As discussed in our previous client alert, the universal proxy rules that went effective on August 31, 2022 require proxy cards distributed by both public companies and nominating shareholders in contested director elections to include both sides' director nominees, such that shareholders casting their vote can “mix-and-match" nominees from each of the company's and the dissident's slate of director nominees.

On August 25, 2022, the staff (the “Staff") of the Division of Corporation Finance of the Securities and Exchange Commission issued three Compliance and Disclosure Interpretations (“C&DIs") focused on the mechanics associated with practical implementation of these new rules. More details on those three C&DIs can be found in our previous blog post.

On November 17, 2023, the Staff provided new guidance on the treatment of over-voted, under-voted and unmarked universal proxy cards in director election contests (see C&DI Proxy Rules and Schedules 14A/14C, Question 139.07, Question 139.08 and Question 139.10). Specifically, these new C&DIs address the following issues:

1. Votes on an over-voted proxy card will not count for any seats in an election contest.

Rule 14a-19(e) requires that each soliciting party in a non-exempt director election contest include all director nominees of all soliciting parties on each universal proxy card. As a result, in a contested election, each soliciting party's universal proxy card will include more nominees than director seats up for election. An “over-voted proxy card" occurs when a shareholder returns a proxy card in a director election contest but exercises a vote “for" the election of more nominees than the number of director seats up for election. For example, voting for 10 nominees when there are only 9 seats up for election is an “over-vote."

Under Question 139.07, the Staff clarifies that (i) any votes on an over-voted proxy card will not count for any seats in a director election and (ii) a soliciting party cannot rely on discretionary authority pursuant to Rule 14a-4(b)(1) to vote the shares represented by an over-voted proxy card on the election of directors. However, such shares can be voted on other matters included on the proxy card for which there is no over-vote and can be counted for purposes of determining a quorum.

2. Votes on an under-voted proxy card will count in an election contest but the proxy will not confer discretionary authority with respect to the remainder of seats up for election.

An “under-voted proxy card" occurs when a shareholder returns a proxy card in a director election contest but exercises a vote “for" the election of fewer nominees than the number of director seats up for election. For example, voting for 8 nominees when there are 9 seats up for election is an “under-vote." Unlike an over-voted proxy card where it is difficult to ascertain a shareholder's true intent, under Question 139.08, the Staff notes that a shareholder has specified its choices for the election of directors with an under-voted proxy card, and as such, the votes on an under-voted proxy card can be counted in a director election. But because a shareholder has specified its choices with an under-voted proxy card, a soliciting party cannot rely on discretionary authority to vote such shares for the remaining director seats up for election. This means that if a shareholder votes for 8 nominees when there are 9 seats up for election, a soliciting party cannot rely on discretionary authority to vote such shares for its nominee to fill the 9th remaining director seat up for election.

3. A soliciting party can use discretionary authority to vote the shares represented by a signed, but unmarked, proxy card.

Under Question 139.09, the Staff clarifies that a soliciting party can use discretionary authority to vote the shares represented by a signed, but unmarked, proxy card in accordance with that party's voting recommendations as permitted by Rule 14a-4(b)(1) because the shareholder has not specified any choices. This means that a soliciting party that receives an unmarked proxy card may vote “for" their nominees to the Board and “withhold" on all of the nominees recommended by the non-soliciting party.

It is important for companies to carefully review their proxy cards to ensure they disclose the treatment of unmarked proxy cards as Rule 14a-4(b)(1) only allows a soliciting party to use discretionary authority on unmarked proxy cards if the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified. Rule 14a-4(b)(1) specifically provides that “[a] proxy may confer discretionary authority with respect to matters as to which a choice is not specified by the security holder," so long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified.

Thank you to associates Maggie Zhang in Orange County and Sheldon Nagesh in Washington, D.C. for their assistance with this update.

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