Document ID: SEC-2021-1692-0001
Agency: sec
Document Type: Rule
Title: Universal Proxy
Posted Date: 2021-12-01T05:00Z

[Federal Register Volume 86, Number 228 (Wednesday, December 1, 2021)]
[Rules and Regulations]
[Pages 68330-68381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25492]

[[Page 68329]]

Vol. 86

Wednesday,

No. 228

December 1, 2021

Part III

Securities and Exchange Commission

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17 CFR Part 240

Universal Proxy; Final Rule

  Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / 
Rules and Regulations  

[[Page 68330]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-93596; IC-34419; File No. S7-24-16]
RIN 3235-AL84

Universal Proxy

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
amending the Federal proxy rules to enhance the ability of shareholders 
to elect directors though the proxy process in a manner consistent with 
their ability to vote in person at a shareholder meeting. Specifically, 
the Commission is requiring the use of a universal proxy card in all 
non-exempt solicitations involving director election contests, except 
those involving registered investment companies and business 
development companies. To facilitate the use of a universal proxy card, 
the Commission is also amending the Federal proxy rules to establish 
certain notice, minimum solicitation, filing, formatting and 
presentation requirements, along with other related rule changes 
consistent with the adoption of a universal proxy requirement. In 
addition, the Commission is adopting new disclosure requirements 
relating to voting standards and further requiring certain voting 
options for all director elections, whether or not contested.

DATES: 
    Effective date: The rules are effective January 31, 2022.
    Compliance dates: See Section II.K.

FOR FURTHER INFORMATION CONTACT: Christina Chalk, Senior Special 
Counsel, or David M. Plattner, Special Counsel, in the Office of 
Mergers and Acquisitions, at (202) 551-3440, Division of Corporation 
Finance, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR 
240.14a-2 (``Rule 14a-2''), 17 CFR 240.14a-3 (``Rule 14a-3''), 17 CFR 
240.14a-4 (``Rule 14a-4''), 17 CFR 240.14a-5 (``Rule 14a-5''), 17 CFR 
240.14a-6 (``Rule 14a-6''), and 17 CFR 240.14a-101 (``Schedule 14A''), 
and new rule 17 CFR 240.14a-19 (``Rule 14a-19''), each under the 
Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (``Exchange 
Act'').\1\
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    \1\ Unless otherwise noted, when we refer to the Exchange Act, 
or any paragraph of the Exchange Act, we are referring to 15 U.S.C. 
78a of the United States Code, at which the Exchange Act is 
codified, and when we refer to rules under the Exchange Act, or any 
paragraph of these rules, we are referring to title 17, part 240 of 
the Code of Federal Regulations [17 CFR part 240], in which these 
rules are published.
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Table of Contents

I. Introduction
    A. Background
    B. Overview of Final Amendments
II. Discussion of Final Amendments
    A. Mandatory Use of Universal Proxies in Non-Exempt 
Solicitations in Contested Elections
    1. Proposed Rules
    2. Comments Received
    3. Final Amendments
    B. Dissident's Notice of Intent To Solicit Proxies in Support of 
Nominees Other Than the Registrant's Nominees
    1. Proposed Rules
    2. Comments Received
    3. Final Amendments
    C. Registrant's Notice of Its Nominees
    1. Proposed Rules
    2. Comments Received
    3. Final Amendments
    D. Minimum Solicitation Requirement for Dissidents
    1. Proposed Rules
    2. Comments Received
    3. Final Amendments
    E. Dissident's Requirement To File Definitive Proxy Statement 25 
Calendar Days Prior to Meeting
    1. Proposed Rules
    2. Comments Received
    3. Final Amendments
    F. Access to Information About All Nominees
    1. Proposed Rules
    2. Comments Received
    3. Final Amendments
    G. Formatting and Presentation of the Universal Proxy Card
    1. Proposed Rules
    2. Comments Received
    3. Final Amendments
    H. Director Election Voting Standards Disclosure and Voting 
Options
    1. Proposed Rules
    2. Comments Received
    3. Final Amendments
    I. Bona Fide Nominee and Short Slate Rules
    1. Elimination of the Short Slate Rule
    a. Proposed Rules
    b. Comments Received
    c. Final Amendments
    2. Modification of the Bona Fide Nominee Rule
    a. Proposed Rules
    b. Comments Received
    c. Final Amendments
    J. Funds
    1. Proposed Rules
    2. Comments Received
    3. Final Amendments
    K. Compliance Dates
III. Other Matters
IV. Economic Analysis
    A. Introduction
    B. Baseline
    1. Affected Parties
    a. Shareholders
    b. Registrants
    c. Dissidents in Contested Elections
    d. Directors
    2. Contested Director Elections
    a. Proxy Contest Data
    b. Notice, Solicitation, and Costs of Proxy Contests
    c. Results of Proxy Contests
    d. Split-Ticket Voting
    3. Other Methods To Seek Change in Board Representation
    C. Discussion of Economic Effects
    1. Effects on Shareholder Voting
    2. Potential Effects on Costs of Contested Elections
    a. Typical Proxy Contests
    b. Nominal Proxy Contests
    3. Potential Effects on Outcomes of Contested Elections
    4. Potential Effects on Incidence and Perceived Threat of 
Contested Elections
    a. Typical Proxy Contests
    b. Nominal Proxy Contests
    5. Specific Implementation Choices
    a. The Short Slate and Bona Fide Nominee Rules
    b. Use of Universal Proxies
    c. Voting Standards Disclosure and Voting Options
V. Paperwork Reduction Act
    A. Summary of the Collection of Information
    B. Effect of the Final Amendments on Existing Collections of 
Information
    C. Aggregate Burden and Cost Estimates for the Amendments
VI. Final Regulatory Flexibility Act Analysis
    A. Need for, and Objectives of, the Final Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Final Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    E. Agency Action to Minimize Effect on Small Entities
VII. Statutory Authority

I. Introduction

A. Background

    State statutes require corporations to hold an annual meeting of 
shareholders for the purpose of electing directors.\2\ A shareholder's 
ability to participate in the election of directors is a fundamental 
right under state corporate law,\3\ and the process by which directors 
are elected is a fundamental aspect of corporate governance that is 
central to maintaining the accountability of directors to shareholders. 
Today, few shareholders

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of public companies with a class of securities registered under the 
Exchange Act attend a registrant's meeting to vote in person.\4\ 
Instead, the primary means for shareholders to become informed about 
matters to be decided on at a meeting and to vote on the election of 
directors and other matters is through the proxy process.
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    \2\ See, e.g., Model Bus. Corp. Act section 7.01 (2016); Cal. 
Corp. Code section 600(b); Del. Code. Ann. tit. 8, section 211(b); 
N.Y. Bus. Corp. Law section 602.
    \3\ See Preston v. Allison, 650 A.2d 646, 649 (Del. 1994); see 
also Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 659 (Del. 
Ch. 1988) (``The shareholder franchise is the ideological 
underpinning upon which the legitimacy of directorial power 
rests.'').
    \4\ During the COVID-19 pandemic, many registrants have held 
virtual rather than in-person shareholder meetings. Because 
registrants holding virtual shareholder meetings conducted proxy 
solicitations in the same manner as they would for in-person 
meetings, for purposes of this release, our references to in-person 
meetings include virtual shareholder meetings unless otherwise 
indicated. Although virtual shareholder meetings have become more 
prevalent, it remains unclear whether virtual shareholder meetings 
will be used as frequently in the future. Because voting at a 
virtual shareholder meeting still requires attendance by a 
shareholder, most shareholders are likely to continue to rely on the 
proxy voting system to exercise their vote. This is supported by the 
fact that, during 2020, the vast majority of shareholders who 
attended virtual shareholder meetings did not vote at the meetings. 
Instead, to the extent they voted, they did so in advance by proxy 
or via voting instruction forms submitted in advance of the 
meetings, rather than by attending the virtual shareholder meeting 
and casting their votes at the meeting. Based on 1,957 virtual 
meetings hosted by one proxy services provider in 2020, the average 
number of shareholders voting at virtual meetings (rather than 
voting in advance by proxy) was 13 shareholders for meetings with 
shareholder proposals (218 cases) and 2 shareholders for meetings 
without shareholder proposals. See Broadridge, Virtual Shareholder 
Meetings 2020 Facts and Figures (April 2021), available at https://www.broadridge.com/_assets/pdf/vsm-facts-and-figures-2020-brochure-april-2021.pdf. Accordingly, the use of virtual shareholder meetings 
will not obviate the need for the final rules regarding universal 
proxy cards.
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    When a shareholder votes by proxy, the shareholder executes a 
written directive instructing the entity to whom the proxy is granted 
how to vote on that shareholder's behalf at the meeting. Although state 
law typically authorizes the use of proxies to vote shares without 
requiring in-person attendance at a shareholder meeting,\5\ registrants 
and other parties soliciting proxy authority must comply with the 
Federal proxy rules.\6\ Regulation of the proxy process has been a core 
function of the Commission since its inception.\7\ Further, protecting 
the ability of shareholders to vote, including their right to elect 
directors through the proxy process, has been the focus of numerous 
Commission rulemakings and other efforts over the years.\8\
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    \5\ See, e.g., Del. Code Ann. tit. 8, section 212.
    \6\ 15 U.S.C. 78n(a).
    \7\ Section 14 of the Exchange Act authorizes the Commission to 
establish rules and regulations governing the solicitation of any 
proxy, consent or authorization in respect of any security 
registered pursuant to Section 12 of the Exchange Act. Registrants 
with reporting obligations only under Exchange Act Section 15(d) and 
foreign private issuers are not subject to the Federal proxy rules 
with respect to solicitations of their own security holders.
    \8\ See, e.g., Reexamination of Rules Relating to Shareholder 
Communications, Shareholder Participation in the Corporate Electoral 
Process, and Corporate Governance Generally, Release No. 34-13901 
(Aug. 29, 1977) [42 FR 44860 (Sept. 7, 1977)]; Regulation of 
Communications Among Shareholders, Release No. 34-30849 (June 23, 
1992) [57 FR 29564 (July 2, 1992)] (``Short Slate Rule Revised 
Proposing Release''); and Regulation of Communications Among 
Shareholders, Release No. 34-31326 (Oct. 16, 1992) [57 FR 48276 
(Oct. 22, 1992)] (``Short Slate Rule Adopting Release''); Roundtable 
on Proxy Voting Mechanics (May 24, 2007) (materials available at 
https://www.sec.gov/spotlight/proxyprocess.htm); Proxy Voting 
Roundtable (Feb. 19, 2015) (materials available at http://www.sec.gov/spotlight/proxy-voting-roundtable.shtml); and Roundtable 
on the Proxy Process (Nov. 15, 2018) (materials available at https://www.sec.gov/proxy-roundtable-2018).
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    As described in greater detail in Section I.B of the Proposing 
Release (81 FR 79122, Nov. 10, 2016), the current proxy rules do not 
allow shareholders voting by proxy in a contested election \9\ to 
replicate the vote they could cast if they voted in person at a 
shareholder meeting. Shareholders voting in person at a meeting may 
select among all of the duly nominated \10\ director candidates 
proposed for election by any party in an election contest and vote for 
any combination of those candidates. Shareholders voting by proxy, 
however, do not have this same flexibility. The interplay between state 
and Federal law means that shareholders voting by proxy generally are 
unable to choose a mix of dissident \11\ and registrant nominees. The 
dissident and registrant each send a proxy card to shareholders, with 
the registrant's proxy card typically listing only the registrant's 
nominees and the dissident's proxy card typically listing only the 
dissident's nominees. State law provides that a later-dated proxy card 
invalidates an earlier-dated card.\12\ Additionally, shareholders 
voting by proxy are limited by Federal law in their choice of nominees 
by Exchange Act Rule 14a-4(d)(1), the ``bona fide nominee rule,'' \13\ 
which provides that no proxy shall confer authority to vote for any 
person to any office for which a ``bona fide nominee is not named in 
the proxy statement.'' The term ``bona fide nominee'' under Rule 14a-
4(d) is a nominee who has ``consented to being named in the proxy 
statement and to serve if elected.'' \14\ Thus, in an election contest, 
one party cannot include the other party's nominees on its proxy card 
without the other party's nominees' consent. In practice, such consent 
is rarely provided.\15\ Therefore, shareholders voting by proxy in a 
director election contest must choose between the dissident's or 
registrant's proxy card. This effectively precludes such shareholders 
from voting by proxy for a mix of director candidates from both sides' 
slates in the contest.
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    \9\ As used in this release, the term ``contested election'' 
refers to an election of directors where a registrant is soliciting 
proxies in support of nominees and a person or group of persons is 
soliciting proxies in support of director nominees other than the 
registrant's nominees.
    \10\ A duly nominated director candidate is a candidate whose 
nomination satisfies the requirements of any applicable state or 
foreign law provision and a registrant's governing documents as they 
relate to director nominations.
    \11\ The term ``dissident'' as used in this release refers to a 
soliciting person other than the registrant who is soliciting 
proxies in support of director nominees other than the registrant's 
nominees.
    \12\ See, e.g., Standard Power & Light Corp. v. Inv. Assocs., 51 
A.2d 572, 608 (Del. 1947); Parshalle v. Roy, 567 A.2d 19, 23 (Del. 
Ch. 1989). See also R. Franklin Balotti, et al., Delaware Law of 
Corporations and Business Organizations, section 7.20 (3d ed. 2015) 
(``Except in the case of irrevocable proxies, a subsequent proxy 
revokes a former proxy. In determining whether a proxy is 
subsequent, the date of execution controls.'').
    \13\ 17 CFR 240.14a-4(d)(1).
    \14\ 17 CFR 240.14a-4(d)(4).
    \15\ Even if a nominee consents to being named on the other 
party's proxy card, each party currently can decide whether to 
include the other's nominees for strategic or other reasons. These 
kinds of strategic decisions may impede shareholder voting options.
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    Although the Commission attempted to address some aspects of this 
problem by adopting the ``short slate rule'' in 1992, shareholders 
voting by proxy still lack the ability to make selections based solely 
on their preferences for particular director candidates as they could 
were they voting in person at a shareholder meeting.\16\ For years, 
shareholders and their advocates have expressed concerns arising from 
being unable to choose a mix of dissident and registrant nominees when 
voting by proxy, and support for universal proxy has grown over 
time.\17\
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    \16\ 17 CFR 240.14a-4(d)(4). The short slate rule permits a 
dissident in certain circumstances to solicit votes for some of the 
registrant's nominees through the use of its proxy card where the 
dissident is not nominating enough director candidates to gain 
majority control of the board in the contest, thereby allowing 
shareholders using the dissident's proxy card to vote for a 
particular split ticket combination. However, as described in 
greater detail in Section I.B of the Proposing Release, shareholders 
voting on the dissident's proxy card are still limited to voting for 
those registrant nominees selected by the dissident, rather than any 
registrant nominee of their choice.
    \17\ See Section I.C of the Proposing Release and infra Section 
II.A.2 and II.A.3.
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    In response to the concerns outlined above, the Commission proposed 
rule amendments in 2016 to mandate the use of universal proxy cards in 
contested director elections to allow shareholders to vote by proxy in 
the same manner as they could do if attending a shareholder meeting 
(``Proposed Rules'').\18\ In 2021,

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the Commission reopened the comment period for the Proposing Release to 
permit commenters to further analyze and comment upon the Proposed 
Rules in light of developments since the publication of the Proposed 
Rules.\19\ We received many comment letters in response to the 
Proposing Release and the Reopening Release.\20\ After taking into 
consideration these public comments, which were generally supportive of 
the rulemaking, and developments in proxy contests since the Proposing 
Release, we are adopting the Proposed Rules substantially as proposed, 
with the exception of an increase in the minimum solicitation 
requirement (described in detail in Section II.D below) and other minor 
changes.
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    \18\ The Proposed Rules were set forth in a release published in 
the Federal Register on November 10, 2016 (81 FR 79122) (Release No. 
34-79164) (``Proposing Release''), and the related comment period 
ended on January 9, 2017.
    \19\ This reopening of the comment period was set out in a 
release published in the Federal Register on May 6, 2021 (86 FR 
24364) (Release No. 34-91603) (``Reopening Release''). The comment 
period ended on June 7, 2021.
    \20\ Unless otherwise indicated, comment letters cited in this 
release are comment letters received in response to the Proposing 
Release and the Reopening Release, which are available at https://www.sec.gov/comments/s7-24-16/s72416.htm.
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B. Overview of Final Amendments

    The new rules will require use of a ``universal proxy card'' in all 
non-exempt director election contests. This universal proxy card must 
include the names of all duly nominated director candidates presented 
for election by any party and for whom proxies are solicited. Requiring 
a universal proxy card in non-exempt director election contests is the 
most effective means to ensure that shareholders voting by proxy are 
able to elect directors in a manner consistent with their right to vote 
in person at a shareholder meeting.\21\
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    \21\ Congress intended our proxy rules to effectuate 
shareholders' ability to fully and consistently exercise the ``fair 
corporate suffrage'' available to them under state corporate law. 
See H. R. Rep. No. 73-1383, 2d Sess., at 13 (1934). See also Mills 
v. Elec. Auto-Lite Co., 396 U.S. 375, 381 (1970); J. I. Case Co. v. 
Borak, 377 U.S. 426, 431 (1964).
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    The amendments that we are adopting in this document will not apply 
to investment companies registered under Section 8 of the Investment 
Company Act of 1940 or business development companies as defined by 
Section 2(a)(48) of the Investment Company Act of 1940 (``BDCs,'' and 
together with registered investment companies, ``funds'').\22\ Funds 
were not covered by the Proposed Rules. In light of developments since 
2016, as well as the comments that we have received, we believe further 
consideration of the application of a universal proxy mandate to some 
or all funds before deciding how to proceed with respect to funds is 
appropriate.
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    \22\ 15 U.S.C. 80a-8; 15 U.S.C. 80a-2(a)(48). BDCs are a 
category of closed-end investment companies that are not registered 
under the Investment Company Act, but are subject to certain 
provisions of the Investment Company Act. See Proposing Release at 
n.178.
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II. Discussion of Final Amendments

    We are adopting the Proposed Rules largely as proposed to better 
align the Federal proxy rules with a shareholder's ability to vote in 
person at a shareholder meeting. The final rules:
     Require the use of a universal proxy card by all 
participants in a non-exempt director election contest. The universal 
proxy card must include the names of both registrant and dissident 
nominees, along with certain other shareholder nominees included as a 
result of proxy access;
     Expand the determination of a ``bona fide nominee'' to 
include a person who consents to being named in any proxy statement for 
a registrant's next shareholder meeting for the election of directors;
     Require dissidents to provide registrants with notice of 
their intent to solicit proxies and to provide the names of their 
nominees no later than 60 calendar days before the anniversary of the 
previous year's annual meeting;
     Require registrants to notify dissidents of the names of 
the registrants' nominees no later than 50 calendar days before the 
anniversary of the previous year's annual meeting;
     Require dissidents to file their definitive proxy 
statement by the later of 25 calendar days before the shareholder 
meeting or five calendar days after the registrant files its definitive 
proxy statement;
     Require each side in a proxy contest to refer shareholders 
to the other party's proxy statement for information about the other 
party's nominees and refer shareholders to the Commission's website to 
access the other side's proxy statement free of charge;
     Require that dissidents solicit the holders of shares 
representing at least 67% of the voting power of the shares entitled to 
vote at the meeting; and
     Establish presentation and formatting requirements for 
universal proxy cards that ensure that each party's nominees are 
presented in a clear, neutral manner.
    We also are adopting, as proposed, changes to the form of proxy and 
proxy statement disclosure requirements applicable to all director 
elections. These amendments:
     Require proxy cards to include an ``against'' voting 
option in director elections, when there is a legal effect \23\ to a 
vote against a director nominee;
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    \23\ State law and the registrant's governing documents 
determine the voting standard for director elections, with director 
nominees generally elected under either a plurality voting standard 
or majority voting standard. They also determine whether an 
``against'' voting option has a legal effect under the applicable 
voting standard. For example, under a plurality voting standard, a 
director nominee can be elected to the board with a single vote in 
favor of his or her election, with the ``withhold or ``against'' 
votes having no impact on the outcome of the election.
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     Require that the proxy card provide shareholders with the 
ability to ``abstain'' in a director election where a majority voting 
standard applies; and
     Require proxy statement disclosure about the effect of a 
``withhold'' vote in an election of directors.
    We discuss the final amendments in greater detail below.\24\
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    \24\ In addition to the substantive final amendments, we are 
making technical amendments to: (i) Rule 14a-3 (punctuational and 
related minor edits); and (ii) Rule 14a-4(b) and Note 3 to Rule 14a-
6(a) (removal of obsolete references to vacated Rule 14a-11).
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A. Mandatory Use of Universal Proxies in Non-Exempt Solicitations in 
Contested Elections

1. Proposed Rules
    The Commission proposed to require the use of universal proxy cards 
in all non-exempt solicitations in contested director elections except 
those involving funds.\25\ The Commission proposed that each side's 
proxy card in a contested director election must include the names of 
all nominees of both the dissident and registrant and the nominees of 
certain shareholders (i.e., proxy access nominees). In proposing the 
mandatory use of universal proxy cards in these kinds of contests, the 
Commission was guided by the principle that shareholders should enjoy 
the same ability to vote on a proxy card as they would have if 
attending a shareholder meeting in person.
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    \25\ See proposed Rule 14a-19(e).
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2. Comments Received
    A number of commenters expressed views on whether the use of a 
universal proxy card should be voluntary or mandatory. Most favored the 
mandatory approach because it more effectively replicates the voting 
options available through in-person voting at a shareholder 
meeting.\26\ Some

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commenters favored a mandatory system to avoid logistical issues that 
would arise in the absence of such a system, and several commenters 
cited the potential for shareholder confusion arising from a voluntary 
approach.\27\ Several commenters noted that an optional system would 
promote gamesmanship, and would lead to the use of a universal proxy 
card as a tactical strategy to benefit a particular participant in a 
contest.\28\ Another noted that proxy contest participants would have 
little incentive to use a universal proxy card under an optional 
system.\29\ One commenter advocated a mandatory system that registrants 
could opt out of with approval of a majority of shareholders.\30\
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    \26\ See letters dated Dec. 28, 2016, Sep. 7, 2017, Nov. 8, 
2018, and Jun. 2, 2021 from Council of Institutional Investors 
(``CII''); letters dated Jan. 4, 2017 and Jun. 7, 2021 from Ohio 
Public Employees Retirement System (``OPERS''); letter dated Jan. 9, 
2017 from Colorado Public Employees Retirement Association 
(``Colorado PERA''); letter dated Jan. 9, 2017 from Trian Fund 
Management, L.P. (``Trian''); letter dated Jan. 9, 2017 from Ad Hoc 
Coalition of Institutional Investors in Closed-End Funds (``Ad Hoc 
Coalition''); letter dated Jan. 9, 2017 from CFA Institute (``CFA 
Institute''); letters dated Jan. 11, 2017 and Jun. 16, 2021 from 
Securities Industry and Financial Markets Association (``SIFMA''); 
letter dated Jan. 11, 2017 from State Board of Administration of 
Florida (``SBA-FL''); letter dated Jan. 9, 2017 from United 
Brotherhood of Carpenters and Joiners of America (``Carpenters''); 
letter dated Jan. 9, 2017 from Office of the Comptroller, State of 
New York (``NY Comptroller''); letter dated Jan. 9, 2017 from 
California State Teachers' Retirement System (``CalSTRS''); letter 
dated Jan. 6, 2017 from American Federation of State, County and 
Municipal Employees (``AFSCME''); letters dated Dec. 19, 2016 and 
Jun. 7, 2021 from Investment Company Institute (``ICI''); letter 
dated Jun. 7, 2021 from Institutional Shareholder Services Inc. 
(``ISS''); letter dated Jun. 4, 2021 from Elliott Investment 
Management L.P. (``Elliott''); letter dated Jun. 3, 2021 from 
Canadian Coalition for Good Governance (``CCGG''); letter dated Jun. 
4, 2021 from Domini Impact Investment LLC (``Domini''); letters 
dated Jan. 9, 2017 and Jun. 7, 2021 from Better Markets (``BM''); 
letter dated Jun. 7, 2021 from Mediant, Inc. (``Mediant''); letter 
dated Jun. 28, 2021 from Principles for Responsible Investment 
(``PRI''); letter dated Jun. 7, 2021 from 41 Signatories with AUM of 
$309,413,549,298; letter dated Jun. 7, 2021 from Professor Scott 
Hirst, Boston University School of Law (``Prof. Hirst''), letter 
dated Jun. 15, 2021 from Matthew P. Lawlor (``M. Lawlor''); letter 
dated Jun. 17, 2021 from Chris Fowle (``C. Fowle''); letter dated 
Apr. 19, 2021 from Undisclosed Majority Shareholder in Numerous 
Ventures (``Anonymous 1''); letter dated Dec. 8, 2017 from Eamonn 
Burke (``E. Burke''). See also Recommendation of the SEC Investor 
Advisory Committee (IAC): Proxy Plumbing, dated Sep. 5, 2019, 
available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-recommendation-proxy-plumbing.pdf (``IAC 
Report''). The IAC Report indicated support for the mandatory 
universal proxy system proposed, while noting that a minority of 
Committee members favored making universal proxy voluntary rather 
than mandatory. Previously, as discussed in the Proposing Release, 
in 2013, the IAC recommended that we explore revising our proxy 
rules to provide proxy contestants with the option to use a 
universal proxy card in connection with short slate director 
nominations. Exchange Act Section 39(g)(2) requires the Commission 
to ``promptly issue a public statement--(A) assessing the finding or 
recommendation of the [Investor Advisory] Committee; and (B) 
disclosing the action, if any, the Commission intends to take with 
respect to the finding or recommendation.'' We have carefully 
considered the recommendations of the IAC on the use of universal 
proxy cards in connection with this rulemaking.
    \27\ See letters from CalSTRS; SIFMA; ISS.
    \28\ See letters from SIFMA; CCGG.
    \29\ See letter dated Jan. 9, 2017 from Fidelity Investments 
(``Fidelity'').
    \30\ See letter from Prof. Hirst.
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    Several commenters favored making the use of a universal proxy card 
optional. One noted that this would allow the Commission to study the 
effect of its use before making it mandatory.\31\ Another advocated 
that registrants be able to opt out of a universal proxy requirement 
through a board vote.\32\ Two commenters argued that shareholders 
should have to demonstrate a continued and significant ownership stake 
in a registrant in order to trigger the use of a universal proxy 
card.\33\
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    \31\ See letter dated Jan. 4, 2017 from Davis Polk & Wardwell 
LLP (``Davis Polk'').
    \32\ See letter dated Jun. 7, 2021 from Sidley Austin LLP 
(``Sidley'').
    \33\ See letter from Sidley and letters dated Jan. 10, 2017 and 
Jun. 7, 2021 from Society for Corporate Governance (``Society'') 
(comparing universal proxy to 17 CFR 240.14a-8 (Rule 14a-8) and 
vacated 17 CFR 240.14a-11 (Rule 14a-11)).
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    Some commenters did not support the use of a universal proxy card. 
Some argued that a mandate would increase the number of proxy contests 
and thereby expose more registrants to costly distraction or increased 
influence of short-term activist investors at the expense of other 
investors.\34\ Two of these commenters argued that the mandatory use of 
universal proxies would ``encourage balkanization'' of the boards of 
public companies by facilitating ``mix and match'' voting between 
nominees from different slates of director candidates, ultimately 
providing a disincentive for companies to go public in the United 
States.\35\ Similarly, another commenter claimed that the ``mix and 
match'' voting enabled by universal proxy cards could result in 
suboptimal board compositions in which board members lack complementary 
skill sets.\36\ Various commenters who opposed the adoption of a 
universal proxy requirement contended that there was not a compelling 
reason to change the existing system \37\ and noted that adoption of 
universal proxy could have unintended consequences, such as shareholder 
confusion and more frequent disqualification of defective ballots.\38\ 
Several commenters argued that a universal proxy requirement would 
increase the influence of proxy advisory firms.\39\ One commenter 
opposed the proposed amendments, suggesting that the Proposed Rules 
``would likely exceed the Commission's authority under the Exchange 
Act'' and arguing that a universal proxy requirement represents a 
``substantial change'' in policy that the Commission had not justified 
under the Administrative Procedure Act.\40\ That commenter noted that 
if the Commission proceeds with the rulemaking, it should adopt an 
optional approach rather than a mandatory one.
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    \34\ See letters dated Jan. 9, 2017 and Jun. 7, 2021 from Center 
for Capital Markets Competitiveness, U.S. Chamber of Commerce 
(``CCMC''); letter dated Jan. 9, 2017 from Corporate Governance 
Coalition for Investor Value (``CGCIV''); letter dated Apr. 30, 2021 
from International Bancshares Corporation (``IBC''); letters from 
Society. The letters from CCMC and CGCIV also objected to the 
mandatory use of a universal proxy on First Amendment grounds. See 
Section II.F below for additional detail.
    \35\ See letters from CCMC; CGCIV.
    \36\ See letter dated Jan. 3, 2017 from National Association of 
Corporate Directors (``NACD'').
    \37\ See, e.g., letters from Davis Polk; CCMC; CGCIV.
    \38\ See, e.g., letters from CCMC; CGCIV.
    \39\ See letters from Sidley; CCMC; CGCIV.
    \40\ See letter from Davis Polk.
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    Another commenter supported mandated universal proxy for operating 
companies, but expressly opposed its use for funds, in part due to the 
additional protections afforded by the Investment Company Act of 
1940.\41\
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    \41\ See letters from ICI.
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3. Final Amendments
    We are adopting Rule 14a-19(e), as proposed, to require the 
mandatory use of universal proxy cards by operating companies in all 
non-exempt director election contests. A mandatory system better 
protects the shareholder voting franchise, while avoiding the confusion 
that could result from a voluntary universal proxy system, where one 
party or the other strategically uses universal proxy only when they 
perceive it to be to their advantage. The logistics of how votes are 
cast through the proxy voting system should not affect the substantive 
voting options of shareholders, and therefore potential outcomes of the 
vote. The ability of shareholders to fully exercise their right under 
state law to elect their preferred candidates through the proxy process 
represents a key reason to adopt the rule amendments. In particular, we 
note that under existing rules, institutional and other large 
shareholders can split their vote between registrant and dissident 
candidates--albeit with effort and expense--because they can arrange 
for a representative to attend the shareholder meeting and vote in 
person. Retail and other smaller investors, however, are unlikely to 
have the resources or sophistication to be able to do so.\42\ The

[[Page 68334]]

mandatory use of universal proxy cards would address this disparity and 
remove this impediment to retail investors' ability to exercise their 
right to vote to the full extent allowed by state law.
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    \42\ While an increase in virtual meetings and corresponding 
technological advances may theoretically make it easier for certain 
retail investors to attend and vote at meetings, most shareholders 
(including many retail investors) hold their shares in ``street 
name'' and, as such, would need to obtain a legal proxy from the 
securities intermediaries that hold their shares (such as a broker-
dealer) in advance to vote at a virtual shareholder meeting, as they 
would need to do to vote at the meeting in person. We therefore 
expect that the vast majority of retail investors will continue to 
vote by proxy and will continue to rely on the ability to do so.
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    Use of a universal proxy card should not be dependent on the 
potentially self-interested considerations of the contesting parties, 
the registrant's board of directors, or any controlling shareholders, 
as it would be under an optional system, or one where a registrant 
(through, for example, a board or shareholder vote) could opt out of a 
universal proxy requirement. Mandating a universal proxy is a more 
efficient and effective means to achieve the objective of allowing 
shareholders to elect their preferred candidates through the proxy 
process. Similarly, a universal proxy requirement should not be 
dependent on the size of a dissident's equity stake in a registrant or 
the period of time it has maintained its equity position. The purpose 
of requiring a universal proxy is to allow shareholders to exercise 
their right to vote for directors in the same manner as they could vote 
through in-person attendance at a shareholder meeting. Conditioning a 
universal proxy mandate on a minimum ownership threshold or holding 
period, as certain commenters advocated, would be contrary to this 
purpose. Conditioning a universal proxy mandate in such manner would 
inappropriately subject shareholders' ability to vote in director 
election contests through the proxy process to conditions that are not 
imposed upon shareholders' ability to vote if attending a shareholder 
meeting.
    In response to commenters arguing for an optional universal proxy 
system, an optional system without additional accompanying rule changes 
would raise problems not presented by a mandatory requirement, such as 
issues related to how and when shareholders presented with a universal 
proxy card would access information about the other party's nominees in 
order to make an informed voting decision. Mandating a universal proxy 
in all non-exempt election contests is less likely to cause shareholder 
confusion than an optional system which would operate differently, 
depending on whether one or both sides elected to opt in or opt out of 
universal proxy. Finally, in response to the commenter who advocated an 
optional system to allow us to study the impact of universal proxy, we 
note that we already have experience with optional universal proxy. Our 
existing proxy rules already effectively allow optional universal proxy 
for registrants because a registrant can require dissident nominees to 
consent to being named on the registrant's proxy card as part of an 
advance notice bylaw provision and associated director and officer 
(D&O) questionnaire, a tactic used by registrants on multiple 
occasions.\43\ This form of optional universal proxy, however, falls 
well short of meeting the objectives of our rulemaking. Use of this 
tactic creates an unfair advantage for registrants, who are then able 
to place dissident nominees on the registrant's proxy card without 
granting dissidents the same ability to place registrant nominees on 
the dissident's cards. Further, use of universal proxy cards and the 
ability of shareholders to select their preferred mix of nominees would 
exist at the sole discretion of the registrant and would be subject to 
management's self-interest.
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    \43\ For example, both the dissident group and the registrant 
used universal proxy cards at EQT Corporation's 2019 Annual Meeting. 
See DEFC14A filed May 20, 2019 by dissidents and DEFC14A filed May 
22, 2019 filed by EQT Corp. The registrant but not the dissident 
group used a universal proxy card at Sandridge Energy's 2018 Annual 
Meeting. See DEFC14A filed May 10, 2018 by Sandridge Energy, Inc. 
and DEFC14A filed May 11, 2018 by dissidents.
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    As discussed in Section IV.C.4 below, it is unclear whether the 
rule changes we are adopting will increase or decrease the number of 
proxy contests. Similarly, it is unclear whether they will increase the 
influence, directly or indirectly, of dissidents, including short-term 
activist investors, as some commenters predicted. Under current rules, 
a shareholder may be forced to make an ``all or nothing'' choice 
between one or the other soliciting party's proxy card. However, a 
universal proxy card may result in increased split votes where 
dissidents do not gain majority control of a board of directors in one 
election. We view the arguments that mandatory universal proxy will 
lead to distraction for registrants, hamstring directors, and lead to 
greater ``balkanization'' of boards of directors as unpersuasive. Even 
with the use of universal proxy cards, registrants and dissidents will 
retain the same ability to advocate the election of their nominees and 
raise concerns about negative boardroom dynamics that they have today. 
Shareholders will continue to have the ability to evaluate these 
concerns, including potential ``balkanization'' of the board, when they 
make their voting decisions. The rule amendments we are adopting are 
intended to improve the mechanics of the proxy voting process, not 
influence its outcome. Further, it is not apparent that allowing 
shareholders to more easily base their vote on individual and 
collective characteristics of board candidates, rather than forcing an 
``either or'' choice between dissident or registrant nominees, would 
negatively impact registrants or boardroom dynamics. We are also 
unaware of such arguments about mix and match voting being made in the 
context of in-person voting, where such a choice is already possible 
for larger shareholders and institutions who expend the effort to vote 
through an in-person representative. Lastly, even if the use of 
universal proxy will lead to greater frequency of ``split'' boards, it 
is unclear whether that effect will necessarily lead to detrimental 
changes in board dynamics, with some viewing a diversity of viewpoints 
among board members as a positive development.\44\ The mandatory use of 
universal proxy cards will permit shareholders to choose their 
preferred mix of directors, taking into consideration both 
complementary skill sets and other board dynamics.
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    \44\ See infra note 295 and accompanying text.
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    For the same reason, we do not believe the universal proxy 
requirement we are adopting will result in promoting the interests of 
special interest groups and short term activists, at the expense of 
shareholders generally. Even with the use of universal proxy cards, a 
dissident must ultimately persuade shareholders that its agenda is in 
their best interests in order to successfully elect its nominees. 
Moreover, if elected to the board of directors, such dissident nominees 
will be subject to the same state-law fiduciary duties to the 
corporation and, and by extension, all of its shareholders as all other 
directors, many of whom are also commonly affiliated with other 
entities.
    Similarly, it is unclear to us how these rule amendments, which 
improve the mechanics of the proxy process, would increase the 
influence of proxy advisory firms,\45\ also referred to as ``proxy 
voting advice businesses.'' These businesses provide voting 
recommendations to their clients, mainly institutional investors and 
investment advisers, who then may consider such recommendations as part 
of their decision-making process. The

[[Page 68335]]

client, not the proxy voting advice business, retains the legal right 
to vote and makes the ultimate decision on how it wishes to exercise 
that right in the election.\46\ In addition, investment advisers and 
other institutional investors using these recommendations are also 
subject to fiduciary duties and other legal obligations with respect to 
their proxy voting obligations. This would not change if universal 
proxy cards are used. Rather, the rule amendments we are adopting 
simply make it easier for the shareholder to vote for the nominees that 
it wants, regardless of whether they are from the dissident's slate or 
the registrant's slate.
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    \45\ Several commenters suggested that the use of universal 
proxies could increase the influence of proxy advisory firms. See 
letters from Sidley; CCMC; CGCIV.
    \46\ To the extent a proxy voting advice business has an 
interest in the director contest, such as a material relationship 
with the dissident or registrant, the Federal proxy rules require 
the proxy voting advice business to disclose this conflict of 
interest, which may mitigate concerns about the objectivity of the 
advice.
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    In response to the commenter questioning our authority to adopt a 
universal proxy requirement,\47\ the final rules are well within the 
plain language of the authority granted by Congress to the Commission 
under Section 14(a). The fact that the Commission in the past enacted 
measures that did not provide for universal proxies in no way suggests 
that the Commission lacked the statutory authority to do so.
---------------------------------------------------------------------------

    \47\ See letter from Davis Polk.
---------------------------------------------------------------------------

    In our view, the suggestion that the Commission has not provided a 
sufficient justification for these rules is unfounded. We are adopting 
these rules now because they best effectuate the Commission's goal of 
having proxy voting mirror the choices that a shareholder has in person 
at a meeting. As noted above, the Commission has long understood the 
limitations that the proxy rules place on a shareholder's ability to 
select its preferred mix of registrant and dissident nominees.\48\ As 
discussed below, the Commission adopted the short slate rule in 1992 in 
an attempt to address this problem. Yet, the short slate rule has not 
resolved the problem, with its conditions limiting the full exercise of 
shareholders' ability to vote for director nominees through the proxy 
process. Further, based on the Commission staff's experience, 
substantial confusion exists regarding the use of the short slate rule, 
including by dissidents attempting to use it.
---------------------------------------------------------------------------

    \48\ See, e.g., Short Slate Rule Revised Proposing Release and 
Short Slate Rule Adopting Release.
---------------------------------------------------------------------------

    For many years, we have received comments from shareholders and 
their advocates expressing strong concerns about the limitations on 
their rights when voting by proxy.\49\ Many commenters on the Proposing 
Release reiterated those concerns and supported a mandatory universal 
proxy system to address them.\50\ Since the issuance of the Proposing 
Release in 2016, the call for universal proxy cards has persisted.\51\ 
Further, voluntary use of universal proxy cards in director contests 
has increased since 2016,\52\ along with an increased presence of 
provisions in registrants' governing documents (such as advance notice 
bylaws) designed to facilitate the use of universal proxy cards 
including by requiring dissidents to provide consents for their 
nominees to be listed in the registrant's proxy materials. These 
provisions, however, do not typically provide dissidents with similar 
consents to include the registrant's nominees and, as discussed above, 
do not adequately address many shareholders' concerns. The concerns 
described above are valid and can be addressed through the universal 
proxy requirement we are adopting in this document. The fact that we 
previously took other steps to try to address some of these same 
concerns does not preclude us from making the changes now that will 
address the current voting limitations. Additionally, we have carefully 
considered the economic effects of the rule, including the costs and 
benefits to shareholders, in Section IV.C below.
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    \49\ See Section I.C of the Proposing Release.
    \50\ See, e.g., letters from CII; OPERS; Trian, CalSTRS; 
Elliott; Domini; PRI.
    \51\ See, e.g., IAC Report; letter dated Aug. 6, 2020 from 
Universal Proxy Working Group (``UPWG'').
    \52\ See supra note 43 and accompanying text.
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    We recognize that whether proxy contests become more frequent may 
depend in part on whether the rule amendments increase a dissident's 
chances of electing some or all of its nominees. We discuss the costs 
associated with proxy contests in Section IV.C below. However, assuming 
these rule amendments result in more frequent proxy contests, the 
ultimate decision on who is elected to the board of directors rests 
with shareholders. In this sense, the mere fact that a dissident mounts 
a proxy contest does not necessarily mean it will be successful unless 
shareholders are persuaded that its platform will benefit them and the 
registrant. Again, these decisions at the heart of corporate governance 
are best left to shareholders.
    The additional disclosure and presentation provisions adopted in 
this document and described in greater detail below will help to avoid 
some of the concerns of those who do not favor mandatory universal 
proxies. For example, participants in a contested election will not be 
required to include information about the opposing side's nominees in 
their own proxy statement. Rather, each side's proxy statement must 
direct shareholders to the opposing side's proxy statement for 
information about that participant's nominees.\53\ Each universal proxy 
card will be subject to the formatting and presentation requirements in 
the revised rules we adopt in this document. These requirements are 
intended to ensure that each side's nominees are grouped together and 
clearly identified as such, and presented in a fair and impartial 
manner.\54\ In addition, each universal proxy card must disclose the 
treatment of proxy cards containing over-votes and under-votes.\55\ 
These disclosure and presentation mandates in our rule amendments are 
intended to avoid shareholder confusion that could result in an 
increase in defective ballots and shareholder disenfranchisement. As 
shareholders become more familiar with universal proxy cards in 
director election contests, any initial confusion will likely 
abate.\56\ While we are mindful of the arguments that mandated 
universal proxy could have unintended consequences with respect to the 
mechanics of voting, the safeguards described above are intended to 
reduce that possibility.
---------------------------------------------------------------------------

    \53\ See newly-adopted Item 7(f) of Schedule 14A.
    \54\ See Rule 14a-19(e).
    \55\ See Rule 14a-19(e)(7). By ``under-votes,'' we mean 
instances in which a shareholder returns a proxy card in a director 
election contest but does not exercise a vote with respect to all of 
the board seats up for election at the relevant shareholder meeting.
    \56\ Current proxy rules relating to split-ticket voting in a 
director election contest may also be confusing to shareholders. 
Rule 14a-4(d)(4) permits a dissident to ``round out'' the slate of 
nominees listed on its proxy card under specified circumstances. 
However, Rule 14a-4(d)(4)(ii) prevents a dissident from directly 
naming a director nominee whom the dissident supports. (See Section 
II.I below.) The staff has observed confusing descriptions in proxy 
statements and proxy cards as a result of this rule. We believe that 
shareholder confusion will decrease, not increase, as a result of 
the amendments we are adopting.
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B. Dissident's Notice of Intent To Solicit Proxies in Support of 
Nominees Other Than the Registrant's Nominees

1. Proposed Rules
    The Commission proposed to require the dissident to provide notice 
to the registrant of the names of the dissident's nominees no later 
than 60 calendar days prior to the anniversary of the previous year's 
annual meeting date.\57\ The proposed notice had to include a statement 
that the dissident intends to solicit the specified percentage of the 
voting power of the shares entitled to vote.\58\
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    \57\ See proposed Rule 14a-19(a) and (b).
    \58\ See proposed Rule 14a-19(b)(3).

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[[Page 68336]]

2. Comments Received
    Several commenters discussed the requirement that dissidents 
provide the registrant with the names of its nominees no later than 60 
calendar days prior to the anniversary of the prior year's annual 
meeting date.
    Many commenters supported the requirement as proposed.\59\ Two 
commenters expressed concern that such requirement could have a 
chilling effect on any ongoing settlement discussions between the 
parties.\60\ To avoid this, one commenter suggested adopting an 
exception that would temporarily exempt the dissident from the proposed 
notice requirement while settlement discussions between the parties are 
taking place.\61\
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    \59\ See letters from CII; Colorado PERA; CalSTRS; CFA 
Institute; SBA-FL; Carpenters; NY Comptroller; AFSCME.
    \60\ See letters dated Jan. 9, 2017 and Jun. 7, 2021 from Olshan 
Frome Wolosky LLP (``Olshan''); Society.
    \61\ See letters from Olshan.
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    Other commenters expressed concern that the proposed deadline would 
compel the board of directors to vet nominees on an accelerated 
timeframe, to the detriment of shareholders at large, where a 
registrant's advance notice bylaw provision required dissidents to 
provide notice of their nominees before the 60-day period mandated in 
our proposed rules.\62\ One commenter expressed concern that where a 
registrant has an advance notice deadline that falls after the 
dissident's 60 calendar day notice deadline (e.g., an advance notice 
deadline of 45 days prior to the anniversary of the prior year's 
meeting), the proposed notice requirement would give the registrant an 
unfair advantage in preparing for an activist campaign, since the 
dissident would have to reveal the identities of its nominees before it 
would be required to do so under the registrant's own governing 
documents.\63\ This commenter suggested adopting an exception to the 
proposed notice requirement applicable to registrants that have advance 
notice bylaw provisions, such that the dissident's notice deadline 
would be the later of the currently proposed deadline or the 
registrant's own advance notice deadline.\64\
---------------------------------------------------------------------------

    \62\ See letters from CCMC; CGCIV; Society; IBC; Sidley.
    \63\ See letters from Olshan.
    \64\ See letters from Olshan.
---------------------------------------------------------------------------

    Several commenters supported allowing dissidents to launch a 
contest after the 60 calendar day deadline, as they could under 
existing rules, without the ability to use a universal proxy card.\65\ 
Finally, one commenter suggested that the dissident's notice be made 
publicly available.\66\
---------------------------------------------------------------------------

    \65\ See letters from CII; SBA-FL; Carpenters; NY Comptroller; 
CalSTRS; Colorado PERA; AFSCME.
    \66\ See letter from Fidelity (arguing that such practice could 
serve as a means for investors who engage in securities lending to 
identify a potential contest before the record date for a meeting, 
thereby providing them with the ability to recall loaned shares).
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting, as proposed, the requirement that a dissident 
provide the registrant with the names of the nominees for whom it 
intends to solicit proxies no later than 60 calendar days before the 
anniversary of the previous year's annual meeting date.\67\ If the 
registrant did not hold an annual meeting during the previous year, or 
if the date of the meeting has changed by more than 30 calendar days 
from the previous year, Rule 14a-19(b)(1), as adopted, requires that 
the dissident provide notice by the later of 60 calendar days prior to 
the date of the annual meeting or the tenth calendar day following the 
day on which public announcement of the date of the annual meeting is 
first made by the registrant. Rule 14a-19 requires a dissident to 
indicate its intent to comply with the minimum solicitation threshold 
in the adopted rules by including in its notice a statement that it 
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.\68\ Rule 14a-19 does not require a dissident to provide this 
notice to the registrant if the information required in the notice has 
already been provided in a preliminary or definitive proxy statement 
filed by the dissident by the deadline imposed by the rule. Rule 14a-19 
also does not require a dissident to file the notice with the 
Commission or otherwise make the notice publicly available.
---------------------------------------------------------------------------

    \67\ The rule also mandates that a dissident promptly notify the 
registrant if any change occurs with respect to its intent to 
solicit proxies in support of its director nominees. See Rule 14a-
19(c).
    \68\ See Rule 14a-19(b)(3). See also, infra Section II.D for a 
discussion of the minimum solicitation requirement.
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    In our view, the Rule 14a-19(b) notice requirement is necessary to 
provide a definitive date by which the parties in a contested election 
will know that use of universal proxies has been triggered and to 
provide the parties with a definitive date by which they will have the 
names of all nominees to compile a universal proxy card. The 60-day 
deadline provides a definitive date far enough in advance of the 
meeting to give the parties sufficient time to prepare a proxy 
statement and form of proxy in accordance with the universal proxy 
requirements.\69\ In addition, 60 calendar days before the anniversary 
of the previous year's annual meeting date does not represent a 
significant additional burden for most dissidents. The deadline that we 
are adopting for the notice is 30 calendar days later than the deadline 
found in most advance notice bylaws, which typically require notice to 
be delivered no earlier than 120 days and no later than 90 days prior 
to the first anniversary of the prior year's annual meeting.\70\ Based 
on a review of the filings for the 101 contested elections initiated 
from 2017-2020, we estimate that dissidents provided some form of 
notice of their intent to nominate candidates for election to the board 
of directors 60 or more calendar days prior to the first anniversary of 
the prior year's annual meeting in 90% of the contests.\71\
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    \69\ For many registrants, the record date for determining 
shareholders entitled to notice of the meeting cannot be more than 
60 days before the date of such meeting. See, e.g., Del. Code Ann. 
tit. 8, section 213. Thus, as a practical matter, registrants very 
rarely file their definitive proxy statement prior to such date.
    \70\ See Sullivan & Cromwell LLP, Proxy Access Bylaw 
Developments and Trends, at 4 (Aug. 18, 2015), available at https://www.sullcrom.com/siteFiles/Publications/SC_Publication_Proxy_Access_Bylaw_Developments_and_Trends.pdf (``S&C 
2015 Report''); Wachtell, Lipton, Rosen & Katz, Nominating and 
Corporate Governance Committee Guide, at 22 (2015), available at 
http://www.wlrk.com/files/2015/NominatingandCorporateGovernanceCommitteeGuide2015.pdf. See also 
Arthur Fleischer, Jr., Gail Weinstein and Scott B. Luftglass, 
Takeover Defense: Mergers and Acquisitions (9th ed. 2020) (stating, 
``As of December 31, 2020, over 98% of the S&P 500 firms had at 
least a 60-day advance-notice requirement for board nominations and/
or shareholder proposals'').
    \71\ The sample (``contested elections sample'') is based on 
staff analysis of EDGAR filings for election contests with dissident 
preliminary proxy statements filed in calendar years 2017 through 
2020, other than election contests involving funds. The staff has 
identified 101 proxy contests involving competing slates of director 
nominees during this time period. For purposes of determining the 
earliest date the dissident provided some form of notice of its 
intent to nominate candidates for election to the board, staff 
considered disclosure in the dissident's definitive additional 
soliciting materials filed under Rule 14a-12, disclosure in 
amendments to the dissident's Schedule 13D and disclosure in both 
the registrant's and dissident's proxy statements.
---------------------------------------------------------------------------

    A dissident's obligation to comply with the notice requirement is 
in addition to its obligation to comply with any applicable advance 
notice provision in the registrant's governing documents. Rule 14a-19's 
notice requirement is a minimum period that does not override or 
supersede a longer period established in the registrant's governing 
documents.\72\ In most cases, Rule 14a-

[[Page 68337]]

19(b) will not meaningfully impact dissidents because, as discussed 
above, most registrants' advance notice provisions impose an earlier 
deadline to provide notice of a dissident's nominees.\73\ In those 
cases, the new requirement does not affect timing considerations, as 
dissidents would already have signaled to registrants their intent to 
launch a contest pursuant to the registrants' bylaw requirements.
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    \72\ Several commenters expressed concern that the proposed 60-
day deadline would shorten the notice that registrants receive of 
impending proxy contests. See letters from CCMC; CGCIV; Society; 
IBC. To clarify and address these concerns, where an advance notice 
bylaw provision requires dissidents to provide earlier notice of its 
nominees, that longer time period controls. Rule 14a-19(b) 
establishes a minimum, not a maximum, notice period.
    \73\ According to a law firm report, 99% of the S&P 500 and 95% 
of the Russell 3000 had advance notice provisions at 2020 year-end. 
See WilmerHale, 2021 M&A Report, at 6 (2021), available at https://www.wilmerhale.com/en/insights/publications/2021-manda-report 
(citing www.SharkRepellent.net) (``WilmerHale M&A Report'').
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    We acknowledge that where the registrant does not have an advance 
notice provision in its governing documents, or has such a provision 
requiring less than 60 days' advance notice, Rule 14a-19(b) imposes an 
additional obligation. Such late-developing contests are rare.\74\ The 
Rule 14a-19(b) 60-day notice requirement is designed to ensure the 
orderly conduct of proxy contests under the new universal proxy 
framework and justifies the potential burden that may arise in the few 
director contests at companies with no advance notice provision or a 
provision requiring less than 60 days' advance notice.
---------------------------------------------------------------------------

    \74\ Based on a review of the contested elections sample, see 
supra note 71, the staff found that dissidents provided notice of 
their intent to nominate director candidates fewer than 60 calendar 
days prior to the shareholder meeting date in 10% of the contests.
---------------------------------------------------------------------------

    Despite some commenters' suggestions,\75\ we are not adopting 
exceptions to the 60-day notice deadline imposed by new Rule 14a-19. 
The universal proxy requirement we are adopting is designed to ensure 
consistency and predictability in election contests; exceptions to the 
60-day deadline would likely invite gamesmanship, create confusion, and 
fundamentally undermine the goals of the rulemaking. As discussed 
above, the orderly use of universal proxy cards in director election 
contests requires timely notice to the registrant, with the 60-day 
deadline in Rule 14a-19(b) establishing a baseline for such notice.\76\ 
Exceptions to this deadline, or requiring less than 60 days' advance 
notice, could lead to confusion among registrants, dissidents, and 
shareholders, as well as increase the risk that universal proxy cards 
and other proxy materials would not be delivered in a timely and 
orderly manner. Finally, in response to the commenters who supported 
allowing contests to take place after the 60-day deadline,\77\ we would 
note that while dissidents who are unable to meet the 60-day notice 
deadline would be prevented from conducting an election contest under 
the rule amendments we are adopting,\78\ such dissidents would not be 
prevented from taking other actions to attempt to effectuate changes to 
the board, such as initiating a ``vote no'' campaign, conducting an 
exempt solicitation, or calling a special meeting (to the extent 
permitted under the registrant's bylaws) to remove existing directors 
and appoint their own nominees to fill the vacancies.
---------------------------------------------------------------------------

    \75\ See, in particular, letters from Olshan.
    \76\ Further, as previously noted, most registrants require 
advance notice under their governing documents far earlier than the 
Rule 14a-19(b) notice requirement.
    \77\ See supra note 65 and accompanying text.
    \78\ In our view, this is appropriate when balanced against the 
goals of the rulemaking and the necessity of the notice period for 
the orderly solicitation process under a mandatory universal proxy 
system.
---------------------------------------------------------------------------

    The Rule 14a-19(b) notice requirement should not deter settlements 
between dissidents and registrants. Under current market practice, 
settlements often occur after the parties have filed their proxy 
statements and even after they have begun soliciting. The new notice 
requirement therefore is unlikely to affect this practice. Finally, the 
purpose of the notice requirement is not served by requiring that the 
notice be made public. However, in practice, each of the dissident and 
the registrant is likely to publicize the sending of the notice 
voluntarily.\79\
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    \79\ For example, depending on the particular facts and 
circumstances, the registrant may disclose the notice under its Form 
8-K filing obligations. We acknowledge the commenter who suggested 
that a publication requirement could be beneficial to those 
investors who engage in securities lending, but we see securities 
lenders' voting practices and record date disclosure practices as 
outside the scope of this rulemaking, with any concerns more 
appropriately addressed through a separate effort.
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C. Registrant's Notice of Its Nominees

1. Proposed Rules
    Similar to the notice required from a dissident under Rule 14a-
19(b), the Commission proposed to require the registrant to notify the 
dissident of the names of its nominees unless the names have already 
been provided in a preliminary or definitive proxy statement filed by 
the registrant.\80\ For the registrant, the Commission proposed that 
the deadline for such notice be no later than 50 calendar days prior to 
the anniversary of the previous year's annual meeting date.
---------------------------------------------------------------------------

    \80\ See proposed Rule 14a-19(d).
---------------------------------------------------------------------------

2. Comments Received
    Relatively few commenters addressed this proposed requirement. Two 
commenters expressly supported the proposed notice requirement for 
registrants.\81\ Three others argued in favor of establishing the same 
notice deadline for registrants and dissidents.\82\ One of these 
commenters believed the proposed later deadline for registrants would 
give registrants a significant strategic advantage over dissidents in 
the solicitation.\83\ This commenter suggested that registrants should 
be required to publicly announce their nominees before dissidents are 
required to provide notice of their nominees.\84\ By contrast, two 
commenters opposed any notice requirement for registrants.\85\
---------------------------------------------------------------------------

    \81\ See letters from CalSTRS; CII.
    \82\ See letters from Olshan; CFA Institute; Elliott.
    \83\ See letters from Olshan.
    \84\ See letters from Olshan.
    \85\ See letters from Society; Sidley.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting Rule 14a-19(d) as proposed. As discussed in the 
Proposing Release and as explained above in the context of the 
dissident's notice deadline, notification deadlines are important in a 
mandatory universal proxy system to provide the parties with a 
definitive date by which they will have the names of all nominees to 
compile a universal proxy card. Absent such a requirement for 
registrants, dissidents could face an informational and timing 
disadvantage in a universal proxy system. Registrants would know the 
names of dissident nominees no later than 60 days prior to the 
meeting,\86\ while dissidents would not necessarily know the names of 
the registrant nominees until the registrant files its preliminary 
proxy statement, which is only required to be filed at least 10 
calendar days before the definitive proxy statement is first sent to 
shareholders and may be filed much closer to the meeting date.\87\ In 
that case, dissidents would have to wait to file their definitive proxy 
statement and proxy card until the registrant filed its preliminary 
proxy statement with the names of the registrant nominees.
---------------------------------------------------------------------------

    \86\ Because the deadline under proposed Rule 14a-19(b)(1) is 
tied to the anniversary of the previous year's annual meeting date, 
60 calendar days before the meeting date approximates the latest 
date on which registrants would know the names of dissident 
nominees.
    \87\ See, as adopted, Rule 14a-19(b)(1); 17 CFR 240.14a-6(a).

---------------------------------------------------------------------------

[[Page 68338]]

    A deadline that is 10 calendar days after the latest date the 
registrant will receive the dissident's notice of nominees is 
appropriate because it provides a sufficient period of time for the 
registrant to consider the dissident's notice, finalize its nominees, 
and respond with its own notice of nominees. The 10-day period is 
appropriate, given that the dissident's notice of nominees may be the 
first indication of a contested solicitation that the registrant 
receives. Moreover, the 50-day deadline is appropriate for providing 
dissidents with timely access to the names of registrant nominees for 
purposes of preparing a universal proxy card. While the deadline for 
registrants is 10 days after the deadline for dissidents, as a 
practical matter, dissidents are unlikely to be disadvantaged because 
registrant nominees are often existing directors about whom information 
will already be available.
    Based on a review of recent contested elections and the staff's 
experience, dissidents typically do not file their definitive proxy 
statement more than 50 calendar days before the meeting date.\88\ Thus, 
based on this market practice, we would not expect the rules adopted in 
this document to delay the timing of the filing of dissident's 
definitive proxy statement.
---------------------------------------------------------------------------

    \88\ Because the deadline under Rule 14a-19(d) is tied to the 
anniversary of the previous year's annual meeting date, 50 calendar 
days prior to the meeting date approximates the latest date on which 
registrants would be required to notify the dissident of the names 
of the registrant's nominees. Based on a review of the contested 
elections sample, see supra note 71, we estimate that dissidents 
filed their definitive proxy statement more than 50 calendar days 
prior to the shareholder meeting date in 20% of the contests.
---------------------------------------------------------------------------

    It is possible that a registrant could provide notice of the names 
of its nominees under Rule 14a-19 and later change its nominees. As 
with the notice requirement for dissidents, Rule 14a-19(d), as adopted, 
requires a registrant to promptly notify the dissident of any change in 
the registrant's nominees. If there is a change in the registrant's 
nominees after the dissident has disseminated a universal proxy card, 
the dissident could elect, but would not be required, to disseminate a 
new universal proxy card reflecting the change in registrant nominees. 
Each side will generally be incentivized to amend its own card if such 
a change occurs to make it more appealing to shareholders, who could 
otherwise turn to the other side's universal proxy card for a current 
list of director nominees. Votes for an individual nominee who 
withdraws his or her name from consideration are generally disregarded 
pursuant to state law, as under current rules.

D. Minimum Solicitation Requirement for Dissidents

1. Proposed Rules
    The Commission proposed, as a key piece of the new universal proxy 
requirement, that the dissident in a contested election be required to 
solicit the holders of shares representing at least a majority of the 
voting power of shares entitled to vote on the election of directors. 
The Commission also proposed that the dissident would need to affirm 
its intention to meet the minimum solicitation requirement by making a 
statement to that effect in its proxy materials and in its notice to 
the registrant.\89\
---------------------------------------------------------------------------

    \89\ See proposed Rule 14a-19(a)(3) and (b)(3).
---------------------------------------------------------------------------

    The minimum solicitation requirement was intended to strike the 
appropriate balance to ensure that, where a universal proxy requirement 
is implemented, 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 in an election contest; 
rather, current rules only require a dissident to furnish a proxy 
statement to each person solicited.\90\ 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 we are adopting, and we have 
increased the threshold for the reasons discussed below.
---------------------------------------------------------------------------

    \90\ See 17 CFR 240.14a-3.
---------------------------------------------------------------------------

2. Comments Received
    We received significant comment on the proposed minimum 
solicitation requirement for dissidents. Initially, there was 
significant support for the majority minimum solicitation requirement 
proposed.\91\ When the comment period was reopened in 2021, however, 
most commenters who addressed the issue favored an increased minimum 
solicitation requirement.\92\ Most of those advocating an increased 
solicitation threshold for dissidents recommended either two-thirds or 
75% of the voting power. Two commenters advocated a 100% minimum 
solicitation requirement for dissidents in order to treat retail 
investors equally with institutional investors and because, as a 
practical matter, the registrant will solicit all shareholders as 
well.\93\ Two commenters recommended that the Commission adopt a 
requirement that all soliciting parties solicit proxies from the same 
number of shareholders, which in practice would likely mean all 
shareholders (because registrants typically solicit all 
shareholders).\94\
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    \91\ See letters from ICI; CII; CalSTRS; CFA Institute; SBA-FL; 
Carpenters; NY Comptroller; Colorado PERA; AFSCME.
    \92\ See letters from ICI; Society; CCMC; OPERS; Mediant; 
Elliott; letter dated May 27, 2021 from American Business Conference 
(``ABC''). CII, in its third letter submitted to the comment file, 
dated Nov. 8, 2018, indicated that, while it continued to agree with 
the minimum solicitation requirement as originally proposed, it 
would--in light of concerns expressed by then-Chairman Clayton--
support moving to a higher threshold in the final rule that would 
(i) increase the minimum solicitation requirement to 75% and (ii) 
require that the total number of persons solicited exceeds 10. In 
its fourth and final letter submitted to the comment file, dated 
Jun. 2, 2021, CII indicated support for moving to a minimum 
solicitation threshold of two-thirds of outstanding voting power. 
See also letter from UPWG, which states that a two-thirds dissident 
minimum solicitation requirement ``could also be workable,'' while 
noting that its members held differing views on the subject. See 
also IAC Report, which also supports increasing the dissident 
minimum solicitation threshold to 67%.
    \93\ See letters from SIFMA; Mediant.
    \94\ See letters from BM; Mediant.
---------------------------------------------------------------------------

    Another commenter urged a minimum solicitation threshold of a 
majority of shareholder accounts (versus voting power) entitled to vote 
on director nominations, asserting that this would help ensure 
meaningful dissident solicitation efforts.\95\ Another commenter 
suggested that the Commission consider whether an additional 
requirement that a minimum number of registered shareholders are 
solicited is necessary to prevent frivolous use of universal proxy.\96\
---------------------------------------------------------------------------

    \95\ See letter from Elliott.
    \96\ See letter from CalSTRS.
---------------------------------------------------------------------------

    One commenter suggested that, ``as a compliance mechanism, a 
dissident should provide the registrant with a written statement 
indicating that the dissident has taken the necessary steps to solicit 
shareholders of at least a majority of the voting power.'' \97\ Another 
commenter suggested that registrants should reimburse dissidents for 
the reasonable costs associated with the solicitation process when at 
least 50% (or a more appropriate percentage established by the 
Commission) of a dissident's nominees are elected.\98\ Another 
commenter opposed any type

[[Page 68339]]

of solicitation requirement for dissidents.\99\
---------------------------------------------------------------------------

    \97\ See letter from CalSTRS.
    \98\ See letter from BM.
    \99\ See letter dated Dec. 5, 2016 from Bulldog Investors, LLC 
(``Bulldog'') (asserting that ``The Commission seems troubled by the 
prospect that such a condition is needed to deter `nominal' or 
`frivolous' proxy contests but fails to clearly articulate the 
actual harm resulting from such contests'').
---------------------------------------------------------------------------

3. Final Amendments
    For reasons described in more detail in the Proposing Release,\100\ 
a universal proxy requirement without a minimum solicitation 
requirement could enable dissidents to capitalize on the registrant's 
solicitation efforts while relieving dissidents of the time and expense 
necessary to undertake meaningful solicitation efforts, thereby 
potentially exposing registrants to frivolous proxy contests. The 
minimum solicitation requirement establishes a fundamentally important 
check in that regard.\101\
---------------------------------------------------------------------------

    \100\ See Proposing Release at Section II.B.4.
    \101\ In response to the commenter who questioned whether actual 
harm results from frivolous contests, unserious contests launched by 
dissidents who are not truly invested in the registrants they target 
impose costs on those registrants and their shareholders without a 
corresponding benefit. See supra Section II.D.2 (discussing comments 
regarding such contests).
---------------------------------------------------------------------------

    After careful consideration of the many comments received on this 
topic, and an updated economic analysis of the costs and benefits of 
setting the minimum solicitation threshold at various levels, we have 
decided to adopt the requirement that dissidents solicit holders of 
shares representing at least 67% of the voting power of shares entitled 
to vote on the election of directors. We have raised the threshold from 
a majority of the voting power to 67% of the voting power in response 
to commenters' concerns that setting the threshold at the proposed 
majority of the voting power would insufficiently deter the potential 
for ``freeriding'' of dissident nominees on the registrant's proxy 
card. A 67% threshold represents an appropriate balance between 
achieving the benefits of the universal proxy requirement for 
shareholders and preventing dissidents from capitalizing on the 
inclusion of dissident nominees on the registrant's universal proxy 
card without undertaking meaningful solicitation efforts. Comments from 
a wide range of market participants, including comments received from 
the Universal Proxy Working Group and the IAC indicated that a 67% 
threshold enjoys broad support and represents a reasonable compromise 
between the competing policy objectives related to this topic.\102\
---------------------------------------------------------------------------

    \102\ See letter from UPWG and IAC Report.
---------------------------------------------------------------------------

    The increase in the dissident minimum solicitation requirement to 
67% should mitigate concerns that the originally-proposed threshold 
would have incentivized dissidents to solicit only the minimum number 
of shareholders while ignoring all others, particularly retail 
shareholders with small holdings. Notably, our analysis of data 
provided by a proxy services provider demonstrates that dissidents 
overwhelmingly tend to solicit a substantial majority of voting power 
despite not being subject to any minimum solicitation threshold in 
contested elections.\103\ We agree that a higher threshold better 
incentivizes dissidents to engage and solicit votes from more 
shareholders without imposing an undue burden on dissidents. As a 
practical matter, those shareholders who are not solicited by the 
dissident will receive the registrant's proxy materials with the names 
of the dissident's nominees and information on how to access the 
dissident's materials on the Commission's website. Therefore, those 
shareholders who wish to do so can take steps to access information 
about dissident nominees before exercising their vote, whether or not 
they are solicited by the dissident. As noted above, current proxy 
rules do not require a dissident to solicit any minimum number of 
shareholders, so the 67% minimum solicitation threshold we are adopting 
represents an important step forward in establishing a minimum 
requirement for dissidents to engage with shareholders.
---------------------------------------------------------------------------

    \103\ Based on industry data from a proxy services provider, all 
dissidents solicited a number of shareholders that exceeded a 67% 
threshold of shares entitled to vote in a sample of 31 proxy 
contests for annual meetings held between July 1, 2018 and June 30, 
2019. In addition, data provided by a proxy services provider for an 
earlier sample of 35 proxy contests from June 30, 2015 through April 
15, 2016, which we used in the economic analysis in the Proposing 
Release, show that only two dissidents (around 6% of the sample) 
solicited less than 67% of the shares entitled to vote. See infra 
Section IV.C.2.a.
---------------------------------------------------------------------------

    A requirement for dissidents to solicit holders of 100% of the 
voting power, as some commenters recommended, would represent a 
substantial burden on dissidents and would likely deter bona fide 
efforts by dissidents, particularly those with fewer resources, to 
elect directors to a registrant's board.\104\ While we recognize that a 
minimum solicitation threshold of anything less than 100% of voting 
power may mean that dissidents may exclude some retail shareholders 
from their solicitation efforts, as noted above, current proxy rules do 
not contain a requirement to solicit any minimum number of 
shareholders. Under the rules we adopt in this document, as under 
current rules, the primary incentive for a dissident to solicit is to 
have its director nominees elected, which remains more likely the more 
shareholders the dissident solicits. In addition to the sizeable costs 
imposed by a 100% voting power solicitation requirement, such a 
requirement would represent a drastic change from current proxy rules, 
which do not mandate that dissidents solicit even a single shareholder. 
In establishing a minimum solicitation requirement for dissidents, we 
are cognizant of the fact that those soliciting on behalf of an 
incumbent board of directors can, win or lose, routinely expect to be 
reimbursed by the company for their costs under state law, while a 
dissident's only hope of reimbursement occurs if its solicitation 
succeeds, or if it otherwise reaches a settlement with the 
registrant.\105\ A significant increase in the minimum solicitation 
threshold may therefore further tip the economic scales in favor of the 
registrant. Finally, given the practical possibility of a very small 
number of shareholders being unintentionally omitted from a proxy 
solicitation, we would envision justifiable concerns regarding 
compliance, and the potential for related gamesmanship contrary to 
shareholder interests--in the form of registrants seeking to take 
advantage of dissidents' technical or immaterial failures to solicit 
every last shareholder account--if a 100% minimum threshold were 
adopted.
---------------------------------------------------------------------------

    \104\ See infra Section IV.C.5.b.
    \105\ See IAC Report.
---------------------------------------------------------------------------

    One commenter suggested imposing a threshold based on a minimum 
number of registered shareholders in addition to a voting power 
threshold ``to prevent frivolous use of the Universal Proxy rule.'' 
\106\ We do not agree that such a requirement is necessary to prevent 
proxy contests where dissidents have no intention of conducting their 
own solicitations. We note that there are relatively few registered 
shareholders, as the vast majority of voting shares of public companies 
are held in ``street name'' through securities intermediaries (such as 
broker-dealers).\107\ Imposing an additional requirement for dissidents 
to solicit those relatively few registered shareholders when most 
voting shares are held by ``street name'' shareholders would increase 
the burdens on

[[Page 68340]]

dissidents while doing little to address the freeriding concerns 
discussed above.
---------------------------------------------------------------------------

    \106\ See letter from CalSTRS.
    \107\ See Concept Release on the U.S. Proxy System, Release No. 
34-62495 (Jul. 14, 2010) [75 FR 42982 (Jul. 22, 2010)], at Section 
II.A, for an explanation of registered shareholders and ``street 
name'' shareholders.
---------------------------------------------------------------------------

    For similar reasons, a requirement for the dissident to solicit a 
minimum number of all shareholder accounts (both registered and 
``street name'' shareholders), as suggested by one commenter, could 
impose significantly higher burdens on dissidents, particularly those 
seeking to effect change at large, widely-held public companies.\108\ A 
requirement to solicit a minimum of 67% or even a majority of the 
shareholder accounts could result in dissidents having to deliver proxy 
statements and universal proxy cards to thousands or tens of thousands 
of shareholder accounts, including those that have relatively few 
shares entitled to vote on the director election. The high cost of such 
deliveries could unduly deter many dissidents, particularly those with 
fewer resources, from attempting to effect change by contesting the 
election of registrants' nominees. Such a burden is unnecessary to 
address the freeriding concerns underlying the minimum solicitation 
requirement.
---------------------------------------------------------------------------

    \108\ See infra notes 390-397 and accompanying text for a 
detailed discussion of the potential costs associated with such a 
requirement.
---------------------------------------------------------------------------

    We have not adopted a special mechanism for ensuring compliance 
with the minimum solicitation requirement because existing proxy rules 
are adequate in that regard. If a dissident fails to meet the 67% 
minimum solicitation threshold, that failure would constitute a 
violation of Rule 14a-19 and the dissident would face the same 
liability as if it had violated any other proxy rules. In addition, 
Rule 14a-19(a)(3) requires dissidents to include a statement in the 
proxy statement or form of proxy that it intends to solicit holders of 
shares representing at least 67% of the voting power of shares entitled 
to vote on the election of directors. The dissident would be subject to 
liability under 17 CFR 240.14a-9 (Exchange Act Rule 14a-9), which 
prohibits material misstatements or omissions in proxy soliciting 
materials, if such a statement is false.
    In response to the suggestion that registrants reimburse dissidents 
for the reasonable costs associated with the solicitation process when 
at least 50% of a dissident's nominees are elected, the universal proxy 
rules are not intended to address the appropriate cost-sharing between 
registrants and dissidents for soliciting fees, which is a separate 
issue. The purpose of the minimum solicitation requirement is to 
prevent freeriding by dissidents who want to take advantage of the 
benefits of the universal proxy requirement but do not intend to 
undertake meaningful solicitation efforts. We also note that 
registrants often have policies in their governing documents outlining 
when reimbursement can be sought, and the universal proxy requirement 
is not intended to intrude into those arrangements.
    We acknowledge the concern regarding some retail investors not 
receiving proxy materials from dissidents electing to solicit the 
minimum required. Increasing the minimum solicitation threshold to 67% 
of the voting power may help address this concern. However, as 
explained above, we must balance this concern against the risk of 
imposing undue costs on dissidents and thereby deterring legitimate, 
potentially value-enhancing contests.
    Finally, we recognize any minimum solicitation requirement imposes 
on the dissident the costs of delivering proxy materials to 
shareholders. To address this concern, the adopted rules, like the 
Proposed Rules, do not mandate a specific method of furnishing the 
proxy materials. A dissident may choose to use the less costly e-proxy 
delivery method (i.e., the ``notice and access'' method of mailing a 
notice of internet availability and posting the proxy materials on a 
website) should it wish.\109\ We also acknowledge that some dissidents 
might have chosen to initiate contests to pursue goals other than 
changes in board composition, such as to publicize a particular issue 
or to encourage management to engage with the dissident.\110\ Such 
contests will not be possible without meaningful solicitation efforts 
under the rules we adopt in this document.
---------------------------------------------------------------------------

    \109\ See infra Section IV.B.2.b for additional detail regarding 
this topic.
    \110\ See discussion in Section IV.B.2.c infra.
---------------------------------------------------------------------------

E. Dissident's Requirement To File Definitive Proxy Statement 25 
Calendar Days Prior to Meeting

1. Proposed Rules
    The Commission proposed to require a dissident in a contested 
election to file its definitive proxy statement with the Commission by 
the later of 25 calendar days prior to the meeting date or five 
calendar days after the registrant files its definitive proxy 
statement, regardless of the proxy delivery method. As proposed, the 
five calendar day deadline would be triggered if the registrant files 
its definitive proxy statement fewer than 30 calendar days prior to the 
meeting date, in which case the dissident would be required to file its 
definitive proxy statement no later than five calendar days after the 
registrant files its definitive proxy statement.
2. Comments Received
    We received few comments on this proposed requirement. Three 
commenters expressed support for the deadline imposed on dissidents to 
file their definitive proxy statement with the Commission.\111\ One 
commenter opposed a filing deadline for the dissident in the absence of 
a similar deadline for registrants.\112\ This commenter advocated 
requiring the registrant to publicly disclose in a Form 8-K the names 
of its nominees, as well as other information about the shareholder 
meeting, such as the record and meeting dates, at least 30 days before 
the earlier of the nomination deadline under the registrant's governing 
instruments or the notice deadline established in proposed Rule 14a-
19.\113\ One commenter proposed, as a disciplinary measure, that if a 
dissident fails to file and disseminate its definitive proxy statement 
by the deadline, then the dissident should be prohibited from engaging 
in a proxy contest at any registrant (or at least, the registrant in 
question) for a period of time (e.g., three years).\114\
---------------------------------------------------------------------------

    \111\ See letters from ICI; CFA Institute; CII.
    \112\ See letters from Olshan.
    \113\ See letters from Olshan.
    \114\ See letter from Sidley.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting, as proposed, the requirement that a dissident in a 
contested director election file its definitive proxy statement with 
the Commission by the later of 25 calendar days prior to the meeting 
date or five calendar days after the registrant files its definitive 
proxy statement.
    Due to the typical sequencing of registrant and dissident proxy 
filings, as well as the fact that dissidents may choose not to solicit 
all shareholders, shareholders may not have seen information about the 
dissident's nominees when they receive a universal proxy card from the 
registrant. Therefore, a dissident filing deadline is appropriate to 
help ensure that shareholders who receive a universal proxy card will 
have access to information about all nominees sufficiently in advance 
of the meeting.\115\ We recognize, however, that

[[Page 68341]]

some shareholders could receive the registrant's proxy statement and 
submit their votes on the registrant's universal proxy card before the 
dissident's proxy statement is available. The 25 calendar day deadline 
will provide those shareholders with sufficient time to access the 
dissident's proxy statement, once available, and to change their votes 
if preferred.
---------------------------------------------------------------------------

    \115\ As discussed in Section II.F infra, we are also adopting a 
requirement that each party in a contested election include a 
statement in its proxy materials referring shareholders to the other 
party's proxy statement for information about the other party's 
nominees and explaining that shareholders can access the other 
party's proxy statement on the Commission's website. Because this 
required disclosure will be included in the registrant's proxy 
materials, which all shareholders would likely receive, the rules 
should ensure that even those shareholders that do not receive the 
dissident's proxy materials will have access to information about 
the dissident's nominees.
---------------------------------------------------------------------------

    We acknowledge that dissidents that use the full set delivery 
method in a contested election have not previously been subject to a 
filing deadline for their definitive proxy statement, and thus this new 
requirement will impose a new filing deadline for such dissidents.\116\ 
Although some dissidents may be required under the final rules to 
prepare their proxy statements earlier than they would have otherwise, 
dissidents filed their definitive proxy statement 25 or more calendar 
days prior to the shareholder meeting date in 82% of the contests 
initiated in 2017 through 2020.\117\ Therefore, the new filing deadline 
should not impose a significant additional burden for most dissidents.
---------------------------------------------------------------------------

    \116\ We understand from a proxy services provider that in the 
31 proxy contests from July 1, 2018 through June 30, 2019, 
dissidents sent full sets of proxy materials to each of the 
shareholders solicited. Dissidents that elect notice and access 
delivery are currently required to make their proxy statement 
available by the later of 40 calendar days prior to the meeting date 
or 10 calendar days after the registrant files its definitive proxy 
statement. For such dissidents, the new filing deadline will provide 
five fewer days to furnish a proxy statement where the registrant 
files its definitive proxy statement less than 30 calendar days 
before the meeting date, which we estimate occurred in 11% of recent 
contested elections. Based on past practice, as described above, we 
would not expect a dissident to elect notice and access delivery in 
a contested election, although it is unclear whether this practice 
would change under the rules adopted in this document.
    \117\ Based on staff analysis of the contested elections sample. 
See supra note 71 and infra note 219 and accompanying text. The data 
is based on 74 out of 101 identified proxy contests since the 
dissident did not file a definitive proxy statement in 27 cases.
---------------------------------------------------------------------------

    We are not adopting a filing deadline for registrants. State 
corporate statutes generally require a registrant to hold an annual 
shareholder meeting for the purpose of electing directors, and those 
statutes generally impose a quorum requirement for such meetings.\118\ 
Unlike dissidents, registrants therefore already have an incentive to 
file the definitive proxy statement and proxy card \119\ to solicit 
proxies well in advance of the meeting date to achieve a quorum for the 
meeting. For example, based on a review of the 101 contested elections 
initiated from 2017 through 2020, the staff found that registrants 
filed their definitive proxy statement 25 or more calendar days prior 
to the shareholder meeting date in over 95% of the contests.\120\ We 
also note that where the registrant nominees are incumbent directors, 
shareholders will have access to information about those nominees from 
prior Commission filings before the registrant files and disseminates 
its definitive proxy statement.
---------------------------------------------------------------------------

    \118\ See, e.g., Del. Code. Ann. tit. 8, section 211(b) and 
section 215(c).
    \119\ The definitive proxy statement, form of proxy and all 
other soliciting materials must be filed with the Commission no 
later than the date they are first sent or given to shareholders. 17 
CFR 240.14a-6(b).
    \120\ Based on staff analysis of the contested elections sample. 
See supra note 71.
---------------------------------------------------------------------------

    We recognize that it is possible that a registrant will have 
prepared and disseminated its definitive proxy statement, including a 
universal proxy card more than 25 calendar days before the meeting 
(i.e., the general deadline under Rule 14a-19 for a dissident to file 
its definitive proxy statement with the Commission). If a registrant 
discovers after disseminating its universal proxy card that a dissident 
failed to file its definitive proxy statement 25 calendar days prior to 
the meeting (or five calendar days after the registrant files its 
definitive proxy statement),\121\ the registrant could elect to 
disseminate a new, non-universal proxy card including only the names of 
the registrant's nominees. Where a dissident fails to comply with Rule 
14a-19, the new rules will not permit the dissident to continue with 
its solicitation under 17 CFR 240.14a-1 through 240.14a-21 and Schedule 
14A (Regulation 14A).
---------------------------------------------------------------------------

    \121\ A dissident could meet the deadline for director 
nominations under the company's governing documents and the deadline 
for providing notice to the registrant under Rule 14a-19 but fail to 
proceed with or later abandon its solicitation. This could happen 
for a number of reasons. For example, the dissident and the 
registrant may enter into a settlement agreement, the dissident may 
elect to discontinue its solicitation for another reason or the 
dissident may fail to comply with some aspect of Rule 14a-19.
---------------------------------------------------------------------------

    In response to the commenter who suggested we adopt a specific 
penalty for dissidents who fail to file a definitive proxy statement by 
the deadline, we believe that existing proxy rules serve as an adequate 
deterrent, in a similar manner to that explained above in the context 
of a potential violation of the new minimum solicitation requirement. 
If a dissident fails to file its definitive proxy statement by the new 
deadline prescribed, that failure would constitute a violation of Rule 
14a-19 and the dissident would face the same liability as if it had 
violated any other proxy rules.
    Because a registrant may disseminate a universal proxy card before 
discovering that a dissident is not proceeding with its solicitation, 
we are requiring the registrant, as proposed, to include disclosure in 
its proxy statement advising shareholders how it intends to treat proxy 
authority granted in favor of a dissident's nominees in the event the 
dissident abandons its solicitation or fails to comply with Regulation 
14A.\122\
---------------------------------------------------------------------------

    \122\ See newly-adopted Item 21(c) of Schedule 14A.
---------------------------------------------------------------------------

    As a result of the adopted rules described above, and as set out in 
the Proposing Release, the overall timing of the process for soliciting 
universal proxies generally would operate as follows:

------------------------------------------------------------------------
                 Due date                          Action required
------------------------------------------------------------------------
No later than 60 calendar days before the   Dissident must provide
 anniversary of the previous year's annual   notice to the registrant of
 meeting date or, if the registrant did      its intent to solicit the
 not hold an annual meeting during the       holders of at least 67% of
 previous year, or if the date of the        the voting power of shares
 meeting has changed by more than 30         entitled to vote on the
 calendar days from the previous year, by    election of directors in
 the later of 60 calendar days prior to      support of director
 the date of the annual meeting or the       nominees other than the
 tenth calendar day following the day on     registrant's nominees and
 which public announcement of the date of    include the names of those
 the annual meeting is first made by the     nominees.
 registrant. [new Rule 14a-19(b)(1)].
No later than 50 calendar days before the   Registrant must notify the
 anniversary of the previous year's annual   dissident of the names of
 meeting date or, if the registrant did      the registrant's nominees.
 not hold an annual meeting during the
 previous year, or if the date of the
 meeting has changed by more than 30
 calendar days from the previous year, no
 later than 50 calendar days prior to the
 date of the annual meeting. [new Rule 14a-
 19(d)].

[[Page 68342]]

 
No later than 20 business days before the   Registrant must conduct
 record date for the meeting. [existing 17   broker searches to
 CFR 240.14a-13 (Rule 14a-13)].              determine the number of
                                             copies of proxy materials
                                             necessary to supply such
                                             material to beneficial
                                             owners.
By the later of 25 calendar days before     Dissident must file its
 the meeting date or five calendar days      definitive proxy statement
 after the registrant files its definitive   with the Commission.
 proxy statement. [new Rule 14a-19(a)(2)].
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F. Access to Information About All Nominees

1. Proposed Rules
    The Commission proposed new Item 7(h) of Schedule 14A (relettered 
as Item 7(f) in this document) to require that each party in a 
contested election refer shareholders to the other party's proxy 
statement for information about the other party's nominees and explain 
that shareholders can access the other party's proxy statement without 
cost on the Commission's website. The Commission also proposed to 
revise Rule 14a-5(c) to permit the parties to refer to information that 
would be furnished in a filing of the other party to satisfy their 
disclosure obligations.\123\ Taken together, these proposed changes 
were intended to enable shareholders to access information with respect 
to all nominees when they receive a universal proxy card. Finally, the 
Commission proposed to change the definition of ``participant'' in 
Instruction 3 to Items 4 and 5 of Schedule 14A to ensure that, even 
though all nominees would be included on the universal proxy card, only 
the party's own nominees would be considered ``participants'' in that 
party's solicitation.
---------------------------------------------------------------------------

    \123\ Prior to these rule changes, Rule 14a-5(c) permits parties 
only to refer to information that has already been furnished in a 
filing of another party.
---------------------------------------------------------------------------

2. Comments Received
    Several commenters expressed support for the requirements that each 
soliciting person in a contested election must refer shareholders to 
the other party's proxy statement for information about the other 
party's nominees and must explain that shareholders can access the 
other party's proxy statement without cost on the Commission's 
website.\124\ Many of these commenters indicated that such a statement 
is sufficient and no additional information, such as instructions as to 
how to access proxy statements on the Commission's website or a 
hyperlink to that website, is necessary.\125\ One of these commenters 
noted that requiring a reference to proxy materials available on the 
Commission's website will allow shareholders to make an informed voting 
decision where they receive a proxy statement and universal proxy card 
from only one soliciting party.\126\
---------------------------------------------------------------------------

    \124\ See letters from CII; Fidelity; CFA Institute; SBA-FL; 
Carpenters; NY Comptroller; CalSTRS; Colorado PERA; AFSCME.
    \125\ See letters from CII; SBA-FL; Carpenters; NY Comptroller; 
CalSTRS; Colorado PERA; AFSCME.
    \126\ See letter from Fidelity.
---------------------------------------------------------------------------

    Several commenters expressed concern that retail investors would 
not receive proxy materials from dissidents electing to solicit the 
minimum required.\127\ One of these commenters indicated that 
shareholders omitted from the dissident's solicitation would be at an 
informational disadvantage, making it difficult for those shareholders 
to make informed voting decisions which would potentially discourage 
shareholders from participating in the election.\128\ Two commenters 
suggested adopting an additional requirement to include a toll-free 
telephone number where shareholders could request paper copies of proxy 
materials free of charge.\129\ To permit retail investors to obtain 
dissident materials without having to navigate the Commission website, 
two commenters suggested permitting broker-dealers to provide dissident 
proxy materials to shareholders upon request and requiring dissidents 
to bear any associated costs.\130\
---------------------------------------------------------------------------

    \127\ See letters from BM; SIFMA; ABC; CCMC; CGCIV; Davis Polk; 
letter dated Jan. 9, 2017 from Business Roundtable (``BR'').
    \128\ See letter from BR.
    \129\ See letters from Fidelity; SIFMA.
    \130\ See letters from Fidelity; SIFMA.
---------------------------------------------------------------------------

    Two commenters argued that requiring both the registrant and 
dissident to ``publicize the election campaign'' of the opposing side 
in the contest is an inappropriate attempt by the Commission to compel 
corporate speech, in contravention of the First Amendment.\131\
---------------------------------------------------------------------------

    \131\ See letters from CCMC; CGCIV.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting, as proposed: (i) New Item 7(f) of Schedule 14A, 
(ii) the changes to Rule 14a-5(c) described above, and (iii) the 
changes to Items 4 and 5 of Schedule 14A described above, in each case 
for the reasons detailed in the Proposing Release.\132\ Although we 
acknowledge the views of the dissenting commenters described above, the 
final rule changes will sufficiently enable shareholders to access 
information with respect to all nominees when they receive a universal 
proxy card. Requiring a new toll-free telephone number is unnecessary, 
given that existing rules already mandate that proxy statements include 
information on how to obtain paper copies.\133\ In our view, the 
Commission website, including the EDGAR system, is sufficiently user-
friendly, with available aids and ongoing enhancements, for all 
investors to access proxy statements filed with the Commission through 
a simple search, and we therefore disagree that retail investors will 
lack the information to locate such materials. Furthermore, proxy 
solicitors and others involved in the contest are available to assist 
retail investors in this regard. Given these facts, the imposition of 
additional costs on dissidents in connection with additional delivery 
procedures, such as through required reimbursement of broker-dealers, 
would not be justified.
---------------------------------------------------------------------------

    \132\ See Proposing Release at Section II.B.5.b.
    \133\ See 17 CFR 240.14a-16 (Rule 14a-16).
---------------------------------------------------------------------------

    Finally, we do not agree with commenters that suggest that the 
final rule runs afoul of the First Amendment. Far from being 
``controversial corporate speech,'' \134\ the rule simply provides 
shareholders voting by proxy with the same information--the names of 
all the candidates for whom they can vote--as they would receive if 
they attended the shareholder meeting in person, and is squarely within 
the ``economic or investor protection benefits that our rules 
ordinarily strive to achieve.'' \135\ Under the existing proxy rules, 
soliciting parties in a contest commonly direct shareholders to 
required disclosure that appears in the other side's proxy 
statement.\136\
---------------------------------------------------------------------------

    \134\ See letters from CCMC; CGCIV.
    \135\ Nat'l Ass'n of Manufacturers v. SEC, 800 F.3d 518, 521 
(D.C. Cir. 2015) (internal quotation marks omitted). Similarly, we 
do not agree with the commenter's suggestion that the rule requires 
a corporation to ``subsidize and publicize'' speech with which it 
may not agree; the rule requirements may be met by, for example, the 
registrant simply pointing out that the opponent's materials can be 
accessed at no cost on the Commission's website.
    \136\ See Rule 14a-5(c).

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[[Page 68343]]

G. Formatting and Presentation of the Universal Proxy Card

1. Proposed Rules
    The Commission proposed Rule 14a-19(e) to include the following 
presentation and formatting requirements for universal proxy cards:
     The proxy card must set forth the names of all duly 
nominated director candidates;
     The proxy card must provide a means for shareholders to 
grant authority to vote for the nominees set forth;
     The proxy card must clearly distinguish among registrant 
nominees, dissident nominees, and any proxy access nominees;
     Within each group of nominees, the nominees must be listed 
in alphabetical order by last name on the proxy card;
     The same font type, style and size must be used to present 
all nominees on the proxy card;
     The proxy card must prominently disclose the maximum 
number of nominees for which authority to vote can be granted; and
     The proxy card must prominently disclose the treatment and 
effect of a proxy executed in a manner that grants authority to vote 
for more nominees than the number of directors being elected, in a 
manner that grants authority to vote for fewer nominees than the number 
of directors being elected, or in a manner that does not grant 
authority to vote with respect to any nominees.
    In addition, where both parties have presented a full slate of 
nominees and there are no proxy access nominees, the Commission 
proposed Rule 14a-19(f), which would allow (but not require) the 
universal proxy card to provide the ability to vote for all dissident 
nominees as a group and all registrant nominees as a group.
2. Comments Received
    The formatting and presentation requirements for the universal 
proxy card and whether each party in a contest should be permitted to 
customize and use its own universal proxy card were the subject of 
multiple comments. Many commenters expressly supported the Proposed 
Rules' presentation and formatting requirements.\137\ Some favored a 
more prescriptive approach, including standardized colors for 
registrant and dissident proxy cards, noting that priority should be 
afforded to standardization and uniformity to avoid shareholder 
confusion.\138\ Several commenters favored mandating identical or 
similar universal proxy cards,\139\ including specific requirements for 
font, style, and text size across both cards.\140\
---------------------------------------------------------------------------

    \137\ See letters from Colorado PERA; CalSTRS; SBA-FL; 
Carpenters; NY Comptroller; AFSCME; UPWG; ISS.
    \138\ See letters from Sidley; OPERS; CFA Institute; UPWG; CII.
    \139\ See letters from Mediant; ISS; Broadridge Financial 
Solutions, Inc.; Bulldog.
    \140\ See letter from SIFMA.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting the formatting and presentation requirements for 
universal proxy cards as proposed. As under current rules, each side 
will disseminate its own proxy card. Each side will be free to choose 
the design of its card, subject to the requirements of the final rules.
    As discussed in the Proposing Release, we considered the merits of 
creating a system whereby the registrant and dissident distribute an 
identical card, with the only difference being the persons given proxy 
authority on the card. In our view, such a system would be inferior to 
the one adopted in this document for the reasons discussed in the 
Proposing Release.\141\ While we recognize the potential benefits of 
more prescriptive requirements for the universal proxy card, the final 
rules, as adopted, appropriately strike a balance between ensuring 
clarity and fairness on the one hand while preserving flexibility on 
the other. Under current proxy rules, each side in a contest has the 
ability to design and use its own proxy card, subject to the 
requirements set forth in the proxy rules. This ability will continue 
under the new rules we adopt. Rather than specifically mandating a set 
format for each card or requiring that each side's universal proxy card 
look identical to the other's, we are allowing each party some latitude 
in designing and distributing its own universal proxy card. However, we 
note that the font type, style, and size must be consistent for all 
nominees presented on the same card. This should avoid concerns about 
bolding or otherwise drawing attention to certain candidates. The goal 
of our adopted rules with respect to the formatting and presentation of 
the universal proxy cards is to ensure clarity and fairness in 
presentation, so that the cards allow shareholders to make an informed 
voting decision, while at the same time providing flexibility for each 
side in a contest to craft its own card, as under current rules.
---------------------------------------------------------------------------

    \141\ See Proposing Release at Section II.B.6.
---------------------------------------------------------------------------

    Though we understand the concern of commenters who worry about the 
potential for shareholder confusion in the absence of additional 
formatting and presentation requirements, including the standardization 
of proxy card colors, we disagree that such additional regulation is 
necessary. Existing disclosure requirements, such as the Rule 14a-4(a) 
requirement that the proxy card prominently identify whether the card 
is sent by the registrant or dissident, along with the new presentation 
requirements described above, will sufficiently inform shareholders as 
to the party sending the card and mitigate any potential confusion 
resulting from the universal proxy cards. We do not believe it is 
necessary to limit each soliciting party to a specific color proxy card 
to ensure shareholders know which party is soliciting their vote, and 
we note that this is not a limitation under current rules. Furthermore, 
any potential confusion over which side may be sending a particular 
card may be less consequential, as each side's card will list the full 
group of nominees from both sides.
    In addition, permitting each side to use its own proxy card will 
preserve each side's ability to exercise discretionary authority under 
Rule 14a-4(c). As explained in the Proposing Release, we did consider a 
system whereby the registrant would distribute a single universal proxy 
card that would include the names of the registrant's nominees and the 
dissident's nominees, as well as all other proposals to be considered 
at the meeting.\142\ However, our reasons for rejecting that idea in 
the Proposing Release still hold.\143\
---------------------------------------------------------------------------

    \142\ See Proposing Release at Section II.B.6.
    \143\ In addition to the reasons set out in the Proposing 
Release, we agree with the reasoning set out in the letter from 
UPWG: ``We believe both of these alternative models could cause 
unnecessary disruption for market participants accustomed to the 
circulation of two competing cards. The core improvement we seek is 
the ability of shareholders to use any proxy card they choose to 
vote for any combination of board nominees they prefer.''
---------------------------------------------------------------------------

    Finally, we adopt, in slightly modified form, the rule that permits 
(but does not require) the universal proxy card to allow a shareholder 
to grant authority to vote for all of the nominees of either the 
dissident or the registrant as a group, so long as the card also 
provides a similar means by which a shareholder can withhold authority 
to vote for such group of nominees and so long as the number of 
nominees of the registrant or the dissident is less than the number of 
directors being elected.\144\

[[Page 68344]]

A new instruction to the adopted rule clarifies that, where applicable 
state law gives legal effect to votes cast against a nominee, a 
soliciting party that wishes to present the ``for-all'' voting option 
described above on its universal proxy card must also provide 
shareholders an ``against-all'' option rather than a ``withhold-all'' 
option.\145\
---------------------------------------------------------------------------

    \144\ See Rule 14a-19(f). Under the final rules and to avoid 
shareholder confusion, where the form of proxy includes one or more 
shareholder ``proxy access'' nominees, the form of proxy may not 
confer the ability to vote for the registrant and dissident nominees 
as a group.
    \145\ See Instruction 2 to paragraph (f) of Rule 14a-19. See 
also Section II.H below and similar changes to the text of Rule 14a-
4.
---------------------------------------------------------------------------

H. Director Election Voting Standards Disclosure and Voting Options

1. Proposed Rules
    The Commission proposed additional amendments to the form of proxy 
and disclosure requirements with respect to voting options and voting 
standards that would apply to all director elections.\146\ First, the 
Proposed Rules would amend Rule 14a-4(b) to: (1) Mandate the inclusion 
of an ``against'' voting option in lieu of a ``withhold authority to 
vote'' option on the form of proxy for the election of directors where 
there is a legal effect to such a vote; and (2) provide shareholders 
who neither support nor oppose a director nominee an opportunity to 
``abstain'' (rather than ``withhold authority to vote'') in a director 
election governed by a majority voting standard.\147\ Second, the 
proposed rule would amend Item 21(b) of Schedule 14A to expressly 
require the disclosure of the effect of a ``withhold'' vote. Finally, 
the Proposed Rules would delete the phrase ``the method by which votes 
will be counted'' from Item 21(b) of Schedule 14A.
---------------------------------------------------------------------------

    \146\ The proposed amendments to the form of proxy and 
disclosure requirements with respect to voting options discussed in 
this section would apply to funds.
    \147\ See proposed Rule 14a-4(b)(4).
---------------------------------------------------------------------------

2. Comments Received
    Several commenters supported the proposed requirement that the form 
of proxy for a director election governed by a majority voting standard 
include a means for shareholders to vote ``against'' each nominee and a 
means for shareholders to ``abstain'' from voting in lieu of providing 
a means to ``withhold authority to vote.'' \148\ Many of these 
commenters requested that the Commission further amend the proxy rules 
to prohibit registrants from providing an ``against'' voting option if 
making that choice has no legal impact on the outcome of the election 
and to require registrants to refer to voting options consistently 
throughout the proxy materials.\149\ One commenter suggested that 
Instruction 2 to Rule 14a-4(b)(2) be eliminated entirely, and that same 
commenter recommended that the Commission replace the ``withhold'' 
voting option with an ``abstain'' option for director elections 
governed by a plurality voting standard.\150\
---------------------------------------------------------------------------

    \148\ See letters from CII; Colorado PERA; CalSTRS; SIFMA; SBA-
FL; NY Comptroller; AFSCME; Carpenters; letter dated Jun. 7, 2021 
from California Public Employees' Retirement System (``CalPERS'').
    \149\ See letters from CII; CalSTRS; SBA-FL; NY Comptroller; 
Colorado PERA; AFSCME.
    \150\ See letter from Carpenters.
---------------------------------------------------------------------------

    Several commenters addressed the proposed changes to Item 21 of 
Schedule 14A. These commenters supported the proposed amendment to Item 
21(b) of Schedule 14A to require the disclosure of the effect of a 
``withhold'' vote.\151\ Another commenter believed that the phrase 
``the method by which votes will be counted'' in Item 21 of Schedule 
14A should be retained, in order to clarify for shareholders the effect 
of each voting option presented on the proxy card, as well as how each 
voting option will be counted.\152\
---------------------------------------------------------------------------

    \151\ See letters from CalPERS; CII.
    \152\ See letter from Carpenters.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting the rule amendments with the modifications 
described below. Rule 14a-4(b) mandates, as proposed, the inclusion of 
an ``against'' voting option in lieu of a ``withhold authority to 
vote'' option on the form of proxy for the election of directors where 
there is a legal effect to such a vote. It also provides shareholders 
who neither support nor oppose a director nominee an opportunity to 
``abstain'' (rather than ``withhold authority to vote'') in a director 
election governed by a majority voting standard. These changes will 
provide shareholders with a better understanding of the effect of their 
votes on the outcome of the election. We also have not eliminated 
Instruction 2 to Rule 14a-4(b)(4), as one commenter had requested, 
because it may provide useful guidance about voting options where 
applicable state law gives legal effect to votes cast against a 
nominee.
    We agree with commenters, however, that including an ``against'' 
voting option on a proxy card where there is no legal effect to such 
vote is unnecessarily confusing for shareholders and have therefore 
amended Rule 14a-4(b) to prohibit such a voting option on the proxy 
card where such votes have no legal effect. Further, in light of 
comment received from the public, we are retaining the phrase ``the 
method by which votes will be counted'' from Item 21(b) of Schedule 14A 
to avoid any ambiguity regarding the need for clear disclosures in the 
proxy statement regarding the effect of each voting option presented to 
shareholders.

I. Bona Fide Nominee and Short Slate Rules

1. Elimination of the Short Slate Rule
a. Proposed Rules
    The Commission proposed to amend Rule 14a-4(d) to eliminate the 
short slate rule for registrants other than funds. The short slate rule 
allows dissidents soliciting in support of a partial slate of nominees 
that would make up a minority of the board of directors to seek 
authority to vote for some of a registrant's nominees.\153\ The 
Proposed Rules would eliminate the short slate rule for operating 
companies because it would be unnecessary with a universal proxy 
requirement and the revised bona fide nominee rule. The Proposed Rules, 
however, would maintain the short slate rule for funds, since, as 
proposed, they would not be included in the universal proxy 
requirement.\154\
---------------------------------------------------------------------------

    \153\ See Rule 14a-4(d)(4). Rule 14a-4(d)(4)(ii) provides that a 
dissident using the short slate rule may not name the registrant 
nominees for which it will vote using proxy authority; rather, the 
dissident may name only those registrant nominees for which it is 
not seeking proxy authority. This requirement may render the proxy 
card confusing for shareholders.
    \154\ See infra Section II.J.
---------------------------------------------------------------------------

b. Comments Received
    Relatively few commenters addressed the proposed elimination of the 
short slate rule for operating companies that would be subject to a 
mandated universal proxy requirement. Several commenters supported its 
elimination in connection with the adoption of a universal proxy 
requirement, noting that such a system would eliminate many of the 
practical constraints associated with the short slate rule (as well as 
the bona fide nominee rule).\155\ Another commenter similarly supported 
the changes, but also advocated retaining the short slate rule, in 
optional form, if the universal proxy requirement is not mandated.\156\
---------------------------------------------------------------------------

    \155\ See letters from Elliott; CFA Institute.
    \156\ See letter from Colorado PERA.
---------------------------------------------------------------------------

c. Final Amendments
    We are eliminating the short slate rule, as proposed, for operating 
companies that will be subject to the final rules mandating the use of 
universal proxy cards. The revisions we adopt to the bona fide nominee 
rule,\157\ along with the changes to mandate the use of a universal 
proxy card in all non-exempt director election contests, obviate the 
need for the short slate rule

[[Page 68345]]

for operating companies. The amended short slate rule, however, will 
continue to be available for funds in contested elections, which will 
not be subject to the universal proxy requirements at this time.\158\ 
If we later adopt rule changes to make the universal proxy requirement 
applicable to some or all funds, we will consider whether to eliminate 
the short slate rule completely at that time.
---------------------------------------------------------------------------

    \157\ See infra Section II.I.2.
    \158\ See Rule 14a-4(d)(1)(ii)(A)-(D).
---------------------------------------------------------------------------

2. Modification of the Bona Fide Nominee Rule
a. Proposed Rules
    In order to facilitate the ability of both parties in a contested 
election to include the names of all nominees on each side's proxy 
card, the Proposed Rules would revise the bona fide nominee rule. To 
remove the technical impediment to including the names of the other 
side's nominees on a universal proxy card created by Rule 14a-4(d)(1) 
and (4), the Proposed Rules would revise the determination of a ``bona 
fide nominee'' in Rule 14a-4(d).\159\ The proposed revisions would 
change the requirement that a nominee consent to being named in ``the'' 
proxy statement of the party listing that nominee on its card, to a 
more general requirement that a nominee consent to being named in ``a'' 
proxy statement of either side in the contest. Proposed Rule 14a-
4(d)(1)(i) would maintain the requirement that a nominee consent to 
serve, if elected.
---------------------------------------------------------------------------

    \159\ See proposed Rule 14a-4(d)(1)(i). Without the adoption of 
the proposed revisions, Rule 14a-4(d)(1) and (4) would limit the 
ability of one side in a contested election from seeking proxy 
authority to vote for any director nominee unless such nominee 
consented to being named in that side's proxy statement, and to 
serve if elected.
---------------------------------------------------------------------------

b. Comments Received
    Multiple commenters who supported the adoption of a universal proxy 
requirement supported the proposed changes to the bona fide nominee 
rule to effectuate that system.\160\ Several of these commenters 
expressly supported allowing a soliciting party to include the names of 
some or all of the registrant's nominees on its own proxy card even 
when the soliciting party is not nominating its own candidates.\161\
---------------------------------------------------------------------------

    \160\ See, e.g., letters from CII; CalSTRS; CalPERS; Colorado 
PERA; UPWG; NY Comptroller; AFSCME; SBA-FL; Elliott; CFA Institute.
    \161\ See letters from CalSTRS; Colorado PERA; CFA Institute; 
letter from CII dated Dec. 28, 2016.
---------------------------------------------------------------------------

    Some commenters advocated more limited changes to the consent 
required by the bona fide nominee rule to narrow its application. As 
proposed, revised Rule 14a-4 would permit (but not require) a dissident 
soliciting in favor of its own proposal, without its own slate of 
director candidates, to include some or all of the registrant's 
nominees on the dissident's proxy card. Similarly, a dissident 
conducting a ``vote no'' campaign against some of the registrant's 
nominees could (but would not be required to) include on the 
dissident's proxy card those registrant nominees it did not oppose. One 
commenter warned of the shareholder confusion that might result in 
those instances in which the dissident chooses not to include all 
registrant nominees on the dissident's card, and argued that such 
confusion could lead to under-voting that would distort voting 
results.\162\ Several commenters favored limiting the consent provided 
under the revised bona fide nominee rule to situations where the 
opposing side solicits in favor of its own nominees.\163\
---------------------------------------------------------------------------

    \162\ See letter from BR.
    \163\ See letters from Society; Sidley; Davis Polk; BR.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting changes to the consent requirement for a bona fide 
nominee in Rule 14a-4(d)(1)(ii) as proposed. This rule change expands 
the scope of a nominee's consent in an election contest to include 
consent to being named in any proxy statement for the applicable 
meeting. The rule amendment is necessary to permit the universal proxy 
requirement we adopt in this document, because it expands the concept 
of consent to allow a nominee to be considered a bona fide nominee when 
named on any side's proxy card in a director election contest.
    As a practical matter and as noted by commenters, it will also 
permit a dissident soliciting in favor of a proposal (but not its own 
director nominees) to include some or all of the registrant's nominees 
on its proxy card. It further allows a dissident conducting a ``vote 
no'' campaign without presenting its own slate of competing nominees to 
permit shareholders to vote for select registrant nominees on the 
dissident's card. In both of these circumstances, the changes to the 
bona fide nominee rule will further shareholder enfranchisement. 
Although including a registrant's nominees on its own proxy card in 
both of these circumstances will remain optional for the dissident 
under the final rules, this optionality will not limit shareholders' 
voting choices. If the dissident does not include some or all 
registrant nominees on the dissident's card, shareholders will always 
be able to vote on the registrant's proxy card. Where a dissident 
includes some but not all registrant nominees on its proxy card, or 
where it solicits in favor of a proposal but does not include 
registrant nominees on its proxy card, the dissident should--in order 
to avoid potential liability under Rule 14a-9 for omission of material 
facts--disclose the fact that its proxy card does not include some or 
all of the registrant nominees and that shareholders who wish to vote 
for nominees not included on the dissident's proxy card may do so on 
the registrant's proxy card. Such disclosure should mitigate the risk 
of shareholder confusion.
    In addition, and in response to the commenter who was concerned 
with the potential of under-voting, we note that the potential for 
disenfranchisement exists under the status quo, but in a more severe 
form. Under current rules, dissidents who are ineligible to use the 
short slate rule (including those not soliciting on behalf of their own 
director nominees) lack the ability to list registrant nominees on 
their proxy card. The risk of any disenfranchisement under the final 
amendments may be mitigated because we expect that dissidents will have 
an incentive to include the registrant nominees on their proxy card (so 
as to increase the incentive for shareholders to use their card) and 
will generally not have strategic reasons to exclude registrant 
nominees from their proxy card due to the lack of a competing slate. 
Finally, to the extent that shareholders vote for fewer nominees than 
open board seats because they are voting on a dissident's proxy card 
that does not list all registrant nominees, this will occur in the 
context of an uncontested election, in which the consequences of 
casting fewer votes in favor of any particular nominee are less 
significant than in the context of a contested election.
    The final rules maintain the requirement that a bona fide nominee 
consent to serve if elected.\164\ This will ensure that neither party 
nominates an individual who has not consented to serve if elected as a 
director. To the extent that any nominee would not serve if elected 
with other nominees (or would not serve unless certain other nominees 
were elected), we would expect this material fact to be disclosed 
prominently in the proxy statement of the party nominating such 
individual. If one or more of the registrant's nominees will not serve 
under such circumstances, the registrant should explain in its proxy 
statement how such vacancies would be filled.
---------------------------------------------------------------------------

    \164\ See proposed Rule 14a-4(d)(1)(i).

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[[Page 68346]]

J. Funds

1. Proposed Rules
    The Proposed Rules excluded funds. Like operating companies, funds 
have boards of directors that are elected by shareholders. Also like 
operating companies, fund boards have significant responsibilities in 
protecting shareholder interests and funds are subject to the Federal 
proxy rules. However, fund shareholders also have important rights 
granted to them under the Investment Company Act of 1940 that 
distinguishes funds from operating companies. For reasons detailed in 
the Proposing Release,\165\ the Commission did not propose to apply the 
universal proxy requirement to funds, but solicited comment on whether 
funds should be covered by the Proposed Rules. In the Reopening 
Release, the Commission observed that since the Proposing Release, 
there had been certain developments in corporate governance matters 
affecting funds, particularly registered closed-end funds and BDCs. In 
light of such developments, the Commission stated that it was 
considering applying the proposed universal proxy card requirements to 
registered closed-end funds and BDCs and again solicited comment on 
whether funds should be covered by the Proposed Rules, with particular 
emphasis on issues related to such funds.\166\
---------------------------------------------------------------------------

    \165\ See Proposing Release at Section II.D.
    \166\ See Reopening Release at Section II.
---------------------------------------------------------------------------

2. Comments Received
    Comments received in response to the Proposing Release and 
Reopening Release were mixed. On the one hand, many commenters 
supported excluding funds from the Proposed Rules because of the 
differences between funds and operating companies--including the 
investor protections provided by applicable securities laws and 
regulations and fund governance structures.\167\ With respect to 
statutory and regulatory protections, some commenters observed that the 
Investment Company Act of 1940 supplements state law to provide 
shareholders with the right to approve fundamental fund features, 
including the right to approve the investment advisory contract and any 
material amendments to the investment advisory contract and changes to 
any of a fund's fundamental investment policies.\168\ With respect to 
fund governance structures, several commenters observed that split-
ticket voting that results in dissident directors joining a fund board 
could disrupt the widespread practice of unitary and cluster boards at 
funds,\169\ which could lead to additional and costly administrative 
complexities and redundancies for funds that ultimately would be borne 
by fund shareholders.\170\
---------------------------------------------------------------------------

    \167\ See, e.g., letters from ICI; CII; Fidelity; letter dated 
Jan. 9, 2017 from Independent Directors Council (``IDC''); letter 
dated Feb. 27, 2017 from Mutual Fund Directors Forum (``Forum'').
    \168\ See letters from CII, ICI; IDC; Fidelity.
    \169\ See letters from ICI; IDC; Fidelity; Forum.
    \170\ See letters from ICI; IDC; Forum. In addition, those 
commenters explained that a dissident director may disrupt other 
fund governance standards such as standards regarding disinterested 
and independent directors.
---------------------------------------------------------------------------

    In addition to providing reasons that the universal proxy rules 
should not apply to funds generally, some commenters also discussed the 
application of those universal proxy rules to specific types of 
management investment companies. Specifically, some commenters stated 
that universal proxies are not necessary for open-end funds because 
open-end funds are not required to have annual shareholder meetings and 
investors are able to redeem at net asset value, resulting in contested 
elections being rare.\171\ With regard to closed-end funds and BDCs, 
several commenters also suggested that universal proxies are not 
necessary because dissidents almost always nominate a full slate of 
nominees in order to achieve a specific objective, such as a 
liquidation event.\172\ Therefore, according to these commenters, 
shareholders typically have a binary choice to vote with fund 
management or against it and these commenters believed such binary 
choices would likely continue with the use of a universal proxy 
card.\173\
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    \171\ See letters from ICI; IDC; Fidelity; Forum.
    \172\ See letters from Forum; ICI; see also letter from IDC. One 
commenter stated that to serve the interests of long-term investors, 
the Commission should provide closed-end funds with more protections 
against activist investors and not erode the protections and 
benefits offered by closed-end funds. See letters from ICI.
    \173\ See letters from ICI; IDC; Forum.
---------------------------------------------------------------------------

    On the other hand, many commenters opposed the exclusion of funds 
generally, and registered closed-end funds and BDCs in particular, from 
the Proposed Rules.\174\ Some commenters contended that because of the 
large retail investor base of registered closed-end funds and BDCs, it 
is difficult for shareholders to effect change when necessary.\175\ One 
commenter expressed support for universal proxies for BDCs and closed-
end funds and suggested that whether shareholders of such entities are 
well-served by unitary or cluster boards is an open question.\176\ 
Another commenter stated that the administrative efficiency of a 
unitary board structure, while worth considering, should be secondary 
to allowing shareholders to promote nominees of their choosing to 
effect the investment objectives of the fund.\177\ A separate commenter 
recommended extending the Proposed Rules to closed-end funds and BDCs, 
but not to open-end funds, given the latter's greater organizational 
complexity and the extreme rarity of proxy contests affecting 
them.\178\
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    \174\ See letters from Bulldog; Ad Hoc Coalition; E. Burke; BM; 
Mediant; letter dated Jan. 12, 2017 from Blue Bell Private Wealth 
Management; letter dated Feb. 3, 2017 from Almitas Capital 
(``Almitas''); letter dated Jun. 29, 2021 from Saba Capital 
Management, L.P. (``Saba'').
    \175\ See letters from Almitas; Bulldog.
    \176\ See letter from Ad Hoc Coalition.
    \177\ See letter from Saba.
    \178\ See letter from Mediant.
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3. Final Amendments
    The final rules we adopt in this document will not apply to funds 
at this time, as the Commission continues to consider any application 
of the rules to funds. Developments since 2016, along with various 
comments discussed above that we have received have led us to conclude 
that further consideration of potential application of the universal 
proxy rules to certain funds is warranted.

K. Compliance Dates

    Because the rule amendments we adopt in this document involve 
significant changes to the manner in which election contests are 
conducted, a transition period is appropriate. New Rule 14a-19 imposes 
notice and other mandates that will require planning and coordination 
by both parties to an election contest. Therefore, to avoid disruption 
to the upcoming proxy season, the rule changes we adopt in this 
document will become effective for any shareholder meeting featuring an 
election contest held after August 31, 2022. The length of this 
transition period is designed to allow adequate time for affected 
parties to plan and prepare for compliance with the new rules, and to 
adjust to the elimination of existing provisions, such as the short 
slate rule.
    Some of the rule amendments we adopt in this document will apply to 
all director elections, not just those that are contested. While these 
changes do not require coordination and notice to the other party, as 
is required in a contested election, they do involve enhanced 
disclosure of the legal effect of votes under the applicable voting 
standard for the election. The amendments also impose new voting 
options where the

[[Page 68347]]

applicable voting standards give effect to abstain or withhold votes. 
Given these changes, the same transition period for compliance (for 
shareholder meetings held after August 31, 2022) is appropriate for all 
of the rule amendments we adopt in this document.

III. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act, the Office of Information 
and Regulatory Affairs has designated these rules a ``major rule,'' as 
defined by 5 U.S.C. 804(2).

IV. Economic Analysis

    We are attentive to the costs imposed by and the benefits obtained 
from the final amendments.\179\ The discussion below addresses the 
potential economic effects of the final amendments, including the 
likely benefits and costs, as well as the likely effects on efficiency, 
competition, and capital formation. We also analyze the potential costs 
and benefits of reasonable alternatives to the amendments.
---------------------------------------------------------------------------

    \179\ Exchange Act Section 3(f) requires us, when engaging in 
rulemaking that requires us to consider or determine whether an 
action is necessary or appropriate in the public interest, to 
consider, in addition to the protection of shareholders, whether the 
action will promote efficiency, competition, and capital formation. 
15 U.S.C. 78c(f). Exchange Act Section 23(a)(2) requires us, when 
adopting rules under the Exchange Act, to consider the impact that 
any new rule would have on competition, and prohibits any rule that 
would impose a burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. 15 
U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

A. Introduction

    As discussed above, we are adopting amendments that will require 
the use of a universal proxy card in all contested elections with 
competing slates of director nominees to address concerns over the 
inability of shareholders using the proxy system to vote for the 
combination of candidates of their choice in a contested election. 
These amendments will allow shareholders voting by proxy to choose 
among director nominees in an election contest in a manner that more 
closely reflects the choice that could be made by voting in person at a 
shareholder meeting. Shareholders voting in person in a contested 
election with competing slates of nominees are able to choose among all 
of the duly nominated candidates. By contrast, shareholders currently 
voting by proxy are typically limited to voting for only registrant 
nominees or voting for only the dissident's nominees (or, in the case 
of certain short slate elections, for the dissident's nominees and 
certain registrant nominees chosen by the dissident).\180\ If 
shareholders wish to vote for a combination of nominees across the two 
slates, they generally must do so in person by attending or sending a 
representative to the shareholder meeting and incurring the costs of 
doing so. In some cases, parties such as proxy solicitors may make 
arrangements for one or more individuals to attend a meeting on behalf 
of certain shareholders to facilitate split-ticket voting. However, 
many shareholders, particularly retail shareholders or those who do not 
hold a large stake in the registrant, might not be willing or able to 
bear the costs of voting in person and may not have access to other 
arrangements. Therefore, these shareholders may not currently be able 
to vote for their preferred selection of candidates.
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    \180\ Though our economic analysis focuses on contests between a 
registrant and a single dissident for ease of exposition, we believe 
that the economic effects discussed below would also apply to 
contests involving more than one dissident. Election contests with 
more than one soliciting dissident are uncommon. For example, the 
staff has identified only one proxy contest in operating companies 
from 2017-2020 that involved more than one dissident with separate 
slates of nominees.
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    The mandated use of universal proxies will allow shareholders to 
vote for any combination of nominees when voting their shares by proxy 
in advance of the meeting, which is generally the way in which the vast 
majority of shares are voted. For shareholders who would otherwise 
incur incremental costs to vote for a combination of candidates that 
could not be voted for by proxy, such as by attending the meeting in 
person, universal proxies will result in direct cost savings. Universal 
proxies will also enable shareholders who want to split their vote but 
are unwilling (or unable) to bear additional costs to be able to vote 
for their preferred combination of nominees to do so without incurring 
additional costs.
    The nomination and election of directors by shareholders represents 
a fundamental governance mechanism that can mitigate conflicts of 
interest between shareholders and management. While the most direct 
effect of the final amendments will be to improve the efficiency of the 
voting process and permit shareholders greater choice when voting by 
proxy in contested director elections, they will also likely impose 
direct costs on dissidents and registrants in certain contests. The 
final amendments may also have broader impacts on corporate governance 
and the relationship between shareholders and management. For reasons 
discussed below,\181\ it is difficult to predict the likely extent or 
direction of these broader potential effects, but we cannot rule out 
the possibility that they could be significant.\182\ For example, 
enabling split-ticket voting could lead to a greater number of boards 
that are composed of a mix of registrant-nominated \183\ and dissident-
nominated directors (``mixed boards''), which may affect the 
effectiveness of boards, either positively or negatively. Additionally, 
mandating the use of universal proxies by registrants as well as 
dissidents--which, in practice, would likely result in the names of 
dissident nominees being disseminated via registrant proxy cards to all 
shareholders--may provide potential dissidents with a new means of 
generating publicity for alternative nominees or for the broader 
concerns behind a contest at a relatively low cost, which could change 
the nature of interactions between potential dissidents and 
management.\184\ The overall incidence of contested elections may 
change as well. These and other potential effects, as well as possible 
mitigating factors, are discussed in detail below.
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    \181\ See Section IV.C.
    \182\ We are unaware of any empirical studies that find that 
universal proxies would have significant effects on corporate 
governance and the relationship between shareholders and management. 
A recent study submitted by a commenter (see letter from Prof. 
Hirst) finds that a universal proxy is unlikely to lead to more 
proxy contests or to greater success by special interest groups. See 
Scott Hirst, Universal Proxies, Yale J. on Reg. 35, 437 (2018) 
(``Hirst Study''). This is an updated version of a study we 
previously discussed in the Proposing Release (see note 209 in the 
Proposing Release). We note that this study relies on several 
critical assumptions that might not be reliable. See infra note 284.
    \183\ For ease of exposition, we refer throughout this economic 
analysis to the nominees of the board, including those that are 
incumbent directors, or its nominating committee, as the nominees of 
the registrant and, in total, as the registrant slate.
    \184\ See, e.g., letter from CCMC (arguing that ``Seeking to 
avoid the cost and distraction of an SEC-sanctioned proxy fight, 
many companies will simply follow the path of least resistance and 
negotiate to place dissident directors directly on their boards 
without the need for a shareholder vote.'').
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    At the outset, where possible, we have attempted to quantify the 
benefits, costs, and effects on efficiency, competition, and capital 
formation expected to result from the final amendments. In many cases, 
however, we are unable to quantify the potential economic effects 
because we lack information necessary to provide a reasonable estimate. 
For example, we are unable to quantify the

[[Page 68348]]

potential change in the number of mixed-board outcomes at contests as a 
result of the final amendments. We are also unable to quantify the 
change in the instance of proxy contests that may result from the final 
amendments.
    Although many commenters supported the mandated use of universal 
proxy in contested director elections, some commenters raised a number 
of economic concerns with the proposed amendments and also suggested 
alternatives in some cases. We have considered those concerns and, 
where appropriate, have expanded our economic analysis to address those 
concerns and alternatives.

B. Baseline

    To assess the economic impact of the final amendments, we are using 
as our baseline the current state of the proxy process. Our baseline 
includes existing Commission rules, state laws, and corporate governing 
documents that jointly govern the ability to solicit proxies in support 
of director nominees other than the registrant nominees and the manner 
in which contested elections are conducted. This section discusses the 
parties involved in director election contests under the current legal 
framework, current proxy voting practices, and the means available to 
shareholders to influence the composition of boards of directors.
1. Affected Parties
    We consider the impact of the final amendments on shareholders, 
registrants, dissidents in contested elections (who are typically also 
shareholders), and directors.
a. Shareholders
    Different types of shareholders exhibit different degrees of 
involvement in voting on matters up for a vote at the companies they 
invest in. In particular, a study by a proxy services provider found 
that there are, on average, large differences in involvement by 
institutional investors compared to retail investors.\185\ 
Institutional and retail investors also face different levels of 
difficulty and resource constraints to vote for their preferred choices 
of nominees in contested director elections under current rules.\186\ 
As a result, the final amendments are likely to have a differential 
impact with respect to the costs of voting and feasible voting choices 
for these two types of shareholders.
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    \185\ See Broadridge and PwC, Proxy Pulse 2020 Proxy Season 
Review (2020), available at https://www.broadridge.com/_assets/pdf/broadridge-proxypulse-2020-review.pdf (``Proxy Pulse 2020'').
    \186\ See infra Section IV.B.2.d for a discussion on different 
shareholders' current ability to arrange split-ticket voting.
---------------------------------------------------------------------------

    The number of beneficial shareholder accounts for U.S. public 
companies varies significantly by company market capitalization: The 
average (median) number of beneficial shareholder accounts is 
approximately 3,900 (1,400) for companies with less than $300 million 
in market capitalization, approximately 11,000 (5,700) for companies 
with between $300 million and $2 billion in market capitalization, 
approximately 28,300 (16,500) for companies with between $2 billion and 
$10 billion in market capitalization, and approximately 279,000 
(102,700) for companies with market capitalization above $10 
billion.\187\ Among all companies, we estimate that 91% of account 
holders are retail investors.\188\ For U.S. public companies that held 
their annual meetings in the main 2020 proxy season (i.e., between 
January 2020 and June 2020), a study by a proxy services provider found 
that retail investors held approximately 29% of shares held in 
brokerage accounts and institutional investors held 71%.\189\ An 
earlier study by the same proxy services provider for U.S. public 
companies that held their annual meetings in the main 2016 proxy season 
(i.e., between January 2016 and June 2016), found that the percentage 
of ownership by retail investors varies significantly with company 
size, and was estimated to be 67% in companies with less than $300 
million in market capitalization, 32% in companies with between $300 
million and $2 billion in market capitalization, 23% in companies with 
between $2 billion and $10 billion in market capitalization, and 27% in 
companies with market capitalization above $10 billion.\190\
---------------------------------------------------------------------------

    \187\ Based on industry data provided by a proxy services 
provider. Note that an individual shareholder may have more than one 
account, so the number of beneficial shareholders likely is lower 
than the number of beneficial shareholder accounts. For the purpose 
of estimating costs related to distribution of proxy materials, the 
number of accounts is the more relevant number because dissemination 
costs such as intermediary and processing fees apply on a per 
account basis per NYSE Rule 451. The data is based on domestic 
companies that held shareholder meetings between July 1, 2018 and 
June 30, 2019.
    \188\ Id.
    \189\ See Proxy Pulse 2020.
    \190\ See Broadridge and PwC, Proxy Pulse 2016 Proxy Season 
Review (3d ed. 2016), available at https://www.broadridge.com/proxypulse/_assets/docs/broadridge-proxypulse-3rd-edition-2016.pdf 
(``Proxy Pulse 2016'').
---------------------------------------------------------------------------

    Retail and institutional shareholders exhibit very different voting 
behavior. In the main 2020 proxy season, while institutional investors 
voted 92% of their shares, retail investors voted only 28% of their 
shares.\191\ Based on an earlier study of the main 2015 proxy season, 
the voting propensity of retail investors does not vary significantly 
by the size of the registrant.\192\ By contrast, institutional 
investors vote a significantly smaller portion of their shares in 
registrants with less than $300 million in market capitalization (72%) 
than in larger registrants (91% to 93%),\193\ which may be a function 
of the types of institutions that invest in companies of different 
sizes.
---------------------------------------------------------------------------

    \191\ See Proxy Pulse 2020. We acknowledge that the voting 
participation of retail shareholders in particular could increase in 
the case of a contested election, because of greater media coverage 
and expanded outreach efforts, but we do not currently have data 
that would allow us to separately estimate the degree of retail 
participation in contested elections.
    \192\ See Broadridge and PwC, Proxy Pulse 2015 Proxy Season 
Wrap-up (3d ed. 2015), available at http://media.broadridge.com/documents/ProxyPulse-Third-Edition-2015.pdf.
    \193\ Id.
---------------------------------------------------------------------------

    Retail and institutional investors may also have differential 
access to resources that can be expended in order to cast a vote, and 
may have different levels of incentive to expend such resources. In 
general, we expect retail investors to face greater resource 
constraints than institutional investors. Differences across 
shareholders in the ability to take advantage of different approaches 
to voting and in the resources expended on voting are discussed in more 
detail in Sections IV.B.2.d and IV.C.1 below.
b. Registrants
    The final amendments mandating the use of universal proxy cards in 
director election contests will apply to all registrants that have a 
class of equity securities registered under Section 12 of the Exchange 
Act and are thereby subject to the Federal proxy rules, except funds. 
The amendments will not apply to foreign private issuers or companies 
with reporting obligations under only Section 15(d) of the Exchange 
Act, whose securities are not subject to the Federal proxy rules. As of 
December 31, 2020, we estimate that approximately 5,400 registrants had 
a class of securities registered under Section 12 of the Exchange Act 
and will be subject to the amendments mandating the use of a universal 
proxy card in contested director elections.\194\

[[Page 68349]]

We also are adopting some changes to the form of proxy and proxy 
statement disclosure requirements applicable to all director elections. 
Because these changes apply to all registrants subject to the Federal 
proxy rules, they will also apply to registered funds. As of September 
30, 2021, there were 14,062 registered management investment companies 
that were subject to the proxy rules: (i) 13,347 Open-end funds, out of 
which 2,497 were Exchange Traded Funds (``ETFs'') registered as open-
end funds or open-end funds that had an ETF share class; (ii) 701 
closed-end funds; and (iii) 14 variable annuity separate accounts 
registered as management investment companies.\195\ In addition, as of 
June 2021, we identified 99 BDCs that were subject to the proxy 
rules.\196\
---------------------------------------------------------------------------

    \194\ We are able to estimate the number of registrants with the 
class of securities registered under Section 12 of the Exchange Act 
by reviewing all Forms 10-K and 10-K amendments filed during 
calendar year 2020 with the Commission. After reviewing all forms, 
we then count the number of unique registrants that identify 
themselves as having a class of securities registered under Section 
12(b) or Section 12(g) of the Exchange Act. Foreign private 
registrants that filed both Forms 20-F and 40-F, as well as asset-
backed registrants that filed Forms 10-D and 10-D/A during calendar 
year 2020 with the Commission are excluded from this estimate. This 
estimate also excludes BDCs; see infra note 196.
    \195\ We estimate the number of unique registered management 
investment companies based on Forms N-CEN filed between December 
2020 and September 2021 with the Commission. Open-end funds are 
registered on Form N-1A, while closed-end funds are registered on 
Form N-2. Variable annuity separate accounts registered as 
management investment companies are trusts registered on Form N-3.
    \196\ BDCs are entities that have been issued an 814-reporting 
number. Our estimate includes 82 BDCs that filed Form 10-K in 2020, 
as well as 17 BDCs that were not traded.
---------------------------------------------------------------------------

    There is substantial variation across registrants in 
characteristics such as incumbent executive and director ownership and 
governance structure, which may affect the degree to which different 
registrants are affected by the final amendments.
Incumbent Executive and Director Ownership
    We expect that incumbent executives and directors would vote in 
support of the registrant's slate of nominees in a director contest at 
the annual meeting,\197\ and that the mandated use of a universal proxy 
card is unlikely to change this expected voting behavior. We therefore 
think that the percentage of total voting power held by a registrant's 
incumbent executives and directors can have an effect on the impact of 
the final amendments on the incidence and outcome of contested director 
elections.
---------------------------------------------------------------------------

    \197\ Note that in the case of a dissident who is also an 
insider (such as an incumbent director), this may not be the case.
---------------------------------------------------------------------------

    Table 1 below reports estimates of the average combined vote 
ownership by incumbent executives and directors for a broad sample of 
3,841 potentially affected registrants, as well as for several size-
related sub-samples of registrants: Those included in the S&P 500 index 
(``large-cap stocks''), in the S&P 400 index (``mid-cap stocks''), in 
the S&P 600 index (``small-cap stocks''), and outside the S&P 1500 
index that is composed of these three indices (and which tend to be 
smaller than those registrants in the S&P 1500). The average (median) 
percentage is 14.6% (5.8%) for all registrants, and this percentage is 
greatest for registrants outside the S&P 1500 index. We also estimate 
the percentage of registrants for which incumbent executives and 
directors hold a majority of the voting power, and hence can control 
who is elected to the board in most circumstances. Overall, incumbent 
executives and directors hold a majority of votes in 8.1% of 
registrants. This percentage ranges from 2.0% for S&P 500 registrants 
to 11.4% for non-S&P 1500 registrants.
    The data in Table 1 indicates that to the extent incumbent 
executives and directors tend to vote for the registrant's slate of 
director nominees in contested elections, the impact of such behavior 
on the economic effects of the final amendments is likely to be more 
important in the non-S&P 1500 category of smaller registrants.

      Table 1--Incumbent Executive and Director Vote Ownership of Registrants Subject to Proxy Rules \198\
----------------------------------------------------------------------------------------------------------------
                                             Incumbent executive and director vote ownership (%
                                                           of total voting power)                Percentage with
                                            ----------------------------------------------------     majority
                                                              25th                      75th        ownership
                                                 Mean      percentile     Median     percentile
----------------------------------------------------------------------------------------------------------------
All registrants............................         14.6          1.8          5.8         18.8              8.1
S&P 500 registrants........................          4.4          0.3          0.8          2.3              2.0
S&P 400 registrants........................          6.8          1.0          2.0          5.5              2.0
S&P 600 registrants........................          9.5          1.8          3.4          8.4              4.1
Non-S&P 1500 registrants...................         19.3          4.0         10.4         27.8             11.4
----------------------------------------------------------------------------------------------------------------

Governance Structure
---------------------------------------------------------------------------

    \198\ Estimates based on staff analysis of director and senior 
executive vote ownership data from Institutional Shareholder 
Services Inc. (``ISS'') as of calendar year 2019. This data is 
available for 3,841 of the potentially affected registrants and may 
include ownership through options exercisable within 60 days. The 
sample represents over 70% of potentially affected registrants. It 
is our understanding that the registrants for which data is missing 
in the ISS database tend to be the smallest registrants in terms of 
market capitalization, and therefore the data presented may not be 
representative for these registrants. In particular, we believe it 
is likely that incumbent management ownership for this group of 
registrants is on average even greater than for the non-S&P 1500 
registrants listed in Table 1.
---------------------------------------------------------------------------

    Registrants' governance characteristics may affect the incidence 
and outcomes of proxy contests currently as well as the effects, if 
any, of potential changes in the proxy rules on the incidence and 
outcomes of proxy contests.\199\ For example, as discussed in more 
detail in the Proposing Release, the presence of a staggered board 
structure in a registrant will mitigate the impact on board composition 
of any final amendments to the proxy rules by prolonging the time over 
which any changes in board composition would occur.\200\ We estimate 
that approximately 42% of registrants have a staggered board.\201\ This 
percentage varies substantially across market capitalization 
categories: Approximately 14% for S&P 500 registrants, 38% for S&P 400 
registrants, 43% for S&P 600 registrants, and 48% for non-S&P 1500 
registrants.\202\
---------------------------------------------------------------------------

    \199\ In the Proposing Release, we also discussed the use of 
dual class shares, where one class of shares has greater voting 
rights than the other, as a mechanism that could potentially 
concentrate the voting control of a registrant in the hands of 
insiders (see Section IV.B.1.b of the Proposing Release). However, 
the potential impact of such dual class share structures on the 
economic effects of the final amendments would ultimately flow 
through the vote ownership of insiders, which we discuss above.
    \200\ See Section IV.B.1.b of the Proposing Release.
    \201\ Estimates based on staff analysis of board characteristics 
data from ISS as of calendar year 2019. This data is available for 
3,841 of the potentially affected registrants.
    \202\ Id.
---------------------------------------------------------------------------

    As discussed in more detail in the Proposing Release, cumulative 
voting for directors may increase the ability of

[[Page 68350]]

minority shareholders to elect a director and may therefore also be 
important to consider when evaluating the potential effects of the 
final amendments on proxy contests.\203\ We estimate that 3.3% of 
registrants have cumulative voting. This percentage also varies across 
market capitalization categories: Approximately 2.2% for S&P 500 
registrants, 3.1% for S&P 400 registrants, 4.1% for S&P 600 
registrants, and 3.4% for non-S&P 1500 registrants.\204\
---------------------------------------------------------------------------

    \203\ See, e.g., David Ikenberry & Josef Lakonishok, Corporate 
Governance through the Proxy Contest: Evidence and Implications, 66 
J. Bus. 405, 413 (1993) (finding that dissidents are successful in 
obtaining at least one seat in 41.3% of contests held under straight 
voting and that this increases to 71.9% in contests using cumulative 
voting).
    \204\ Estimates based on staff analysis of board characteristics 
data from ISS as of calendar year 2019. This data is available for 
3,841 of the potentially affected registrants. We do not have ready 
access to this data for other registrants.
---------------------------------------------------------------------------

    Registrants' governing documents generally provide that one of two 
main standards be applied to the election of directors: Either a 
majority voting standard or a plurality voting standard. Under a 
majority voting standard, directors are elected only if they receive 
affirmative votes from a majority of the shares voting or present at 
the meeting, and shareholders can vote ``for'' each nominee, 
``against'' each nominee, or ``abstain'' from voting their shares. By 
contrast, under a plurality voting standard, the nominees receiving the 
greatest number of ``for'' votes are elected, and shareholders can 
withhold votes from specific nominees but cannot vote ``against'' any 
of them. In those cases in which a majority standard is in place in 
director elections, registrants tend to have a carve-out in the bylaws 
(or charter) that applies a plurality standard in contested director 
elections. In the case of a majority voting standard in a contested 
election, there is a risk that some or all of the nominees receiving 
the highest relative shareholder support may still not win a majority 
of votes cast. This risk is especially high when nominees only appear 
on either the registrant's or the dissident's card, which is generally 
the case under the current proxy rules. Based on data that we have 
available for affected S&P 1500 registrants, we estimate that whereas 
approximately 70% have a majority standard in director elections, only 
approximately 6% of the affected S&P 1500 registrants have a majority 
standard without a carve-out for a plurality standard in the case of a 
contested election.\205\
---------------------------------------------------------------------------

    \205\ Estimates based on staff analysis of governance data for 
S&P 1500 companies from ISS as of calendar year 2020.
---------------------------------------------------------------------------

c. Dissidents in Contested Elections
    The dissidents in contested elections are typically shareholders of 
the registrant, but may fit into one of several categories. A common 
category of dissidents is activist hedge funds that take a proactive 
approach to the companies in their investment portfolios by trying to 
influence the management and decision-making through various means, 
such as proxy contests. Dissidents may also be former insiders or 
employees of the registrant. A party to a possible business combination 
may also contest the election of directors at a registrant when, for 
example, it is seeking to acquire the registrant but the registrant's 
current board does not approve of the transaction. In some cases, a 
group of dissatisfied shareholders other than activist hedge funds 
jointly contests an election. Section IV.B.2.a below provides further 
information about the relative frequency of different types of 
dissidents in recent director contests.
d. Directors
    We note that reputational concerns may be an important 
consideration for directors and potential directors.\206\ Past research 
has found that proxy contests may affect the reputation of incumbent 
directors, in that such contests appear to have had a significant 
adverse effect on the number of other directorships they hold.\207\ 
Therefore, any changes to the proxy rules that would increase the 
likelihood of proxy contests at any given registrant could reduce the 
willingness of current and potential directors to be nominated to serve 
on the registrant's board in the future.
---------------------------------------------------------------------------

    \206\ See, e.g., Ronald Masulis & Shawn Mobbs, Independent 
Director Incentives: Where Do Talented Directors Spend Their Limited 
Time and Energy?, 111 J. Fin. Econ 406, 426 (Feb. 2014) (concluding 
that director reputation is a powerful incentive for independent 
directors).
    \207\ See Vyacheslav Fos & Margarita Tsoutsoura, Shareholder 
Democracy in Play: Career Consequences of Proxy Contests, 114 J. 
Fin. Econ. 316, 326 (2014) (finding that, following a proxy contest, 
all directors in the targeted company experience on average a 
significant decline in the number of their directorships, not only 
in the targeted company, but also in other, non-targeted companies).
---------------------------------------------------------------------------

2. Contested Director Elections
    Currently, a shareholder voting by proxy is generally limited to 
voting for either the registrant slate or the dissident slate (and, 
when used to round out a slate, certain registrant nominees chosen by 
the dissident).\208\ By contrast, a shareholder that attends an annual 
meeting may vote for any combination of registrant and dissident 
nominees.
---------------------------------------------------------------------------

    \208\ However, it may be possible for a registrant to require a 
dissident's nominees to consent to be named on the registrant's card 
pursuant to the director questionnaires required under a 
registrant's advance notice bylaw provisions. As noted above, the 
staff has observed an increased use of this tactic since 2016. This 
option is not available to the dissident. In addition, we have 
observed at least one case since 2016 where universal proxy was used 
by both parties, presumably based on obtaining voluntary consent by 
the included nominees. See supra note 43 and accompanying text.
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a. Proxy Contest Data
    We identify 148 proxy contests \209\ that were initiated through 
the filing of preliminary proxy statements by dissidents in calendar 
years 2017-2020 across all registrants subject to the proxy rules other 
than funds.\210\ Of these proxy contests, we estimate that 101 involved 
an election contest with competing slates of director nominees at an 
annual meeting of shareholders.\211\ In one case, there were two 
dissidents with separate slates of nominees. Most of the contests with 
competing slates of board nominees were in smaller to midsize 
companies: Nine were S&P 500 companies, 13 were S&P 400 companies, 17 
were S&P 600 companies, and 62 were outside the S&P 1500. In terms of 
the type of dissidents initiating proxy contests with competing slates, 
activist investors (mainly hedge funds and other types of investment 
companies) were dissidents in approximately 79% of the contests, 
whereas former or current insiders and employees, other groups of 
shareholders, or companies seeking

[[Page 68351]]

business combinations made up the rest of the dissidents.\212\
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    \209\ This total number of proxy contests includes all cases in 
which a proponent or dissident initiated a ``solicitation in 
opposition'' to the registrant, whether in relation to an election 
of directors or with respect to another issue. A solicitation in 
opposition includes (i) any solicitation opposing a proposal 
supported by the registrant; and (ii) any solicitation supporting a 
proposal that the registrant does not expressly support, other than 
a shareholder proposal included in the registrant's proxy material 
pursuant to Rule 14a-8. See 17 CFR 240.14a-6(a), Note 3. The total 
number includes consent solicitations for special meetings and 
written consent solicitations (36 cases), which may be board related 
contests but are not subject to the required use of universal 
proxies. This total number of proxy contests does not include exempt 
solicitations, which are discussed in Section IV.B.3, infra.
    \210\ Based on staff review of EDGAR filings in calendar years 
2017 through 2020.
    \211\ This represents on average approximately 25 board-
nomination contests per year, which is lower than the average of 36 
initiated contests per year we found for 2014 and 2015 in the 
Proposing Release. The 47 proxy contests initiated in 2017-2020 that 
did not represent election contests with competing slates of 
candidates at an annual meeting of shareholders include: Consent 
solicitations for the removal and election of directors at a special 
meeting or through written consent; contests involving ``vote no'' 
campaigns; and proposals on issues other than director nominees. 
Consent solicitations and ``vote no'' campaigns are discussed in 
Section IV.B.3, infra.
    \212\ Based on information from Factset's SharkRepellent 
database and staff's review of EDGAR filings.
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    Approximately 30% of the contests with competing slates were 
contests for majority control of the board.\213\ However, because less 
than a majority of board seats were up for election in approximately 
31% of the contests due to staggered board structures, dissidents 
sought majority control in 43% of contests where it was possible to do 
so (30 out of 70 cases). Among the 31 cases where less than a majority 
of seats were up for election, dissidents nominated candidates for all 
of the seats that were up for election in 48% of contests (15 cases). 
Overall, dissidents nominated candidates for all of the seats that were 
up for election in approximately 25% of contests (25 cases out of 101).
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    \213\ This percentage is somewhat larger than the 26% reported 
in the Proposing Release for 72 board contests initiated in years 
2014 and 2015.
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b. Notice, Solicitation, and Costs of Proxy Contests
    The Commission's proxy rules do not currently require dissidents to 
provide notice to registrants of their intention to solicit votes for 
their nominees. However, as discussed, advance notice bylaws are common 
among registrants. For example, at the end of 2020, 99% of S&P 500 
registrants had advance notice provisions, and 95% of the Russell 3000 
had such provisions.\214\ We understand that the latest date on which 
notice may be provided under advance notice bylaws typically ranges 
from 90 to 120 days before the anniversary of the meeting date.\215\
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    \214\ See WilmerHale M&A Report. An advance notice bylaw can 
generally be waived by a registrant's board of directors at their 
discretion, though we do not have data that would allow us to 
determine the frequency with which such bylaws are waived. If not 
waived, such bylaws may also be challenged in court (such as in the 
case of ``inequitable circumstances''). See, e.g., AB Value 
Partners, L.P. v. Kreisler Mfg. Corp., No. 10434-VCP, 2014 WL 
7150465 (Del Ch. Dec. 16, 2015).
    \215\ See S&C 2015 Report.
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    Among the 101 director election contests initiated in years 2017-
2020, approximately 90% of dissidents either publicly announced or 
communicated their intent to nominate directors to the registrant at 
least 60 days before the anniversary of the previous year's annual 
meeting date (or 60 days before the annual meeting date if the 
registrant did not hold an annual meeting during the previous year, or 
if the date of the meeting had changed by more than 30 calendar days 
from the previous year).\216\ Further statistics on the distribution of 
the timing for initial nomination communications and filing of 
preliminary proxy statements are shown in Table 2 below.
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    \216\ Based on information from Factset's SharkRepellent 
database and staff's analysis of EDGAR filings. When available, 
staff gathered information on the timing of dissidents' direct 
communications to registrants of their intent to nominate directors 
from the parties' proxy filings, which frequently list such 
information as part of the solicitation background descriptions. 
Such communications are not always immediately publicly disclosed.
    \217\ Id. For 37 of the 101 director contests initiated in 2017-
2020, the announcement and filing days are measured relative to the 
annual meeting date rather than the anniversary of the previous 
year's meeting date, because either the registrant did not hold an 
annual meeting during the previous year or the date of the meeting 
changed by more than 30 calendar days from the previous year.

    Table 2--Timing of Initiation of Election Contests and Filing of Preliminary Proxy Statements Relative to
                        Anniversary of Previous Year's Meeting Dates, in 2017-2020 \217\
----------------------------------------------------------------------------------------------------------------
                                                Percentage
                                    ---------------------------------
                                      At least   At least   At least     Mean      Median      Min        Max
                                      45 days    60 days    90 days
----------------------------------------------------------------------------------------------------------------
Days between first announcement or          93         90         65        108         93         16        377
 communication of election contest
 intent and anniversary of previous
 year's meeting date...............
Days between dissident filing               75         43         13         65         56          7        369
 preliminary proxy statement and
 anniversary of previous year's
 meeting date......................
----------------------------------------------------------------------------------------------------------------

    For the contests where dissidents ultimately file a definitive 
proxy statement (74 cases), approximately 80% of dissident definitive 
statements are filed at most 50 days before the anniversary of the 
previous year's annual meeting date (or 50 days before the annual 
meeting date if the registrant did not hold an annual meeting during 
the previous year, or if the date of the meeting had changed by more 
than 30 calendar days from the previous year).\218\ In addition, more 
than 82% of dissidents' definitive statements are filed 25 days or more 
before the actual annual meeting date.\219\
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    \218\ Based on data from Factset's SharkRepellent database and 
staff analysis of EDGAR filings.
    \219\ Id.
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    While dissidents in proxy contests are required to make their proxy 
statements publicly available via the EDGAR system, they are not 
currently subject to any requirements as to how many shareholders they 
must solicit. When dissidents actively solicit shareholders they have 
the choice of sending shareholders a full package of proxy materials 
(``full set'') or sending only a one-page notice informing them of the 
online availability of proxy materials (``notice and access'' or 
``notice-only''). We estimate that approximately 52% of dissidents 
solicited all shareholders in a sample of recent proxy contests.\220\ 
Furthermore, the dissidents in this sample of contests sent full sets 
of proxy materials to each of the shareholders solicited.\221\ The use 
of the full set delivery method may be driven by findings that such 
solicitations are associated with a higher rate of voting than notice-
only solicitations.\222\ Among those contests in which dissidents did 
not solicit all shareholders, the average (median) percentage of shares 
held by solicited shareholders was approximately 95% (96%) of the 
outstanding shares of the registrant eligible to vote, and the minimum 
(maximum) percentage of the outstanding shares eligible to vote held by 
solicited shareholders was approximately 83% (99.9%).\223\ The average 
(median) percentage of shareholder accounts solicited in these contests 
was approximately 20% (14%), and the minimum (maximum) percentage of 
accounts solicited was 1% (71%).\224\
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    \220\ Based on industry data provided by a proxy services 
provider for a sample of 31 proxy contests for annual meetings held 
between July 1, 2018 and June 30, 2019.
    \221\ Id.
    \222\ See, e.g., Broadridge, Analysis of Traditional and Notice 
& Access Issuers: Issuer Adoption, Distribution and Voting for 
Fiscal Year Ending June 30, 2013 (Oct. 2013), available at http://media.broadridge.com/documents/Broadridge-6-Yr-NA-Stats-Report-2013.pdf.
    \223\ Based on industry data provided by a proxy services 
provider for a sample of 31 proxy contests for annual meetings held 
between July 1, 2018 and June 30, 2019.
    \224\ Id.

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[[Page 68352]]

    In proxy contests, both registrants and dissidents incur direct 
costs of solicitation.\225\ These costs may include, for example, fees 
paid to proxy solicitors, expenditures for attorneys and public 
relations advisors, and printing and mailing costs. We understand that 
for registrants, the costs of solicitation in proxy contests generally 
exceed the solicitation costs associated with a shareholder meeting 
without a contested election. Both dissidents and registrants are 
required to provide estimates of the costs of solicitation in their 
proxy statements.\226\ As shown in Table 3 below, based on a review of 
proxy contests initiated in years 2017-2020, the median reported 
estimated total costs were approximately $1,650,000 for registrants and 
approximately $750,000 for dissidents.\227\
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    \225\ In some cases, dissidents may seek reimbursement of their 
expenses from registrants. Such potential reimbursement is governed 
by state law and is more likely in the case of a successful proxy 
contest. The proxy rules require dissidents to disclose whether 
reimbursement will be sought from the registrant, and, if so, 
whether the question of such reimbursement will be submitted to a 
vote of shareholders. See 17 CFR 240.14a-101, Item 4(b)(5).
    \226\ Registrants may, but do not have to, exclude from the 
total estimated solicitation costs the amount normally expended for 
a solicitation for an election of directors in the absence of a 
contest, and costs represented by salaries and wages of regular 
employees and officers, provided a statement to that effect is 
included in the proxy statement. It is our understanding that most 
registrants exclude such costs from their estimated total costs.
    \227\ This represents a substantial increase in median (and 
average) reported solicitation expenses for both registrants and 
dissidents compared to earlier years, as reported in the Proposing 
Release (see Section IV.B.2.b of the Proposing Release for data on 
estimated solicitation expenses in earlier years).
    \228\ Based on data from Factset's SharkRepellent database and 
staff analysis of EDGAR filings in calendar years 2017-2020.

     Table 3--Reported Estimates of Solicitation Expenses in Election Contests Initiated in 2017-2020 \228\
----------------------------------------------------------------------------------------------------------------
                                                       Mean           Median          Minimum         Maximum
----------------------------------------------------------------------------------------------------------------
Estimated Total Costs:
    Registrant..................................      $3,891,886      $1,650,000         $65,000     $35,000,000
    Dissident...................................       1,812,938         750,000          20,000      25,000,000
Estimated Fees Paid to Proxy Solicitor:
    Registrant..................................         540,486         300,000          10,000       3,500,000
    Dissident...................................         278,614         125,000          12,500       2,500,000
----------------------------------------------------------------------------------------------------------------

    Beyond these estimated solicitation expenses, proxy contests may be 
associated with other indirect costs, such as the cost of management or 
dissident time spent in the process of conducting the contest and 
expenses associated with any discussions held between management and 
the dissident(s) or other participants who could influence the outcome 
(e.g., large investors and proxy advisor firms). We do not have data on 
these indirect costs. One study that considers the cost of earlier as 
well as later stages of engagement between management and activist 
hedge fund dissidents, which eventually culminate in a proxy contest, 
estimates that a campaign ending in a proxy contest has a total (direct 
and indirect) average cost to the dissident of approximately $10 
million over the full period of engagement.\229\
---------------------------------------------------------------------------

    \229\ See Nickolay Gantchev, The Costs of Shareholder Activism: 
Evidence from a Sequential Decision Model, 107 J. Fin. Econ. 610, 
624 (2013).
---------------------------------------------------------------------------

    In addition to the typical proxy contests \230\ discussed above, on 
rare occasions, there have also been ``nominal contests,'' in which the 
dissidents incur little more than the basic required costs to pursue a 
contest. In particular, a dissident engaging in a nominal proxy contest 
would have to bear the cost of drafting a proxy statement and 
undergoing the staff review and comment process for that filing. 
However, a dissident in a nominal contest would not expend resources on 
substantial solicitation, such as to disseminate its proxy materials 
through full set delivery to a substantial percentage of shareholders 
versus only to select shareholders, to hire the services of a proxy 
solicitor, or to engage in other broad outreach efforts, as would be 
the case in a typical proxy contest. Based on staff experience in 
administering the proxy rules, nominal contests are very rare, and the 
staff is unaware of any nominal contest that has resulted in the 
dissident gaining seats for its nominees. We do not have data that is 
well-suited for empirically identifying nominal contests, in part 
because a contest is sometimes settled or withdrawn before the 
dissident has filed its definitive proxy statement and no estimates are 
included in the preliminary proxy statement.
---------------------------------------------------------------------------

    \230\ For ease of reference, we use ``typical proxy contests'' 
to refer to contested elections of directors other than the nominal 
contests described below.
---------------------------------------------------------------------------

c. Results of Proxy Contests
    A proxy contest may result in several possible outcomes. Our 
staff's review of 101 proxy contests initiated in 2017-2020 found that 
approximately 53% (54 cases) did not make it to a vote. In these cases, 
registrants may have settled by agreeing to nominate or appoint some 
number of the dissident's candidates to the board of directors or by 
making other concessions, the dissident may have chosen to withdraw in 
the absence of any concessions, or other events may have precluded a 
vote.\231\ Among the approximately 47% (47 cases) of proxy contests 
initiated in 2017-2020 that proceeded to a vote, dissidents were at 
least partially successful (i.e., achieved some board representation) 
in about 38% (18 cases) of these contests.\232\ In six voted contests 
where dissidents achieved board representation, only some of the 
nominees on the dissident's slate were elected to the board, which 
represents a ``split-ticket'' outcome in around 13% of the contests 
that went to a vote. In 17 of the voted contests where dissidents 
achieved board representation, the end result was a ``mixed board'' 
with directors elected from both slates, whereas the dissident's 
nominees were elected to fill all positions of the board in one 
contest. Between settlements and voted contests, dissidents achieved at 
least some board

[[Page 68353]]

representation in a bit more than half of the director election 
contests (53 out of 101), and achieved majority control in 
approximately 20% of contests.
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    \231\ This percentage of director election contests not 
proceeding to a vote is higher than the 33% that we found in the 
Proposing Release for a sample of 72 contests initiated in 2014 and 
2015. However, it is in line with what has been reported in previous 
research for contests prior to 2014. See, e.g., Vyacheslav Fos, The 
Disciplinary Effects of Proxy Contests, 63 Manag. Sci. 655 (2017) 
(``Fos study'') (finding that, for proxy contests including 
contested elections as well as a much smaller number of issue 
contests from 1994 to 2012, about 53% did not make it to a vote, 
where 25% were settled, 15% were withdrawn, 6% ended with a 
delisting or a takeover, and 7% did not make it to a vote for other 
reasons).
    \232\ The estimated percentage of voted director election 
contests that lead to dissident board representation is somewhat 
less than what has been found for contest samples from earlier 
years, where dissidents won board representation in about half of 
the cases that went to a vote at the annual meeting. See Section 
IV.B.2.c of the Proposing Release.
---------------------------------------------------------------------------

    Contests differ in the closeness of voting outcomes. The staff has 
analyzed the difference in votes between the elected director with the 
lowest number of votes and the nominee who came closest to being 
elected. Out of the 47 contests initiated in 2017-2020 that proceeded 
to a vote, registrants disclosed full voting results in Form 8-K 
filings in 41 contests. In these contests, the median director elected 
with the fewest votes received 73% more votes than the nominee with the 
next highest number of votes. The median difference in votes received 
between the director elected with the fewest votes and the nominee with 
the next highest number of votes as a percentage of total outstanding 
votes was approximately 19%, and around 24% of the contests (10 out of 
41) had a difference in votes received as a percentage of outstanding 
votes of 5% or less. In the contests where the difference in votes 
received was 5% or less of total outstanding votes, the elected 
director who received the fewest votes received no more than 13% more 
votes than the non-elected nominee who received the greatest votes. For 
the purpose of our analysis below, we define ``close contests'' as 
those where the difference in votes received between the director 
elected with the fewest votes and the nominee with the next highest 
number of votes is 5% or less of total outstanding votes, because in 
such contests a relatively small number of shareholders could have been 
determinative of the outcome.
    We are unaware of any nominal contest that has resulted in the 
dissident gaining seats for their nominees. Dissidents may nevertheless 
choose to initiate nominal contests to pursue goals other than changes 
in board composition, such as to publicize a particular issue or to 
encourage management to engage with the dissident. However, we do not 
have data that would allow us to measure success along those other 
dimensions.
d. Split-Ticket Voting
    Shareholders have the option of voting a split ticket but can do so 
only by attending the shareholder meeting in person and voting their 
shares at that meeting. In practice, however, in-person meeting 
attendance may be limited due to cost and other logistical 
constraints,\233\ which may be especially likely for small shareholders 
and retail investors. We understand that in certain elections, the 
parties to the contest and their agents (e.g., proxy solicitors) will 
help some shareholders ``split their ticket'' by arranging for an in-
person representative to vote these shareholders' shares at the meeting 
on the ballots used for in-person voting. We do not have data on the 
number or characteristics of shareholders that are arranging to vote a 
split ticket through current practices, but our understanding is that 
these practices are available only to relatively large shareholders.
---------------------------------------------------------------------------

    \233\ See, e.g., letter from the Council of Institutional 
Investors dated Jan. 8, 2014, available at https://www.sec.gov/rules/petitions/2014/petn4-672.pdf (describing in-person attendance 
as ``generally an expensive and impractical proposition''). See also 
letter from CII dated Dec. 28, 2016; letter from Fidelity; letter 
dated Dec. 23, 2016 from Hermes (``Hermes''); letter from Trian. The 
burden of attending a meeting for the purpose of voting a split 
ticket may be significantly lower in the case of a virtual 
shareholder meeting but such online meetings are still relatively 
rare.
    \234\ See Francois Brochet, Roman Chychyla & Fabrizio Ferri, 
Virtual Shareholder Meetings, European Corporate Governance 
Institute--Finance Working Paper No. 777/2021, at 10 (July 1, 2021), 
available at https://ssrn.com/abstract=3743064 (retrieved from SSRN 
Elsevier database) or http://dx.doi.org/10.2139/ssrn.3743064.
---------------------------------------------------------------------------

    We recognize that the monetary costs and other burdens of attending 
a meeting in person will likely be lower to shareholders if the meeting 
is held virtually, because the time and expenses associated with 
travelling to the meeting would be eliminated. However, there may still 
be time or other resource constraints that would affect a shareholder's 
ability to attend a virtual meeting. Before the COVID-19 pandemic, 
fully virtual or hybrid annual meetings were a small fraction of annual 
meetings, but growing steadily. For example, one recent study of 
shareholder meetings by U.S. registrants found that virtual or hybrid 
shareholder meetings grew from 20 in 2011 to 285 in 2019, with about 60 
to 70 new companies adopting meetings with a virtual component each 
year after 2015.\234\ The arrival of the COVID-19 pandemic in the 
United States in March 2020 caused many registrants to switch to a 
virtual format for their shareholder meetings, and one study found that 
more than 2,300 annual meetings were held virtually in 2020. Based on 
1,957 virtual meetings hosted by one proxy services provider in 2020, 
the average number of shareholders voting at virtual meetings (rather 
than voting in advance by proxy), held in 2020 was 13 shareholders for 
meetings with shareholder proposals (218 cases) and 2 shareholders for 
meetings without shareholder proposals.\235\ Thus, in-person voting 
appears to have been rare also in virtual meetings, suggesting 
shareholder still have a strong preference for voting by proxy, or face 
barriers to attending and voting at the meeting, even when meetings are 
held virtually. It is our understanding that virtual meetings are still 
in widespread use this year (2021) as we are still in the COVID-19 
pandemic. It remains to be seen to what extent registrants that were 
forced to switch to virtual meetings during the current pandemic will 
continue to hold virtual meetings going forward. Moreover, among the 
101 proxy contests initiated from 2017-2020, staff analysis found that 
only 13 annual meetings were held virtually, and all of those were held 
after March 2020 (making up approximately 59% of the meetings in the 
sample that were held after March 2020).
---------------------------------------------------------------------------

    \235\ See Broadridge, Virtual Shareholder Meetings 2020 Facts 
and Figures (April 2021), available at https://www.broadridge.com/_assets/pdf/vsm-facts-and-figures-2020-brochure-april-2021.pdf.
---------------------------------------------------------------------------

    For shareholders that do not have ready access to other 
arrangements, the decision of whether or not to attend a meeting or 
seek other arrangements for splitting their ticket is likely to depend 
on having the ability and resources to do so, as well as having the 
incentive to incur the associated costs. To the extent an individual 
investor believes vote splitting is beneficial, the larger its 
ownership stake is, the greater the financial incentives to incur the 
current costs of arranging a split-ticket vote. However, beyond the 
direct financial incentives from a larger ownership stake, a large 
investor also has a voting impact commensurate with that stake, which 
increases the likelihood that its votes are determinative. This in 
turn, increases the large investor's incentives to arrange for vote 
splitting when deemed beneficial. We believe institutions are more 
likely than retail shareholders to have both the resources and the 
incentives to currently vote a split ticket (if they have the 
preference to do so).
    Because the incentive to arrange a split-ticket vote when such a 
vote is preferred is dependent on having both a sizable financial 
stake, in dollar terms, as well as significant voting influence, in 
percentage terms, we consider the distribution of both of these factors 
for institutional shareholders. We use data from Form 13F filings to 
estimate these distributions, which limits us to considering 
institutions required to report their holdings on Form 13F.\236\

[[Page 68354]]

Moreover, we only consider shares over which these institutions have 
voting authority in contested director elections. We do not have 
comparable data for other institutional shareholders or for retail 
shareholders.
---------------------------------------------------------------------------

    \236\ Non-exempt institutional investment managers that exercise 
investment discretion over $100 million or more in Section 13(f) 
securities are required to report their holdings on Form 13F with 
the Commission.
---------------------------------------------------------------------------

    We first consider the potential incentive to arrange split-ticket 
vote based on voting influence, as measured by fraction ownership of 
voting shares. Figure 1 shows the average percentage, across 
registrants, of the total outstanding shares held by Form 13F filers 
that each meet a given minimum threshold of ownership of voting shares. 
The average percentage of the total outstanding shares is calculated 
across all registrants within different size categories. As in previous 
analyses, registrant size is approximated by reference to the S&P 
index. The data suggest that there is currently a substantial portion 
of outstanding shares for which institutional holders may have enough 
individual voting influence to incentivize them to arrange split-ticket 
voting if preferred. For example, if we consider average total 
ownership by Form 13F filers that are larger block holders 
(individually owning 5% or more of shares) and therefore are likely to 
be pivotal voters, the average percentage of the total outstanding 
shares held by these institutions is approximately 14% for non-S&P 1500 
registrants, 21% for S&P 600 registrants, 16% for S&P 400 registrants, 
and 11% for S&P 500 registrants. The large difference in ownership 
between S&P 600 and non-S&P 1500 registrants, despite both groups being 
relatively small registrants, is due to a smaller number of 
institutions holding stock (of any amount) in the non-S&P 1500 
registrants. Figure 1 also shows the average total ownership of shares 
held by Form 13F filers meeting lower minimum thresholds of ownership 
of voting shares (0.5%, 1.0%, and 2.5% respectively), in case ownership 
less than 5% may provide sufficient voting influence to incentivize an 
institution to arrange split-ticket voting. Because we are only 
considering ownership by institutions required to report their holdings 
on Form 13F, there may be additional owners with incentives to arrange 
split-ticket voting (for any given minimum ownership threshold) that 
are not captured in the data presented in Figure 1.
[GRAPHIC] [TIFF OMITTED] TR01DE21.005

    Even a large voting stake in a company may not currently be enough 
to incentivize a shareholder to incur the costs of attending the annual 
meeting to vote a split ticket if the investment is low in dollar 
terms. Therefore we also consider the combined voting power by 
institutions filing Form 13F that individually have a substantial 
dollar investment in a registrant. In particular, Figure 2 shows the 
average percentage, across registrants, of the total outstanding shares 
held by Form 13F filers that each meet a given threshold of minimum 
dollar stake in the registrant. For example, for Form 13F filers that 
hold stock worth $1 million or more in a given registrant, the average 
percentage of the total outstanding shares held by these institutions 
is above 50% for all registrants belonging to one of the S&P 1500 
component indexes. By contrast, the corresponding average percentage of 
outstanding shares held among non-S&P 1500

[[Page 68355]]

registrants is approximately 31%. If we instead consider only Form 13F 
filers that each hold stock worth $10 million or more, the average 
percentage of outstanding shares held by these institutions is 47% for 
S&P 500 registrants, 47% for S&P 400 registrants, 38% for S&P 600 
registrants, and 19% for non-S&P 1500 registrants. Overall, the 
estimates in Figure 2 suggest that a substantial portion of voting 
shares in registrants are held by institutions that have a significant 
financial interest. This is particularly so for relatively larger 
registrants.
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    \237\ The estimates in the figure are based on staff analysis of 
Form 13F filings related to potentially affected registrants from 
the first quarter of 2020 in the Thomson Reuters Form 13F database, 
which is the most recent time period we had access to for this 
analysis. The analysis reflects only holdings for which institutions 
have voting authority in contested director elections.
[GRAPHIC] [TIFF OMITTED] TR01DE21.006

3. Other Methods To Seek Change in Board Representation
---------------------------------------------------------------------------

    \238\ Id. Financial interest is estimated as the market value of 
all shares held by the individual institution in a specific 
registrant. For the average percentage of outstanding shares, we 
only considered holdings for which institutions had voting authority 
in contested director elections.
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    As discussed in more detail in the Proposing Release,\239\ beyond 
proxy contests culminating at annual meetings, we note that under the 
baseline, there are a number of other methods shareholders currently 
can use to potentially affect changes to the composition of a board of 
directors. Such shareholder interventions could be in the form of (i) 
making recommendations for director candidates directly to the 
nominating committee of the board,\240\ (ii) pursuing consent 
solicitations,\241\ (iii) pursuing exempt solicitations at the annual 
meeting, (iv) taking advantage of proxy access provisions in corporate 
bylaws to nominate a limited number of director candidates for 
inclusion in the registrant's proxy statement, (v) withholding votes 
from (or voting against) directors in uncontested elections as well as 
waging formal ``vote no'' campaigns to encourage other shareholders to 
do so, or (vi) seeking a change in board composition by making 
nominations from the floor of a meeting, without soliciting proxies.
---------------------------------------------------------------------------

    \239\ See Section IV.B.3 of the Proposing Release.
    \240\ See letter from NACD (stating that ``NACD actively 
encourages such shareholder participation on director nomination. 
Indeed, contested elections will likely become less common as boards 
continue to improve their work in creating optimal boards and in 
communicating their methods for achieving them.'').
    \241\ Consent solicitations may take the form of a two-step 
procedure where a dissident first obtains sufficient support from 
shareholders to call a special meeting or sufficient voting 
ownership to call a special meeting, and then puts to a vote, either 
by proxy or in person at the special meeting, a proposal to remove 
certain directors and elect certain other nominees. The criteria for 
how and when a special meeting can be called vary both by state law 
and corporate bylaws and governing documents (e.g., certificate of 
incorporation). Depending on state law and governing documents, a 
dissident may alternatively be able to perform a consent 
solicitation in one step, in which it seeks support for a proposal 
to remove certain directors and elect certain other nominees purely 
through written consent by shareholders.
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C. Discussion of Economic Effects

    The economic benefits and costs of the final amendments, including 
impacts on efficiency, competition, and capital formation, are 
discussed below. We first address the effects of the changes to the 
proxy process together as a package, including both benefits and costs. 
In particular, we discuss the anticipated effects of the final 
amendments on shareholder voting and then consider anticipated effects 
with respect to the costs, outcomes, incidence, and perceived threat of 
contested elections at affected registrants. We then discuss the 
economic effects that can be attributed to specific implementation 
choices in the final amendments, to the extent possible, and the 
relative benefits and costs of the principal reasonable

[[Page 68356]]

alternatives to these implementation choices.
    Our economic analysis of the final amendments reflects our 
consideration of a number of broad issues related to corporate 
governance and the proxy system. First, the design of the voting 
process, as a primary mechanism through which shareholders provide 
input into the composition of boards, can affect the ability of 
shareholders to exercise one of their most fundamental rights--to 
select and hold accountable the fiduciaries responsible for overseeing 
their investments. Second, it is difficult to predict how the various 
parties involved in contested elections are likely to respond to any 
changes to the proxy process, complicating the evaluation of whether 
such changes would enhance or detract from board effectiveness and 
registrants' efficiency and competitiveness. Third, corporate 
governance involves a number of closely interrelated mechanisms, so any 
effects on contested elections may be either mitigated or magnified by 
changes in the use or effectiveness of other mechanisms. These issues 
are discussed in more detail in the Proposing Release and provide 
context for the discussion of potential economic effects that 
follows.\242\
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    \242\ See Section IV.C in the Proposing Release.
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1. Effects on Shareholder Voting
    By mandating the use of a universal proxy in contested elections, 
the final amendments will allow all shareholders to vote through the 
proxy system for the combination of director nominees of their choice, 
as they will no longer be limited to voting for only nominees chosen by 
the registrant or for only nominees chosen by the dissident.\243\ In 
addition, the ability to vote for dissident nominees by proxy would no 
longer be limited to shareholders solicited by the dissident because 
any shareholders not solicited by the dissident would still be able to 
vote for those nominees using the registrant's proxy card.\244\ This 
change is expected to increase the efficiency with which shareholders 
vote in contested elections. In particular, universal proxies will 
result in benefits in the form of cost savings for shareholders who 
would otherwise expend time and resources to attend a shareholder 
meeting in person or otherwise arrange to vote for a combination of 
candidates that could not be voted for by proxy. Other shareholders may 
be newly able to vote for their most preferred candidates. That is, 
there may be shareholders who would vote for a combination of 
management and dissident candidates if a universal proxy were available 
but who do not currently do so because it is not feasible (and in 
particular cost-effective) to undertake such a vote. In the Proposing 
Release, we discussed in more detail the current cost or inability for 
investors to vote for their preferred mix of director candidates from 
both slates of nominees, as well as investors' express demand for 
split-ticket voting.\245\
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    \243\ Nominees ``chosen'' by the dissident may include certain 
registrant nominees. The short slate rule permits a dissident in 
certain circumstances to solicit votes for some of the registrant's 
nominees through the use of its proxy card where the dissident is 
not nominating enough director candidates to gain majority control 
of the board in the contest, thereby allowing shareholders using the 
dissident's proxy card to split their vote. However, shareholders 
voting on the dissident's proxy card would still be limited to 
voting for those registrant nominees selected by the dissident, 
rather than any registrant nominee of their choice.
    \244\ For shareholders not solicited by the dissident, while the 
registrant's universal proxy card would allow them to support 
dissident nominees, they would still need to seek out the 
dissident's proxy statement in the EDGAR system (as directed by the 
registrant's proxy statement) to obtain information about the 
dissident nominees.
    \245\ See Section IV.D.1.a in the Proposing Release.
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    Several commenters expressed general support for the use of 
universal proxy to enable split-ticket voting, arguing that split-
ticket voting is currently either too costly or outright impossible to 
achieve for most shareholders given currently available 
approaches.\246\ By contrast, one commenter argued against the mandated 
use of universal proxy and claimed that there already exist less costly 
``work arounds'' for investors who want to be able to choose candidates 
from both slates without voting in person.\247\ We acknowledge ``work 
arounds'' exist, but as discussed above, such approaches may still be 
too costly or are not generally available to all shareholders who wish 
to split their ticket, whereas mandated use of universal proxy will 
ensure all shareholders--regardless of time, resources, sophistication, 
or ability to use other approaches--have access to a comparatively low-
cost alternative for split-ticket voting.
---------------------------------------------------------------------------

    \246\ See, e.g., letters from CII dated Dec. 28, 2016; Fidelity; 
Hermes; Trian.
    \247\ See letter from Society dated Jan. 10, 2017.
---------------------------------------------------------------------------

    As described in Section IV.B.2.d, the increased use of virtual 
meetings can reduce the cost for shareholders to vote a split-ticket at 
the annual meeting by eliminating the time and expenses associated with 
travelling to physically attend the meeting. However it is unclear how 
widespread the use of virtual meetings will be after the current COVID-
19 pandemic is over, especially for meetings with contested director 
elections. Despite the lower cost of attending virtual meetings, voting 
by proxy card is likely to be less time-consuming and gives 
shareholders the flexibility to fill out the card with their votes at a 
time of their choosing, compared to having to attend a virtual meeting 
at one specific point in time. Supporting this, the evidence on 
shareholder attendance and voting at virtual meetings show that a vast 
majority of shareholders rely on the proxy process to vote even when 
the meeting is held virtually.\248\
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    \248\ See supra note 235 and accompanying text.
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    For reasons discussed in more detail in the Proposing Release, we 
expect that institutional shareholders and large shareholders are 
relatively more likely than other shareholders to implement a split-
ticket vote under current rules, and therefore will experience cost 
savings by being able to do so more easily via the proxy process under 
the final amendments adopted in this document.\249\
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    \249\ See Section IV.D.1.a of the Proposing Release. See supra 
Section IV.B.1.a and IV.B.1.d for updated data on shareholders, 
including ownership statistics.
---------------------------------------------------------------------------

    As discussed in more detail in the Proposing Release, the 
availability of universal proxies would also expand the voting 
alternatives of shareholders, such as retail shareholders or other 
small shareholders, for whom it would not otherwise be practical or 
feasible to vote for their preferred combination of candidates.\250\ To 
the extent that such shareholders are interested in splitting their 
ticket, the availability of universal proxies may result in a greater 
number of split-ticket votes than under the current system.
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    \250\ One commenter particularly highlighted increased access to 
split-ticket voting for retail investors and other small 
shareholders as a benefit of mandating the use of universal proxy; 
see letter from CII dated Sep. 7, 2017 (stating that ``Importantly, 
requiring a universal proxy would benefit retail investors and 
institutional investors with relatively smaller positions by 
allowing them to choose among all board nominees without attending 
the shareholder meeting, which can involve travel and other costs 
that may be prohibitive.'').
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    In addition, because dissidents currently are not required to 
solicit all shareholders, we observe that, in a substantial fraction of 
proxy contests, many shareholders do not receive the dissident's proxy 
card and thus cannot vote by proxy for dissident candidates.\251\ The 
requirement in the

[[Page 68357]]

final amendments that registrants, as well as dissidents, use universal 
proxies will allow shareholders who are not solicited by dissidents to 
nonetheless vote for some or all of the dissident nominees through the 
proxy process, by using the registrant's universal proxy card.
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    \251\ Based on industry data provided by a proxy services 
provider for a sample of proxy contests from July 1, 2018 through 
June 30, 2019, we estimate that there are some shareholders that 
dissidents do not solicit in approximately 48% of contested 
elections, while dissidents in the remainder of contested elections 
solicit all shareholders. In contests in which fewer than all 
shareholders were solicited, only those accounts holding a number of 
shares of the registrant that exceeded a minimum threshold of shares 
were subject to solicitation by the dissident.
---------------------------------------------------------------------------

    Thus, by providing for a universal proxy card, the final amendments 
will allow all shareholders to vote for their preferred candidates. We 
expect that retail and small shareholders are more likely than other 
shareholders to vote differently under a universal proxy system than 
under the current system because they currently have limited access to 
other means of voting a split-ticket and a lower likelihood of being 
solicited by dissidents. However, we also note that such shareholders 
may be less likely to vote in general.\252\ For these shareholders, the 
final amendments are not likely to result in direct cost savings, but 
will allow them to submit votes that better reflect their preferences. 
The indirect benefits or costs of their expanded voting options depend 
on whether such changes in voting behavior are widespread enough to 
change actual or expected election outcomes, and the nature of these 
changes in outcomes, as discussed below.\253\
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    \252\ Retail shareholders vote 28% of their shares on average, 
though their participation rate could be higher in the case of a 
contested election, because of factors such as increased media 
coverage, expanded outreach efforts, and greater shareholder 
interest in the contest. See supra Section IV.B.1.a.
    \253\ See infra Sections IV.C.3 and IV.C.4.
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    There is also a possibility that universal proxies could lead some 
shareholders to be confused about their voting options and how to 
properly mark the proxy cards to accurately reflect their choices, as 
noted by some commenters.\254\ This may give rise to minor costs to 
some shareholders in contested elections, if it increases the time 
required by these shareholders to mark and submit a proxy card. It may 
also increase the risk that some shareholders submit proxy cards that 
do not accurately reflect their intentions or that could be invalidated 
because they are improperly marked. However, we believe that the risk 
of any such confusion will be mitigated by the presentation and 
formatting requirements of the final amendments, as discussed in 
Section IV.C.5.b below.
---------------------------------------------------------------------------

    \254\ See, e.g., letters from BR; Broadridge Financial 
Solutions, Inc.; Society.
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    Finally, to the extent shareholders currently erroneously believe 
they can vote for a mix of nominees from the competing slates by using 
both the registrant's and the dissident's card, universal proxies are 
likely to mitigate any such behavior among shareholders.
2. Potential Effects on Costs of Contested Elections
    The final amendments may directly impose minor costs on registrants 
\255\ and dissidents that engage in proxy contests, relative to the 
current costs that these parties bear in proxy contests.\256\ The final 
amendments may also have effects on the expected outcomes of contested 
elections that could result in either a net increase or net decrease in 
the total costs that either registrants or dissidents incur in 
contested elections, primarily because of strategic changes in 
discretionary solicitation expenditures. The extent and direction of 
such indirect changes in costs incurred are difficult to predict. We 
also consider the amendments' cost implications in the context of 
nominal contests, in which the dissidents incur little more than the 
basic required costs to pursue a contest, which are currently rare but 
could become more or less frequent under the final amendments.
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    \255\ Note that costs on registrants are borne by the 
registrants' investors.
    \256\ The potential direct cost savings resulting from the final 
amendments for certain shareholders are discussed in Section IV.C.1 
supra.
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a. Typical Proxy Contests
    The total cost borne by a registrant or dissident in a typical 
proxy contest would generally include solicitation costs, such as basic 
proxy distribution and postage costs, expenditures on proxy solicitors, 
attorneys and public relations advisors, and any time spent by the 
parties or their staff on outreach efforts. The total cost to 
registrants would also reflect items such as any additional time spent 
by staff on determining and implementing a strategy in response to the 
contest and any costs of revising their proxy materials given the proxy 
contest. The total cost to dissidents would also reflect time spent by 
the dissident to pursue a contest, the cost to seek nominees and gain 
their consent to be nominated, and the cost of drafting a preliminary 
and definitive proxy statement and undergoing the staff's review and 
comment process for those filings. These total costs are difficult to 
estimate because the components of these costs (other than estimated 
solicitation expenditures) are not specifically required to be 
disclosed and may vary significantly across contests. However, we note 
that many of the components of these costs are not likely to be 
affected by the final amendments. In much of the discussion that 
follows, we focus primarily on solicitation costs because we believe 
that these costs are most likely to be affected by the final 
amendments.
    We first consider the direct cost implications of the final 
amendments. As discussed in more detail in the Proposing Release,\257\ 
we do not expect the solicitation requirement to impose a large 
incremental cost burden on dissidents in typical proxy contests in 
which the dissident engages in substantial solicitation efforts. We 
continue to expect this even though the final rule, in a modification 
of the proposed rule, raises the solicitation threshold from a majority 
of the voting power to 67% of the voting power. Our continued 
expectation is based on staff analysis of data that show most 
dissidents in director election contests currently solicit at least 67% 
of the voting power even in the absence of any solicitation 
requirement.\258\ Therefore, in the vast majority of cases, we expect 
dissidents that would have engaged in proxy contests even in the 
absence of the final amendments not to bear any incremental direct 
costs due to the solicitation requirement. Similarly, for dissidents 
that newly decide to engage in a typical proxy contest (as opposed to a 
nominal contest) as a result of the final amendments, we do not expect 
the solicitation requirement to change the costs that they would expect 
to bear relative to the costs of any other typical proxy contest.\259\
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    \257\ See Section IV.D.2.a of the Proposing Release.
    \258\ In particular, as noted above, all dissidents solicited a 
number of shareholders that exceeded the 67% threshold of shares 
entitled to vote in a sample of 31 recent proxy contests. See supra 
notes 220 and 223 and accompanying text. In addition, data provided 
by a proxy services provider for an earlier sample of 35 proxy 
contests from June 30, 2015 through April 15, 2016, which we used in 
the economic analysis in the Proposing Release, show that only two 
dissidents (around 6% of this sample) solicited less than 67% of the 
shares entitled to vote in elections.
    \259\ The median total solicitation cost was approximately 
$750,000 for dissidents initiating contests in years 2017-2020. See 
supra Section IV.B.2.b.
---------------------------------------------------------------------------

    In the infrequent cases in which dissidents in a typical proxy 
contest may currently not solicit shareholders holding 67% of the 
voting power, dissidents are still likely to solicit shareholders 
holding a significant proportion of these shares to have a chance of 
winning any board seats.\260\ In addition, the number of accounts 
required to reach the minimum

[[Page 68358]]

solicitation requirement in typical contests is generally a small 
fraction of the total accounts outstanding. For example, within a 
sample of recent proxy contests, we estimate the number of accounts 
that one would have had to solicit to meet the 67% minimum solicitation 
requirement ranges from about 0.1% to 13% of the outstanding 
shareholder accounts, with the median number of accounts required 
equaling about 1.4% of the total shareholder accounts.\261\ Based on 
our sample, we expect that the incremental cost to a dissident 
currently soliciting less than the required 67% of the voting power 
will be minor relative to the total costs incurred by dissidents in 
typical proxy contests. However, because of the increase in the minimum 
solicitation requirement compared to the proposal, any such incremental 
costs will be larger under the final amendments compared to what they 
would have been under the proposed majority of the voting power 
requirement.
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    \260\ Based on data provided by a proxy services provider for a 
sample of 35 proxy contests from June 30, 2015 through April 15, 
2016, the two dissidents that solicited less than 67% of shares 
entitled to vote solicited accounts representing 31.5% and 60% of 
the shares, respectively.
    \261\ Based on industry data provided by a proxy services 
provider for a sample of 31 proxy contests from July 1, 2018 through 
June 30, 2019.
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    Specifically, in the infrequent case in which a dissident would 
otherwise have solicited shareholders representing a substantial 
fraction, but not 67%, of the voting power, we estimate that such a 
dissident would bear an incremental cost of approximately $5,400, if 
using the least expensive approach,\262\ to expand solicitation to meet 
the minimum 67% solicitation requirement.\263\ This estimated 
incremental cost is larger than the $1,000 incremental cost we 
estimated in the Proposing Release for dissidents not meeting the 
proposed majority solicitation requirement. However, it is still minor 
compared to the median total solicitation expenses estimated for 
dissidents in director election contests, representing less than one 
percent of the median total solicitation cost reported in recent proxy 
statements by dissidents (which may include expenditures for proxy 
solicitors, attorneys, and public relations advisors as well as the 
more basic proxy distribution fees and postage costs).\264\ The level 
of any such incremental cost will be driven by any shortfall in the 
number of shareholders that would otherwise be solicited compared to 
the number that will be required to be solicited to meet the 67% voting 
threshold. Factors that may affect this shortfall include the size of 
the dissident's own voting stake in the registrant and the demographics 
of the shareholder base, such as whether share ownership is widely 
dispersed or more concentrated in a given registrant.
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    \262\ As in the Proposing Release, staff assumed that the 
dissident would use the least expensive approach (i.e., notice and 
access delivery) to solicit additional accounts given that the 
dissident would not have chosen to solicit these accounts but for 
the proposed minimum solicitation requirement. To the extent that 
dissidents were to use an approach other than the least expensive 
approach to solicit additional shareholders to meet this 
requirement, their incremental costs would likely be higher than 
estimated here. Such approaches may include using full set rather 
than notice and access delivery, soliciting more than the minimum 
required number of shareholders, or incurring additional 
solicitation expenditures on phone calls or other forms of outreach. 
It is difficult to estimate how much more these approaches would 
cost than the least expensive approach because of the variety of 
approaches that could be used and because of the degree of variation 
in expenses, such as postage and printing costs, that would depend 
on the total size of the dissident's proxy materials.
    \263\ This estimate was derived by the staff based on the NYSE 
Rule 451 fee schedule and industry data provided by a proxy services 
provider. In particular, staff based this estimate on the two cases 
out of the 35 contests from June 30, 2015 through April 15, 2016 for 
which information was provided in which less than 67% of the shares 
eligible to vote were solicited by the dissident. The required 
increase in expenses to solicit 67% of the shares eligible to vote 
was estimated based on the number of additional accounts that would 
have to be solicited and the applicable fees under NYSE Rule 451 and 
postage costs for notice and access delivery. The staff also used 
the provided data on the proxy contests to estimate the increase in 
the number of banks or brokers considered ``nominees'' under NYSE 
Rule 451 that might be involved at the higher solicitation level. 
The estimated average incremental solicitation cost of approximately 
$5,400 includes nominee coordination fees of $22 for each of the 
additional nominees expected to be involved, plus basic processing 
fees, notice and access fees, preference management fees, and 
postage totaling $1.57 (for suppressed accounts, such as those that 
have affirmatively consented to electronic delivery) to $1.80 (for 
other accounts) per additional account to be solicited. Staff 
assumed that half of the additional accounts to be solicited are 
suppressed and that none of these accounts requested full set 
delivery by prior consent or upon receipt of the notice (because 
such delivery requirements may apply to only a small fraction of 
accounts and are not expected to significantly affect the overall 
estimate of costs). Additional notice and access fees of $0.25 per 
account were assumed to be required for each account that was 
solicited prior to increasing the level of solicitation because of 
the use of notice and access delivery for some accounts. Given the 
number of accounts involved, no additional intermediary unit fees 
were expected to apply. This estimate does not include printing 
costs for the notice, for which we do not have relevant data to make 
an estimate.
    \264\ The median total solicitation cost reported in proxy 
statements by dissidents in proxy contests in years 2017-2020 is 
approximately $750,000. See supra Section IV.B.2.b.
---------------------------------------------------------------------------

    It is possible dissidents in future typical contests could target 
companies more similar to the general population of registrants rather 
than the type of target companies we have observed in recent contests. 
Based on aggregated data provided by a proxy services provider for more 
than 5,000 operating companies holding shareholder meetings from July 
1, 2018 through June 30, 2019, we have information on the average 
distribution of shares by account size within four different size (in 
terms of market capitalization) categories of registrants. Using this 
data, we estimate that in the broader population of operating 
companies, the average fraction of accounts needed to be solicited to 
meet the minimum requirement ranges from approximately 0.2% for 
companies with more than $10 billion in market capitalization to 
approximately 1% for companies with less than $300 million in market 
capitalization. These estimated fractions fall within the range of the 
observed solicited fractions of accounts in the sample of recent proxy 
contests, which further supports our expectation that the solicitation 
requirement is unlikely to impose a large incremental cost burden on 
dissidents in typical proxy contests in which the dissident engages in 
substantial solicitation efforts.
    Registrants may also incur minor incremental costs in typical proxy 
contests as a direct result of the final amendments to implement the 
required changes to their proxy cards. For example, under the final 
amendments, registrants must list dissident nominees on their proxy 
cards and provide disclosure about the consequences of voting for a 
greater or lesser number of nominees than available director positions. 
In addition, both registrants and dissidents may incur costs to make 
additional changes to their proxy statements in reaction to the final 
amendments, such as additional disclosures urging shareholders not to 
support their opponent's candidates using their card and expressing 
their views as to the importance of a unified or a mixed board. These 
costs are expected to be minimal in comparison to the total costs that 
registrants and dissidents bear in a typical proxy contest.\265\
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    \265\ See infra Section V for estimates for purposes of the 
Paperwork Reduction Act of 1995 of the incremental burden that may 
be required to prepare proxy materials under the final amendments.
---------------------------------------------------------------------------

    We next consider indirect effects of the final amendments on the 
costs of proxy contests. As noted in the Proposing Release, for both 
registrants and dissidents in typical proxy contests, other effects of 
the final amendments have the potential to result in more significant 
changes in costs than the effects related to revising proxy materials 
or the solicitation requirement. This is because the greatest potential 
impact on the cost of proxy contests is likely related to strategic 
increases or decreases in discretionary solicitation efforts in 
response to any changes that the final amendments may bring about in 
the (actual or perceived)

[[Page 68359]]

likelihood of the different potential outcomes of the contest. Changes 
in discretionary solicitation efforts may include increases or 
decreases in expenditures on proxy solicitors or the degree of outreach 
through phone calls or mailings to convince shareholders to vote for a 
party's candidates. In particular, while we estimate that the median 
total solicitation cost for dissidents was approximately $750,000, we 
estimate that the median basic cost of soliciting shareholders, namely 
the proxy distribution fees and postage costs for the first mailing, 
was approximately $14,000.\266\ The large expenditures on solicitation 
beyond the basic costs of soliciting shareholders (an estimated median 
incremental expenditure of over $736,000), demonstrate the potential 
for substantial increases or decreases in costs if a party were to 
change its approach to discretionary solicitation activities. However, 
it is difficult to predict the extent or direction of this potential 
effect because any changes in discretionary solicitation expenditures 
are highly dependent on the particular situation and the parties' own 
views as to how the final amendments would affect their likelihood of 
gaining or retaining seats and the potential impact of solicitation 
efforts.\267\
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    \266\ Our estimate of total solicitation costs is based on costs 
reported in proxy statements in calendar years 2017-2020. See supra 
Section IV.B.2.b. Our estimate of proxy distribution fees and 
postage costs is based on industry data provided by a proxy services 
provider for a sample of 31 proxy contests from July 1, 2018 through 
June 30, 2019, and excludes dissident printing costs (for which we 
do not have relevant data to make an estimate).
    \267\ Effects on strategic discretionary expenditures, whether 
increases or decreases, are more likely in the case of what would 
otherwise be close contests. We estimate that approximately 24% of 
proxy contests that went to a vote in 2017-2020 were close contests, 
as defined in supra Section IV.B.2.c.
---------------------------------------------------------------------------

    For example, registrants that expect that a universal proxy may 
otherwise result in more dissident nominees being elected may incur 
additional costs to increase outreach to shareholders in an effort to 
limit support for dissident nominees. Similarly, dissidents may 
increase solicitation expenditures in cases in which they expect the 
use of universal proxies and any corresponding increase in split-ticket 
voting to result in more registrant nominees retaining seats than 
otherwise expected. At the same time, registrants or dissidents may 
reduce solicitation expenditures in cases in which they believe that 
any increased split-ticket voting related to universal proxies would 
result on average in more support for their own nominees, given that 
they may therefore be able to achieve the same expected outcome at a 
lower cost than in the absence of universal proxies.\268\ They may also 
reduce their expenditure if the use of universal proxies is more likely 
to lead to a less consequential outcome (for example, an expected 
mixed-board outcome instead of an expected change in majority control), 
or if the expenditure were less likely to change that outcome than 
under the current rules.
---------------------------------------------------------------------------

    \268\ That said, such registrants or dissidents could 
alternatively decide to increase solicitation expenditures relative 
to what they would otherwise have spent if they think that they may 
actually be able to gain or retain more seats than would otherwise 
have been feasible.
---------------------------------------------------------------------------

    Supporting the possibility of no change in discretionary expenses 
at all, one commenter expressed doubt that dissidents or registrants 
will materially alter solicitation expenditures under the amendments, 
with the argument that proxy fights already put a premium on each side 
getting its message out to investors and that letting shareholders vote 
by proxy for their preferred mix of candidates will not alter this 
equation.\269\
---------------------------------------------------------------------------

    \269\ See letter from CII dated Dec. 28, 2016.
---------------------------------------------------------------------------

b. Nominal Proxy Contests
    The final amendments may also have implications for nominal 
contests, in which the dissidents incur little more than the basic 
required costs to pursue a contest by refraining from material 
solicitation efforts, such as arranging for full set delivery, use of a 
proxy solicitor, and other outreach. As discussed in the Proposing 
Release, despite the fact that there may be a low chance of succeeding 
in obtaining a board seat if a dissident does not undertake substantial 
solicitation efforts as it would in a typical proxy contest, dissidents 
may nevertheless choose to initiate nominal contests to pursue goals 
other than changes in board composition. Such contests are currently 
rare \270\ but could become more or less attractive as a result of the 
final amendments, as discussed in Section IV.C.4.b below.
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    \270\ Based on staff experience. See supra Section IV.B.2.b.
---------------------------------------------------------------------------

    A dissident engaging in a nominal proxy contest currently must bear 
the cost of drafting a preliminary proxy statement and undergoing the 
staff's review and comment process for that filing. Under the final 
amendments, such a dissident would also be required to meet the notice 
requirements and bear the cost of meeting the solicitation requirements 
of the final amendments. Using aggregated data on average share account 
distributions by account size for registrants in four different size 
(market capitalization) categories,\271\ we estimate the average cost 
of using the least expensive approach \272\ to meet the 67% minimum 
solicitation requirement through an intermediary for each of these 
categories of registrants.\273\ Specifically, we estimate that the 
average cost for a dissident to meet the solicitation requirement is 
approximately $5,300 at companies with less than $300 million in market 
capitalization, approximately $5,800 at companies with between $300 
million and $2 billion in market capitalization,

[[Page 68360]]

approximately $6,300 at companies with between $2 billion and $10 
billion in market capitalization, and approximately $9,800 at companies 
with market capitalization above $10 billion.\274\ These estimated 
average costs are significantly less than the average total 
solicitation expenses incurred by a dissident in a typical proxy 
contest. As noted above in Section IV.B.2.b, reported proxy 
solicitation expenses for dissidents in recent contests range from 
$20,000 to $25 million, with an average (median) of approximately $1.8 
million ($750,000). These expenses substantially exceed the estimated 
cost of a nominal contest in part because a dissident in a typical 
proxy contest would generally incur higher proxy dissemination costs 
through the use of full set delivery and the solicitation of a larger 
fraction of the shareholders entitled to vote, but also because of 
substantial additional expenditures on solicitation beyond the cost of 
proxy dissemination, such as the expense of hiring a proxy solicitor to 
perform additional outreach.
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    \271\ Based on aggregated industry data provided by a proxy 
services provider for more than 5,000 operating companies holding 
shareholder meetings from July 1, 2018 through June 30, 2019. The 
four different categories for which we have data on operating 
companies' average distribution of shares are: (i) Less than $300 
million in market capitalization, (ii) between $300 million and $2 
billion, (iii) between $2 billion and $10 billion, and (iv) above 
$10 billion.
    \272\ See supra note 262.
    \273\ The cost estimates were derived by staff based on the NYSE 
Rule 451 fee schedule and industry data provided by a proxy services 
provider. The required cost to meet the proposed solicitation 
requirement was estimated based on the number of accounts that would 
have to be solicited on average at a registrant in each of four 
market capitalization categories and the applicable fees under NYSE 
Rule 451 and postage costs for notice and access delivery. 
Specifically, industry data provided by a proxy services provider 
indicates that to reach 67% of the voting power a dissident would 
have to solicit on average approximately 46 accounts at companies 
with less than $300 million in market capitalization, approximately 
88 accounts at companies with between $300 million and $2 billion in 
market capitalization, approximately 147 accounts at companies with 
between $2 billion and $10 billion in market capitalization, and 
approximately 529 accounts at companies with market capitalization 
above $10 billion. (See supra Section IV.B.1.a for statistics on 
average total number of accounts in each respective category.) Staff 
also estimated that the number of brokers and banks involved for the 
purpose of determination of the nominee coordination fee ranges from 
12 for the smallest category to 176 nominees for the largest 
category of registrants. The estimated solicitation costs ranging 
from $5,300 to $9,800 includes intermediary unit fees, which apply 
with a minimum of $5,000, plus nominee coordination fees of $22 per 
bank or broker considered a ``nominee'' under NYSE Rule 451, plus 
basic processing fees, notice and access fees, preference management 
fees, and postage totaling $1.57 (for suppressed accounts, such as 
those that have affirmatively consented to electronic delivery) to 
$1.80 (for other accounts) per account. Staff assumed that half of 
the accounts in question are suppressed and that none of these 
accounts requested full set delivery by prior consent or upon 
receipt of the notice (because such delivery requirements may apply 
to only a small fraction of accounts and are not expected to 
significantly affect the overall estimate of costs). This estimate 
does not include printing costs for the notice, for which we do not 
have relevant data to make an estimate. Note that an individual 
shareholder may have more than one account, so the number of 
beneficial shareholders likely is lower than the number of 
beneficial shareholder accounts. For the purpose of estimating costs 
related to distribution of proxy materials, the number of accounts 
is the more relevant number because dissemination costs such as 
intermediary and processing fees apply on a per account basis per 
NYSE Rule 451.
    \274\ Id.
---------------------------------------------------------------------------

    The basic required cost to contest an election at a given 
registrant may also be affected by the dissident's own voting stake in 
the registrant and the characteristics of the shareholder base, such as 
whether share ownership is widely dispersed or more concentrated in a 
given registrant. In particular, these costs may be substantially lower 
in cases where a dissident can meet the solicitation requirement by 
disseminating materials on its own, without hiring a proxy services 
provider or similar intermediary, as in the case of a registrant with a 
very concentrated shareholder base and majority owners that are known 
and easily contacted. By contrast, these costs are likely to be 
substantially higher, for example, at larger registrants with highly 
dispersed ownership where the total number of shareholder accounts that 
will need to be solicited to reach at least 67% of the voting power can 
be very high.
    Some commenters raised concerns that mandated use of universal 
proxy would increase the number of proxy contests and thereby expose 
more registrants to costly distraction.\275\ In the Proposing Release 
we acknowledged that the mandated use of universal proxy may result in 
an increased incidence of nominal contests, and that we expect that 
registrants that are the subject of such additional contests will bear 
incremental costs. We continue to expect these costs to be higher than 
in the case of current nominal contests (for which we believe that the 
costs borne by registrants are relatively low), but still significantly 
lower than in the case of a typical proxy contest. In particular, 
registrants may revise their proxy materials and increase their 
solicitation expenditures to explain the appearance of the names of 
dissident nominees on their proxy cards and urge shareholders not to 
support the dissident's nominees. However, we do not expect 
solicitation expenditures to rise as much as they would in the average 
typical proxy contest because the registrant, in its solicitation 
efforts, would not be competing with a dissident that is spending 
significant resources on solicitation. For these reasons, we estimate 
that the cost borne by a registrant facing a nominal proxy contest may 
be approximately $65,000, based on the lowest incremental solicitation 
cost reported by registrants in recent proxy contests.\276\
---------------------------------------------------------------------------

    \275\ See, e.g., letters from BR; CCMC; CGCIV.
    \276\ See supra Section IV.B.2.b.
---------------------------------------------------------------------------

3. Potential Effects on Outcomes of Contested Elections
    In addition to reducing costs for certain shareholders who would 
submit split-ticket votes even in the absence of universal proxies, the 
mandated use of universal proxies we are adopting may result in 
additional shareholders submitting split-ticket votes. For those 
shareholders not solicited by dissidents, to the extent they do not 
support any of the registrant's nominees, universal proxies may also 
result in an increase in voting support for some or all of the 
dissident's nominees, as they will now have the ability to cast their 
votes for dissident nominees without being directly solicited by 
dissidents (or needing to make other arrangements to be able to vote 
for dissident nominees). Such changes in voting behavior could be 
significant enough to affect election outcomes in the contests that 
would have occurred even in the absence of the final amendments, as 
well as to change the incentive to initiate contests.\277\ In 
particular, either more registrant nominees or more dissident nominees 
might be elected than under the baseline, where vote splitting is 
harder to achieve and some shareholders do not receive a proxy card 
that includes the dissident slate. Any resulting changes in board 
composition or changes in control of the board may result in both 
benefits and costs for the affected parties. However, these effects are 
uncertain because it is difficult to predict the extent or direction of 
any changes in voting behavior as a result of the final amendments and 
to evaluate whether any resulting changes in board composition will 
lead to more or less effective board oversight.
---------------------------------------------------------------------------

    \277\ The potential incidence of additional contests that would 
not have occurred in the absence of the final amendments is 
discussed in Section IV.C.4 infra.
---------------------------------------------------------------------------

    There may be elections in which universal proxies will result in 
changes to the percentage of the vote obtained by each director 
candidate, but in which the changes in vote totals would not be 
sufficient to change the ultimate election results. In our assessment 
this would be the likely outcome for the majority of contested 
elections that would have taken place in the absence of the final 
amendments. We estimate that approximately three-quarters of recent 
contests that went to a vote were not close contests and would require 
shareholders holding significant voting power (greater than 5%) to 
change their voting behavior to lead to a different election 
result.\278\ We also note that the voting power represented by 
shareholders that may potentially change their voting behavior is 
limited due to the fact that some shareholders, particularly large 
shareholders, are currently able to send representatives to shareholder 
meetings or use other mechanisms to implement split-ticket votes when 
desired. We do not expect the votes submitted by these shareholders to 
change as a result of the final amendments. The extent to which other 
shareholders are interested in splitting their tickets or, for those 
not solicited by dissidents, in voting solely for some or all of the 
dissident nominees, is unclear, particularly as the option has not 
generally been available to them (without additional cost) under the 
current rules.\279\
---------------------------------------------------------------------------

    \278\ Based on staff review of contested elections initiated in 
2017-2020, votes representing greater than 5% of the total 
outstanding voting power would have to change in order to change the 
result in about 76% of the elections. Within that 76%, almost two-
thirds of the elections would have required a change in votes 
representing greater than 20% of the outstanding voting power to 
result in a change in the election outcome.
    \279\ For example, it has been asserted that retail 
shareholders, when they vote, tend to support management. See, e.g., 
Neil Stewart, Retail Shareholders: Looking out for the Little Guy, 
IR Magazine (May 15, 2012), available at http://www.irmagazine.com/articles/shareholder-targeting-id/18761/retail-shareholders-looking-out-little-guy/ (stating that ``as a rule, retail investors tend to 
support management''); Mary Ann Cloyd, How Well Do You Know Your 
Shareholders?, Harvard Law School Forum on Corporate Governance and 
Financial Regulation Blog, June 18, 2013, available at https://corpgov.law.harvard.edu/2013/06/18/how-well-do-you-know-your-shareholders/ (stating that ``retail shareholders support 
management's voting recommendations at high rates''). Additionally, 
a recent study, using proprietary data on retail investors' voting 
behavior from a proxy services provider, found further evidence on 
retail investors voting in support of management. Specifically, the 
study's analysis suggested that more retail ownership leads to more 
successful management proposals and fewer successful shareholder 
proposals in close votes. See Alon Brav, Matthew Cain & Jonathon 
Zytnick, Retail Shareholder Participation in the Proxy Process: 
Monitoring, Engagement, and Voting, J. Fin. Econ (Aug. 2021) 
(forthcoming). By contrast, a survey of 801 retail investors found 
that the majority of these retail investors believe activists add 
long-term value, and may thus be more likely to support activists 
than generally thought. See Brunswick Group, A look at Retail 
Investors' Views of Shareholder Activism and Why it Matters (July 
2015), available at https://www.brunswickgroup.com/media/597919/Brunswick-Group-Retail-Investors-Views-of-Shareholder-Activism-Summary-of-Results.pdf.

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[[Page 68361]]

    However, any changes in voting behavior due to universal proxies 
could affect election outcomes in those contests that would otherwise 
have been very close contests. We estimate that in the 24% of contests 
that we consider to be close contests, the director elected with the 
fewest votes received no more than 13% more votes than the non-elected 
nominee with the most votes.\280\ In such cases, universal proxies may 
be more likely to affect the election outcome. Close contests may be 
more likely to occur at registrants with cumulative voting.\281\
---------------------------------------------------------------------------

    \280\ See supra Section IV.B.2.c.
    \281\ Under cumulative voting, each shareholder is generally 
allowed to cast as many votes as there are nominees and may allocate 
more than one vote to certain nominees, which may lead to a more 
concentrated distribution of votes. By contrast, close contests may 
be relatively less likely at registrants with majority voting 
standards that do not revert to a plurality standard in the case of 
a contested election, or with high levels of incumbent executive and 
director ownership. For example, we estimate that approximately 3% 
of S&P 1500 registrants have cumulative voting, approximately 6% of 
S&P 1500 registrants have majority voting standards that do not 
revert to a plurality standard in a proxy contest, and approximately 
3% of registrants have incumbent executives and directors who 
together own a majority of the outstanding shares. See supra Section 
IV.B.1.
---------------------------------------------------------------------------

    A recent study uses an alternative approach to estimate the 
percentage of contests in which universal proxies may be more likely to 
affect the election outcome.\282\ This study estimates that it is 
possible that universal proxies would have led to different election 
outcomes in up to 15% of cases in a sample of proxy contests from 2001 
through 2016.\283\ This statistic is somewhat lower than our estimate 
that close contests may represent approximately one-fourth of recent 
contests, but is also a more direct attempt to estimate how many of the 
sample contests might have had different outcomes if, hypothetically, 
universal proxy had been used. However, we note that the study makes 
several assumptions in arriving at this statistic, and it is unclear 
whether these assumptions can be relied upon.\284\
---------------------------------------------------------------------------

    \282\ See Hirst Study.
    \283\ See Hirst Study, at 488 (finding that 40 out of 269 proxy 
contests examined may have had outcomes that were distorted as a 
result of barriers to split-ticket voting).
    \284\ For example, the estimates in this study are based on an 
assumption that facilitating split-ticket voting through the 
availability of universal proxies could result only in changes in 
votes that were otherwise marked as ``withheld'' from a candidate, 
while votes ``for'' any candidate would be assumed not to change. 
Also, the study assumes that the degree of increase in ``for'' votes 
for any given candidate upon facilitating split-ticket voting would 
be limited to the number of votes withheld from a single opposing 
candidate, while votes withheld from a different opposing candidate 
would be assumed not to switch to be in favor of this candidate. For 
the study's own discussion of the validity and reliability of these 
assumptions, see Hirst Study, at 488. We are unable to test 
independently the reliability of these assumptions because we do not 
have data that would allow us to predict how voting behavior might 
change with the availability of a universal proxy.
---------------------------------------------------------------------------

    To the extent universal proxies lead to changes in election 
outcomes, it is not clear how this would affect the composition of 
boards. There may be either more registrant nominees or more dissident 
nominees elected to boards, or there may be no change, on average, in 
the types of nominees elected.\285\ Also, there may be either fewer 
changes in control or more changes in control, or there may be the same 
frequency of changes in control as under the baseline. The impact of 
forcing shareholders to choose between one proxy card and the other in 
an election contest depends on the dynamics of the particular contest. 
On the one hand, where dissatisfaction with current management is 
greater, shareholders who would otherwise prefer to split their vote 
may be more likely under the current proxy system to utilize the 
dissident's card and forego the opportunity to vote for some registrant 
nominees, to send the message that board change is needed. This choice 
will no longer be necessary under the final amendments, which may lead 
to a greater likelihood that one or more registrant nominees retain 
their seats. On the other hand, there also may be cases in which the 
registrant nominees would, in the absence of the final amendments, have 
retained all of their seats. Currently, we observe that registrant 
nominees retain all of the seats up for election in 62% of the contests 
that proceed to a vote.\286\ In such cases, an increase in split-ticket 
voting, as well as any incremental votes for the full dissident slate 
by shareholders not solicited by the dissident, may increase the 
likelihood of dissident nominees gaining one or more of those seats.
---------------------------------------------------------------------------

    \285\ One study finds no evidence that universal proxies are 
likely to favor dissident nominees; if anything the evidence 
suggests that the opposite may be the case. See Hirst Study. 
However, this conclusion is based on several critical assumptions 
about how shareholder behavior may change upon the availability of 
universal proxy, and we are unable to test the reliability of these 
assumptions. See supra note 284.
    \286\ See supra Section IV.B.2.c.
---------------------------------------------------------------------------

    Given some of these possible dynamics, we expect that the election 
of mixed boards will be somewhat more likely under the final amendments 
than under the current proxy system. We expect this in particular for 
typical contests where the dissidents are engaging in meaningful 
solicitation efforts.\287\ By contrast, due to the expected minimal 
level of solicitation efforts by dissidents in nominal contests, we 
expect the registrant slate to prevail intact in most such contests. 
However, we cannot predict whether any increase in mixed boards would 
be the result of one or more registrant nominees retaining seats when a 
board composed of only dissident nominees would otherwise have been 
elected or one or more dissident nominees gaining seats when all 
registrant nominees would have retained their seats, nor can we predict 
the magnitude of any increase in the frequency of such mixed board 
outcomes under the final amendments.\288\ Also, it is not necessarily 
the case that any such changes in outcomes would more accurately 
reflect shareholder preferences, even though these outcomes may be the 
product of removing constraints on the combination of nominees that 
shareholders can vote for, because of limitations in the way that 
voting rules can communicate preferences.\289\
---------------------------------------------------------------------------

    \287\ We estimate that approximately 38% of recent contests that 
proceeded to a vote resulted in a mixed board being elected. Id.
    \288\ One study questions whether universal proxies would result 
in a substantial increase in mixed board outcomes, based on an 
analysis indicating that mixed board outcomes could increase by no 
more than approximately 3% of the contests studied. See Hirst Study. 
However, this analysis and conclusion are based on several critical 
assumptions about how shareholder behavior may change upon the 
availability of universal proxies, and we are unable to test the 
reliability of these assumptions. See supra note 284.
    \289\ For example, consider a registrant with 100 voting 
shareholders, three director seats up for election, and a dissident 
with two nominees. Assume that 54 of the shareholders prefer to 
elect the dissident nominees but are indifferent about which 
registrant nominee retains the third seat. On a universal proxy, 
each of these shareholders therefore votes for one registrant 
nominee, with equal probability across the three registrant 
nominees. The remaining 46 prefer the full registrant slate. In this 
case, with a universal proxy, 54 votes would be earned by each of 
the dissident nominees, but 64 votes (46 plus one-third of 54 votes) 
would be earned by each of the registrant nominees, leading to the 
registrant slate winning the election even though a majority of 
shareholders prefer that the dissidents gain two seats. See also 
letter from CII dated Nov. 8, 2018 (providing another hypothetical 
example that shows how voting outcomes may depart from shareholder 
preferences when universal proxy is used in combination with the 
dissident nominating a short slate). For further discussion of the 
limitations of voting rules, see, e.g., Kenneth Arrow, Social Choice 
and Individual Values (1st ed. 1951).

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[[Page 68362]]

    Universal proxies may therefore result in either an increase or 
decrease in changes in control of a board, and in either dissidents or 
management winning more seats on the board, or a change in voting 
percentages without a change in the board composition. We expect that 
dissidents and registrants will take these potential impacts into 
consideration in their approach to potential proxy contests. For 
example, as discussed in more detail in the following section, if the 
parties to a contest anticipate that changes in voting behavior 
associated with universal proxies may change the number of seats that 
they expect to win, these expectations may affect the likelihood that 
they enter into a settlement agreement that results in changes to the 
board or other concessions. Such changes to board composition and 
concessions may either enhance or reduce, or have no significant effect 
on, the efficiency and the competitiveness of registrants.
    It is also possible that parties will take measures to reduce the 
likelihood of changes in election outcomes. For example, proxy 
statements and other related communications could include additional 
disclosures intended to deter shareholders from voting split-tickets, 
such as emphasizing the importance of a unified board and clarifying 
whether some or all of one party's nominees might not agree to serve if 
their party does not hold a majority of board seats. Such disclosures 
might reduce the likelihood of split-ticket voting and limit any 
potential increase in mixed boards. Another potential tactical response 
may involve the adoption by registrants of additional defenses to 
shareholder interventions. For example, registrants might adopt 
director qualification bylaws or might limit the indemnification or 
committee membership of dissident-nominated directors.\290\ Such 
changes could limit the likelihood of dissident nominees being elected 
or limit their impact if they are elected. Similarly, if dissidents 
anticipate that the final amendments could result in fewer dissident 
nominees being elected, they may choose to rely more heavily on other 
types of interventions, such as soliciting consents to replace some 
board members with their own nominees at a special meeting. Also, 
dissidents interested in minority representation may nonetheless choose 
to run longer slates of candidates, to the extent it could increase the 
likelihood that at least some of their nominees are elected.
---------------------------------------------------------------------------

    \290\ See, e.g., J.W. Verret, Defending Against Shareholder 
Proxy Access: Delaware's Future Reviewing Company Defenses in the 
Era of Dodd-Frank, 36 J. Corp. Law 391, 404-06 (2011); Matthew D. 
Cain, Jill E. Fisch, Sean J. Griffith & Steven Davidoff Solomon, How 
Corporate Governance Is Made: The Case of the Golden Leash, 164 U. 
Pa. L. Rev. 649, 671 -678 (2016).
---------------------------------------------------------------------------

    While the measures discussed above would serve to blunt the effect 
of the final amendments on election outcomes, the effect of other 
potential responses may serve to magnify these effects. For example, 
the parties to a contested election may change what they spend on 
solicitation. Some parties may increase these expenditures to further 
capitalize on an advantage that they anticipate the final amendments 
would give them, or to mitigate a disadvantage they perceive. If so, 
that may result in a greater likelihood of the parties' candidates 
being selected.
    The composition of boards may also be affected by changes in the 
set of potential nominees that may result from effects that the final 
amendments could have on the incentives of directors. As discussed 
above, reputational concerns may be an important consideration for 
directors and potential directors, and research has found that proxy 
contests may have an adverse effect on a director's reputation.\291\ 
For this reason, some potential directors may be relatively less 
willing to be nominated if they believe that universal proxies would 
reduce the likelihood that they are elected to a seat or retain their 
seat on a board. While we do not have specific data that suggests the 
final amendments would result in an increase in the reluctance of 
directors to serve, and it is unclear whether any such reluctance would 
be more likely to affect more qualified or less qualified candidates, 
any incremental increase in the reluctance of directors to serve may 
affect the ability of registrants to recruit individuals with the 
different skill sets needed to compose an effective board.
---------------------------------------------------------------------------

    \291\ See supra Section IV.B.1.d.
---------------------------------------------------------------------------

    The effects of any changes in election outcomes on board 
effectiveness are difficult to predict. On the one hand, if more 
dissident nominees are elected or dissidents are more likely to gain 
control, it could result in greater efficiency and competitiveness to 
the extent dissident-nominated directors may be more effective 
monitors.\292\ On the other hand, if more registrant nominees retain 
their seats or are more likely to retain control, the board may be 
better able to focus on long-term value creation, because a lower risk 
of board turnover may reduce the risk that directors unduly focus on 
short-term metrics.\293\ Also, a lower chance of changes in control may 
reduce the risk that expensive change in control provisions in debt 
covenants and other material contracts and agreements are 
triggered.\294\ Universal proxies may lead to more mixed boards with 
directors from both parties than under the current proxy system. Mixed 
boards may increase the effectiveness of boards, such as through a 
reduction of ``groupthink'' and benefits stemming from inclusion of 
directors with diverse backgrounds,\295\ particularly because

[[Page 68363]]

shareholders voting on universal proxies would have the ability to vote 
for the combination of directors that they believe provides the best 
mix of backgrounds given the specific circumstances of the 
registrant.\296\ However, mixed boards may also lead to more frequent 
internal conflicts and result in less efficient decision-making within 
boards,\297\ as also argued by some commenters.\298\
---------------------------------------------------------------------------

    \292\ See, e.g., Jun-Koo Kang, Hyemin Kim, Jungmin Kim, and 
Angie Low, Activist-appointed Directors, J. Fin. Quant. Anal. (2020) 
(forthcoming), available at SSRN: https://ssrn.com/abstract=3380837 
(retrieved from SSRN Elsevier database) or http://dx.doi.org/10.2139/ssrn.3380837 (finding that companies appointing independent 
directors nominated by activists, either through contests or 
negotiations, experience a larger value increase than companies 
appointing other directors, and that the increase in value is higher 
among companies with greater monitoring needs and entrenched 
boards); Ian Gow, Sa-Pyung Sean Shin & Suraj Srinivasan, Activist 
Directors: Determinants and Consequences, Harv. Bus. Sch. Working 
Paper No. 14-120 (June 2014), available at http://www.hbs.edu/faculty/Pages/item.aspx?num=47599 (finding that activist 
interventions that result in new directors being appointed to the 
board are associated with significant strategic and operational 
actions by firms, as well as with positive stock reactions and 
improved operating performance).
    \293\ See, e.g., Martijn Cremers, Lubomir P. Litov & Simone M. 
Sepe, Staggered Boards and Long-Term Firm Value, Revisited, 128 J. 
Fin. Econ 422 (Nov. 2017) (suggesting that a greater likelihood of 
longer director tenure can serve as a longer-term commitment device 
with positive effects on longer-term value creation).
    \294\ For example, one study found in its sample of debt issues 
that over half of the debt issued in 2012 contained change in 
control covenants that gave bondholders an option to require the 
issuer to offer to purchase all of the bonds (typically at 101% of 
their par value) if, at any time, the majority of the board of 
directors ceased to be those who were directors at the time of 
issuance or those whose election was approved by a majority of the 
continuing directors. See Frederick Bereskin & Helen Bowers, Poison 
Puts: Corporate Governance Structure or Mechanism for Shifting 
Risk?, working paper (Sept. 8, 2015), available at https://www.weinberg.udel.edu/IIRCiResearchDocuments/2015/09/FINAL-Poison-Puts-Research-Sept-2015.pdf. Triggering such covenants, often 
referred to as ``proxy puts,'' can result in companies repurchasing 
their own debt at a loss as well as having to incur expenses to 
refinance with a new debt issue. Such covenants are more binding 
when they are of the ``dead hand'' variety, which prevents the board 
from approving dissident-nominated directors in order to avoid 
triggering the covenant. See F. William Reindel, Dead Hand Proxy 
Puts--What You Need To Know, Harvard Law School Forum on Corporate 
Governance and Financial Regulation Blog, June 10, 2015, available 
at https://corpgov.law.harvard.edu/2015/06/10/dead-hand-proxy-puts-what-you-need-to-know/.
    \295\ See, e.g., Jeffrey Coles, Naveen Daniel & Lalitha Naveen, 
Director Overlap: Groupthink versus Teamwork, working paper (2020), 
available at https://dx.doi.org/10.2139/ssrn.3650609 (retrieved from 
SSRN Elsevier database); David Carter, Betty Simkins & Gary Simpson, 
Corporate Governance, Board Diversity, and Firm Value, 38 Fin. Rev. 
33 (2003); Gennaro Bernile, Vineet Bhagwat & Scott Yonker, Board 
diversity, firm risk, and corporate policies, 127 J. Fin. Econ. 588 
(2018).
    \296\ See letter from CII dated Dec. 28, 2016.
    \297\ See, e.g., Anup Agrawal & Mark Chen, Boardroom Brawls: An 
Empirical Analysis of Disputes Involving Directors, 7 Quart. J. Fin. 
1 (2017) (studying boardroom disputes that are disclosed upon 
directors resigning or declining to stand for re-election and 
finding that directors who are likely to be more independent of 
management are more likely to be involved in the dispute); Jason 
Roderick Donaldson, Nadya Malenko & Giorgia Piacentino, Deadlock on 
the Board, 33 Rev. Fin. Stud.4445 (October 2020) (showing that board 
diversity can exacerbate deadlock because differences in preferences 
over alternative polices gives directors an incentive to block 
implementation of alternatives preferred by other directors, to 
preserve their option to get their preferred alternative implemented 
in the future).
    \298\ See supra notes 35 and 36 and accompanying text.
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4. Potential Effects on Incidence and Perceived Threat of Contested 
Elections
    As discussed in Sections IV.C.2 and IV.C.3 above, the effects of 
the final amendments on the outcomes and costs to registrants and 
dissidents of contested elections are uncertain, but could be 
significant. In this section, we consider how any such effects of the 
final amendments may change the incentives of dissidents to initiate 
proxy contests and the manner in which registrants react to the 
possibility of a contested election (the perceived ``threat'' of a 
contest), even in the absence of a contest.
    We first consider the potential impact of the final rule on the 
incidence or perceived threat of typical proxy contests, in which the 
dissident expends significant resources on solicitation. We then 
consider the impact on the incidence or perceived threat of nominal 
contests, in which dissidents, taking advantage of the mandatory use of 
universal proxies, expend significantly fewer resources than in a 
typical proxy contest.\299\ Any changes in the incidence of contested 
elections of these different types, or, even in the absence of a 
contest, in managerial decision-making or the relationship between 
shareholders and management as a result of a change in the perceived 
threat of such contests, may result in costs and benefits for 
shareholders, registrants, and dissidents.
---------------------------------------------------------------------------

    \299\ We also note that there may be effects on the incidence 
and perceived threat of ``late-breaking'' proxy contests, or 
contests initiated close to the meeting date, because of the notice 
requirement and the proxy statement filing deadline prescribed by 
the final amendments. These timing requirements and their potential 
effects are discussed in more detail in Section IV.C.5 infra.
---------------------------------------------------------------------------

    Several commenters argued that mandating the use of universal proxy 
cards will likely increase the frequency of proxy contests, thereby 
increasing costs for registrants and distracting their managers.\300\ 
By contrast, one commenter argued that mandating the use of universal 
proxy cards is unlikely to increase the frequency of contested 
elections, stating that ``[s]hareholders invest significant resources 
in running a proxy contest; the decision to proceed generally is driven 
by the shareholder's thesis regarding the economics of the engagement 
and likelihood of success.'' \301\ Other commenters argued the effect 
on the number of contests is difficult to predict.\302\ We disagree 
with the commenters arguing that contests are likely to increase due to 
the amendments; instead, we generally agree with the commenters arguing 
that any effects on the number of contests is hard to predict. In 
addition, although we to some extent agree with the commenters that 
argue that the costs to registrants will increase if the number of 
contests increases, we recognize that there could be benefits as well, 
which we discuss in more detail below. Overall, the effects on costs 
and benefits for all affected parties due to any changes in the 
incidence or perceived threat of contests are uncertain, as the extent 
and direction of the effects of the final amendments on the outcomes 
and costs of contested elections are unclear, both because it is 
difficult to predict how different parties will respond to such 
effects, and because it is difficult to evaluate whether changes in the 
incidence or perceived threat of contests would have positive or 
negative effects on board or registrant performance.
---------------------------------------------------------------------------

    \300\ See letters from BR; CCMC; CGCIV; IBC.
    \301\ See letter from CII dated Dec. 28, 2016.
    \302\ See letters from Trian; Hermes.
---------------------------------------------------------------------------

a. Typical Proxy Contests
Effects Related to Anticipated Changes in Outcomes
    Any effects on the expected outcomes of typical proxy contests may 
affect the incidence of such contests as well as the likelihood that a 
registrant makes changes (whether in board composition or with respect 
to other decisions) even in the absence of actual contests. The likely 
effects of universal proxies on the outcome of a typical contest depend 
on the dynamics of the particular contest. Thus, it is not clear 
whether, on average, the final amendments would increase or decrease 
the likelihood of changes in control or the number of board seats won 
by either party.
    On the one hand, a dissident who expects to gain more seats under 
the final amendments than under the baseline may have an increased 
incentive to initiate a typical proxy contest. This would particularly 
be the case for a dissident that expects a greater likelihood of 
gaining control of the board, and for whom majority control of the 
board would be required to institute the changes the dissident desires. 
On the other hand, a dissident who expects, under the final amendments, 
to gain fewer seats or face a lower likelihood of gaining control than 
under the baseline may have a decreased incentive to initiate a typical 
contest.
    If, under the final amendments, a registrant is expected to face a 
higher risk of losing seats or control of the board to dissident 
nominees, it is likely that a potential dissident could exercise 
greater influence over that registrant. Conversely, it is likely that 
the influence of potential dissidents would be reduced where a lower 
risk of losing seats or control to dissident nominees is expected under 
the final amendments. These changes in influence may derive from the 
outcomes of election contests or from negotiations with registrants in 
the course of, or in the absence of, a contest. In particular, 
registrants facing a greater likelihood of contests, or a higher chance 
of losing seats (or control) if a contest were initiated, may be more 
likely to enter into a settlement agreement with the dissident and may 
also be more likely to concede at earlier stages of engagement or to 
make changes in response to alternative interventions (such as ``vote 
no'' campaigns).\303\ Registrants facing a reduced likelihood of 
contests or a lower chance of losing seats (or control) if a contest 
were initiated may be less likely to enter into settlement agreements, 
to engage in negotiations at earlier stages, or to make

[[Page 68364]]

changes in response to alternative interventions.
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    \303\ See, e.g., Unofficial Transcript of the Proxy Voting 
Roundtable (Feb. 19, 2015), available at https://www.sec.gov/spotlight/proxy-voting-roundtable/proxy-voting-roundtable-transcript.txt (``Roundtable Transcript''), comment of Michelle 
Lowry, Professor, Drexel University, at 60 and Lisa M. Fairfax, 
Professor, George Washington University Law School, at 48 (noting 
that universal proxies could facilitate settlements with or 
accommodations to dissidents before a contest arose).
---------------------------------------------------------------------------

    Thus, it is likely that any changes in expectations regarding the 
outcome of a potential contest would affect the degree of a dissident's 
influence relative to that of a registrant's incumbent board and 
management. It is difficult to generalize about the effects of the 
final amendments as they are very likely to depend on the dynamics of a 
particular contest (or potential contest). Also, it is not clear 
whether the actual incidence of contested elections would increase or 
decrease, because any change in a dissident's incentive to initiate 
contests may be accompanied by a change in the likelihood that a 
registrant makes earlier concessions to prevent a disagreement from 
proceeding to the stage of a proxy contest.
Effects Related to Anticipated Changes in Costs
    While it is unclear whether the final amendments are likely to 
change the expected costs of typical proxy contests to registrants and 
dissidents, any such changes in the expected costs may also affect the 
incidence or perceived threat of such contests. In particular, a 
dissident that expects to achieve a similar outcome at a lower cost may 
have a greater incentive to initiate a typical proxy contest.\304\ 
Registrants that expect dissidents to face lower costs, or those 
registrants that expect to bear additional costs in the form of 
increased solicitation expenditures in a contested election, may have 
greater incentive to make concessions. By contrast, a dissident that 
expects to incur additional solicitation expenses to achieve the same 
outcome may have a lower incentive to initiate a typical proxy contest, 
while registrants that expect dissidents to face higher costs, or 
registrants that expect to face lower costs in a contested election, 
may have a lower incentive to make concessions.
---------------------------------------------------------------------------

    \304\ It is possible that a significant reduction in the average 
cost to dissidents in typical proxy contests could have effects that 
reduce the incentive to initiate some contests. In particular, some 
studies have found that a high required cost of proxy contests may 
serve as a credible signal to other shareholders that the value that 
the dissident's slate of directors can bring to the registrant is 
high, or else the dissident would not be bearing the cost of a proxy 
contest. In an environment in which the average cost of a typical 
proxy contest is very low, the ability of dissidents to get support 
for their nominees may be decreased, as it may be more difficult and 
potentially more costly than otherwise for a dissident whose contest 
has strong merit to differentiate its contest from less worthy 
contests. See, e.g., John Pound, Proxy Contests and the Efficiency 
of Shareholder Oversight, 20 J. Fin. Econ. 237 (1988); Utpal 
Bhattacharya, Communication Costs, Information Acquisition, and 
Voting Decisions in Proxy Contests, 10 Rev. Fin. Stud. 1065 (1997).
---------------------------------------------------------------------------

Differential Effects Across Registrants
    To the extent that the incidence and perceived threat of typical 
proxy contests may change, certain registrants may be affected more 
than others. For example, relatively smaller to midsize registrants may 
be more affected because they are currently the most likely to be 
involved in proxy contests.\305\ Any marginal changes may therefore 
have the greatest impact on this group of registrants. However, more 
significant changes in the nature of proxy contests could also make it 
more attractive to target types of registrants that were infrequently 
the subject of proxy contests in the past. For example, to the extent 
that large registrants may currently be less likely to be targeted 
because of the greater resources they can expend to counter a 
dissident's solicitation efforts, a significant decrease in dissidents' 
expected discretionary solicitation expenditures or a large increase in 
their likelihood of success could lead to a higher threat or incidence 
of contests at such registrants.
---------------------------------------------------------------------------

    \305\ For example, staff estimates that only nine of the 101 
registrants involved in proxy contests initiated in years 2017-2020 
were in the S&P 500 index. See supra Section IV.B.2.a.
---------------------------------------------------------------------------

    The governance structures of registrants are also likely to play a 
role in the impact of the final amendments. On the one hand, 
registrants with governance characteristics that may increase the 
potential impact of proxy contests, such as cumulative voting, may be 
more affected than others.\306\ On the other hand, registrants with 
governance characteristics that make them more difficult to target with 
certain kinds of election contests, such as those with high incumbent 
management ownership, may be less affected by the final 
amendments.\307\
---------------------------------------------------------------------------

    \306\ See supra note 203.
    \307\ See supra Section IV.B.1.b.
---------------------------------------------------------------------------

b. Nominal Proxy Contests
    The final amendments may also affect the incidence or perceived 
threat of nominal proxy contests, in which the dissidents incur little 
more than the basic costs required to engage in a contest and which are 
currently rare.\308\ The nature of nominal proxy contests may be 
affected by the final amendments in two key ways. First, the 
solicitation requirement will likely increase the costs to dissidents 
of pursuing such contests. As discussed above, beyond the minimal costs 
currently incurred, such dissidents will also have to bear the costs 
required to meet the minimum solicitation requirement, which we 
estimate would be on average approximately $5,300 to $9,800 depending 
on the size of the registrant.\309\ This cost could be lower in cases 
in which the services of an intermediary are not required to meet the 
solicitation requirement (as in the case of registrants with highly 
concentrated ownership) or higher at registrants with a more dispersed 
shareholder base. As discussed above, while this required solicitation 
cost will be greater than the expenditure currently required in a 
nominal contest, the costs will remain substantially lower than the 
solicitation costs dissidents bear in typical proxy contests.\310\
---------------------------------------------------------------------------

    \308\ See supra Section IV.B.2.b.
    \309\ See supra Section IV.C.2.b.
    \310\ Id.
---------------------------------------------------------------------------

    Second, requiring that registrants use universal proxies will, in 
practice, allow dissidents in nominal contests to put the names of 
their director candidates in front of all shareholders, via the 
registrant's proxy card, without additional expense. This change could 
somewhat increase the likelihood that a dissident in a nominal contest 
succeeds in gaining seats for their nominees, though, as in the case of 
current nominal contests, dissidents may have a very limited chance of 
succeeding in gaining seats if they do not engage in meaningful 
independent solicitation efforts. Dissidents engaging in a nominal 
contest will not be required to meet the eligibility criteria that 
apply to other alternatives that would allow dissidents to include some 
form of information on the registrant's proxy card, such as the 
requirements of a proxy access bylaw, where available. Dissidents may 
therefore consider engaging in a nominal contest when they would not 
qualify to use alternatives such as proxy access or when these 
alternatives are not available. However, the information included in 
the registrant's proxy materials would likely be more limited in the 
case of a nominal contest (just a list of names and a reference that 
the dissident's proxy materials are available without cost at the 
Commission's website) than these other alternatives.
    Based on staff experience, we expect that a dissident that solicits 
holders that represent at least 67% of voting power and files a 
preliminary and definitive proxy statement, without engaging in any 
other solicitation efforts, would generally have a very limited chance 
of having any of its nominees elected to the board despite their names 
being included on the registrant proxy card. The likelihood that a 
nominal contest results in dissident nominees winning seats may depend 
on many factors

[[Page 68365]]

including the identity of dissident's nominees, their backgrounds and 
name recognition, the shareholders' level of dissatisfaction with the 
registrant, and the efforts of the registrant to dissuade shareholders 
from supporting the dissident's nominees.\311\ In general, we expect 
that engaging in a nominal contest will not be an attractive 
alternative for most potential dissidents that are truly interested in 
gaining board representation,\312\ particularly if other alternatives 
are feasible.\313\
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    \311\ While the registrant's universal proxy card would permit a 
vote for dissident nominees, its proxy statement can and likely will 
include disclosure arguing against such a vote. If the dissident 
does not counter with positive information about its nominees 
disseminated in a meaningful way to a significant percentage of 
shareholders, we expect that the dissident's odds of success in the 
solicitation will be low.
    \312\ We note that the Commission's 2007 amendments to the proxy 
rules allowing notice and access delivery of proxy statements 
decreased the minimum cost at which a proxy contest could be 
conducted through potentially reduced mailing costs, but did not 
seem to cause an increase in contested elections, which may be 
evidence of the importance of full set delivery and other 
solicitation expenditures in gathering support for dissident 
nominees. See, e.g., Fabio Saccone, E-Proxy Reform, Activism, and 
the Decline in Retail Shareholder Voting, The Conference Board 
Director Notes Working Paper No. DN-021 (Dec. 26, 2010), available 
at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1731362 
(retrieved from SSRN Elsevier database). For details on the 2007 
amendments to the proxy rules, see Shareholder Choice Regarding 
Proxy Materials, Release No. 34-56135 (July 26, 2007) [72 FR 42222 
(Aug. 1, 2007)].
    \313\ These alternatives may include a typical proxy contest 
(with additional solicitation expenditures but also, potentially, 
with a higher chance of success) or use of a proxy access bylaw (if 
available and if the dissident is eligible to use proxy access). We 
are unaware of any cases in which such bylaws have been used to 
nominate directors to date. However, most proxy access bylaws would 
require a registrant to include information about the dissident 
nominees and a supporting statement from the dissident in its proxy 
materials and would not require the dissident to bear the costs and 
meet the requirements described above. That said, it is possible 
that dissidents interested in board representation but for whom 
additional expenditures are not feasible or justified, and for whom 
proxy access is unavailable, may consider a nominal proxy contest.
---------------------------------------------------------------------------

    As discussed in more detail in the Proposing Release, even if the 
chance of obtaining board representation through a nominal contest may 
be low, dissidents may be interested in other possible effects, such as 
attracting attention to themselves and their agenda.\314\ Such 
attention could be used by the dissident to publicize a desired change 
or a particular issue,\315\ or to encourage management to engage with 
the dissident. However, it is unclear whether the inclusion of 
dissident nominees on the registrant's proxy card would significantly 
increase the publicity surrounding a nominal proxy contest.
---------------------------------------------------------------------------

    \314\ See Section IV.D.4.b of the Proposing Release.
    \315\ While the shareholder proposal process may be used to 
raise some such concerns, and would allow these concerns to be 
expressed more directly in the registrant's proxy statement, such 
proposals would also need to meet the requirements of Rule 14a-8. 
For example, proposals on certain topics, such as those pertaining 
to ordinary business matters, may be properly excluded by 
registrants from their proxy materials. See 17 CFR 240.14a-8(i)(7).
---------------------------------------------------------------------------

    It is difficult to say whether and to what extent the possibility 
of such publicity would lead dissidents to more frequently initiate 
nominal contests, and similarly, whether the ability of dissidents to 
run such contests would influence the incentives of management to 
pursue changes in response to such dissidents. We believe the 
likelihood of a significant increase in nominal contests will be 
mitigated by the new costs associated with the minimum solicitation 
requirement and the current availability to dissidents of other 
(potentially lower-cost) routes to obtaining publicity.\316\ Also, 
while nominal contests are currently rare, it is also possible that 
their incidence could decline further under the final amendments given 
the new costs imposed on such contests. In particular, dissidents that 
would otherwise pursue nominal contests might consider alternatives 
that would not trigger the solicitation requirement, such as an exempt 
solicitation, or could choose not to take any such actions due to the 
higher costs imposed on nominal contests by the final amendments.
---------------------------------------------------------------------------

    \316\ For example, for a much lower cost, a dissident required 
to file beneficial ownership reports under Section 13(d) could send 
a letter to the board detailing its desired changes and file it as 
an attachment to a Schedule 13D filing, making it available to the 
public (though, unlike a registrant's universal proxy card, the 
Schedule 13D filing would not be mailed or otherwise disseminated to 
shareholders).
---------------------------------------------------------------------------

c. Effects of Any Changes in Incidence or Perceived Threat of Proxy 
Contests
    Overall, it is in the incidence or perceived threat of proxy 
contests, and thus a change in the level of engagement with and the 
influence of dissidents. However, to the extent that any of these 
factors is significantly affected, we cannot rule out the possibility 
that there may be significant effects on the efficiency and 
competitiveness of registrants. Several commenters expressed concerns 
that mandating the use of universal proxy cards would increase the 
number of contests and have a negative impact on the working of boards 
and managerial decision-making to the detriment of shareholders.\317\ 
We discussed such potential effects in the economic analysis of the 
Proposing Release and discuss them as well in more detail below.\318\ 
However, we note that while any increase in the incidence or threat of 
proxy contests would likely increase costs for registrants and take 
more of registrant management's time and effort, such an increase could 
still benefit shareholders if the contests (or threat thereof) 
ultimately result in more effective boards and improved registrant 
performance. We also discuss the potential for such benefits below.
---------------------------------------------------------------------------

    \317\ See supra notes 34-36 and accompanying text.
    \318\ See Section IV.D.4.c of the Proposing Release.
---------------------------------------------------------------------------

    There is some evidence that proxy contests may be beneficial to 
shareholders. For example, studies have found proxy contests to be 
associated with positive share price reactions.\319\ In this vein, some 
observers have argued that the low incidence of proxy contests is due 
to collective action problems related to the high costs of proxy 
contests \320\ and that a higher rate of proxy contests may be 
optimal.\321\ Any increase in engagement between management, 
dissidents, and shareholders that may result because of changes in the 
likelihood of proxy contests, such as discussions at earlier stages of 
a campaign or reactions to other types of shareholder interventions, 
could similarly be beneficial. Such engagement may improve the 
effectiveness of boards, may lead to value-enhancing changes, and may 
perhaps be a more efficient means to achieve such changes than 
expensive proxy contests. For example, one study found that an 
increased likelihood of being targeted with a proxy contest (even if an 
actual proxy contest does not materialize) is associated with changes 
in corporate policies that are followed

[[Page 68366]]

by improved operating performance.\322\ In these ways, an increase in 
the incidence or perceived threat of proxy contests could represent a 
valuable disciplinary force for some boards.
---------------------------------------------------------------------------

    \319\ See, e.g., Yair Listokin, Corporate Voting versus Market 
Price Setting, 11 Am. L. & Econ. Rev. 608 (2009) (finding that, in a 
sample of proxy contests, close dissident victories were related to 
positive stock price impacts, while close management victories were 
related to negative stock price impacts); Harold Mulherin & Annette 
Poulsen, Proxy Contests and Corporate Change: Implications for 
Shareholder Wealth, 47 J. Fin. Econ. 279, 307 (1998) (finding that 
their sample of proxy contests was associated with shareholder value 
increases, particularly when the contests led to management turnover 
or acquisitions) (``Mulherin & Poulsen Study''); Fos Study (finding 
that the average abnormal returns to target shareholders reach 6.5% 
around proxy contest announcements). See also Matthew Denes, 
Jonathan M. Karpoff & Victoria McWilliams, Thirty Years of 
Shareholder Activism: A Survey of Empirical Research, 44 J. Corp. 
Fin. 405 (2017).
    \320\ That is, when a small group of shareholders must bear all 
of the costs of proxy contests while sharing in only a fraction of 
any benefits, with other shareholders absorbing the rest, the small 
group may be discouraged from initiating potentially value-enhancing 
proxy contests.
    \321\ See, e.g., Lucian A. Bebchuk, The Myth of the Shareholder 
Franchise, 93 Va. L. Rev. 675, 712 (2007); Bernard S. Black, 
Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520 (1990).
    \322\ See Fos Study.
---------------------------------------------------------------------------

    Conversely, an increase in the incidence and perceived threat of 
contests could also have a negative impact on the efficiency and 
competitiveness of registrants. For example, studies have found that 
proxy contests in which dissidents win one or more seats but there is 
no change in the incumbent management team and the registrant is not 
acquired are associated with underperformance in the years after the 
contest.\323\ These results are consistent with the idea that conflicts 
in the boardroom may have detrimental effects for shareholders. An 
increase in the perceived threat of proxy contests or in engagement 
with dissidents could also have negative implications. For example, 
some studies have found that boards that face a lower threat of being 
replaced because of poor short-term results may be better able to focus 
on long-term value creation.\324\ Studies have also found that 
increased dissident influence may be detrimental, to the extent that 
managers make concessions or policy changes that are value-decreasing 
in order to deter activists.\325\ Thus, in some cases, an increase in 
the incidence or perceived threat of proxy contests could represent a 
costly distraction for boards and corporate officers, as also argued by 
some commenters.\326\ However, for the reasons outlined above, we are 
not able to assess the likelihood and extent of such costly distraction 
as a result of the final amendments. In addition, two commenters argued 
that adoption of a mandated universal proxy card could increase the 
incentive for founders to keep their companies private.\327\ Any such 
increased incentive for companies to stay or go private rather than 
bear the threat of proxy contests could negatively affect capital 
formation,\328\ but given the overall relatively low annual frequency 
of director election contests compared to the number of public 
registrants, we do not think the final amendments are likely to 
significantly affect the decisions of founders to take their companies 
public, even if they perceive the mandated use of universal proxies 
negatively.
---------------------------------------------------------------------------

    \323\ See, e.g., Mulherin & Poulsen Study, at 305-08; David 
Ikenberry & Josef Lakonishok, Corporate Governance Through the Proxy 
Contest: Evidence and Implications, 66 J. of Bus. 405, 424-25 
(1993).
    \324\ See Martijn Cremers, Lubomir Litov & Simone Sepe, 
Staggered Boards and Long-Term Firm Value, Revisited, 126 J. Fin. 
Econ 422 (2017); Martijn Cremers, Erasmo Giambona, Simone Sepe & Ye 
Wang, Hedge Fund Activism and Long-Term Firm Value, 17-20, working 
paper (Nov. 19, 2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2693231 (retrieved from SSRN Elsevier 
database).
    \325\ See, e.g., John Matsusaka & Oguzhan Ozbas, A Theory of 
Shareholder Approval and Proposal Rights, 33 J. Law Econ. Organ. 377 
(2017).
    \326\ See, e.g., letters from CCMC; CGCIV; IBC; Society.
    \327\ See letters from CCMC; CGCIV.
    \328\ See, e.g., Geoff Colvin, Going Private: Take this Market 
and Shove it, Fortune Magazine (May 29, 2016), available at http://fortune.com/going-private/ (citing the avoidance of proxy contests 
as motivation for firms to go private). While it is possible that 
companies could have some incremental incentive to stay or go 
private, we believe it is unlikely that the final amendments would 
result in an increased incentive for registrants to relist or 
redomicile overseas, given that these changes alone would not be 
sufficient to avoid being subject to the U.S. proxy rules. For 
example, foreign issuers may be subject to the U.S. proxy rules 
unless they qualify as foreign private issuers under 17 CFR 240.3b-
4(c) (Exchange Act Rule 3b-4(c)). In particular, a foreign 
registrant cannot qualify as a foreign private issuer if more than 
50% of its securities are held by U.S. residents and at least one of 
the following applies: (i) A majority of the officers and directors 
are U.S. citizens or residents; (ii) more than 50% of the issuer's 
assets are located in the U.S.; or (iii) the issuer's business is 
principally administered in the U.S. See 17 CFR 240.3b-4.
---------------------------------------------------------------------------

    Given these competing factors, to the extent there is any change in 
the incidence and perceived threat of typical proxy contests, the 
effects are likely to vary from registrant to registrant, and it is 
difficult to predict the average effects of changes in the nature of 
proxy contests across all registrants. The possible effects of changes 
in the incidence or threat of nominal proxy contests are similarly 
unclear. To the extent that such contests have the potential to affect 
the outcomes of director elections, the actual incidence or perceived 
threat of such contests may either increase director discipline or 
create a distraction for boards, as in the case of typical proxy 
contests. However, as discussed above, because of the low level of 
solicitation efforts by dissidents in a nominal contest, we anticipate 
that these contests will be much less likely to affect the outcomes in 
director elections compared to typical contests. Nevertheless, such 
contests may be used to attract attention in the interest of pursuing 
other changes. In some cases, drawing attention to particular issues in 
this way could lead to value-enhancing changes. In other cases, 
dissidents may use such contests to pursue interests that may not be 
shared by other shareholders, in which case the average shareholder may 
be unlikely to benefit and yet likely bear the costs of registrants 
expending additional resources on solicitation in such contests. In 
these cases, the negotiations resulting from such contests or the 
perceived threat of such contests could also result in registrants 
making concessions to dissidents that may not be in the best interest 
of the average shareholder in order to reduce the costs of contending 
with such contests.
    Finally, the effects of any changes in proxy contests may be 
affected by managers and market participants altering their behavior in 
reaction to the final amendments. In particular, changes in the nature 
of proxy contests may increase or decrease the use of complementary or 
substitute governance mechanisms.\329\ For example, studies have found 
that a historical increase in proxy contests was associated with a 
decrease in hostile takeovers, in which an entity acquires control of a 
company against the wishes of the incumbent board by purchasing its 
stock, suggesting proxy contests and hostile takeovers may be 
substitute mechanisms for control challenges.\330\ By contrast, 
activist shareholders with large holdings in a particular registrant 
(``activist blockholders'') who may be able to directly monitor and 
communicate with management, may represent a type of governance 
mechanism that can be a complement to proxy contests.\331\ For example, 
if activist blockholders are present, it may be easier to overcome 
collective action problems and initiate and win a proxy contest. Thus, 
any increase in the potential impact of proxy contests may be enhanced 
by the presence of activist blockholders. At the same time, if the 
potential impact of proxy contests increases, the incentive of 
registrants to engage with activist blockholders and make suggested 
improvements may increase, enhancing the monitoring value of activist 
blockholders.\332\
---------------------------------------------------------------------------

    \329\ The concepts of complementary and substitute governance 
mechanisms are discussed in Section IV.B supra.
    \330\ See, e.g., Fos Study.
    \331\ See Section IV.B.1.b for the frequency and size of 
institutional blockholdings among potentially affected registrants 
for which this data is available.
    \332\ For a broader review of issues concerning the role of 
activist blockholders in corporate governance, see Alex Edmans, 
Blockholders and Corporate Governance, 6 Ann. Rev. Fin. Econ. 23 
(2014).
---------------------------------------------------------------------------

    Any effects that follow from increasing the incidence or perceived 
threat of proxy contests may be either mitigated or magnified by 
indirect effects on these substitute and complementary mechanisms. For 
example, any increase in the incidence of proxy contests could be 
offset by reductions in the use of substitute

[[Page 68367]]

mechanisms such as takeovers.\333\ Relatedly, two commenters argued 
that adoption could impede private ordering and frustrate recent 
efforts by issuers and their shareholders to adopt ``proxy access'' 
bylaws.\334\ We cannot rule out this possibility, but if shareholders 
view a universal proxy system as such a close substitute to proxy 
access bylaws that they would disband efforts to pass proxy access 
bylaws at registrants, it is not apparent that it would come at a loss 
to shareholders. By contrast, another commenter did not expect such 
substitution, arguing that a universal proxy requirement would not 
change the equation for those who may use proxy access bylaws in the 
future because, in their view, universal proxy simply improves the 
process when there is a proxy contest with competing proxy cards.\335\
---------------------------------------------------------------------------

    \333\ We note that proxy contests may be a complementary 
mechanism for certain types of takeovers. In particular, proxy 
contests can facilitate some hostile takeovers by removing directors 
who oppose the transaction in question. See Mulherin & Poulsen 
Study, at 309.
    \334\ See letters from CCMC; CGCIV.
    \335\ See letter from CII dated Dec. 28, 2016.
---------------------------------------------------------------------------

    Alternatively, an increase in the incidence or perceived threat of 
proxy contests could be magnified by complementary mechanisms whose 
effectiveness and therefore usage may increase (such as by activists 
being more likely to acquire blockholdings) in an environment in which 
proxy contests are more frequent. Such interactions may have 
significant effects on the overall economic effects of the final 
amendments. However, because so many different governance mechanisms 
are closely interrelated, it is difficult to predict the extent and 
impact of such interactions.
5. Specific Implementation Choices
    In this section, we discuss, to the extent possible, any costs and 
benefits specifically attributable to individual aspects of the final 
amendments. We also discuss significant implementation alternatives and 
their benefits and costs compared to the amendments.
a. The Short Slate and Bona Fide Nominee Rules
Elimination of the Short Slate Rule
    For registrants other than funds, we are eliminating the short 
slate rule in Rule 14a-4(d)(4), which currently permits a dissident 
seeking to elect a minority of the board and running a slate of 
nominees that is less than the number of directors being elected to 
round out its slate by soliciting authority to also vote for certain 
registrant nominees. The elimination of the short slate rule will 
potentially impose costs on certain dissidents. Under the existing 
proxy rules, dissidents qualifying to use the short slate rule can 
select the set of registrant nominees that they prefer to round out 
their slate. Eliminating this rule, and requiring a universal proxy, 
will take away this choice on the part of the dissident, reducing any 
related strategic advantage that the dissident may expect to gain, and 
will instead allow shareholders voting on the dissident proxy card to 
select the registrant nominees, if any, that they prefer.
    We have considered whether, as an alternative to the final 
amendments, the proxy rules should instead be revised to treat contests 
that do not involve a potential change in the majority of the board 
differently from contests in which control of the board is at stake, as 
in the current short slate rule and as previously recommended by some 
observers.\336\ For example, we have considered an alternative approach 
that would not require the use of universal proxies in contests that 
may involve a potential change in a majority of the board. When a 
dissident is seeking a majority of seats on the board, electing a mixed 
board where a minority of seats would be held by dissident nominees may 
be inconsistent with the intentions and goals of both the dissident and 
the registrant. Not requiring universal proxy cards in such cases could 
reduce the likelihood of electing a mixed board when such an outcome is 
undesirable to both parties to the contest and could be disruptive. 
However, under this alternative, shareholders would continue to have 
more limited voting options when voting by proxy than when voting in 
person in contests that involve a potential change in a majority of the 
board. Furthermore, the risk of electing a mixed board when it would be 
disruptive or contrary to the goals of both parties to the contest 
could also be mitigated through disclosure emphasizing the importance 
of achieving (or retaining) majority control of the board and 
clarifying the willingness of each nominee to serve in the case control 
is not achieved.
---------------------------------------------------------------------------

    \336\ In 2013, the IAC recommended that the Commission consider 
providing proxy contestants with the option to provide universal 
proxies in connection with short slate director nominations. At that 
time, the IAC did not make such a recommendation in the case of 
elections in which majority control of the board is at stake. See 
Recommendations of the Investor Advisory Committee Regarding SEC 
Rulemaking to Explore Universal Proxy Ballots (Jul. 25, 2013), 
available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/universal-proxy-recommendation-072613.pdf (``IAC 2013 
Recommendation''), at 2.
---------------------------------------------------------------------------

Modification of the Bona Fide Nominee Rule
    We are amending the definition of a bona fide nominee under Rule 
14a-4(d)(4) for registrants other than funds to include all director 
nominees that have consented to being named in any proxy statement, 
whether that of the registrant or that of a dissident, relating to the 
registrant's next meeting of shareholders at which directors are to be 
elected.
    The final amendment to the definition of a bona fide nominee will 
remove the impediment imposed by the current rule to including other 
parties' nominees on one's own proxy card. We believe that this 
amendment will, in and of itself, likely impose no direct cost on 
parties to contested elections because it would not require parties to 
change their slates of nominees or their proxy materials. However, 
revising Rule 14a-4(d)(4) is a prerequisite to any rule that would 
allow or require universal proxies. As such, all of the other costs and 
benefits discussed above, the details of which depend on the other 
implementation choices in the final rule, are conditional on this 
amendment. Additionally, revising Rule 14a-4(d)(4) alone, without the 
other amendments we are adopting, would permit the optional use of 
universal proxies, an alternative we discuss below.
Solicitations Without a Competing Slate
    Under existing rules, a party may solicit proxies without 
presenting a competing slate, such as when soliciting proxies against 
some or all of the registrant nominees (a ``vote no'' campaign) or when 
soliciting proxies in favor of one or more proposals on matters other 
than the current election of directors. The final amendment to the bona 
fide nominee rule would permit, but not require, proponents conducting 
solicitations without a competing slate to also solicit authority with 
respect to some or all registrant nominees in their proxy statements 
and proxy cards. Because the registrant in a contest without competing 
slates does not need to include the proponent's proposals on its own 
card, shareholders who are positively inclined to the proponent's 
proposals (and solicited by the proponent) may be more likely to use 
the proponent's card if they are also offered the ability to vote on 
the election of some or all of the director nominees. As a result, the 
change to the bona fide nominee rule may result in somewhat increased 
support for proponents in solicitations without a competing slate.
    This potential increase in support may increase proponents' 
incentives to

[[Page 68368]]

initiate such campaigns. As in the other contexts discussed above, it 
is difficult to predict to what extent proponents may increase the 
incidence of such campaigns, or to what degree the involved parties may 
react in other ways to the potential for somewhat higher support in 
solicitations without a competing slate. For example, any resulting 
increase in the frequency of such campaigns may be partially offset by 
accompanying changes in incentives for registrants to engage with 
proponents. Such interventions could also substitute, in some cases, 
for contested elections. It is unclear whether increased support for, 
or an increased incidence of, proponent initiatives would generally 
enhance or detract from the effectiveness of boards and the efficiency 
and competitiveness of registrants.
    Some commenters were concerned about negative unintended 
consequences from permitting proponents conducting solicitations 
without a competing slate to include nominees in their proxy statements 
and proxy cards, and therefore opposed this approach.\337\ Two of these 
commenters in particular argued that the bona fide nominee rule 
revisions could lead to misleading or confusing proxy materials and 
adverse impacts on voting results in otherwise uncontested 
elections.\338\
---------------------------------------------------------------------------

    \337\ See letters from BR; Society; Sidley.
    \338\ See letters from BR; Society.
---------------------------------------------------------------------------

    We do not think there is a high risk of confusion among 
shareholders in the case where the soliciting proponent includes all 
nominees. Instead, in these cases the amendments we are adopting will 
serve to further shareholder enfranchisement by adding the director 
election to the menu of voting choices faced by shareholders voting on 
the proponent's card. We acknowledge that there is some risk of 
confusion when the soliciting proponent includes some but not all 
nominees on its proxy card. However, above we have clarified that when 
a dissident includes some but not all nominees on its proxy card, the 
dissident should disclose that shareholders who wish to vote for 
nominees not included on the dissident's proxy card may do so on the 
registrant's proxy card in order to avoid potential liability under 
Rule 14a-9 for omission of material facts.\339\ Such disclosures should 
help mitigate any confusion among shareholders in these cases.
---------------------------------------------------------------------------

    \339\ See supra Section II.I.2.c.
---------------------------------------------------------------------------

    An alternative to the final amendments would be to require 
proponents conducting solicitations without a competing slate to 
include the names of all duly nominated director candidates on their 
proxy cards (unless they are soliciting votes against all nominees). 
This approach may have limited effect in the case of a ``vote no'' 
campaign, because shareholders would already be able to vote ``for'' 
and ``against'' their choice of any registrant nominees by using the 
registrant proxy card. By contrast, in the case of a proponent that 
solicits in favor of a particular proposal, the registrant may choose 
to not include the proposal on its proxy card, in which case, 
shareholders voting on the proponent's proxy card would be 
disenfranchised as to the selection of directors under current rules 
and similarly may be disenfranchised under the final approach unless 
the proponent chooses to include all director nominees on its proxy 
card. This alternative would remove the risk of such disenfranchisement 
with respect to voting for directors. However, the risk of such 
disenfranchisement under the final amendments is likely mitigated 
because we expect that such proponents would have the incentive to 
include the director nominees on their proxy card to increase the 
incentive for shareholders to use their card and would generally not 
have strategic reasons to exclude nominees from their proxy card 
because of the lack of a competing slate.
b. Use of Universal Proxies
Mandatory Use of Universal Proxies in Non-Exempt Solicitations in 
Contested Elections
Mandatory vs. Optional Use of Universal Proxies
    Requiring both the registrant and the dissident in any contested 
election with competing slates to use universal proxies will enable all 
shareholders to vote for the combination of candidates of their choice 
in all such elections, whether they vote by proxy or in person at the 
meeting. As discussed in more detail above, imposing this mandate on 
the registrant as well as the dissident may impose some direct costs on 
both parties and may result in potentially significant, but uncertain, 
strategic advantages or disadvantages for these parties, leading to 
further costs and benefits for these parties and either benefits or 
costs for shareholders at large. Mandating the use of universal proxies 
by registrants in particular may have certain significant implications. 
Specifically, requiring registrants to use universal proxies will 
likely result in all shareholders receiving a proxy card that will 
allow them to vote for any combination of the full set of director 
nominees, more accurately reflecting the voting options available to 
shareholders at the meeting. However, requiring the names of the 
dissident nominees to appear on the registrant's proxy card will allow 
a form of access to the registrant's proxy materials without the 
eligibility criteria that accompany other forms of access,\340\ and 
could result in an increased incidence of nominal contests that 
capitalize on this new channel for such access. As discussed in Section 
IV.C.4.b above, it is unclear to what extent any dissidents would 
choose such an approach and whether any such contests would be 
beneficial or detrimental.
---------------------------------------------------------------------------

    \340\ For example, proxy access bylaws, where available, 
generally apply certain eligibility criteria including an ownership 
threshold.
---------------------------------------------------------------------------

    Some commenters were in favor of making the use of universal 
proxies optional for all parties rather than mandatory,\341\ which also 
has been recommended by certain observers in the past.\342\ Under an 
optional approach, whether or not a party chose to provide a universal 
proxy likely would depend on strategic considerations. Having the 
option rather than a requirement to use a universal proxy may benefit 
either registrants or dissidents, depending on the nature of individual 
contests. Optional universal proxies likely would be used by a 
contesting party, to the possible detriment of its opponent, when the 
party believes that including the names of the opponent's nominees on 
its own card would be in its best interest, but not otherwise. For 
example, a party that expects strong support for its opponent's 
nominees may prefer to include those nominees on its proxy card to 
increase the likelihood that shareholders use its card, since they 
would be able to do so without giving up the ability to support at 
least some of the opponent's nominees. Optional universal proxies may 
also mitigate the risk, relative to that under the final amendments, of 
electing a mixed board when such an outcome is inconsistent with the 
intentions of both the dissident and the registrant, because both 
parties may be less likely to use a universal proxy in such cases. This 
alternative may also reduce the likelihood of an increase in nominal 
contests because the registrant would control whether or not the names 
of dissident candidates were included on its proxy card. Finally, 
because allowing the optional use of universal proxy cards would 
necessarily entail removing the impediments to such proxies in the 
existing proxy rules, such an approach might facilitate the ``private 
ordering'' of

[[Page 68369]]

a universal proxy requirement--that is, the ability of shareholders to 
request that individual registrants commit to a policy of using 
universal proxies in future contests through changes to their corporate 
governing documents--at only those registrants where shareholders 
believe mandatory universal proxies would be beneficial.\343\
---------------------------------------------------------------------------

    \341\ See, e.g., letters from Davis Polk; Society.
    \342\ See IAC 2013 Recommendation, at 2.
    \343\ The availability of such private ordering may depend on 
developments in state law. Also, if only a minority of shareholders 
is potentially interested in splitting their votes, it may be 
difficult to obtain the support required to revise bylaws or other 
corporate governing documents to require universal proxies.
---------------------------------------------------------------------------

    However, under an optional approach it is likely that in many cases 
neither registrants nor dissidents would include their opponent's 
nominees on their proxies, to avoid diluting the potential support for 
their own nominees among those shareholders that use their proxy card. 
To the extent that contesting parties were further given the option to 
determine how many and which of their opponent's nominees to include, 
it is likely that the contesting parties would often include fewer than 
all of the duly-nominated candidates on their proxy cards, even when 
they did include some of their opponent's nominees. In any such cases, 
shareholders would continue to have more limited voting options when 
voting by proxy than when voting in person. Thus, we expect that an 
optional approach would result in inconsistent application and not 
fully achieve the goal of allowing shareholders the ability to vote by 
proxy for their preferred combination of director candidates, as they 
could at a shareholder meeting. Several commenters also raised concerns 
about an optional approach based on the risk for such inconsistent 
application of universal proxy due to strategic considerations by both 
registrants and dissidents.\344\ As discussed in more detail in the 
Proposing Release, we additionally note that Canada's system of 
optional universal proxies has not resulted in widespread and 
consistent application of universal proxy in director contests.\345\
---------------------------------------------------------------------------

    \344\ See letters from SIFMA; CCGG; Fidelity.
    \345\ See Section IV.D.5.b of the Proposing Release. See also 
letter from CCGG (stating that ``Universal proxy ballots are 
currently legal in Canada, and nothing prevents parties from using 
them now and yet they are seldom used, presumably because the 
parties do not see an advantage.'').
---------------------------------------------------------------------------

    Some commenters recommended different versions of an opt-out 
approach rather than a mandatory approach. For example, one commenter 
advocated a mandatory requirement that registrants could opt out of 
with approval of a majority of (non-insider) shareholders.\346\ Another 
commenter advocated that registrants be able to opt out of universal 
proxy through a board vote.\347\ Theoretically, such opt-out approaches 
could maximize the benefits and minimize the costs of a mandatory 
approach if shareholders or boards would only opt out from the 
mandatory use in those cases where it is expected to be harmful to 
shareholders. However, in practical application this is less likely to 
be the case, since there is a risk that self-interested large 
shareholders or board members would vote to opt out precisely in such 
cases where mandated use of universal proxy and shareholder 
enfranchisement in director elections is optimal to shareholders at 
large. In addition, such opt-out alternatives would run counter to the 
objective of allowing shareholders to elect their preferred candidates 
through the proxy process as they can at the annual meeting, and the 
efficiency gains to shareholders that are interested in split-ticket 
voting would be lost for the registrants that would opt out of 
mandatory universal proxies.
---------------------------------------------------------------------------

    \346\ See letter from Prof. Hirst.
    \347\ See letter from Sidley.
---------------------------------------------------------------------------

    In the Proposing Release, we also considered hybrid alternatives 
that would require at least one party to a contest to use a universal 
proxy, potentially allowing a greater number of shareholders to split 
their ticket using a proxy compared to an optional approach but also 
potentially allowing fewer shareholders the ability to split their 
ticket compared to the final rule. We discuss the potential economic 
effects of these hybrid alternatives in more detail in the Proposing 
Release.\348\ We did not receive any support for the hybrid 
alternatives from commenters, whereas two commenters were explicitly 
against such approaches.\349\
---------------------------------------------------------------------------

    \348\ See Section IV.D.5.b of the Proposing Release.
    \349\ See letters from CII Dec. 28, 2016; Colorado PERA.
---------------------------------------------------------------------------

Applicability of Mandatory Universal Proxies to Registered Investment 
Companies and Business Development Companies
    As discussed above, the Commission is continuing to consider the 
application of a universal proxy mandate to some or all funds.\350\
---------------------------------------------------------------------------

    \350\ See supra section II.J.
---------------------------------------------------------------------------

Notice Requirements
    The final amendments would require that dissidents in all contested 
elections provide notice to registrants of their intention to solicit 
proxies in favor of other nominees, and the names of those nominees, no 
later than 60 calendar days prior to the anniversary of the previous 
year's annual meeting date.\351\ A notice to the registrant is 
necessary for the registrant to be able to include the names on the 
universal proxy card it prepares and distributes to shareholders. 
Without providing such notice, a dissident would not be permitted to 
run a non-exempt solicitation in support of its director nominees. The 
final amendments would also require registrants to provide similar 
notice to dissidents no later than 50 days before the anniversary of 
the previous year's annual meeting date, to allow dissidents sufficient 
time to include the names of registrant nominees on the universal proxy 
card that they prepare and disseminate to shareholders.
---------------------------------------------------------------------------

    \351\ If the registrant did not hold an annual meeting during 
the previous year, or if the date of the meeting has changed by more 
than 30 calendar days from the previous year, then the final 
amendments would require that notice must be provided no later than 
60 calendar days prior to the date of the annual meeting or the 
tenth calendar day following the day on which public announcement of 
the date of the annual meeting is first made by the registrant, 
whichever is later.
---------------------------------------------------------------------------

    Because advance notice bylaws commonly require a similar amount of 
notice by dissidents seeking to nominate alternative candidates, the 
effect of the notice requirement for dissidents may be limited.\352\ As 
discussed above, we understand that advance notice bylaws generally 
have deadlines ranging from 90 to 120 days before the meeting 
anniversary date.\353\ However, it is possible that some registrants 
have advance notice bylaws with later deadlines. Also, some registrants 
do not currently have such bylaws and it is possible that boards may 
waive the applicability of such bylaws.\354\ Further, relatively 
smaller registrants are somewhat less likely to have advance notice 
provisions than larger registrants, and proxy contests are more common 
among these relatively smaller registrants.\355\ The final amendments 
would, in effect, replicate the primary effects of an advance notice 
bylaw applying to contested elections even at registrants that 
currently have no advance notice bylaws (or bylaws with later 
deadlines, to the extent these exist).
---------------------------------------------------------------------------

    \352\ It has been estimated that 99% of S&P 500 firms and 95% of 
Russell 3000 firms had an advance notice bylaw at the end of 2020. 
See supra Section IV.B.2.b.
    \353\ See S&C 2015 Report.
    \354\ See supra note 214.
    \355\ See supra Section IV.B.2.b.
---------------------------------------------------------------------------

    Although we believe that only a small fraction of registrants do 
not already have a comparable or stricter notice requirement, because 
the bylaws at different registrants may have been designed to reflect 
their individual

[[Page 68370]]

circumstances, imposing this new requirement on all registrants may 
result in costs. In particular, the notice requirements would impose a 
new constraint on dissidents in cases in which the same degree of 
notice was not otherwise required, potentially imposing some 
incremental costs on such dissidents. The final amendments would also 
prevent the incidence (and eliminate the threat) of contests initiated 
later than the required notice deadline (``late-breaking'' proxy 
contests) at all registrants. As in the case of other potential effects 
of the final amendments on the incidence and perceived threat of 
contested elections, these effects of the notice requirements may 
reduce either the degree of board discipline or the risk of 
unproductive distraction for boards.\356\
---------------------------------------------------------------------------

    \356\ See supra Section IV.C.4.
---------------------------------------------------------------------------

    To consider potential effects on late-breaking proxy contests, we 
reviewed the timing of recent proxy contests. As shown in Table 2 
above, we estimate that dissidents filed their initial preliminary 
proxy statements on average 65 days before the meeting anniversary date 
for contested elections initiated in years 2017-2020.\357\ We also 
estimate that approximately 57% of these contested elections had an 
initial preliminary proxy statement filed by the dissident within 60 
days of the meeting anniversary date, which may represent some late-
breaking contests.\358\ While the filing of a preliminary proxy 
statement does not mark the earliest point at which a dissident 
initiates a proxy contest and finalizes a slate of nominees, it does 
provide a threshold date before which these actions must have occurred. 
We also considered the earliest date at which a dissident either 
directly communicated its intent to nominate directors to the 
registrants or publicly announced its intent to pursue a proxy contest 
in a regulatory filing. For those contests for which we have such 
information, we estimate that in approximately 10% of these contested 
elections the dissident communicated or publicly announced its intent 
to pursue a proxy contest within 60 days of the meeting anniversary 
date, which is another measure of potential late-breaking 
contests.\359\ The initial communication or public announcement of 
intent does not necessarily coincide with providing notice of the names 
of the dissident nominees, but it may mark a threshold date after which 
such notice could have been provided.
---------------------------------------------------------------------------

    \357\ See supra Section IV.B.2.b.
    \358\ Id.
    \359\ Id.
---------------------------------------------------------------------------

    We therefore cannot rule out that the notice requirement may 
prevent some proxy contests that would otherwise have occurred. 
However, dissidents who might have initiated late-breaking contests may 
simply adjust their timetable to be compatible with the notice 
requirement. Also, any effects of the notice requirements on the 
incidence or threat of late-breaking contested elections may be offset 
somewhat by the ability of dissidents who are unable to meet the notice 
deadline to take other actions, such as initiating a ``vote no'' 
campaign, using an exempt solicitation,\360\ or calling a special 
meeting (to the extent possible under the bylaws) to remove existing 
directors and elect their own nominees, which may allow them to achieve 
similar goals with respect to changes to the board.
---------------------------------------------------------------------------

    \360\ In this case, the total number of persons solicited could 
be no more than 10. See Section IV.B.3.
---------------------------------------------------------------------------

    While advance notice bylaws currently apply to dissidents at many 
registrants, registrants are not currently subject to a requirement 
that they provide notice of their nominees to dissidents. Thus, the 
notice requirement for registrants would represent a new obligation for 
registrants in contested elections. We estimate that 61% of registrants 
filed a preliminary proxy statement (or definitive proxy statement if 
they did not file a preliminary) at least 50 days before the meeting 
anniversary date for contested elections initiated in years 2017-
2020,\361\ so we expect that the majority of registrants will have a 
list of nominees ready by the notice deadline. However, the notice 
requirement may require some registrants to finalize their list of 
nominees somewhat earlier than they would otherwise.
---------------------------------------------------------------------------

    \361\ Based on data from Factset's SharkRepellent database and 
staff analysis of EDGAR filings.
---------------------------------------------------------------------------

    Also, to the extent that a registrant might consider changing its 
selected nominees after providing notice and after the dissident 
thereby disseminates its definitive proxy materials (but perhaps before 
the registrant does so), the notice requirement may provide registrants 
with an increased incentive not to make such changes because of the 
risk that votes for registrant nominees on the dissident card could be 
invalidated. Because the notice requirement may require some 
registrants to finalize their nominees earlier than they would 
otherwise and may increase registrants' incentives not to change their 
nominees, there is a possibility that this requirement could have a 
detrimental effect on the quality of candidates that registrants 
nominate. However, the majority of registrants in recent contests filed 
a preliminary proxy statement at least 50 days before the meeting 
anniversary date, so the notice deadline is close to the date by which 
registrants typically disclose their nominees. We therefore expect any 
such effects to generally be comparatively minor.
    We have also considered alternatives to the notice requirements 
included in the final amendments, such as earlier as well as later 
potential notice deadlines for dissidents. In these alternatives, we 
have assumed that the notice deadline for registrants would also be 
revised to be 10 days after the revised deadline for the dissident, to 
allow the registrant sufficient time to prepare its notice and list of 
nominees in reaction to the receipt of a notice from a dissident. Under 
a later notice deadline, the risk of preventing late-breaking proxy 
contests that would otherwise have occurred, particularly at 
registrants without advance notice bylaws, would be reduced. For 
example, when considering a deadline of no later than 45 calendar days 
(as opposed to 60 calendar days, as in the final rule) prior to the 
meeting anniversary date, we found that in approximately 7% of 
contested elections initiated in years 2017-2020, the dissident 
announced its intent to pursue a proxy contest within 45 days of the 
anniversary (as compared to 10% within 60 days), and in 25% of the 
contests initiated in years 2017-2020, the dissident filed a 
preliminary proxy statement within 45 days of the meeting (as compared 
to 57% within 60 days).
    Additionally, a later deadline for registrants would reduce the 
likelihood that some registrants may have to finalize their nominees 
earlier than they would otherwise. For example, we estimate that in 
approximately 19% of contested elections initiated in years 2017-2020, 
the registrant filed its preliminary proxy statement within the 35 days 
before the meeting anniversary date (as compared to 39% within 50 
days).
    However, a later deadline may increase the risk of confusion among 
shareholders and impose additional solicitation costs if the 
registrant's non-universal proxy card has already been disseminated and 
requires revision. In particular, we estimate that in 22% of contests 
initiated in years 2017-2020, registrants filed a definitive proxy 
statement at least 45 days before the

[[Page 68371]]

meeting anniversary date.\362\ By contrast, we estimate that in fewer 
than 10% of contests in this sample did the registrant file a 
definitive proxy statement earlier than 60 days before the meeting 
anniversary date.\363\
---------------------------------------------------------------------------

    \362\ Based on data from Factset's SharkRepellent database and 
staff analysis of EDGAR filings.
    \363\ Id.
---------------------------------------------------------------------------

    An earlier deadline, such as 90 days prior to the anniversary of 
the prior year's meeting, would reduce the risk, relative to the final 
amendments, of the potential confusion or costs related to notice being 
received after non-universal registrant proxy cards have already been 
disseminated. However, the risk that registrants will have distributed 
their proxy cards prior to the 60-day deadline seems relatively low, 
and an earlier deadline may further preclude late-breaking contests 
beyond those prevented by the required deadline. For example, when 
considering a deadline of no later than 90 calendar days (as opposed to 
60 calendar days, as in the final rule) prior to the anniversary of the 
previous year's annual meeting date, we found that in a significant 
percentage of contested elections initiated in years 2017-2020, the 
dissident communicated or announced its intent to pursue a proxy 
contest or filed its preliminary proxy statement between 60 and 90 days 
prior to the meeting anniversary date. Some of these contests may have 
been permitted under a 60-day deadline but excluded in the case of a 
90-day deadline.\364\
---------------------------------------------------------------------------

    \364\ Staff estimates that in 25% of contested elections 
initiated in years 2017-2020, the dissident communicated or 
announced its intent to pursue a proxy contest between 60 and 90 
days prior to the meeting, and that in 30% of contested elections 
initiated in years 2017-2020, the dissident filed a preliminary 
proxy statement between 60 and 90 days prior to the meeting. See 
supra Section IV.B.2.b. Neither the date on which intent to pursue a 
contest is initially communicated/announced nor that on which a 
preliminary proxy statement is filed need correspond to the date on 
which notice could have been provided in these contests, though they 
may provide some indication of the universe of contests that might 
have been affected by a particular notice deadline.
---------------------------------------------------------------------------

    Additionally, an earlier deadline for registrants would increase 
the likelihood that some registrants may have to finalize their 
nominees earlier than they would otherwise. For example, we estimate 
that in approximately 52% of contested elections initiated in years 
2017-2020, the registrant filed its preliminary proxy statement between 
80 and 50 days before the meeting anniversary date.\365\
---------------------------------------------------------------------------

    \365\ Based on data from Factset's SharkRepellent database and 
staff analysis of EDGAR filings.
---------------------------------------------------------------------------

    A further alternative would be to require universal proxies in 
cases where the dissident provides notice to the registrant, and not 
require them in cases where the dissident does not meet the notice 
deadline. Under this alternative, the dissident would be permitted to 
initiate a late-breaking proxy contest but, because of the risk of 
confusion if proxies have already been disseminated, would not trigger 
the use of universal proxies, while other contests (in which notice was 
provided) would require universal proxies. This alternative may raise 
similar concerns to those discussed above with respect to the optional 
use of universal proxies, in that there would still be some elections 
without universal proxies, and the dissident could strategically time 
its actions to avoid triggering universal proxies when it believes 
there is an advantage to doing so.
    One commenter claimed that registrants typically re-evaluate their 
contemplated slate after receiving advance notice of a contest, often 
leading to recruitment of new nominees, and that such important 
decisions will not be possible within 10 days.\366\ As an alternative 
that would address this comment, we have also considered not requiring 
registrants to provide notice to dissidents of their nominees. In this 
case, dissidents would generally become aware of the registrant 
nominees when the registrant files its preliminary proxy statement, 
which is required to be filed at least 10 calendar days prior to the 
date the registrant's definitive proxy statement is first sent to 
shareholders, and would have to finalize their own proxy cards 
thereafter. This alternative would avoid imposing a new notice 
obligation on registrants, and may reduce the risk that such an 
obligation could marginally reduce the quality of registrant nominees 
in some cases. However, requiring that notice be provided by both 
parties to the contest would limit the possibility that registrants may 
gain a strategic advantage by learning about and being able to react to 
the dissident's slate of nominees significantly earlier than when the 
dissident may be informed of the registrant's slate.
---------------------------------------------------------------------------

    \366\ See letter from Society dated Jan. 10, 2017.
---------------------------------------------------------------------------

Minimum Solicitation Requirement for Dissidents
    As discussed above, we have raised the threshold from the proposed 
majority of the voting power to 67% of the voting power in response to 
commenters' concerns that setting the threshold at the majority of the 
voting power would insufficiently deter the potential for 
``freeriding'' of dissident nominees on the registrant's proxy 
card.\367\ As discussed in more detail above,\368\ because the vast 
majority of typical proxy contests will not be affected by this 
increase in solicitation requirement, and in the infrequent cases in 
which there may be an effect this requirement will impose minor 
incremental costs to dissidents, we maintain our assessment from the 
Proposing Release that the solicitation requirement will not have 
significant effects on the costs of typical proxy contests.\369\
---------------------------------------------------------------------------

    \367\ See supra Section II.D.3.
    \368\ See supra Section IV.C.2.a.
    \369\ See supra Section IV.C.2.b.
---------------------------------------------------------------------------

    Nevertheless, we expect that the solicitation requirement in the 
final amendments will impose a cost on any dissidents that may try to 
capitalize on the ability to introduce the names of alternative 
candidates on the registrant's proxy card by running a nominal proxy 
contest, in which minimal resources are spent on solicitation. As 
discussed above, in addition to the existing cost of pursuing a nominal 
proxy contest, we estimate that, using the least expensive approach, it 
will cost on average between $5,300 and $9,800 depending on the size of 
the registrant to meet the minimum solicitation requirement through an 
intermediary.\370\ Under the proposed threshold of a majority of the 
voting power, the equivalent estimated range would instead be 
approximately $5,100 to $6,200, depending of the size of the 
registrant.\371\ Thus, raising the threshold to 67% from a majority of 
the voting power will increase the cost of nominal contests somewhat 
across the board, but especially for dissidents targeting larger 
registrants. Therefore, the additional cost required to comply with the 
minimum solicitation requirement, beyond current expenditures in 
contests, is likely to represent a relatively larger incremental cost 
in the case of nominal contests relative to the baseline. We expect 
that the minimum solicitation requirement to some degree may deter 
dissidents from initiating nominal contests, as discussed in Section 
IV.C.4.b above.
---------------------------------------------------------------------------

    \370\ Id.
    \371\ See supra note 273 for estimation details. The lower 
estimated costs compared to the 67% threshold case is due to fewer 
accounts needed to be solicited and a reduction in the estimated 
number of nominees causing lower nominee coordination fees. Note 
that the estimated costs are bounded from below at $5,000, which is 
the minimum intermediary unit fee per NYSE Rule 451.
---------------------------------------------------------------------------

    In the Proposing Release we considered the alternative of requiring 
universal proxies without imposing any minimum solicitation requirement 
on

[[Page 68372]]

dissidents,\372\ but did not receive much support from commenters in 
favor of such an alternative.\373\ By contrast, we received significant 
support for a minimum solicitation requirement on dissidents when 
mandating the use of universal proxies in director elections, generally 
based on concerns related to the risk that dissidents could otherwise 
``freeride'' on registrants' solicitation efforts and launch 
potentially frivolous contests without meaningful solicitation efforts 
of their own.\374\ We share these concerns and continue to believe, for 
reasons discussed in more detail in the Proposing Release,\375\ that 
without such a requirement, dissidents' ability to introduce an 
alternative set of nominees to all shareholders on registrants' 
universal proxy cards without incurring meaningful solicitation 
expenditures may result in an increase in frivolous contests that do 
not enhance shareholder value. Such contests could also cause 
registrants to incur significant expenses to advocate against the 
dissident's position and could distract management from critical 
business matters. However, we acknowledge that by imposing a minimum 
solicitation requirement it may make some otherwise beneficial contests 
cost-prohibitive. We believe such instances will be rare, as dissidents 
in most typical contests already meet the solicitation requirement, or, 
in the few cases they do not, we estimate they face relatively limited 
increases in solicitation costs to meet the requirement, as discussed 
above.
---------------------------------------------------------------------------

    \372\ See Section IV.D.5.b of the Proposing Release for a more 
detailed discussion of this alternative.
    \373\ Only one commenter supported no solicitation requirement. 
See letter from Bulldog.
    \374\ See supra Section II.D.2 for a review of the comments 
received on the minimum solicitation requirement.
    \375\ See Section IV.D.5.b of the Proposing Release.
---------------------------------------------------------------------------

    Although some of the commenters in favor of the solicitation 
requirement also supported the proposed threshold of a majority of the 
voting power, other commenters in favor recommended higher thresholds, 
such as two-thirds, 75%, or 100% of the voting power.\376\ In the 
Proposing Release we considered the alternative of requiring that 
dissidents solicit all shareholders,\377\ and concluded that this 
alternative could increase minimum solicitation costs to such an extent 
that it may reduce the incidence of nominal contests that might not be 
in the interests of shareholders at large. However, we also concluded 
that this alternative may significantly increase the costs borne by 
dissidents in a large fraction of typical proxy contests and may 
prevent some value-enhancing contests from taking place. In response to 
commenters who recommend that we require dissidents to solicit all 
shareholders,\378\ we have updated and expanded our estimations of the 
costs to dissidents of meeting such a requirement both for nominal and 
typical contests, respectively.
---------------------------------------------------------------------------

    \376\ See supra Section II.D.2 for a review of the comments 
received on the minimum solicitation requirement.
    \377\ See Section IV.D.5.b of the Proposing Release for a more 
detailed discussion of this alternative.
    \378\ See letters from SIFMA; Mediant.
---------------------------------------------------------------------------

    Specifically, we estimate that the average cost for a dissident 
soliciting all shareholders using the least expensive approach \379\ in 
a nominal contest would be approximately $14,900 at companies with less 
than $300 million in market capitalization, approximately $26,200 at 
companies with between $300 million and $2 billion in market 
capitalization, approximately $58,300 at companies with between $2 
billion and $10 billion in market capitalization, and approximately 
$516,900 at companies with market capitalization above $10 
billion.\380\ These are significantly higher estimated costs, 
especially for larger registrants, than what we estimated above for 
using the least expensive approach to meet the final rule's 67% minimum 
solicitation requirement through an intermediary, which vary between on 
average $5,300 and $9,800 depending on the registrant's size in terms 
of market capitalization.\381\
---------------------------------------------------------------------------

    \379\ See supra note 262.
    \380\ These estimates were derived by staff based on the NYSE 
Rule 451 fee schedule and industry data provided by a proxy services 
provider. See supra note 273 (providing assumptions for the 
estimation of the average costs of solicitation at a registrant in 
each of four different market capitalization categories). In this 
case, staff estimated the costs of NYSE Rule 451 fees and postage 
for soliciting the average total number of accounts in each size 
category (see supra Section IV.B.1.a for the average number of total 
accounts in each category of registrant) using notice and access 
delivery, and assumed that the number of brokers and banks involved 
for the purpose of determination of the nominee coordination fee is 
equal to 84, 130, 214, and 701, respectively.
    \381\ See supra Section IV.C.2.b.
---------------------------------------------------------------------------

    In addition, a requirement that dissidents solicit all shareholders 
would also affect the cost to dissidents in more typical proxy 
contests. As discussed above, we understand that in 48% of recent proxy 
contests, dissidents solicited a number of shareholders fewer than all 
of the shareholders eligible to vote.\382\ We estimate that, using the 
least expensive approach,\383\ it would have cost dissidents in these 
contests approximately an additional $9,000 to $4.0 million, with a 
median of approximately $37,000, beyond the costs they already 
incurred, to increase their level of solicitation to include all 
shareholders.\384\ These new cost estimates strengthen our belief that 
requiring dissidents to solicit all shareholders would increase the 
costs borne by dissidents in most typical proxy contests and may 
prevent some contests that may be beneficial to shareholders at large 
from taking place.
---------------------------------------------------------------------------

    \382\ See supra Section IV.B.2.
    \383\ See supra note 262.
    \384\ These estimates were derived by staff based on the NYSE 
Rule 451 fee schedule and industry data provided by a proxy services 
provider for a sample of 31 proxy contests for annual meetings held 
between July 1, 2018 and June 30, 2019. In particular, the required 
increase in expenses to solicit all shareholders was estimated based 
on the number of additional accounts that would have to be solicited 
among the 15 cases where all shareholders were not solicited and the 
applicable fees under NYSE Rule 451 and postage costs for notice and 
access delivery. For the purpose of the nominee coordination fee, 
staff also used the provided data on the proxy contests to estimate 
the increase in the number of banks or brokers considered 
``nominees'' under NYSE Rule 451 that might be involved at the 
higher solicitation level. The estimated incremental solicitation 
cost for each contest includes nominee coordination fees of $22 for 
each of the additional nominees expected to be involved, plus basic 
processing fees, notice and access fees, preference management fees, 
and postage totaling $1.57 (for suppressed accounts, such as those 
that have affirmatively consented to electronic delivery) to $1.80 
(for other accounts) per account for additional accounts solicited 
within the first 10,000 accounts solicited, and on a declining scale 
for additional accounts thereafter. Staff assumed that half of the 
additional accounts to be solicited are suppressed and that none of 
these accounts requested full set delivery by prior consent or upon 
receipt of the notice (because such delivery requirements may apply 
to only a small fraction of accounts and are not expected to 
significantly affect the overall estimate of costs). Additional 
notice and access fees of $0.25 per account for the first 10,000 
accounts, and on a declining scale thereafter, were assumed to be 
required for each account that was solicited prior to increasing the 
level of solicitation because of the use of notice and access 
delivery for some accounts. The estimates also include incremental 
intermediary unit fees of $0.25 per account for each additional 
account above 20,000 accounts solicited. This estimate does not 
include printing costs for the notice, for which we do not have 
relevant data to make an estimate.
---------------------------------------------------------------------------

    As another alternative, we have also considered a 75% threshold of 
the voting power for the minimum solicitation requirement, as recommend 
by at least one commenter.\385\ Repeating our estimations above using 
this threshold, we estimate that the average cost for a dissident to 
meet a 75% minimum solicitation requirement using the least expensive 
approach \386\ in a nominal contest would be approximately $5,600 at 
companies with less than $300 million in market capitalization, 
approximately $6,400 at companies with between $300 million and $2 
billion in market capitalization, approximately $7,300 at companies 
with between $2 billion and $10 billion

[[Page 68373]]

in market capitalization, and approximately $13,100 at companies with 
market capitalization above $10 billion.\387\ Not surprisingly, 
increasing the threshold to 75% would increase the expected average 
costs of nominal contests compared to the 67% threshold we are 
adopting, even if the increase is modest for the smaller registrant 
categories.
---------------------------------------------------------------------------

    \385\ See letter from CII dated Nov. 8, 2018.
    \386\ See supra note 262.
    \387\ These estimates were derived by staff based on the NYSE 
Rule 451 fee schedule and industry data provided by a proxy services 
provider. See supra note 273 (providing assumptions for the 
estimation of the average costs of solicitation at a registrant in 
each of four different market capitalization categories). In this 
case, staff estimated the costs of NYSE Rule 451 fees and postage 
for soliciting the minimum number of accounts representing at least 
75% of the voting power in each size category (estimated at 79, 149, 
256, and 898, respectively) using notice and access delivery, and 
assumed that the number of brokers and banks involved for the 
purpose of determination of the nominee coordination fee is equal to 
20, 50, 85, and 299, respectively.
---------------------------------------------------------------------------

    As discussed above, it is our understanding that dissidents in very 
few typical contests in recent years solicit shareholders representing 
less than 75% of the voting power.\388\ However, based on the few cases 
we have observed, we estimate the average additional cost those 
dissidents would have incurred, beyond their actual incurred 
solicitation expenses, to meet the 75% requirement using the least 
expensive approach through an intermediary to be approximately 
$20,000.\389\ This estimated additional cost is approximately four 
times the additional cost we estimated for the 67% threshold we are 
adopting. This indicates that increasing the threshold to 75% (or 
beyond) would materially increase costs for dissidents in typical 
contests.
---------------------------------------------------------------------------

    \388\ See supra Section IV.B.2.b.
    \389\ These estimates were derived by staff based on the NYSE 
Rule 451 fee schedule and industry data provided by a proxy services 
provider. See supra note 263 (providing assumptions for the 
estimation of the average costs of solicitation in a typical 
contest). In this case, staff estimated the average additional costs 
of NYSE Rule 451 fees and postage needed to meet a minimum 
solicitation requirement of 75% of the voting power, using the two 
cases out of the 35 contests from June 30, 2015 through April 15, 
2016 provided by a proxy services provider in which less than 75% of 
the shares eligible to vote were originally solicited by the 
dissident.
---------------------------------------------------------------------------

    As an alternative to a solicitation requirement based on voting 
power, one commenter recommended a minimum solicitation threshold of a 
majority of shareholder accounts entitled to vote on director 
nominations, asserting that this would help ensure meaningful dissident 
solicitation efforts.\390\ Repeating our estimations using a 50% of 
shareholder accounts threshold, we estimate that the average cost for a 
dissident soliciting all shareholders using the least expensive 
approach \391\ in a nominal contest would be approximately $10,900 at 
companies with less than $300 million in market capitalization, 
approximately $17,100 at companies with between $300 million and $2 
billion in market capitalization, approximately $33,200 at companies 
with between $2 billion and $10 billion in market capitalization, and 
approximately $270,600 at companies with market capitalization above 
$10 billion.\392\ Thus, the increase in costs of nominal contests under 
this alternative solicitation requirement is significantly greater than 
the increase in costs we expect under the 67% of the voting power 
threshold we are adopting, which we estimate would be on average 
approximately $5,300 to $9,800 depending on the size of the 
registrant.\393\
---------------------------------------------------------------------------

    \390\ See letter from Elliott.
    \391\ See supra note 262.
    \392\ These estimates were derived by staff based on the NYSE 
Rule 451 fee schedule and industry data provided by a proxy services 
provider. See supra note 273 (providing assumptions for the 
estimation of the average costs of solicitation at a registrant in 
each of four different market capitalization categories). In this 
case, staff estimated the costs of NYSE Rule 451 fees and postage 
for soliciting the average total number of accounts in each size 
category (estimated at 79, 149, 256, and 898, respectively) using 
notice and access delivery, and assumed that the number of brokers 
and banks involved for the purpose of determination of the nominee 
coordination fee is equal to 20, 50, 85, and 299, respectively.
    \393\ See supra Section IV.C.2.b.
---------------------------------------------------------------------------

    For the recent typical contests discussed above in which dissidents 
solicited a number of shareholders fewer than all of the shareholders 
eligible to vote,\394\ dissidents solicited less than 50% of accounts 
in 13 out of 15 contests. We estimate that the alternative of requiring 
solicitation of at least 50% of shareholder accounts in these 13 cases 
would have cost approximately an additional $3,000 to $1.9 million, 
with a median of approximately $28,000,\395\ beyond the costs they 
already incurred, to increase their level of solicitation to meet this 
threshold, using the least expensive approach.\396\ Even though this 
alternative would increase solicitation costs of typical contests less 
than the alternative of requiring solicitation of all shareholders, it 
still represents a significant increase compared to the current rules 
and also compared to the increase in costs we expect under the 67% of 
the voting power threshold we are adopting, which we estimate would be 
zero for most typical contests and on average approximately $5,400 for 
the infrequent typical contests soliciting less than 67% of the voting 
power.\397\
---------------------------------------------------------------------------

    \394\ See supra Section IV.B.2.
    \395\ These estimates were derived by staff based on the NYSE 
Rule 451 fee schedule and industry data provided by a proxy services 
provider. See supra note 384 (providing assumptions for the 
estimation of the average costs of solicitation in a typical contest 
in which the dissident does not solicit all shareholders). In this 
case, staff estimated the average increase in costs of NYSE Rule 451 
fees and postage based on the number of additional accounts that 
would have to be solicited to reach 50% of accounts based on the 
sub-sample of 13 proxy contests in which the dissident solicited 
less than 50% of accounts.
    \396\ See supra note 262.
    \397\ See supra Section IV.C.2.a.
---------------------------------------------------------------------------

    In general, any solicitation requirement that imposes a very low 
cost on the dissident may increase the risks discussed above that are 
associated with permitting the dissident to obtain exposure for its 
nominees on the registrant's card with minimal expenditure of its own 
resources in the solicitation, while a solicitation requirement that 
imposes a very high cost may deter value-enhancing proxy contests. 
Based on the estimated dissident solicitation costs for both nominal 
and typical contests under different alternative minimum solicitation 
requirements, we think the 67% of the voting power solicitation 
requirement we are adopting achieves a reasonable balance of reducing 
the risk of frivolous contests without materially impeding legitimate 
contests.
    One concern raised by several commenters related to the proposed 
minimum solicitation requirement is that retail shareholders would not 
receive solicitation materials from dissidents soliciting the minimum 
required.\398\ One of these commenters indicated that shareholders 
omitted from the dissident's solicitation would be at an informational 
disadvantage, making it difficult for those shareholders to make 
informed voting decisions, which would potentially discourage 
shareholders from participating in the election.\399\
---------------------------------------------------------------------------

    \398\ See letters from BM; SIFMA; ABC; BR; CCMC; CGCIV; Davis 
Polk.
    \399\ See letter from BR.
---------------------------------------------------------------------------

    We acknowledge that any approach that requires the dissident to 
solicit less than all of the shareholders entitled to vote (such as 
under the final amendments) may result in many shareholders, especially 
those with relatively few shares in their accounts such as many retail 
investors, not receiving proxy material directly from the dissident. As 
noted in the Proposing Release, any shareholders not solicited by the 
dissident will still see the names of the dissident's nominees on the 
registrant's proxy card but would have to seek out the dissident's 
proxy statement in the EDGAR system (as directed by the registrant's 
proxy

[[Page 68374]]

statement) to learn about those nominees and make an informed voting 
decision.\400\ For a shareholder that is motivated enough to vote in a 
director election, we generally do not think that having to seek out 
the dissident's proxy statement online through EDGAR is a burden large 
enough to discourage the investor from making the effort to become 
informed about the dissident's nominees. However, we cannot rule out 
that there will be some shareholders at the margin who will not be 
willing to expend the effort required to find the information, and 
consequently become discouraged enough that they do not follow through 
on their plans to vote in the election, but we think this will be a 
small fraction of otherwise interested shareholders. More importantly, 
given that there is no minimum solicitation requirement in place 
currently under the baseline, and assuming current dissidents 
conducting typical contests will not reduce their solicitation efforts 
under the final amendments, we expect that more rather than fewer 
shareholders will directly receive dissidents' proxy statements.
---------------------------------------------------------------------------

    \400\ See Section IV.D.5.b of the Proposing Release.
---------------------------------------------------------------------------

Dissemination of Proxy Materials
    The final amendments will require any dissident in a contested 
election to file a proxy statement by the later of 25 calendar days 
prior to the meeting date, or five calendar days after the date that 
the registrant files its definitive proxy statement, regardless of the 
choice of proxy delivery method. This requirement will help to ensure 
that all shareholders who receive a universal proxy, which will not be 
required to include complete information about the opposing party's 
nominees, will have access to information about all nominees a 
sufficient time before the meeting. We do not expect this requirement 
to impose a substantial burden or constraint on dissidents given 
existing requirements and the notice requirement of the final 
amendments.
    In particular, dissidents that elect notice-only delivery are 
currently required to make their proxy statement available at the later 
of 40 calendar days prior to the meeting date or 10 calendar days after 
the registrant files its definitive proxy statement. For such 
dissidents, the required filing deadline will provide five fewer days 
to furnish a proxy statement in cases in which the registrant files its 
definitive proxy statement within fewer than 30 calendar days of the 
meeting date, which we estimate occurred in approximately 11% of recent 
contested elections, and this new deadline should not otherwise present 
an incremental timing constraint for such dissidents.\401\ Dissidents 
that elect full set delivery are not currently subject to any such 
requirement, and thus the dissemination requirement would impose a new 
filing deadline for all such dissidents. Some dissidents may therefore 
be required to prepare their proxy statements earlier than they would 
otherwise. In particular, we estimate that dissidents filed a 
definitive proxy statement within 25 days of the meeting in 18% of 
recent contested elections.\402\
---------------------------------------------------------------------------

    \401\ Based on staff review of contested elections initiated in 
years 2017-2020.
    \402\ Id.
---------------------------------------------------------------------------

    In the absence of other requirements, the required filing deadline 
might prevent late-breaking proxy contests. However, because the final 
amendments separately require dissidents to provide notice of the 
contest and the names of their nominees by the 60th calendar day before 
the anniversary of the prior year's meeting (with alternative treatment 
for cases in which the meeting date has changed significantly since the 
prior year), we do not expect this requirement to impose a significant 
further limitation on late-breaking contests. Also, while the filing 
deadline will require some dissidents to prepare their proxy statements 
earlier than they would otherwise, we do not expect this requirement to 
impose a substantial incremental constraint or burden in most cases. In 
particular, because of the notice requirement, dissidents will 
generally have approximately one month to furnish a definitive proxy 
statement after having provided the names of their nominees to the 
registrant.
    Alternatively, we have considered proposing an earlier filing 
deadline for dissidents. While an earlier filing deadline may reduce 
the risk that some shareholders receive the registrant's proxy 
statement and make their voting decisions before the dissident's proxy 
statement is available, such a deadline may also impose an incremental 
burden on dissidents and could prevent some late-breaking proxy 
contests beyond those prevented by the notice requirement.
    One commenter expressed concerns that imposing a filing deadline on 
the dissident without imposing a similar filing deadline on registrants 
would confer a strategic advantage to registrants.\403\ As an 
alternative, we considered adopting a similar 25-day filing deadline 
also for registrants, which would mitigate such concerns. However, as 
discussed in more detail above, registrants already have incentives to 
file their definitive proxy statement well in advance of the meeting 
date.\404\ Providing further evidence for such incentives, we find that 
95% of registrants in a sample of recent contest filed their definitive 
proxy statement at least 25 days before the annual meeting.\405\ Thus, 
despite the absence of a filing deadline for registrants, it is 
unlikely that the required 25-day filing deadline for dissidents in the 
final amendments will confer significant strategic benefits to 
registrants.
---------------------------------------------------------------------------

    \403\ See letters from Olshan.
    \404\ See supra Section II.E.3.
    \405\ Based on a review of the 101 contested elections initiated 
from 2017 through 2020.
---------------------------------------------------------------------------

Formatting and Presentation of the Universal Proxy Card
    The final amendments specify certain presentation and formatting 
requirements for universal proxies. We do not expect the presentation 
and formatting requirements to impose any significant direct costs on 
registrants or dissidents, though they may bear some indirect costs in 
the form of reduced flexibility to strategically design their proxy 
card.
    These presentation and formatting requirements are expected to 
mitigate the risk that shareholders receiving universal proxies may be 
confused about their voting choices and how to properly mark their 
card. For example, shareholders could otherwise be unsure about the 
total number of candidates for which they can grant authority to vote, 
or about which candidates are nominated by which party. Such confusion 
could increase the likelihood that some shareholders submit invalid 
proxies or submit proxies that do not reflect their intentions.\406\ 
This may be exacerbated in the case of nominees being put forth by 
multiple dissidents or when there are proxy access nominees as well as 
dissident and registrant nominees.\407\
---------------------------------------------------------------------------

    \406\ See letter from BR for similar concerns.
    \407\ See, e.g., Roundtable Transcript, comment of David Katz, 
Partner, Wachtell, Lipton, Rosen and Katz, at 42.
---------------------------------------------------------------------------

    In addition to preventing confusion, these presentation and 
formatting requirements may also promote the fair and equal 
presentation of all nominees on the proxy cards. In particular, these 
requirements would prevent registrants and dissidents from 
strategically choosing the font, style, sizing, and order of candidate 
names in ways that could create an advantage for their slate. For 
example, political science research has found that the order of 
placement of

[[Page 68375]]

candidates' names on ballots can affect voting outcomes.\408\
---------------------------------------------------------------------------

    \408\ See, e.g., Joanne Miller & Jon Krosnick, The Impact of 
Candidate Name Order on Election Outcomes, 62 Pub. Opinion Q. 291 
(1998); David Brockington, A Low Information Theory of Ballot 
Position Effect, 25 Pol. Behav. 1 (2003); Jonathan G.S. Koppell & 
Jennifer A. Steen, The Effects of Ballot Placement on Election 
Outcomes, 66 J. Pol. 267 (2004).
---------------------------------------------------------------------------

    One commenter raised a concern that the presentation and formatting 
requirements we are adopting do not adequately address the risk that a 
shareholder who returns a paper universal proxy card may inadvertently 
vote for more nominees than are up for election, resulting in all of 
that shareholder's votes being wholly invalidated.\409\ We disagree 
with this assessment and think that we are adequately addressing this 
risk in the final amendments by requiring prominent disclosure in the 
proxy card regarding the effect and treatment of the proxy in such 
cases.
---------------------------------------------------------------------------

    \409\ See letter from BR.
---------------------------------------------------------------------------

    Some commenters argued for more standardization of the universal 
proxy, including some that wanted a requirement for identical proxy 
cards.\410\ We acknowledge that further standardization may come with 
some added incremental benefits in terms of reducing potential 
confusion and potential gamesmanship. However, we think the 
requirements we are adopting strike a good balance by promoting clarity 
and fairness of the presentation while preserving some flexibility in 
design choices for registrants and dissidents, who may have particular 
views on what they think is an effective presentation of their proxy 
cards and therefore may experience some costs from an overly 
prescriptive approach.
---------------------------------------------------------------------------

    \410\ See supra Section II.G.2.
---------------------------------------------------------------------------

    In the Proposing Release we also considered alternatives that would 
provide for more flexibility in presentation and formatting of the 
universal proxy card.\411\ We have received little support by 
commenters for such approaches and our original assessments of these 
alternatives stand.
---------------------------------------------------------------------------

    \411\ See Section IV.D.5.b of the Proposing Release.
---------------------------------------------------------------------------

c. Voting Standards Disclosure and Voting Options
    The final amendments require certain disclosures with respect to 
voting options and voting standards in proxy statements, which would 
also apply to funds. We expect that the costs to registrants of such 
additional disclosures will be minimal. In particular, as discussed 
below, even though we expect registrants may need to update certain 
standardized portions of their proxy statements and proxy cards, many 
of those disclosures, once revised, are not likely to require 
significant revision from year to year, and for the purpose of the 
Paperwork Reduction Act of 1995 (``PRA''), we estimate the average 
burden per affected registrant to be 10 minutes.\412\ To the extent 
that such disclosures reduce shareholder uncertainty or confusion as to 
the effect of their votes, the efficiency of the voting process may be 
improved. However, we do not anticipate significant changes in voting 
outcomes or corporate decisions as a result of these disclosures.
---------------------------------------------------------------------------

    \412\ See infra Section V.C.
---------------------------------------------------------------------------

V. Paperwork Reduction Act

A. Summary of the Collection of Information

    Certain provisions of our rules, schedules, and forms affected by 
the amendments contain ``collection of information'' requirements 
within the meaning of the PRA.\413\ The Commission published a notice 
requesting comment on changes to these collection of information 
requirements in the Proposing Release and submitted these requirements 
to the Office of Management and Budget (``OMB'') for review in 
accordance with the PRA.\414\ While several commenters provided 
comments on the potential costs of the Proposed Rules, no commenters 
specifically addressed our PRA analysis.\415\
---------------------------------------------------------------------------

    \413\ 44 U.S.C. 3501 et seq.
    \414\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \415\ See supra Section II.
---------------------------------------------------------------------------

    The hours and costs associated with preparing, filing, and 
distributing the schedules and forms constitute reporting and cost 
burdens imposed by each collection of information. An agency may not 
conduct or sponsor, and a person is not required to comply with, a 
collection of information unless it displays a currently valid OMB 
control number. Compliance with the information collections is 
mandatory. Responses to the information collections are not 
confidential and there is no mandatory retention period for the 
information disclosed. The titles for the affected collections of 
information are:
    (1) Regulation 14A (Commission Rules 14a-1 through 14a-21 and 
Schedule 14A) (OMB Control No. 3235-0059); and
    (2) 17 CFR 270.20a-1 (Rule 20a-1 under the Investment Company Act 
of 1940), Solicitations of Proxies, Consents, and Authorizations (OMB 
Control No. 3235-0158).
    The Commission adopted Regulation 14A pursuant to the Exchange Act 
and Rule 20a-1 pursuant to the Investment Company Act. These rules set 
forth the disclosure and other requirements for proxy statements filed 
by soliciting parties to help investors make informed investment and 
voting decisions.
    A description of the final amendments, including the need for the 
information and its use, as well as a description of the likely 
respondents, can be found in Section II above, and a discussion of the 
expected economic effects of the final amendments can be found in 
Section IV above.

B. Effect of the Final Amendments on Existing Collections of 
Information

    For operating companies, the amendments revise the consent required 
of a bona fide nominee, eliminate the short slate rule, and establish 
new procedures for the solicitation of proxies, the preparation and use 
of proxy cards, and the dissemination of information about all director 
nominees in contested elections.\416\ The amendments will affect the 
collection of information requirements of soliciting parties by 
requiring the use of a universal proxy card in all non-exempt 
solicitations in connection with contested elections. They will also 
establish requirements for universal proxy cards, including specified 
formatting and presentation mandates. The amendments require all 
parties to refer shareholders to the other party's proxy statement for 
information about the other party's nominees and explain that 
shareholders can access the other party's proxy statement on the 
Commission's website. In addition, the amendments require dissidents in 
election contests to provide a notice of intent to solicit and a list 
of their nominees to the registrant and they eliminate the ability of 
dissidents to round out their slate with registrant nominees through 
use of the short slate rule. The amendments further establish filing 
deadlines for a dissident's definitive proxy statement and require 
dissidents to solicit at least 67% of the voting power of shares 
entitled to vote on the election of directors. These requirements for 
contested elections do not meaningfully impact the reporting and cost 
burden associated with the collection of information.\417\
---------------------------------------------------------------------------

    \416\ These amendments do not apply to funds.
    \417\ Our current proxy rules do not prescribe a minimum 
solicitation requirement for either registrants or dissidents; 
however, customary practice has been for soliciting parties to 
solicit more than 67% of the voting power of shares entitled to vote 
on the election of directors because either, in the case of a 
registrant, it wishes to meet notice, informational and quorum 
requirements for the annual meeting, or, in the case of a dissident, 
such solicitation is necessary in order to successfully wage a proxy 
contest. Based on staff analysis of the industry data provided by a 
proxy services provider for 31 proxy contests between July 1, 2018 
and June 30, 2019, less than 67% of the voting power was solicited 
by a dissident in not a single proxy contest in that sample. Of the 
35 proxy contests between June 30, 2015 and April 15, 2016 analyzed 
in the Proposing Release (see Section IV.B.2.b of the Proposing 
Release), only 2 dissidents solicited less than 67% of the voting 
power. In those instances, we estimate that the proposed amendments 
would have resulted in average incremental solicitation expenses 
(exclusive of printing costs) to the dissident of approximately 
$5,400 if the least expensive approach to soliciting through an 
intermediary had been used to solicit the required additional number 
of shareholders. See supra notes 262 and 263. For PRA purposes, we 
therefore estimate that there would be one contest annually that 
would not have otherwise solicited 67% and thus would incur 
additional solicitation costs of $5,400, which amount we add to the 
estimated reporting and cost burden associated with Regulation 14A.

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[[Page 68376]]

    We are also amending the proxy rules for all director elections to:
     Specify that the proxy card must include an ``against'' 
voting option when applicable state law gives effect to a vote 
``against'' a nominee;
     require proxy cards to give shareholders the ability to 
``abstain'' in an election where a majority voting standard is in 
effect; and
     mandate disclosure about the effect of a ``withhold'' vote 
in an election.
    We arrived at the estimates discussed below by reviewing our burden 
estimates for similar disclosure. The amendments regarding the use of a 
universal proxy card, required notices and related disclosure should 
result in only a small amount of additional required disclosure and the 
addition of only a limited amount of information (the names of duly 
nominated director candidates for which the soliciting party has 
complied with Rule 14a-19 on proxy cards). The application of these 
amendments will be limited to contested elections. In addition, the 
additional disclosure and changes to the proxy card relating to the 
appropriate use of ``against,'' ``abstain'' or ``withhold'' voting 
options should similarly result in only a small incremental increase in 
required disclosure; however, those changes will apply to proxy 
materials in all director elections, not just contested elections.

C. Aggregate Burden and Cost Estimates for the Amendments

    We derived our burden hour and cost estimates by estimating the 
total amount of time it will take to prepare and review the required 
disclosures called for by the final amendments. This estimate 
represents the average burden for all soliciting parties, both large 
and small. In deriving our estimates, we recognize that the burdens 
will likely vary among soliciting parties. Some soliciting parties may 
experience costs in excess of this average in the first year of 
compliance with the amendments and some parties may experience less 
than the average costs.
    As discussed more fully in Section IV.C.4 above, it is unclear 
whether the amendments will result in an increase or decrease in the 
number of election contests, and we therefore estimate no change in the 
number of proxy statement filings as a result of the amendments. We 
estimate that the average incremental burden for a registrant to 
prepare a universal proxy card in a contested election and include the 
required disclosure will be two hours. We similarly estimate that the 
average incremental burden for a dissident to prepare a universal proxy 
card in a contested election and include the required disclosure will 
be two hours. We additionally estimate that the average incremental 
burden for a dissident and registrant to prepare the notice to the 
opposing party containing the names of its nominees in a contested 
election will be approximately one hour. Thus, we estimate that the 
total incremental burden for Schedule 14A will increase by three hours 
per election contest for registrants and three hours per election 
contest for other soliciting parties.\418\ For purposes of the PRA, we 
estimate there will be 25 annual election contests per year,\419\ 
resulting in 150 additional total incremental burden hours (6 hours x 
25 election contests) under Schedule 14A as a result of adopted Rule 
14a-19 and the related amendments.
---------------------------------------------------------------------------

    \418\ There may be a range of burdens by soliciting parties as 
they determine exactly how to present the proxy card and the 
language of the required disclosure; however, we estimate the 
burdens described above as the average burden for soliciting 
parties.
    \419\ We do not estimate that there will be additional election 
contests as a result of the final rules. We estimate approximately 
25 election contests per year based on the average of actual proxy 
contests for elections of directors in calendar years 2017-2020.
---------------------------------------------------------------------------

    We estimate that the additional disclosure and changes to the proxy 
card relating to the appropriate use of ``against,'' ``abstain'' or 
``withhold'' voting options in proxy materials for all director 
elections will be considerably less than one hour for each proxy 
statement and card relating to an election of directors. Unlike the 
other amendments relating specifically to election contests, these 
amendments will apply to all director elections, including director 
elections for funds. As a result of these amendments, registrants may 
need to update certain standardized portions of their proxy statements 
and proxy cards, and many of those disclosures, once revised, are not 
likely to require significant revision from year to year. We estimate 
that these changes will result in an average of 10 minutes of 
additional burden per response.\420\ For purposes of the PRA, we 
estimate the changes will result in 1,062 hours of additional total 
incremental burden under Regulation 14A (10 minutes x 6,369 filings) 
and 222 hours of total incremental burden under Rule 20a-1 (10 minutes 
x 1,333 filings).\421\
---------------------------------------------------------------------------

    \420\ We estimate that the incremental burden for the additional 
disclosure and changes to the proxy card will increase by 20 minutes 
in the first year and then be reduced to five minutes in years two 
and three, resulting in a three-year average of an increased 10-
minute burden per response.
    \421\ For purposes of the Regulation 14A and Rule 20a-1 
collections of information, the number of filings corresponds to the 
estimated number of new filings that will be made each year under 
Regulation 14A and Rule 20a-1, which include filings such as DEF 
14A; DEFA14A; DEFM14A; and DEFC14A. When calculating the PRA burden 
for any particular collection of information, the total number of 
annual burden hours estimated is divided by the total number of 
annual responses estimated, which provides the average estimated 
annual burden per response. The current inventory of approved 
collections of information is maintained by the Office of 
Information and Regulatory Affairs (``OIRA''), a division of OMB. 
The total annual burden hours and number of responses associated 
with Regulation 14A and Rule 20a-1, as updated from time to time, 
can be found at https://www.reginfo.gov/public/do/PRAMain. We 
recognize that the adopted rules may only effect a subset of the 
estimated proxy filings in the OMB inventory, but we are using the 
estimate for all proxy filings to provide a conservative estimate of 
the impact of the rule amendments.
---------------------------------------------------------------------------

    These estimates include the time and cost of preparing disclosure 
that has been appropriately reviewed, including, as applicable, by 
management, in-house counsel, outside counsel and members of the board 
of directors. This burden will be added to the current burden for 
Regulation 14A and Rule 20a-1, as applicable. For proxy statements 
under Regulation 14A, we estimate that 75% of the burden of preparation 
is carried internally and that 25% of the burden of preparation is 
carried by outside professionals retained at an average cost of $400 
per hour. The portion of the burden carried by outside professionals is 
reflected as a cost, while the portion of the burden carried internally 
is reflected in hours. We estimate a similar allocation between 
internal burden hours and outside professional costs with respect to 
the PRA burden for Rule 20a-1.
    As a result of the estimates discussed above, we estimate for 
purposes of the PRA that the total incremental burden on all soliciting 
parties of the final amendments under Regulation 14A will be 909 hours 
for internal time (1,212

[[Page 68377]]

total incremental burden hours \422\ x 75%) and $121,200 (1,212 total 
incremental burden hours x 25% x $400), plus $5,400 in professional 
costs due to the additional solicitation burden, for the services of 
outside professionals. We further estimate for purposes of the PRA that 
the total incremental burden on all soliciting parties of the final 
amendments under Rule 20a-1 will be 166.5 hours for internal time (222 
total incremental burden hours x 75%) and $22,200 (222 total 
incremental burden hours x 25% x $400) for the services of outside 
professionals.
---------------------------------------------------------------------------

    \422\ This figure represents the sum of the aforementioned 150 
additional total incremental burden hours from election contests and 
the aforementioned 1,062 additional total incremental burden hours 
from director elections generally.
---------------------------------------------------------------------------

    A summary of the estimated changes is included in the table below.

                                                Table 1--Calculation of Incremental PRA Burden Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           Estimated
                                   Current     Estimated     Current       Estimated       Estimated        Current       increase in    Estimated total
                                    annual       annual       burden      increase in    total burden    professional    professional     professional
                                  responses    responses      hours      burden hours        hours           costs           costs            costs
                                         (A)          (B)          (C)             (D)     (E) = C + D             (F)             (G)           = F + G
--------------------------------------------------------------------------------------------------------------------------------------------------------
Schedule 14A...................        6,369        6,369      777,590           1,212         778,802    $103,678,712        $126,600      $103,805,312
Rule 20a-1.....................        1,333        1,333      113,305             222         113,527      39,990,000          22,200        40,012,200
--------------------------------------------------------------------------------------------------------------------------------------------------------

VI. Final Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') \423\ requires the 
Commission, in promulgating rules under Section 553 of the 
Administrative Procedure Act,\424\ to consider the impact of those 
rules on small entities. We have prepared this Final Regulatory 
Flexibility Analysis (``FRFA'') in accordance with Section 604 of the 
RFA.\425\ An Initial Regulatory Flexibility Act Analysis (``IRFA'') was 
prepared in accordance with the RFA and was included in the Proposing 
Release. The FRFA relates to the amendments to Exchange Act Rules 14a-
2, 14a-3, 14a-4, 14a-5, 14a-6, and 14a-101, and new Exchange Act Rule 
14a-19.
---------------------------------------------------------------------------

    \423\ 5 U.S.C. 601 et seq.
    \424\ 5 U.S.C. 553.
    \425\ 5 U.S.C. 604.
---------------------------------------------------------------------------

A. Need for, and Objectives of, the Final Amendments

    The final amendments will allow a shareholder voting by proxy to 
choose among director nominees in an election contest in a manner that 
more closely reflects the choice that could be made by voting in person 
at a shareholder meeting. To this end, we are amending the proxy rules 
applicable to operating companies to:
     Revise the consent required of a bona fide nominee;
     eliminate the short slate rule;
     require the use of universal proxy cards in all non-exempt 
solicitations in connection with contested elections; and
     prescribe requirements for universal proxy cards including 
notice, filing and solicitation requirements.
    We are also adopting amendments that will apply to all director 
elections and will require disclosure regarding the effect of 
shareholder action to vote ``against,'' ``withhold'' or ``abstain'' and 
require that the appropriate voting option be included on the proxy 
card.
    The need for, and objectives of, the amendments are discussed in 
more detail in Section I, above. We discuss the economic impact, 
including the estimated compliance costs and burdens, of the amendments 
in Sections IV and V above.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on all aspects of 
the IRFA, including how the Proposed Rules could further lower the 
burden on small entities, the number of small entities that would be 
affected by the Proposed Rules, the existence or nature of the 
potential impact of the proposals on small entities discussed in the 
analysis, and how to quantify the impact of the Proposed Rules. We did 
not receive any comments specifically addressing the IRFA. However, we 
received a number of comments on the Proposed Rules generally,\426\ and 
have considered these comments in developing the FRFA.
---------------------------------------------------------------------------

    \426\ See supra Section II.
---------------------------------------------------------------------------

C. Small Entities Subject to the Final Amendments

    The final amendments will affect small entities that file proxy 
statements under the Exchange Act. The RFA defines ``small entity'' to 
mean ``small business,'' ``small organization,'' or ``small 
governmental jurisdiction.'' \427\ For purposes of the RFA, under our 
rules, an issuer, other than an investment company, is a ``small 
business'' or ``small organization'' if it had total assets of $5 
million or less on the last day of its most recent fiscal year and is 
engaged or proposing to engage in an offering of securities that does 
not exceed $5 million.\428\ We estimate that there are approximately 
660 issuers that file with the Commission, other than investment 
companies, that may be considered small entities and are potentially 
subject to all of the final amendments.\429\ Under 17 CFR 270.0-10, an 
investment company, including a business development company, is 
considered to be a small entity if it, together with other investment 
companies in the same group of related investment companies, has net 
assets of $50 million or less as of the end of its most recent fiscal 
year. Commission staff estimates that, as of June 2021, there were 70 
registered investment companies that would be subject to the proposed 
amendments that may be considered small entities.\430\
---------------------------------------------------------------------------

    \427\ 5 U.S.C. 601(6).
    \428\ See 17 CFR 230.157 under the Securities Act and 17 CFR 
240.0-10(a) under the Exchange Act.
    \429\ This estimate is based on staff analysis of issuers 
potentially subject to the final amendments, excluding co-
registrants, with EDGAR filings on Form 10-K, or amendments thereto, 
filed during the calendar year of January 1, 2020 to December 31, 
2020, or filed by September 1, 2021, that, if timely filed by the 
applicable deadline, would have been filed between January 1 and 
December 31, 2020. Analysis is based on data from XBRL filings, 
Compustat, Ives Group Audit Analytics, and manual review of filings 
submitted to the Commission.
    \430\ These estimates are based on staff analysis of Morningstar 
data and data submitted by investment company registrants in forms 
filed on EDGAR as of June 30, 2021.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    As noted above, the purpose of the final amendments is to allow a 
shareholder voting by proxy to choose among director nominees in an 
election contest in a manner that more closely reflects the choice that 
could be made by voting in person at a shareholder meeting. In 
addition, we are adopting amendments that apply to all director 
elections and require disclosure

[[Page 68378]]

regarding the effect of shareholder action to vote ``against,'' 
``withhold'' or ``abstain'' and mandate that the appropriate voting 
option be listed on the proxy card. The changes in reporting 
requirements for soliciting parties are outlined in detail in Section I 
above. Compliance with certain provisions of the amendments may require 
the use of professional skills, including legal skills.
    These amendments are unlikely to impose significant recordkeeping 
requirements. We discuss the economic effects, including the estimated 
costs and burdens, of the final amendments on all registrants, 
including small entities, in Sections IV and V above.

E. Agency Action To Minimize Effect on Small Entities

    The RFA directs us to consider alternatives that would accomplish 
our stated objectives, while minimizing any significant adverse impact 
on small entities. Accordingly, we considered the following 
alternatives:
     Establishing different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
     clarifying, consolidating, or simplifying compliance and 
reporting requirements under the rule for small entities;
     using performance rather than design standards; and
     exempting small entities from all or part of the 
requirements.
    The current proxy rules relating to election contests and the proxy 
rules generally do not impose different standards or requirements based 
on the size of the registrant or dissident. These rules contain both 
performance and design standards in order to achieve appropriate 
disclosure in the proxy voting process under the Exchange Act.\431\
---------------------------------------------------------------------------

    \431\ For example, the proxy rules include filing deadlines and 
some required specific disclosure. However, Schedule 14A generally 
permits parties to craft their disclosure as they deem appropriate.
---------------------------------------------------------------------------

    The final amendments require very limited additional disclosure by 
either the registrant or the dissident, but do impose additional filing 
and solicitation requirements on dissidents and an obligation on both 
parties in an election contest to include the other side's nominees on 
their respective proxy cards and to notify the other party of the names 
of their respective director nominees.
    The final amendments are intended to permit shareholders voting by 
proxy in an election contest to reflect their choices as they could if 
voting in person at a shareholder meeting. We believe the final 
amendments are equally appropriate for parties of all sizes engaged in 
an election contest because they facilitate the important objective of 
shareholder enfranchisement, which does not depend on the size of the 
soliciting party. For that reason, we are not adopting different 
compliance or reporting requirements or timetables for small entities, 
or an exception for small entities. Similarly, we believe that the 
final amendments do not need further clarification, consolidation, or 
simplification for small entities.
    Finally, as with the current proxy rules, the final amendments 
include both performance and design standards. In particular, the 
universal proxy card is subject to certain presentation and formatting 
requirements, but there is flexibility as to the exact design of the 
card within the guidelines established by the amendments.

VII. Statutory Authority

    We are adopting the rule amendments contained in this release under 
the authority set forth in Sections 14 and 23(a) of the Exchange Act.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, we are amending title 17, chapter 
II, of the Code of Federal Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *

0
2. Amend Sec.  240.14a-2 by revising paragraph (b) introductory text to 
read as follows:

Sec.  240.14a-2   Solicitations to which Sec.  240.14a-3 to Sec.  
240.14a-15 apply.

* * * * *
    (b) Sections 240.14a-3 through 240.14a-6 (other than Sec.  240.14a-
6(g) and (p)), 240.14a-8, 240.14a-10, 240.14a-12 through 240.14a-15, 
and 240.14a-19 do not apply to the following:
* * * * *

Sec.  240.14a-3   [Amended]

0
3. Amend Sec.  240.14a-3 as follows:
0
a. In paragraph (a)(3)(i), remove the period at the end of the 
paragraph and add in its place ``; or''; and
0
b. In paragraph (a)(3)(ii), remove the semicolon and add a period in 
its place.

0
4. Amend Sec.  240.14a-4 as follows:
0
a. Revise paragraph (b)(2);
0
b. Remove the undesignated paragraph and instructions following 
paragraph (b)(2);
0
c. Redesignate paragraph (b)(3) as paragraph (b)(5);
0
d. Add new paragraph (b)(3), paragraph (b)(4), and instruction 1 to 
paragraphs (b)(2), (3), and (4);
0
e. Revise paragraphs (c)(5) and (d)(1);
0
f. In paragraph (d)(2), remove the comma at the end of the paragraph 
and add a semicolon in its place;
0
g. In paragraph (d)(3), add a semicolon before ``or'' at the end of the 
paragraph; and
0
h. Revise paragraph (d)(4).
    The revisions and additions read as follows:

Sec.  240.14a-4  Requirements as to proxy.

* * * * *
    (b) * * *
    (2) A form of proxy that provides for the election of directors 
shall set forth the names of persons nominated for election as 
directors, including any person whose nomination by a shareholder or 
shareholder group satisfies the requirements of an applicable state or 
foreign law provision, or a registrant's governing documents as they 
relate to the inclusion of shareholder director nominees in the 
registrant's proxy materials.
    (3) Except as otherwise provided in Sec.  240.14a-19, a form of 
proxy that provides for the election of directors may provide a means 
for the security holder to grant authority to vote for the nominees set 
forth, as a group, provided that there is a similar means for the 
security holder to withhold authority to vote for such group of 
nominees (or, when applicable state law gives legal effect to votes 
cast against a nominee, a similar means for the security holder to vote 
against such group of nominees and a means for security holders to 
abstain from voting for such group of nominees). Any such form of proxy 
which is executed by the security holder in such manner as not to 
withhold authority to vote for the election of any nominee, or not to 
grant authority to

[[Page 68379]]

vote against the election of any nominee, shall be deemed to grant 
authority to vote for the election of any nominee, provided that the 
form of proxy so states in bold-face type. Means to grant authority to 
vote for any nominees as a group or to withhold authority for any 
nominees as a group or to vote against any nominees as a group may not 
be provided if the form of proxy includes one or more shareholder 
nominees in accordance with an applicable state or foreign law 
provision, or a registrant's governing documents as they relate to the 
inclusion of shareholder director nominees in the registrant's proxy 
materials.
    (4) When applicable state law gives legal effect to votes cast 
against a nominee, then in lieu of providing a means for security 
holders to withhold authority to vote, the form of proxy shall provide 
a means for security holders to vote against each nominee and a means 
for security holders to abstain from voting. When applicable state law 
does not give legal effect to votes cast against a nominee, such form 
of proxy shall not provide a means for security holders to vote against 
any nominee and such form of proxy shall clearly provide any of the 
following means for security holders to withhold authority to vote for 
each nominee:
    (i) A box opposite the name of each nominee which may be marked to 
indicate that authority to vote for such nominee is withheld; or
    (ii) An instruction in bold-face type which indicates that the 
security holder may withhold authority to vote for any nominee by 
lining through or otherwise striking out the name of any nominee; or
    (iii) Designated blank spaces in which the security holder may 
enter the names of nominees with respect to whom the security holder 
chooses to withhold authority to vote; or
    (iv) Any other similar means, provided that clear instructions are 
furnished indicating how the security holder may withhold authority to 
vote for any nominee.
    Instruction 1 to paragraphs (b)(2), (3), and (4). Paragraphs 
(b)(2), (3), and (4) do not apply in the case of a merger, 
consolidation or other plan if the election of directors is an integral 
part of the plan.
* * * * *
    (c) * * *
    (5) The election of any person to any office for which a bona fide 
nominee is named in a proxy statement and such nominee is unable to 
serve or for good cause will not serve.
* * * * *
    (d) * * *
    (1) To vote for the election of any person to any office for which 
a bona fide nominee is not named in the proxy statement:
    (i) A person shall not be deemed to be a bona fide nominee and 
shall not be named as such unless the person has consented to being 
named in a proxy statement relating to the registrant's next annual 
meeting of shareholders at which directors are to be elected (or a 
special meeting in lieu of such meeting) and to serve if elected.
    (ii) Notwithstanding paragraph (d)(1)(i) of this section, if the 
registrant is an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development 
company as defined by section 2(a)(48) of the Investment Company Act of 
1940 (15 U.S.C. 80a-2(a)(48)), a person shall not be deemed to be a 
bona fide nominee and shall not be named as such unless the person has 
consented to being named in the proxy statement and to serve if 
elected. Provided, however, that nothing in this section shall prevent 
any person soliciting in support of nominees who, if elected, would 
constitute a minority of the board of directors of an investment 
company registered under the Investment Company Act of 1940 or a 
business development company as defined by section 2(a)(48) of the 
Investment Company Act of 1940, from seeking authority to vote for 
nominees named in the registrant's proxy statement, so long as the 
soliciting party:
    (A) Seeks authority to vote in the aggregate for the number of 
director positions then subject to election;
    (B) Represents that it will vote for all the registrant nominees, 
other than those registrant nominees specified by the soliciting party;
    (C) Provides the security holder an opportunity to withhold 
authority with respect to any other registrant nominee by writing the 
name of that nominee on the form of proxy; and
    (D) States on the form of proxy and in the proxy statement that 
there is no assurance that the registrant's nominees will serve if 
elected with any of the soliciting party's nominees;
* * * * *
    (4) To consent to or authorize any action other than the action 
proposed to be taken in the proxy statement, or matters referred to in 
paragraph (c) of this section.
* * * * *

0
5. Amend Sec.  240.14a-5 as follows:
0
a. Revise paragraph (c);
0
b. In paragraph (e)(2), remove the ``and'' at the end of the paragraph;
0
c. In paragraph (e)(3), remove the period and add ``; and'' in its 
place; and
0
d. Add paragraph (e)(4).
    The revisions and addition read as follows:

Sec.  240.14a-5  Presentation of information in proxy statement.

* * * * *
    (c) Any information contained in any other proxy soliciting 
material which has been or will be furnished to each person solicited 
in connection with the same meeting or subject matter may be omitted 
from the proxy statement, if a clear reference is made to the 
particular document containing such information.
* * * * *
    (e) * * *
    (4) The deadline for providing notice of a solicitation of proxies 
in support of director nominees other than the registrant's nominees 
pursuant to Sec.  240.14a-19 for the registrant's next annual meeting 
unless the registrant is an investment company registered under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business 
development company as defined by section 2(a)(48) of the Investment 
Company Act of 1940 (15 U.S.C. 80a-2(a)(48)).
* * * * *

0
6. Amend Sec.  240.14a-6 by revising note 3 to paragraph (a) to read as 
follows:

Sec.  240.14a-6  Filing requirements.

* * * * *
    (a) * * *

    Note 3 to paragraph (a):  Solicitation in Opposition. For 
purposes of the exclusion from filing preliminary proxy material, a 
``solicitation in opposition'' includes: {a{time}  Any solicitation 
opposing a proposal supported by the registrant; {b{time}  any 
solicitation supporting a proposal that the registrant does not 
expressly support, other than a security holder proposal included in 
the registrant's proxy material pursuant to Sec.  240.14a-8; and 
{c{time}  any solicitation subject to Sec.  240.14a-19. The 
inclusion of a security holder proposal in the registrant's proxy 
material pursuant to Sec.  240.14a-8 does not constitute a 
``solicitation in opposition,'' even if the registrant opposes the 
proposal and/or includes a statement in opposition to the proposal. 
The inclusion of a shareholder nominee in the registrant's proxy 
materials pursuant to an applicable state or foreign law provision, 
or a registrant's governing documents as they relate to the 
inclusion of shareholder director nominees in the registrant's proxy 
materials does not constitute a ``solicitation in opposition'' for 
purposes of paragraph (a) of this section, even if the registrant 
opposes the shareholder nominee and solicits against the shareholder 
nominee and in favor of a registrant nominee.

* * * * *

[[Page 68380]]

0
7. Add Sec.  240.14a-19 to read as follows:

Sec.  240.14a-19  Solicitation of proxies in support of director 
nominees other than the registrant's nominees.

    (a) No person may solicit proxies in support of director nominees 
other than the registrant's nominees unless such person:
    (1) Provides notice to the registrant in accordance with paragraph 
(b) of this section unless the information required by paragraph (b) of 
this section has been provided in a preliminary or definitive proxy 
statement previously filed by such person;
    (2) Files a definitive proxy statement with the Commission in 
accordance with Sec.  240.14a-6(b) by the later of:
    (i) 25 calendar days prior to the security holder meeting date; or
    (ii) Five (5) calendar days after the date that the registrant 
files its definitive proxy statement; and
    (3) Solicits the holders of shares representing at least 67% of the 
voting power of shares entitled to vote on the election of directors 
and includes a statement to that effect in the proxy statement or form 
of proxy.
    (b) The notice shall:
    (1) Be postmarked or transmitted electronically to the registrant 
at its principal executive office no later than 60 calendar days prior 
to the anniversary of the previous year's annual meeting date, except 
that, if the registrant did not hold an annual meeting during the 
previous year, or if the date of the meeting has changed by more than 
30 calendar days from the previous year, then notice must be provided 
by the later of 60 calendar days prior to the date of the annual 
meeting or the 10th calendar day following the day on which public 
announcement of the date of the annual meeting is first made by the 
registrant;
    (2) Include the names of all nominees for whom such person intends 
to solicit proxies; and
    (3) Include a statement that such person 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 in support of 
director nominees other than the registrant's nominees.
    (c) If any change occurs with respect to such person's intent to 
solicit the holders of shares representing at least 67% of the voting 
power of shares entitled to vote on the election of directors in 
support of director nominees other than the registrant's nominees or 
with respect to the names of such person's nominees, such person shall 
notify the registrant promptly.
    (d) A registrant shall notify the person conducting a proxy 
solicitation subject to this section of the names of all nominees for 
whom the registrant intends to solicit proxies unless the names have 
been provided in a preliminary or definitive proxy statement previously 
filed by the registrant. The notice shall be postmarked or transmitted 
electronically no later than 50 calendar days prior to the anniversary 
of the previous year's annual meeting date, except that, if the 
registrant did not hold an annual meeting during the previous year, or 
if the date of the meeting has changed by more than 30 calendar days 
from the previous year, then notice must be provided no later than 50 
calendar days prior to the date of the annual meeting. If any change 
occurs with respect to the names of the registrant's nominees, the 
registrant shall notify the person conducting a proxy solicitation 
subject to this section promptly.
    (e) Notwithstanding the provisions of Sec.  240.14a-4(b)(2), if any 
person is conducting a proxy solicitation subject to this section, the 
form of proxy of the registrant and the form of proxy of any person 
soliciting proxies pursuant to this section shall:
    (1) Set forth the names of all persons nominated for election by 
the registrant and by any person or group of persons that has complied 
with this section and the name of any person whose nomination by a 
shareholder or shareholder group satisfies the requirements of an 
applicable state or foreign law provision or a registrant's governing 
documents as they relate to the inclusion of shareholder director 
nominees in the registrant's proxy materials;
    (2) Provide a means for the security holder to grant authority to 
vote for the nominees set forth;
    (3) Clearly distinguish between the nominees of the registrant, the 
nominees of the person or group of persons that has complied with this 
section and the nominees of any shareholder or shareholder group whose 
nominees are included in a registrant's proxy materials pursuant to the 
requirements of an applicable state or foreign law provision or a 
registrant's governing documents;
    (4) Within each group of nominees referred to in paragraph (e)(3) 
of this section, list nominees in alphabetical order by last name;
    (5) Use the same font type, style and size for all nominees;
    (6) Prominently disclose the maximum number of nominees for which 
authority to vote can be granted; and
    (7) Prominently disclose the treatment and effect of a proxy 
executed in a manner that grants authority to vote for the election of 
fewer or more nominees than the number of directors being elected and 
the treatment and effect of a proxy executed in a manner that does not 
grant authority to vote with respect to any nominees.
    (f) If any person is conducting a proxy solicitation subject to 
this section, the form of proxy of the registrant and the form of proxy 
of any person soliciting proxies pursuant to this section may provide a 
means for the security holder to grant authority to vote for the 
nominees of the registrant set forth, as a group, and a means for the 
security holder to grant authority to vote for the nominees of any 
other soliciting person set forth, as a group, provided that there is a 
similar means for the security holder to withhold authority to vote for 
such groups of nominees unless the number of nominees of the registrant 
or of any other soliciting person is less than the number of directors 
being elected. Means to grant authority to vote for any nominees as a 
group or to withhold authority for any nominees as a group may not be 
provided if the form of proxy includes one or more shareholder nominees 
in accordance with an applicable state or foreign law provision or a 
registrant's governing documents as they relate to the inclusion of 
shareholder director nominees in the registrant's proxy materials.
    (g) This section shall not apply to:
    (1) A consent solicitation; or
    (2) A solicitation in connection with an election of directors at 
an investment company registered under the Investment Company Act of 
1940 (15 U.S.C. 80a-1 et seq.) or a business development company as 
defined by section 2(a)(48) of the Investment Company Act of 1940 (15 
U.S.C. 80a-2(a)(48)).
    Instruction 1 to paragraphs (b)(1) and (d). Where the deadline 
falls on a Saturday, Sunday, or holiday, the deadline will be treated 
as the first business day following the Saturday, Sunday, or holiday.
    Instruction 2 to paragraph (f). Where applicable state law gives 
legal effect to votes cast against a nominee, the form of proxy may 
provide a means for the security holder to grant authority to vote for 
the nominees of the registrant set forth, as a group, and a means for 
the security holder to grant authority to vote for the nominees of any 
other soliciting person set forth, as a group, provided that, in lieu 
of the ability to withhold authority to vote as a group, there is a 
similar means for the security holder to

[[Page 68381]]

vote against such group of nominees (as well as a means for security 
holders to abstain from voting for such group of nominees).

0
9. Amend Sec.  240.14a-101 as follows:
0
a. Revise Instruction 3(a)(i) and (ii) to Item 4;
0
b. Add Item 7(f); and
0
c. In Item 21, revise paragraph (b) and add paragraph (c).
    The revisions and addition read as follows:

Sec.  240.14a-101   Schedule 14A. Information required in proxy 
statement.

* * * * *
    Item 4. * * *
    Instructions. * * *
* * * * *
    (a) * * *
    (i) In the case of a solicitation made on behalf of the registrant, 
the registrant, each director of the registrant and each of the 
registrant's nominees for election as a director;
    (ii) In the case of a solicitation made otherwise than on behalf of 
the registrant, each of the soliciting person's nominees for election 
as a director;
* * * * *
    Item 7. * * *
    (f) If a person is conducting a solicitation that is subject to 
Sec.  240.14a-19, the registrant must include in its proxy statement a 
statement directing shareholders to refer to any other soliciting 
person's proxy statement for information required by Item 7 of this 
Schedule 14A with regard to such person's nominee or nominees and a 
soliciting person other than the registrant must include in its proxy 
statement a statement directing shareholders to refer to the 
registrant's or other soliciting person's proxy statement for 
information required by Item 7 of this Schedule 14A with regard to the 
registrant's or other soliciting person's nominee or nominees. The 
statement must explain to shareholders that they can access the other 
soliciting person's proxy statement, and any other relevant documents, 
without cost on the Commission's website.
* * * * *
    Item 21. * * *
* * * * *
    (b) Disclose the method by which votes will be counted, including 
the treatment and effect under applicable state law and registrant 
charter and bylaw provisions of abstentions, broker non-votes, and, to 
the extent applicable, a security holder's withholding of authority to 
vote for a nominee in an election of directors.
    (c) When applicable, disclose how the soliciting person intends to 
treat proxy authority granted in favor of any other soliciting person's 
nominees if such other soliciting person abandons its solicitation or 
fails to comply with Sec.  240.14a-19.
* * * * *

    By the Commission.

    Dated: November 17, 2021.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25492 Filed 11-30-21; 8:45 am]
BILLING CODE 8011-01-P