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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
changes in response to alternative interventions.
Thus, it is likely that any changes in expectations regarding the outcome of a potential contest would affect the degree of a dissidents influence relative to that of a registrants incumbent board and management. It is difficult to generalize about the effects of the final amendments as they are very likely to depend on the dynamics of a particular contest or potential contest. Also, it is not clear whether the actual incidence of contested elections would increase or decrease, because any change in a dissidents incentive to initiate contests may be accompanied by a change in the likelihood that a registrant makes earlier concessions to prevent a disagreement from proceeding to the stage of a proxy contest.
Effects Related to Anticipated Changes in Costs
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While it is unclear whether the final amendments are likely to change the expected costs of typical proxy contests to registrants and dissidents, any such changes in the expected costs may also affect the incidence or perceived threat of such contests. In particular, a dissident that expects to achieve a similar outcome at a lower cost may have a greater incentive to initiate a typical proxy contest.304 Registrants that expect dissidents to face lower costs, or those registrants that expect to bear additional costs in the form of increased solicitation expenditures in a contested election, may have greater incentive to make concessions. By contrast, a dissident that expects to incur additional solicitation expenses to achieve the same outcome may have a lower incentive to initiate a typical proxy contest, while registrants that expect dissidents to face higher costs, or registrants that expect to face lower 304 It is possible that a significant reduction in the average cost to dissidents in typical proxy contests could have effects that reduce the incentive to initiate some contests. In particular, some studies have found that a high required cost of proxy contests may serve as a credible signal to other shareholders that the value that the dissidents slate of directors can bring to the registrant is high, or else the dissident would not be bearing the cost of a proxy contest. In an environment in which the average cost of a typical proxy contest is very low, the ability of dissidents to get support for their nominees may be decreased, as it may be more difficult and potentially more costly than otherwise for a dissident whose contest has strong merit to differentiate its contest from less worthy contests.
See, e.g., John Pound, Proxy Contests and the Efficiency of Shareholder Oversight, 20 J. Fin. Econ.
237 1988; Utpal Bhattacharya, Communication Costs, Information Acquisition, and Voting Decisions in Proxy Contests, 10 Rev. Fin. Stud. 1065
1997.

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costs in a contested election, may have a lower incentive to make concessions.
Differential Effects Across Registrants To the extent that the incidence and perceived threat of typical proxy contests may change, certain registrants may be affected more than others. For example, relatively smaller to midsize registrants may be more affected because they are currently the most likely to be involved in proxy contests.305 Any marginal changes may therefore have the greatest impact on this group of registrants. However, more significant changes in the nature of proxy contests could also make it more attractive to target types of registrants that were infrequently the subject of proxy contests in the past. For example, to the extent that large registrants may currently be less likely to be targeted because of the greater resources they can expend to counter a dissidents solicitation efforts, a significant decrease in dissidents expected discretionary solicitation expenditures or a large increase in their likelihood of success could lead to a higher threat or incidence of contests at such registrants.
The governance structures of registrants are also likely to play a role in the impact of the final amendments.
On the one hand, registrants with governance characteristics that may increase the potential impact of proxy contests, such as cumulative voting, may be more affected than others.306 On the other hand, registrants with governance characteristics that make them more difficult to target with certain kinds of election contests, such as those with high incumbent management ownership, may be less affected by the final amendments.307
b. Nominal Proxy Contests The final amendments may also affect the incidence or perceived threat of nominal proxy contests, in which the dissidents incur little more than the basic costs required to engage in a contest and which are currently rare.308
The nature of nominal proxy contests may be affected by the final amendments in two key ways. First, the solicitation requirement will likely increase the costs to dissidents of pursuing such contests. As discussed above, beyond the minimal costs currently incurred, such dissidents will also have to bear the costs required to 305 For example, staff estimates that only nine of the 101 registrants involved in proxy contests initiated in years 20172020 were in the S&P 500
index. See supra Section IV.B.2.a.
306 See supra note 203.
307 See supra Section IV.B.1.b.
308 See supra Section IV.B.2.b.

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meet the minimum solicitation requirement, which we estimate would be on average approximately $5,300 to $9,800 depending on the size of the registrant.309 This cost could be lower in cases in which the services of an intermediary are not required to meet the solicitation requirement as in the case of registrants with highly concentrated ownership or higher at registrants with a more dispersed shareholder base. As discussed above, while this required solicitation cost will be greater than the expenditure currently required in a nominal contest, the costs will remain substantially lower than the solicitation costs dissidents bear in typical proxy contests.310
Second, requiring that registrants use universal proxies will, in practice, allow dissidents in nominal contests to put the names of their director candidates in front of all shareholders, via the registrants proxy card, without additional expense. This change could somewhat increase the likelihood that a dissident in a nominal contest succeeds in gaining seats for their nominees, though, as in the case of current nominal contests, dissidents may have a very limited chance of succeeding in gaining seats if they do not engage in meaningful independent solicitation efforts. Dissidents engaging in a nominal contest will not be required to meet the eligibility criteria that apply to other alternatives that would allow dissidents to include some form of information on the registrants proxy card, such as the requirements of a proxy access bylaw, where available. Dissidents may therefore consider engaging in a nominal contest when they would not qualify to use alternatives such as proxy access or when these alternatives are not available. However, the information included in the registrants proxy materials would likely be more limited in the case of a nominal contest just a list of names and a reference that the dissidents proxy materials are available without cost at the Commissions website than these other alternatives.
Based on staff experience, we expect that a dissident that solicits holders that represent at least 67% of voting power and files a preliminary and definitive proxy statement, without engaging in any other solicitation efforts, would generally have a very limited chance of having any of its nominees elected to the board despite their names being included on the registrant proxy card.
The likelihood that a nominal contest results in dissident nominees winning seats may depend on many factors 309 See
supra Section IV.C.2.b.

310 Id.

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