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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
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including the identity of dissidents nominees, their backgrounds and name recognition, the shareholders level of dissatisfaction with the registrant, and the efforts of the registrant to dissuade shareholders from supporting the dissidents nominees.311 In general, we expect that engaging in a nominal contest will not be an attractive alternative for most potential dissidents that are truly interested in gaining board representation,312 particularly if other alternatives are feasible.313
As discussed in more detail in the Proposing Release, even if the chance of obtaining board representation through a nominal contest may be low, dissidents may be interested in other possible effects, such as attracting attention to themselves and their agenda.314 Such attention could be used by the dissident to publicize a desired change or a particular issue,315 or to 311 While the registrants universal proxy card would permit a vote for dissident nominees, its proxy statement can and likely will include disclosure arguing against such a vote. If the dissident does not counter with positive information about its nominees disseminated in a meaningful way to a significant percentage of shareholders, we expect that the dissidents odds of success in the solicitation will be low.
312 We note that the Commissions 2007
amendments to the proxy rules allowing notice and access delivery of proxy statements decreased the minimum cost at which a proxy contest could be conducted through potentially reduced mailing costs, but did not seem to cause an increase in contested elections, which may be evidence of the importance of full set delivery and other solicitation expenditures in gathering support for dissident nominees. See, e.g., Fabio Saccone, E-Proxy Reform, Activism, and the Decline in Retail Shareholder Voting, The Conference Board Director Notes Working Paper No. DN021 Dec. 26, 2010, available at http papers.ssrn.com/sol3/papers.
cfm?abstract_id=1731362 retrieved from SSRN
Elsevier database. For details on the 2007
amendments to the proxy rules, see Shareholder Choice Regarding Proxy Materials, Release No. 34
56135 July 26, 2007 72 FR 42222 Aug. 1, 2007.
313 These alternatives may include a typical proxy contest with additional solicitation expenditures but also, potentially, with a higher chance of success or use of a proxy access bylaw if available and if the dissident is eligible to use proxy access.
We are unaware of any cases in which such bylaws have been used to nominate directors to date.
However, most proxy access bylaws would require a registrant to include information about the dissident nominees and a supporting statement from the dissident in its proxy materials and would not require the dissident to bear the costs and meet the requirements described above. That said, it is possible that dissidents interested in board representation but for whom additional expenditures are not feasible or justified, and for whom proxy access is unavailable, may consider a nominal proxy contest.
314 See Section IV.D.4.b of the Proposing Release.
315 While the shareholder proposal process may be used to raise some such concerns, and would allow these concerns to be expressed more directly in the registrants proxy statement, such proposals would also need to meet the requirements of Rule 14a8. For example, proposals on certain topics, such as those pertaining to ordinary business matters, may be properly excluded by registrants
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encourage management to engage with the dissident. However, it is unclear whether the inclusion of dissident nominees on the registrants proxy card would significantly increase the publicity surrounding a nominal proxy contest.
It is difficult to say whether and to what extent the possibility of such publicity would lead dissidents to more frequently initiate nominal contests, and similarly, whether the ability of dissidents to run such contests would influence the incentives of management to pursue changes in response to such dissidents. We believe the likelihood of a significant increase in nominal contests will be mitigated by the new costs associated with the minimum solicitation requirement and the current availability to dissidents of other potentially lower-cost routes to obtaining publicity.316 Also, while nominal contests are currently rare, it is also possible that their incidence could decline further under the final amendments given the new costs imposed on such contests. In particular, dissidents that would otherwise pursue nominal contests might consider alternatives that would not trigger the solicitation requirement, such as an exempt solicitation, or could choose not to take any such actions due to the higher costs imposed on nominal contests by the final amendments.
c. Effects of Any Changes in Incidence or Perceived Threat of Proxy Contests Overall, it is in the incidence or perceived threat of proxy contests, and thus a change in the level of engagement with and the influence of dissidents.
However, to the extent that any of these factors is significantly affected, we cannot rule out the possibility that there may be significant effects on the efficiency and competitiveness of registrants. Several commenters expressed concerns that mandating the use of universal proxy cards would increase the number of contests and have a negative impact on the working of boards and managerial decisionmaking to the detriment of shareholders.317 We discussed such potential effects in the economic analysis of the Proposing Release and from their proxy materials. See 17 CFR 240.14a 8i7.
316 For example, for a much lower cost, a dissident required to file beneficial ownership reports under Section 13d could send a letter to the board detailing its desired changes and file it as an attachment to a Schedule 13D filing, making it available to the public though, unlike a registrants universal proxy card, the Schedule 13D
filing would not be mailed or otherwise disseminated to shareholders.
317 See supra notes 3436 and accompanying text.

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discuss them as well in more detail below.318 However, we note that while any increase in the incidence or threat of proxy contests would likely increase costs for registrants and take more of registrant managements time and effort, such an increase could still benefit shareholders if the contests or threat thereof ultimately result in more effective boards and improved registrant performance. We also discuss the potential for such benefits below.
There is some evidence that proxy contests may be beneficial to shareholders. For example, studies have found proxy contests to be associated with positive share price reactions.319 In this vein, some observers have argued that the low incidence of proxy contests is due to collective action problems related to the high costs of proxy contests 320 and that a higher rate of proxy contests may be optimal.321 Any increase in engagement between management, dissidents, and shareholders that may result because of changes in the likelihood of proxy contests, such as discussions at earlier stages of a campaign or reactions to other types of shareholder interventions, could similarly be beneficial. Such engagement may improve the effectiveness of boards, may lead to value-enhancing changes, and may perhaps be a more efficient means to achieve such changes than expensive proxy contests. For example, one study found that an increased likelihood of being targeted with a proxy contest even if an actual proxy contest does not materialize is associated with changes in corporate policies that are followed 318 See
Section IV.D.4.c of the Proposing Release.
e.g., Yair Listokin, Corporate Voting versus Market Price Setting, 11 Am. L. & Econ. Rev.
608 2009 finding that, in a sample of proxy contests, close dissident victories were related to positive stock price impacts, while close management victories were related to negative stock price impacts; Harold Mulherin & Annette Poulsen, Proxy Contests and Corporate Change: Implications for Shareholder Wealth, 47 J. Fin. Econ. 279, 307
1998 finding that their sample of proxy contests was associated with shareholder value increases, particularly when the contests led to management turnover or acquisitions Mulherin & Poulsen Study; Fos Study finding that the average abnormal returns to target shareholders reach 6.5%
around proxy contest announcements. See also Matthew Denes, Jonathan M. Karpoff & Victoria McWilliams, Thirty Years of Shareholder Activism:
A Survey of Empirical Research, 44 J. Corp. Fin. 405
2017.
320 That is, when a small group of shareholders must bear all of the costs of proxy contests while sharing in only a fraction of any benefits, with other shareholders absorbing the rest, the small group may be discouraged from initiating potentially value-enhancing proxy contests.
321 See, e.g., Lucian A. Bebchuk, The Myth of the Shareholder Franchise, 93 Va. L. Rev. 675, 712
2007; Bernard S. Black, Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520 1990.
319 See,
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