, more proxy fights and more costs for corporations to bear, but maybe not a great deal more accountability and change within the boardroom.
Contact:
John Jannarone
Editor-in-Chief
editor@corpgov.com
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