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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
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minority shareholders to elect a director and may therefore also be important to consider when evaluating the potential effects of the final amendments on proxy contests.203 We estimate that 3.3% of registrants have cumulative voting. This percentage also varies across market capitalization categories:
Approximately 2.2% for S&P 500
registrants, 3.1% for S&P 400
registrants, 4.1% for S&P 600
registrants, and 3.4% for non-S&P 1500
registrants.204
Registrants governing documents generally provide that one of two main standards be applied to the election of directors: Either a majority voting standard or a plurality voting standard.
Under a majority voting standard, directors are elected only if they receive affirmative votes from a majority of the shares voting or present at the meeting, and shareholders can vote for each nominee, against each nominee, or abstain from voting their shares. By contrast, under a plurality voting standard, the nominees receiving the greatest number of for votes are elected, and shareholders can withhold votes from specific nominees but cannot vote against any of them. In those cases in which a majority standard is in place in director elections, registrants tend to have a carve-out in the bylaws or charter that applies a plurality standard in contested director elections.
In the case of a majority voting standard in a contested election, there is a risk that some or all of the nominees receiving the highest relative shareholder support may still not win a majority of votes cast. This risk is especially high when nominees only appear on either the registrants or the dissidents card, which is generally the case under the current proxy rules.
Based on data that we have available for affected S&P 1500 registrants, we estimate that whereas approximately 70% have a majority standard in director elections, only approximately 6% of the affected S&P 1500 registrants have a majority standard without a carve-out for a plurality standard in the case of a contested election.205
203 See, e.g., David Ikenberry & Josef Lakonishok, Corporate Governance through the Proxy Contest:
Evidence and Implications, 66 J. Bus. 405, 413
1993 finding that dissidents are successful in obtaining at least one seat in 41.3% of contests held under straight voting and that this increases to 71.9% in contests using cumulative voting.
204 Estimates based on staff analysis of board characteristics data from ISS as of calendar year 2019. This data is available for 3,841 of the potentially affected registrants. We do not have ready access to this data for other registrants.
205 Estimates based on staff analysis of governance data for S&P 1500 companies from ISS
as of calendar year 2020.

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c. Dissidents in Contested Elections The dissidents in contested elections are typically shareholders of the registrant, but may fit into one of several categories. A common category of dissidents is activist hedge funds that take a proactive approach to the companies in their investment portfolios by trying to influence the management and decision-making through various means, such as proxy contests. Dissidents may also be former insiders or employees of the registrant.
A party to a possible business combination may also contest the election of directors at a registrant when, for example, it is seeking to acquire the registrant but the registrants current board does not approve of the transaction. In some cases, a group of dissatisfied shareholders other than activist hedge funds jointly contests an election. Section IV.B.2.a below provides further information about the relative frequency of different types of dissidents in recent director contests.
d. Directors We note that reputational concerns may be an important consideration for directors and potential directors.206 Past research has found that proxy contests may affect the reputation of incumbent directors, in that such contests appear to have had a significant adverse effect on the number of other directorships they hold.207 Therefore, any changes to the proxy rules that would increase the likelihood of proxy contests at any given registrant could reduce the willingness of current and potential directors to be nominated to serve on the registrants board in the future.
2. Contested Director Elections Currently, a shareholder voting by proxy is generally limited to voting for either the registrant slate or the dissident slate and, when used to round out a slate, certain registrant nominees chosen by the dissident.208
206 See, e.g., Ronald Masulis & Shawn Mobbs, Independent Director Incentives: Where Do Talented Directors Spend Their Limited Time and Energy?, 111 J. Fin. Econ 406, 426 Feb. 2014
concluding that director reputation is a powerful incentive for independent directors.
207 See Vyacheslav Fos & Margarita Tsoutsoura, Shareholder Democracy in Play: Career Consequences of Proxy Contests, 114 J. Fin. Econ.
316, 326 2014 finding that, following a proxy contest, all directors in the targeted company experience on average a significant decline in the number of their directorships, not only in the targeted company, but also in other, non-targeted companies.
208 However, it may be possible for a registrant to require a dissidents nominees to consent to be named on the registrants card pursuant to the director questionnaires required under a registrants advance notice bylaw provisions. As noted above,
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By contrast, a shareholder that attends an annual meeting may vote for any combination of registrant and dissident nominees.
a. Proxy Contest Data We identify 148 proxy contests 209
that were initiated through the filing of preliminary proxy statements by dissidents in calendar years 20172020
across all registrants subject to the proxy rules other than funds.210 Of these proxy contests, we estimate that 101
involved an election contest with competing slates of director nominees at an annual meeting of shareholders.211 In one case, there were two dissidents with separate slates of nominees. Most of the contests with competing slates of board nominees were in smaller to midsize companies: Nine were S&P 500
companies, 13 were S&P 400
companies, 17 were S&P 600
companies, and 62 were outside the S&P
1500. In terms of the type of dissidents initiating proxy contests with competing slates, activist investors mainly hedge funds and other types of investment companies were dissidents in approximately 79% of the contests, whereas former or current insiders and employees, other groups of shareholders, or companies seeking the staff has observed an increased use of this tactic since 2016. This option is not available to the dissident. In addition, we have observed at least one case since 2016 where universal proxy was used by both parties, presumably based on obtaining voluntary consent by the included nominees. See supra note 43 and accompanying text.
209 This total number of proxy contests includes all cases in which a proponent or dissident initiated a solicitation in opposition to the registrant, whether in relation to an election of directors or with respect to another issue. A solicitation in opposition includes i any solicitation opposing a proposal supported by the registrant; and ii any solicitation supporting a proposal that the registrant does not expressly support, other than a shareholder proposal included in the registrants proxy material pursuant to Rule 14a8. See 17 CFR
240.14a6a, Note 3. The total number includes consent solicitations for special meetings and written consent solicitations 36 cases, which may be board related contests but are not subject to the required use of universal proxies. This total number of proxy contests does not include exempt solicitations, which are discussed in Section IV.B.3, infra.
210 Based on staff review of EDGAR filings in calendar years 2017 through 2020.
211 This represents on average approximately 25
board-nomination contests per year, which is lower than the average of 36 initiated contests per year we found for 2014 and 2015 in the Proposing Release.
The 47 proxy contests initiated in 20172020 that did not represent election contests with competing slates of candidates at an annual meeting of shareholders include: Consent solicitations for the removal and election of directors at a special meeting or through written consent; contests involving vote no campaigns; and proposals on issues other than director nominees. Consent solicitations and vote no campaigns are discussed in Section IV.B.3, infra.

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