DealLawyers.com Blog

Presumably, the proxy advisors’ mostly unchanged approach to analyzing contested elections was one factor that dulled UPC’s impact in 2023. Both ISS and Glass Lewis continue to require that an activist first demonstrate a compelling case for change before considering activist candidates.

Michael Levin at The Activist Investor says this prong used to make sense before, but, he argues, with the precision allowed with UPC, contested elections should be about credentials, and while a thesis for the company is relevant, it should be a consideration — not table stakes.

Before UPC, shareholders had only a binary choice in a proxy contest. They would choose between the BoD plan and nominees and the activist plan and nominees. The directors would derive automatically from there. Even though shareholders technically vote on directors, they in effect would vote on the company or activist vision for the company. So, proxy advisors would first assess those plans. If an activist had a better plan, then and only then would proxy advisors assess whether the activist’s director nominees improve on the company incumbents.

UPC transformed a binary election into a continuous vote on directors. Shareholders now express preferences with more precision than before. Around the time the SEC implemented the new UPC, ISS and Glass Lewis said UPC would not change their approach. Yet, it should.

Under UPC, the “case for change” has become much less relevant as director credentials become more relevant. To compare and vote for company or activist candidates, shareholders do not necessarily also need to assess their respective plans. Even successful companies can use new directors. Under UPC, an activist can nominate a single superb candidate to replace an obviously less qualified incumbent. The obsolete “case for change” thinking precludes proxy advisors from supporting that superb challenger. […]

Sure, each of the company and activist can describe a vision, thesis, or plan for the company. ISS or Glass Lewis can evaluate each and decide which one will serve shareholders better. Next, shareholders can ask, which directors are best suited to implementing the preferred plan? Importantly, would one or more of the activist nominees support the plan better than one or more of the incumbents? If so, the proxy advisor would recommend a challenger even though it prefers the company plan. Similarly, the proxy advisor could also recommend an incumbent to implement the activist plan. In this way, we address the point of the proxy contest, directors.

Just the more subtle shift we saw in 2023 — with the proxy advisors placing greater emphasis on individual director qualifications — caused contested elections to feel much more personal. Even companies not faced with a contested election found themselves revisiting their approach to describing individual director qualifications and explaining what each candidate brings to the table.

– Meredith Ervine