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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
by improved operating performance.322
In these ways, an increase in the incidence or perceived threat of proxy contests could represent a valuable disciplinary force for some boards.
Conversely, an increase in the incidence and perceived threat of contests could also have a negative impact on the efficiency and competitiveness of registrants. For example, studies have found that proxy contests in which dissidents win one or more seats but there is no change in the incumbent management team and the registrant is not acquired are associated with underperformance in the years after the contest.323 These results are consistent with the idea that conflicts in the boardroom may have detrimental effects for shareholders. An increase in the perceived threat of proxy contests or in engagement with dissidents could also have negative implications. For example, some studies have found that boards that face a lower threat of being replaced because of poor short-term results may be better able to focus on long-term value creation.324 Studies have also found that increased dissident influence may be detrimental, to the extent that managers make concessions or policy changes that are valuedecreasing in order to deter activists.325
Thus, in some cases, an increase in the incidence or perceived threat of proxy contests could represent a costly distraction for boards and corporate officers, as also argued by some commenters.326 However, for the reasons outlined above, we are not able to assess the likelihood and extent of such costly distraction as a result of the final amendments. In addition, two commenters argued that adoption of a mandated universal proxy card could increase the incentive for founders to keep their companies private.327 Any such increased incentive for companies to stay or go private rather than bear the threat of proxy contests could negatively 322 See
Fos Study.
e.g., Mulherin & Poulsen Study, at 305
08; David Ikenberry & Josef Lakonishok, Corporate Governance Through the Proxy Contest: Evidence and Implications, 66 J. of Bus. 405, 42425 1993.
324 See Martijn Cremers, Lubomir Litov & Simone Sepe, Staggered Boards and Long-Term Firm Value, Revisited, 126 J. Fin. Econ 422 2017; Martijn Cremers, Erasmo Giambona, Simone Sepe & Ye Wang, Hedge Fund Activism and Long-Term Firm Value, 1720, working paper Nov. 19, 2015, available at http papers.ssrn.com/sol3/papers.
cfm?abstract_id=2693231 retrieved from SSRN
Elsevier database.
325 See, e.g., John Matsusaka & Oguzhan Ozbas, A
Theory of Shareholder Approval and Proposal Rights, 33 J. Law Econ. Organ. 377 2017.
326 See, e.g., letters from CCMC; CGCIV; IBC;
Society.
327 See letters from CCMC; CGCIV.

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affect capital formation,328 but given the overall relatively low annual frequency of director election contests compared to the number of public registrants, we do not think the final amendments are likely to significantly affect the decisions of founders to take their companies public, even if they perceive the mandated use of universal proxies negatively.
Given these competing factors, to the extent there is any change in the incidence and perceived threat of typical proxy contests, the effects are likely to vary from registrant to registrant, and it is difficult to predict the average effects of changes in the nature of proxy contests across all registrants. The possible effects of changes in the incidence or threat of nominal proxy contests are similarly unclear. To the extent that such contests have the potential to affect the outcomes of director elections, the actual incidence or perceived threat of such contests may either increase director discipline or create a distraction for boards, as in the case of typical proxy contests. However, as discussed above, because of the low level of solicitation efforts by dissidents in a nominal contest, we anticipate that these contests will be much less likely to affect the outcomes in director elections compared to typical contests.
Nevertheless, such contests may be used to attract attention in the interest of pursuing other changes. In some cases, drawing attention to particular issues in this way could lead to value-enhancing changes. In other cases, dissidents may use such contests to pursue interests that may not be shared by other shareholders, in which case the average shareholder may be unlikely to benefit and yet likely bear the costs of registrants expending additional resources on solicitation in such 328 See, e.g., Geoff Colvin, Going Private: Take this Market and Shove it, Fortune Magazine May 29, 2016, available at http fortune.com/goingprivate/ citing the avoidance of proxy contests as motivation for firms to go private. While it is possible that companies could have some incremental incentive to stay or go private, we believe it is unlikely that the final amendments would result in an increased incentive for registrants to relist or redomicile overseas, given that these changes alone would not be sufficient to avoid being subject to the U.S. proxy rules. For example, foreign issuers may be subject to the U.S.
proxy rules unless they qualify as foreign private issuers under 17 CFR 240.3b4c Exchange Act Rule 3b4c. In particular, a foreign registrant cannot qualify as a foreign private issuer if more than 50% of its securities are held by U.S. residents and at least one of the following applies: i A
majority of the officers and directors are U.S.
citizens or residents; ii more than 50% of the issuers assets are located in the U.S.; or iii the issuers business is principally administered in the U.S. See 17 CFR 240.3b4.

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contests. In these cases, the negotiations resulting from such contests or the perceived threat of such contests could also result in registrants making concessions to dissidents that may not be in the best interest of the average shareholder in order to reduce the costs of contending with such contests.
Finally, the effects of any changes in proxy contests may be affected by managers and market participants altering their behavior in reaction to the final amendments. In particular, changes in the nature of proxy contests may increase or decrease the use of complementary or substitute governance mechanisms.329 For example, studies have found that a historical increase in proxy contests was associated with a decrease in hostile takeovers, in which an entity acquires control of a company against the wishes of the incumbent board by purchasing its stock, suggesting proxy contests and hostile takeovers may be substitute mechanisms for control challenges.330 By contrast, activist shareholders with large holdings in a particular registrant activist blockholders who may be able to directly monitor and communicate with management, may represent a type of governance mechanism that can be a complement to proxy contests.331 For example, if activist blockholders are present, it may be easier to overcome collective action problems and initiate and win a proxy contest. Thus, any increase in the potential impact of proxy contests may be enhanced by the presence of activist blockholders. At the same time, if the potential impact of proxy contests increases, the incentive of registrants to engage with activist blockholders and make suggested improvements may increase, enhancing the monitoring value of activist blockholders.332
Any effects that follow from increasing the incidence or perceived threat of proxy contests may be either mitigated or magnified by indirect effects on these substitute and complementary mechanisms. For example, any increase in the incidence of proxy contests could be offset by reductions in the use of substitute 329 The concepts of complementary and substitute governance mechanisms are discussed in Section IV.B supra.
330 See, e.g., Fos Study.
331 See Section IV.B.1.b for the frequency and size of institutional blockholdings among potentially affected registrants for which this data is available.
332 For a broader review of issues concerning the role of activist blockholders in corporate governance, see Alex Edmans, Blockholders and Corporate Governance, 6 Ann. Rev. Fin. Econ. 23
2014.

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