Billionaire raider-turned-activist Carl Icahn on Thursday "applauded" the nation's securities regulator for issuing a draft rewrite of the rules for director-election proxy fights, arguing that the proposed change will eliminate "needless confusion."
Icahn's comments come after the Securities and Exchange Commission on Wednesday, in a split 2-to-1 vote, approved draft rules advancing agency Chairwoman Mary Jo White's initiative to propose setting up a "universal proxy card" system that would give shareholders more flexibility to pick among dissident director candidates and incumbent board members embroiled in a proxy fight. Activist funds like Icahn's often seek to install directors onto corporate boards to help drive their M&A or operational change agenda.
Currently, shareholders who don't go to company meetings can vote either for director candidates offered on the activist's proxy card or on the company's card. This means they can't support only a few of the dissidents offered at the same time that they back the rest of the company's slate. Though investors attending shareholder meetings are able to make these voting distinctions, most institutional and retail investors vote remotely and large pension funds and other institutional investors have been pushing for the change.
The SEC's proposed rule will require that both the protagonist and the incumbent board issue universal proxy cards giving shareholders the ability to pick and choose from all the dissident and incumbent director candidates.
Some observers argue that the move would hurt activists because it would make it less likely that investors will back their full minority or change-of-control slate. However, despite that concern, Icahn said in a statement that he supports the change because it will "give shareholders greater freedom of choice."
In addition, Icahn said he believed the change would be extremely positive for the capital markets and he's hopeful that the "powerful voices in opposition" to the universal proxy card will not be successful in defeating it. The U.S. Chamber of Commerce has come out in opposition to the rule, arguing it will result in a spike in annual director fights.
While institutional investors have pushed for the measure there is no congressional statute requiring the SEC to adopt rules on the matter. As a result it's very possible that the rule-change is never adopted. The agency is setting up a 60 day period for interested groups to submit comments on the issue.
In addition, Icahn said he hopes it will end some of the "gamesmanship" employed by incumbent boards to keep shareholder nominated directors out of the boardroom. However, he didn't provide any additional details on this issue.
The change is expected to substantially shift the playing field for contests but it is unclear whether the rule, once it's adopted, will be a positive for activists or companies. It will likely will depend on the situation. With the universal card system, a shareholder may decide to vote for one or two dissident directors when they may have previously backed the entire incumbent management-nominated slate on the company's card. Alternatively, in another situation, an investor may only pick one or two of a four person dissident director slate instead of all the activist-backed nominees if they also have the ability to support the rest of the company's board.
In addition, the influential proxy advisory firms, Institutional Shareholder Services and Glass Lewis, often recommend that investors back some dissident directors and oppose other insurgent-backed candidates. A universal proxy card system will make it easier for investors to follow their recommendations.
The rule proposal requires the protagonist to solicit a majority of shares to back their director candidates by distributing proxy cards and other material to shareholders. By requiring the protagonist to cover distribution costs, which can average as much as $150,000 but often run much higher, the SEC seeks to ensure that the dissident has "skin in the game" by investing a minimum amount of their own capital in the campaign. The goal of the provision is to discourage small-time investors without any real investment in the company from launching nuisance campaigns. Without the solicitation requirement, a gadfly manager could get a free-ride with its candidates on the company's card.