Universal proxies, and their use for contested director elections, have been a recent topic of conversation in both Canada and the United States. In September, 2015, the Canadian Coalition for Good Governance (CCGG) published a Universal Proxy Policy, encouraging the use of a universal proxy whenever a Canadian public company is faced with contested director elections, and in October of 2016, the Securities and Exchange Commission (SEC) published proposed rule changes that would require a universal proxy be used.
A universal proxy lists all nominees for board positions, whether they have been nominated by management or other parties, and allows a shareholder voting by proxy the opportunity to vote for nominees from each slate in the same way that a shareholder voting in person at the meeting would have in voting by ballot. This results in a proxy that contains more nominees than there are board positions available. It is important to note that a universal proxy does not necessarily mean that there is an active or aggressive proxy battle occurring; the additional nominees on the proxy may be part of an understated effort to change the board of directors, or an issuer agreeing to accept a shareholder nominee received in accordance with their advance notice by-law.
Although there have been a few examples of a universal proxy being used in Canada, including for Canadian Pacific Railway Limited’s meeting in May 2012, we believe that there are various scenarios that should be contemplated when a universal proxy is being used:
- Even with the use of a universal proxy, the proxy mailed by management will be different from the proxy mailed by a dissident group. As the proxy is used to appoint a third party to vote at the meeting on behalf of the shareholder who cannot be present, it is expected that the dissident party would use a proxy that appoints individuals they have selected, as opposed to appointing votes to the management nominees. This is relevant as the use of a universal proxy may not actually simplify the process for shareholders; although they will have the ability to select nominees from each slate, they will still be receiving multiple forms of proxies.
- The use of a universal proxy can lead to issues with lost votes when a shareholder does not fully complete the director election motion. For instance, if there are eight board positions available and 12 nominees, but the shareholder votes their proxy for three management and three non-management nominees, there is no standard by which the two remaining votes can be cast. Management will likely have disclosed on the proxy that any votes not indicated will be voted as management recommends, but if there are two votes to be allocated and five management nominees with no voting indication marked, there is no way for the votes to be equally distributed. Instructions and voting recommendations on proxies and in management proxy circulars must therefore be carefully drafted to reduce or eliminate any uncertainty.
- There is the possibility of an increase in spoiled votes. In the previous scenario, if the shareholder votes in favour of nine of the 12 nominees, the entire director motion would be deemed invalid as there is no way to determine, in an equitable way, which eight of the nine votes would be accepted.
- Proxies distributed by, and delivered back to, the outside party will contain votes that are being cast for the management nominees appearing on the universal proxy. Management will therefore lose some insights as to how certain shareholders have voted, as they will not have immediate access to this information.
Although we agree with the premise that the use of a universal proxy can be a powerful tool to enhance shareholder democracy and corporate accountability, we believe that there are still some technical issues that should be contemplated to ensure that any shareholder meeting using this form of proxy runs as smoothly and efficiently as possible.