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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
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Universal proxies may therefore result in either an increase or decrease in changes in control of a board, and in either dissidents or management winning more seats on the board, or a change in voting percentages without a change in the board composition. We expect that dissidents and registrants will take these potential impacts into consideration in their approach to potential proxy contests. For example, as discussed in more detail in the following section, if the parties to a contest anticipate that changes in voting behavior associated with universal proxies may change the number of seats that they expect to win, these expectations may affect the likelihood that they enter into a settlement agreement that results in changes to the board or other concessions. Such changes to board composition and concessions may either enhance or reduce, or have no significant effect on, the efficiency and the competitiveness of registrants.
It is also possible that parties will take measures to reduce the likelihood of changes in election outcomes. For example, proxy statements and other related communications could include additional disclosures intended to deter shareholders from voting split-tickets, such as emphasizing the importance of a unified board and clarifying whether some or all of one partys nominees might not agree to serve if their party does not hold a majority of board seats.
Such disclosures might reduce the likelihood of split-ticket voting and limit any potential increase in mixed boards. Another potential tactical response may involve the adoption by registrants of additional defenses to shareholder interventions. For example, registrants might adopt director qualification bylaws or might limit the indemnification or committee membership of dissident-nominated directors.290 Such changes could limit the likelihood of dissident nominees being elected or limit their impact if they are elected. Similarly, if dissidents anticipate that the final amendments could result in fewer dissident another hypothetical example that shows how voting outcomes may depart from shareholder preferences when universal proxy is used in combination with the dissident nominating a short slate. For further discussion of the limitations of voting rules, see, e.g., Kenneth Arrow, Social Choice and Individual Values 1st ed. 1951.
290 See, e.g., J.W. Verret, Defending Against Shareholder Proxy Access: Delawares Future Reviewing Company Defenses in the Era of DoddFrank, 36 J. Corp. Law 391, 40406 2011; Matthew D. Cain, Jill E. Fisch, Sean J. Griffith & Steven Davidoff Solomon, How Corporate Governance Is Made: The Case of the Golden Leash, 164 U. Pa. L.
Rev. 649, 671 678 2016.

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nominees being elected, they may choose to rely more heavily on other types of interventions, such as soliciting consents to replace some board members with their own nominees at a special meeting. Also, dissidents interested in minority representation may nonetheless choose to run longer slates of candidates, to the extent it could increase the likelihood that at least some of their nominees are elected.
While the measures discussed above would serve to blunt the effect of the final amendments on election outcomes, the effect of other potential responses may serve to magnify these effects. For example, the parties to a contested election may change what they spend on solicitation. Some parties may increase these expenditures to further capitalize on an advantage that they anticipate the final amendments would give them, or to mitigate a disadvantage they perceive. If so, that may result in a greater likelihood of the parties candidates being selected.
The composition of boards may also be affected by changes in the set of potential nominees that may result from effects that the final amendments could have on the incentives of directors. As discussed above, reputational concerns may be an important consideration for directors and potential directors, and research has found that proxy contests may have an adverse effect on a directors reputation.291 For this reason, some potential directors may be relatively less willing to be nominated if they believe that universal proxies would reduce the likelihood that they are elected to a seat or retain their seat on a board. While we do not have specific data that suggests the final amendments would result in an increase in the reluctance of directors to serve, and it is unclear whether any such reluctance would be more likely to affect more qualified or less qualified candidates, any incremental increase in the reluctance of directors to serve may affect the ability of registrants to recruit individuals with the different skill sets needed to compose an effective board.
The effects of any changes in election outcomes on board effectiveness are difficult to predict. On the one hand, if more dissident nominees are elected or dissidents are more likely to gain control, it could result in greater efficiency and competitiveness to the extent dissident-nominated directors may be more effective monitors.292 On 291 See
supra Section IV.B.1.d.
e.g., Jun-Koo Kang, Hyemin Kim, Jungmin Kim, and Angie Low, Activist-appointed Directors, J. Fin. Quant. Anal. 2020 forthcoming, available at SSRN: https ssrn.com/abstract=3380837
292 See,
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the other hand, if more registrant nominees retain their seats or are more likely to retain control, the board may be better able to focus on long-term value creation, because a lower risk of board turnover may reduce the risk that directors unduly focus on short-term metrics.293 Also, a lower chance of changes in control may reduce the risk that expensive change in control provisions in debt covenants and other material contracts and agreements are triggered.294 Universal proxies may lead to more mixed boards with directors from both parties than under the current proxy system. Mixed boards may increase the effectiveness of boards, such as through a reduction of groupthink and benefits stemming from inclusion of directors with diverse backgrounds,295 particularly because retrieved from SSRN Elsevier database or http
dx.doi.org/10.2139/ssrn.3380837 finding that companies appointing independent directors nominated by activists, either through contests or negotiations, experience a larger value increase than companies appointing other directors, and that the increase in value is higher among companies with greater monitoring needs and entrenched boards;
Ian Gow, Sa-Pyung Sean Shin & Suraj Srinivasan, Activist Directors: Determinants and Consequences, Harv. Bus. Sch. Working Paper No. 14120 June 2014, available at http www.hbs.edu/faculty/
Pages/item.aspx?num=47599 finding that activist interventions that result in new directors being appointed to the board are associated with significant strategic and operational actions by firms, as well as with positive stock reactions and improved operating performance.
293 See, e.g., Martijn Cremers, Lubomir P. Litov &
Simone M. Sepe, Staggered Boards and Long-Term Firm Value, Revisited, 128 J. Fin. Econ 422 Nov.
2017 suggesting that a greater likelihood of longer director tenure can serve as a longer-term commitment device with positive effects on longerterm value creation.
294 For example, one study found in its sample of debt issues that over half of the debt issued in 2012
contained change in control covenants that gave bondholders an option to require the issuer to offer to purchase all of the bonds typically at 101% of their par value if, at any time, the majority of the board of directors ceased to be those who were directors at the time of issuance or those whose election was approved by a majority of the continuing directors. See Frederick Bereskin &
Helen Bowers, Poison Puts: Corporate Governance Structure or Mechanism for Shifting Risk?, working paper Sept. 8, 2015, available at https
www.weinberg.udel.edu/IIRCiResearchDocuments/
2015/09/FINAL-Poison-Puts-Research-Sept2015.pdf. Triggering such covenants, often referred to as proxy puts, can result in companies repurchasing their own debt at a loss as well as having to incur expenses to refinance with a new debt issue. Such covenants are more binding when they are of the dead hand variety, which prevents the board from approving dissident-nominated directors in order to avoid triggering the covenant.
See F. William Reindel, Dead Hand Proxy Puts What You Need To Know, Harvard Law School Forum on Corporate Governance and Financial Regulation Blog, June 10, 2015, available at https
corpgov.law.harvard.edu/2015/06/10/dead-handproxy-puts-what-you-need-to-know/.
295 See, e.g., Jeffrey Coles, Naveen Daniel &
Lalitha Naveen, Director Overlap: Groupthink versus Teamwork, working paper 2020, available at https dx.doi.org/10.2139/ssrn.3650609

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