On October 26, 2016, the SEC voted two to one to propose amendments to the proxy rules that, if adopted, would require the use of "universal" proxy cards in contested director elections, as well as impose new nominee notification and filing deadlines. On the same day, the SEC adopted final rules to facilitate intrastate and regional securities offerings by amending Securities Act Rule 147 to streamline offerings relying on recently adopted intrastate crowdfunding exemptions under state securities laws.
Universal proxy cards should be on the board's and management's radar screen because they would introduce for the first time a practical way for shareholders to split their votes for the combination of management nominees and dissident nominees of their choice (mix-and-match). As a result, a universal proxy card voting system could be significant enough to affect election outcomes in some proxy contests.
To review the SEC's proposing release regarding universal proxy cards, click here.
To review the SEC's adopting release regarding intrastate and regional offerings, click here.
Proposed Rules on Universal Proxy Cards
Under the current proxy rules, shareholders almost always receive two sets of proxy cards in a proxy contest – one from the company (management) and one from the dissident. In contrast, under the proposed rules, each party in a contested election would continue to distribute its own proxy materials and use its own proxy card to solicit votes for its preferred slate of nominees. However, each party’s proxy card would be required to include the nominees of all parties (a single "universal" proxy card), and thus enable the proxy voter to select its preferred combination of candidates.
In addition to the use of universal proxy cards in contested elections, the proposed amendments would require proxy contestants to:
- notify each other of their respective director nominees well in advance of the anniversary of the previous year’s annual meeting date (60 days in advance for dissidents, 50 days for companies);
- refer shareholders to the other party’s proxy statement for information about that party’s nominees and indicate that the other party’s proxy statement can be accessed free of charge on the SEC’s website;
- comply with certain presentation and formatting specifications for universal proxy cards;
- include in the proxy card an "against" voting option where there is a legal effect to a vote against a nominee and provide an "abstain" voting option in an election governed by a majority voting standard; and
- provide disclosure around the effect of a "withhold" vote in an election of directors.
Final Rules Regarding Intrastate and Regional Offerings
New Rule 147A and Amendments to Rule 147
SEC Rule 147 was originally adopted by the SEC in 1974 to implement the intrastate exemption in Section 3(a)(11) of the Securities Act, which provides an exemption from registration under the Securities Act for "[a]ny security which is part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or, if a corporation, incorporated by and doing business within, such State or Territory." Although passed with good intention, it was rarely used in modern times because of the restrictions in the rule and the development of the internet and crowdfunding.
With the adoption of new Rule 147A and the amendments to Securities Act Rule 147, the SEC sought to update and modernize the existing intrastate offering framework that permits companies to raise money from investors within their state without concurrently registering the offers and sales at the federal level.
Amended Rule 147 would remain a safe harbor under Section 3(a)(11) of the Securities Act, so that issuers may continue to use the rule for securities offerings relying on current state law exemptions. New Rule 147A would be substantially identical to Rule 147 except that it would allow offers to be accessible to out-of-state residents and for companies to be incorporated or organized out-of-state.
Both amended Rule 147 and new Rule 147A will include the following provisions:
- a requirement that the issuer satisfy at least one "doing business" requirement that will demonstrate the in-state nature of the issuer's business;
- a new "reasonable belief" standard for issuers to rely upon in determining the residence of the purchaser at the time of the sale of securities;
- a requirement that issuers obtain a written representation from each purchaser as to his or her residency;
- the residence of a purchaser that is a non-natural person, such as a corporation, partnership or limited liability company, will be defined as the location where, at the time of the sale, the entity has its "principal place of business;"
- a limit on resales to persons resident within the state or territory of the offering for a period of six months from the date of the sale by the issuer to the purchaser of a security sold pursuant to the exemption;
- an integration safe harbor that will include any prior offers or sales of securities by the issuer, as well as certain subsequent offers or sales of securities by the issuer occurring after the completion of the offering; and
- disclosure requirements, including legend requirements, to offerees and purchasers about the limits on resales.
Amendments to Rule 504 and Repeal of Rule 505
Rule 504 of Regulation D is an exemption from registration under the Securities Act for offers and sales of up to $1 million of securities in a 12-month period, provided that the issuer is not an Exchange Act reporting company, investment company or blank check company. The rule also imposes certain conditions on offers and sales, with limited exceptions made for offers and sales made in accordance with specified types of state registration provisions and exemptions. The final rules adopted by the SEC also amend Rule 504 to increase the aggregate amount of securities that may be offered and sold in any 12-month period from $1 million to $5 million and disqualify certain bad actors from participating in Rule 504 offerings. In light of the changes to Rule 504, the SEC repealed Rule 505, which provided a safe harbor for offerings now covered by amended Rule 504.