``withhold'' vote.\151\ Another commenter believed that the phrase
``the method by which votes will be counted'' in Item 21 of Schedule
14A should be retained, in order to clarify for shareholders the effect
of each voting option presented on the proxy card, as well as how each
voting option will be counted.\152\
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    \151\ See letters from CalPERS; CII.
    \152\ See letter from Carpenters.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting the rule amendments with the modifications
described below. Rule 14a-4(b) mandates, as proposed, the inclusion of
an ``against'' voting option in lieu of a ``withhold authority to
vote'' option on the form of proxy for the election of directors where
there is a legal effect to such a vote. It also provides shareholders
who neither support nor oppose a director nominee an opportunity to
``abstain'' (rather than ``withhold authority to vote'') in a director
election governed by a majority voting standard. These changes will
provide shareholders with a better understanding of the effect of their
votes on the outcome of the election. We also have not eliminated
Instruction 2 to Rule 14a-4(b)(4), as one commenter had requested,
because it may provide useful guidance about voting options where
applicable state law gives legal effect to votes cast against a
nominee.
    We agree with commenters, however, that including an ``against''
voting option on a proxy card where there is no legal effect to such
vote is unnecessarily confusing for shareholders and have therefore
amended Rule 14a-4(b) to prohibit such a voting option on the proxy
card where such votes have no legal effect. Further, in light of
comment received from the public, we are retaining the phrase ``the
method by which votes will be counted'' from Item 21(b) of Schedule 14A
to avoid any ambiguity regarding the need for clear disclosures in the
proxy statement regarding the effect of each voting option presented to
shareholders.

I. Bona Fide Nominee and Short Slate Rules

1. Elimination of the Short Slate Rule
a. Proposed Rules
    The Commission proposed to amend Rule 14a-4(d) to eliminate the
short slate rule for registrants other than funds. The short slate rule
allows dissidents soliciting in support of a partial slate of nominees
that would make up a minority of the board of directors to seek
authority to vote for some of a registrant's nominees.\153\ The
Proposed Rules would eliminate the short slate rule for operating
companies because it would be unnecessary with a universal proxy
requirement and the revised bona fide nominee rule. The Proposed Rules,
however, would maintain the short slate rule for funds, since, as
proposed, they would not be included in the universal proxy
requirement.\154\
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    \153\ See Rule 14a-4(d)(4). Rule 14a-4(d)(4)(ii) provides that a
dissident using the short slate rule may not name the registrant
nominees for which it will vote using proxy authority; rather, the
dissident may name only those registrant nominees for which it is
not seeking proxy authority. This requirement may render the proxy
card confusing for shareholders.
    \154\ See infra Section II.J.
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b. Comments Received
    Relatively few commenters addressed the proposed elimination of the
short slate rule for operating companies that would be subject to a
mandated universal proxy requirement. Several commenters supported its
elimination in connection with the adoption of a universal proxy
requirement, noting that such a system would eliminate many of the
practical constraints associated with the short slate rule (as well as
the bona fide nominee rule).\155\ Another commenter similarly supported
the changes, but also advocated retaining the short slate rule, in
optional form, if the universal proxy requirement is not mandated.\156\
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    \155\ See letters from Elliott; CFA Institute.
    \156\ See letter from Colorado PERA.
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c. Final Amendments
    We are eliminating the short slate rule, as proposed, for operating
companies that will be subject to the final rules mandating the use of
universal proxy cards. The revisions we adopt to the bona fide nominee
rule,\157\ along with the changes to mandate the use of a universal
proxy card in all non-exempt director election contests, obviate the
need for the short slate rule

for operating companies. The amended short slate rule, however, will
continue to be available for funds in contested elections, which will
not be subject to the universal proxy requirements at this time.\158\
If we later adopt rule changes to make the universal proxy requirement
applicable to some or all funds, we will consider whether to eliminate
the short slate rule completely at that time.
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    \157\ See infra Section II.I.2.
    \158\ See Rule 14a-4(d)(1)(ii)(A)-(D).
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2. Modification of the Bona Fide Nominee Rule
a. Proposed Rules
    In order to facilitate the ability of both parties in a contested
election to include the names of all nominees on each side's proxy
card, the Proposed Rules would revise the bona fide nominee rule. To
remove the technical impediment to including the names of the other
side's nominees on a universal proxy card created by Rule 14a-4(d)(1)
and (4), the Proposed Rules would revise the determination of a ``bona
fide nominee'' in Rule 14a-4(d).\159\ The proposed revisions would
change the requirement that a nominee consent to being named in ``the''
proxy statement of the party listing that nominee on its card, to a
more general requirement that a nominee consent to being named in ``a''
proxy statement of either side in the contest. Proposed Rule 14a-
4(d)(1)(i) would maintain the requirement that a nominee consent to
serve, if elected.
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    \159\ See proposed Rule 14a-4(d)(1)(i). Without the adoption of
the proposed revisions, Rule 14a-4(d)(1) and (4) would limit the
ability of one side in a contested election from seeking proxy
authority to vote for any director nominee unless such nominee
consented to being named in that side's proxy statement, and to
serve if elected.
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b. Comments Received
    Multiple commenters who supported the adoption of a universal proxy
requirement supported the proposed changes to the bona fide nominee
rule to effectuate that system.\160\ Several of these commenters
expressly supported allowing a soliciting party to include the names of
some or all of the registrant's nominees on its own proxy card even
when the soliciting party is not nominating its own candidates.\161\
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    \160\ See, e.g., letters from CII; CalSTRS; CalPERS; Colorado
PERA; UPWG; NY Comptroller; AFSCME; SBA-FL; Elliott; CFA Institute.
    \161\ See letters from CalSTRS; Colorado PERA; CFA Institute;
letter from CII dated Dec. 28, 2016.
---------------------------------------------------------------------------

    Some commenters advocated more limited changes to the consent
required by the bona fide nominee rule to narrow its application. As
proposed, revised Rule 14a-4 would permit (but not require) a dissident
soliciting in favor of its own proposal, without its own slate of
director candidates, to include some or all of the registrant's
nominees on the dissident's proxy card. Similarly, a dissident
conducting a ``vote no'' campaign against some of the registrant's
nominees could (but would not be required to) include on the
dissident's proxy card those registrant nominees it did not oppose. One
commenter warned of the shareholder confusion that might result in
those instances in which the dissident chooses not to include all
registrant nominees on the dissident's card, and argued that such
confusion could lead to under-voting that would distort voting
results.\162\ Several commenters favored limiting the consent provided
under the revised bona fide nominee rule to situations where the
opposing side solicits in favor of its own nominees.\163\
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    \162\ See letter from BR.
    \163\ See letters from Society; Sidley; Davis Polk; BR.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting changes to the consent requirement for a bona fide
nominee in Rule 14a-4(d)(1)(ii) as proposed. This rule change expands
the scope of a nominee's consent in an election contest to include
consent to being named in any proxy statement for the applicable
meeting. The rule amendment is necessary to permit the universal proxy
requirement we adopt in this document, because it expands the concept
of consent to allow a nominee to be considered a bona fide nominee when
named on any side's proxy card in a director election contest.
    As a practical matter and as noted by commenters, it will also
permit a dissident soliciting in favor of a proposal (but not its own
director nominees) to include some or all of the registrant's nominees
on its proxy card. It further allows a dissident conducting a ``vote
no'' campaign without presenting its own slate of competing nominees to
permit shareholders to vote for select registrant nominees on the
dissident's card. In both of these circumstances, the changes to the
bona fide nominee rule will further shareholder enfranchisement.
Although including a registrant's nominees on its own proxy card in
both of these circumstances will remain optional for the dissident
under the final rules, this optionality will not limit shareholders'
voting choices. If the dissident does not include some or all
registrant nominees on the dissident's card, shareholders will always
be able to vote on the registrant's proxy card. Where a dissident
includes some but not all registrant nominees on its proxy card, or
where it solicits in favor of a proposal but does not include
registrant nominees on its proxy card, the dissident should--in order
to avoid potential liability under Rule 14a-9 for omission of material
facts--disclose the fact that its proxy card does not include some or
all of the registrant nominees and that shareholders who wish to vote
for nominees not included on the dissident's proxy card may do so on
the registrant's proxy card. Such disclosure should mitigate the risk
of shareholder confusion.
    In addition, and in response to the commenter who was concerned
with the potential of under-voting, we note that the potential for
disenfranchisement exists under the status quo, but in a more severe
form. Under current rules, dissidents who are ineligible to use the
short slate rule (including those not soliciting on behalf of their own
director nominees) lack the ability to list registrant nominees on
their proxy card. The risk of any disenfranchisement under the final
amendments may be mitigated because we expect that dissidents will have
an incentive to include the registrant nominees on their proxy card (so
as to increase the incentive for shareholders to use their card) and
will generally not have strategic reasons to exclude registrant
nominees from their proxy card due to the lack of a competing slate.
Finally, to the extent that shareholders vote for fewer nominees than
open board seats because they are voting on a dissident's proxy card
that does not list all registrant nominees, this will occur in the
context of an uncontested election, in which the consequences of
casting fewer votes in favor of any particular nominee are less
significant than in the context of a contested election.
    The final rules maintain the requirement that a bona fide nominee
consent to serve if elected.\164\ This will ensure that neither party
nominates an individual who has not consented to serve if elected as a
director. To the extent that any nominee would not serve if elected
with other nominees (or would not serve unless certain other nominees
were elected), we would expect this material fact to be disclosed
prominently in the proxy statement of the party nominating such
individual. If one or more of the registrant's nominees will not serve
under such circumstances, the registrant should explain in its proxy
statement how such vacancies would be filled.
---------------------------------------------------------------------------

    \164\ See proposed Rule 14a-4(d)(1)(i).

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J. Funds

1. Proposed Rules
    The Proposed Rules excluded funds. Like operating companies, funds
have boards of directors that are elected by shareholders. Also like
operating companies, fund boards have significant responsibilities in
protecting shareholder interests and funds are subject to the Federal
proxy rules. However, fund shareholders also have important rights
granted to them under the Investment Company Act of 1940 that
distinguishes funds from operating companies. For reasons detailed in
the Proposing Release,\165\ the Commission did not propose to apply the
universal proxy requirement to funds, but solicited comment on whether
funds should be covered by the Proposed Rules. In the Reopening
Release, the Commission observed that since the Proposing Release,
there had been certain developments in corporate governance matters
affecting funds, particularly registered closed-end funds and BDCs. In
light of such developments, the Commission stated that it was
considering applying the proposed universal proxy card requirements to
registered closed-end funds and BDCs and again solicited comment on
whether funds should be covered by the Proposed Rules, with particular
emphasis on issues related to such funds.\166\
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    \165\ See Proposing Release at Section II.D.
    \166\ See Reopening Release at Section II.
---------------------------------------------------------------------------

2. Comments Received
    Comments received in response to the Proposing Release and
Reopening Release were mixed. On the one hand, many commenters
supported excluding funds from the Proposed Rules because of the
differences between funds and operating companies--including the
investor protections provided by applicable securities laws and
regulations and fund governance structures.\167\ With respect to
statutory and regulatory protections, some commenters observed that the
Investment Company Act of 1940 supplements state law to provide
shareholders with the right to approve fundamental fund features,
including the right to approve the investment advisory contract and any
material amendments to the investment advisory contract and changes to
any of a fund's fundamental investment policies.\168\ With respect to
fund governance structures, several commenters observed that split-
ticket voting that results in dissident directors joining a fund board
could disrupt the widespread practice of unitary and cluster boards at
funds,\169\ which could lead to additional and costly administrative
complexities and redundancies for funds that ultimately would be borne
by fund shareholders.\170\
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    \167\ See, e.g., letters from ICI; CII; Fidelity; letter dated
Jan. 9, 2017 from Independent Directors Council (``IDC''); letter
dated Feb. 27, 2017 from Mutual Fund Directors Forum (``Forum'').
    \168\ See letters from CII, ICI; IDC; Fidelity.
    \169\ See letters from ICI; IDC; Fidelity; Forum.
    \170\ See letters from ICI; IDC; Forum. In addition, those
commenters explained that a dissident director may disrupt other
fund governance standards such as standards regarding disinterested
and independent directors.
---------------------------------------------------------------------------

    In addition to providing reasons that the universal proxy rules
should not apply to funds generally, some commenters also discussed the
application of those universal proxy rules to specific types of
management investment companies. Specifically, some commenters stated
that universal proxies are not necessary for open-end funds because
open-end funds are not required to have annual shareholder meetings and
investors are able to redeem at net asset value, resulting in contested
elections being rare.\171\ With regard to closed-end funds and BDCs,
several commenters also suggested that universal proxies are not
necessary because dissidents almost always nominate a full slate of
nominees in order to achieve a specific objective, such as a
liquidation event.\172\ Therefore, according to these commenters,
shareholders typically have a binary choice to vote with fund
management or against it and these commenters believed such binary
choices would likely continue with the use of a universal proxy
card.\173\
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    \171\ See letters from ICI; IDC; Fidelity; Forum.
    \172\ See letters from Forum; ICI; see also letter from IDC. One
commenter stated that to serve the interests of long-term investors,
the Commission should provide closed-end funds with more protections
against activist investors and not erode the protections and
benefits offered by closed-end funds. See letters from ICI.
    \173\ See letters from ICI; IDC; Forum.
---------------------------------------------------------------------------

    On the other hand, many commenters opposed the exclusion of funds
generally, and registered closed-end funds and BDCs in particular, from
the Proposed Rules.\174\ Some commenters contended that because of the
large retail investor base of registered closed-end funds and BDCs, it
is difficult for shareholders to effect change when necessary.\175\ One
commenter expressed support for universal proxies for BDCs and closed-
end funds and suggested that whether shareholders of such entities are
well-served by unitary or cluster boards is an open question.\176\
Another commenter stated that the administrative efficiency of a
unitary board structure, while worth considering, should be secondary
to allowing shareholders to promote nominees of their choosing to
effect the investment objectives of the fund.\177\ A separate commenter
recommended extending the Proposed Rules to closed-end funds and BDCs,
but not to open-end funds, given the latter's greater organizational
complexity and the extreme rarity of proxy contests affecting
them.\178\
---------------------------------------------------------------------------

    \174\ See letters from Bulldog; Ad Hoc Coalition; E. Burke; BM;
Mediant; letter dated Jan. 12, 2017 from Blue Bell Private Wealth
Management; letter dated Feb. 3, 2017 from Almitas Capital
(``Almitas''); letter dated Jun. 29, 2021 from Saba Capital
Management, L.P. (``Saba'').
    \175\ See letters from Almitas; Bulldog.
    \176\ See letter from Ad Hoc Coalition.
    \177\ See letter from Saba.
    \178\ See letter from Mediant.
---------------------------------------------------------------------------

3. Final Amendments
    The final rules we adopt in this document will not apply to funds
at this time, as the Commission continues to consider any application
of the rules to funds. Developments since 2016, along with various
comments discussed above that we have received have led us to conclude
that further consideration of potential application of the universal
proxy rules to certain funds is warranted.

K. Compliance Dates

    Because the rule amendments we adopt in this document involve
significant changes to the manner in which election contests are
conducted, a transition period is appropriate. New Rule 14a-19 imposes
notice and other mandates that will require planning and coordination
by both parties to an election contest. Therefore, to avoid disruption
to the upcoming proxy season, the rule changes we adopt in this
document will become effective for any shareholder meeting featuring an
election contest held after August 31, 2022. The length of this
transition period is designed to allow adequate time for affected
parties to plan and prepare for compliance with the new rules, and to
adjust to the elimination of existing provisions, such as the short
slate rule.
    Some of the rule amendments we adopt in this document will apply to
all director elections, not just those that are contested. While these
changes do not require coordination and notice to the other party, as
is required in a contested election, they do involve enhanced
disclosure of the legal effect of votes under the applicable voting
standard for the election. The amendments also impose new voting
options where the

applicable voting standards give effect to abstain or withhold votes.
Given these changes, the same transition period for compliance (for
shareholder meetings held after August 31, 2022) is appropriate for all
of the rule amendments we adopt in this document.

III. Other Matters

    If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application.
    Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated these rules a ``major rule,'' as
defined by 5 U.S.C. 804(2).

IV. Economic Analysis

    We are attentive to the costs imposed by and the benefits obtained
from the final amendments.\179\ The discussion below addresses the
potential economic effects of the final amendments, including the
likely benefits and costs, as well as the likely effects on efficiency,
competition, and capital formation. We also analyze the potential costs
and benefits of reasonable alternatives to the amendments.
---------------------------------------------------------------------------

    \179\ Exchange Act Section 3(f) requires us, when engaging in
rulemaking that requires us to consider or determine whether an
action is necessary or appropriate in the public interest, to
consider, in addition to the protection of shareholders, whether the
action will promote efficiency, competition, and capital formation.
15 U.S.C. 78c(f). Exchange Act Section 23(a)(2) requires us, when
adopting rules under the Exchange Act, to consider the impact that
any new rule would have on competition, and prohibits any rule that
would impose a burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act. 15
U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

A. Introduction

    As discussed above, we are adopting amendments that will require
the use of a universal proxy card in all contested elections with
competing slates of director nominees to address concerns over the
inability of shareholders using the proxy system to vote for the
combination of candidates of their choice in a contested election.
These amendments will allow shareholders voting by proxy to choose
among director nominees in an election contest in a manner that more
closely reflects the choice that could be made by voting in person at a
shareholder meeting. Shareholders voting in person in a contested
election with competing slates of nominees are able to choose among all
of the duly nominated candidates. By contrast, shareholders currently
voting by proxy are typically limited to voting for only registrant
nominees or voting for only the dissident's nominees (or, in the case
of certain short slate elections, for the dissident's nominees and
certain registrant nominees chosen by the dissident).\180\ If
shareholders wish to vote for a combination of nominees across the two
slates, they generally must do so in person by attending or sending a
representative to the shareholder meeting and incurring the costs of
doing so. In some cases, parties such as proxy solicitors may make
arrangements for one or more individuals to attend a meeting on behalf
of certain shareholders to facilitate split-ticket voting. However,
many shareholders, particularly retail shareholders or those who do not
hold a large stake in the registrant, might not be willing or able to
bear the costs of voting in person and may not have access to other
arrangements. Therefore, these shareholders may not currently be able
to vote for their preferred selection of candidates.
---------------------------------------------------------------------------

    \180\ Though our economic analysis focuses on contests between a
registrant and a single dissident for ease of exposition, we believe
that the economic effects discussed below would also apply to
contests involving more than one dissident. Election contests with
more than one soliciting dissident are uncommon. For example, the
staff has identified only one proxy contest in operating companies
from 2017-2020 that involved more than one dissident with separate
slates of nominees.
---------------------------------------------------------------------------

    The mandated use of universal proxies will allow shareholders to
vote for any combination of nominees when voting their shares by proxy
in advance of the meeting, which is generally the way in which the vast
majority of shares are voted. For shareholders who would otherwise
incur incremental costs to vote for a combination of candidates that
could not be voted for by proxy, such as by attending the meeting in
person, universal proxies will result in direct cost savings. Universal
proxies will also enable shareholders who want to split their vote but
are unwilling (or unable) to bear additional costs to be able to vote
for their preferred combination of nominees to do so without incurring
additional costs.
    The nomination and election of directors by shareholders represents
a fundamental governance mechanism that can mitigate conflicts of
interest between shareholders and management. While the most direct
effect of the final amendments will be to improve the efficiency of the
voting process and permit shareholders greater choice when voting by
proxy in contested director elections, they will also likely impose
direct costs on dissidents and registrants in certain contests. The
final amendments may also have broader impacts on corporate governance
and the relationship between shareholders and management. For reasons
discussed below,\181\ it is difficult to predict the likely extent or
direction of these broader potential effects, but we cannot rule out
the possibility that they could be significant.\182\ For example,
enabling split-ticket voting could lead to a greater number of boards
that are composed of a mix of registrant-nominated \183\ and dissident-
nominated directors (``mixed boards''), which may affect the
effectiveness of boards, either positively or negatively. Additionally,
mandating the use of universal proxies by registrants as well as
dissidents--which, in practice, would likely result in the names of
dissident nominees being disseminated via registrant proxy cards to all
shareholders--may provide potential dissidents with a new means of
generating publicity for alternative nominees or for the broader
concerns behind a contest at a relatively low cost, which could change
the nature of interactions between potential dissidents and
management.\184\ The overall incidence of contested elections may
change as well. These and other potential effects, as well as possible
mitigating factors, are discussed in detail below.
---------------------------------------------------------------------------

    \181\ See Section IV.C.
    \182\ We are unaware of any empirical studies that find that
universal proxies would have significant effects on corporate
governance and the relationship between shareholders and management.
A recent study submitted by a commenter (see letter from Prof.
Hirst) finds that a universal proxy is unlikely to lead to more
proxy contests or to greater success by special interest groups. See
Scott Hirst, Universal Proxies, Yale J. on Reg. 35, 437 (2018)
(``Hirst Study''). This is an updated version of a study we
previously discussed in the Proposing Release (see note 209 in the
Proposing Release). We note that this study relies on several
critical assumptions that might not be reliable. See infra note 284.
    \183\ For ease of exposition, we refer throughout this economic
analysis to the nominees of the board, including those that are
incumbent directors, or its nominating committee, as the nominees of
the registrant and, in total, as the registrant slate.
    \184\ See, e.g., letter from CCMC (arguing that ``Seeking to
avoid the cost and distraction of an SEC-sanctioned proxy fight,
many companies will simply follow the path of least resistance and
negotiate to place dissident directors directly on their boards
without the need for a shareholder vote.'').
---------------------------------------------------------------------------

    At the outset, where possible, we have attempted to quantify the
benefits, costs, and effects on efficiency, competition, and capital
formation expected to result from the final amendments. In many cases,
however, we are unable to quantify the potential economic effects
because we lack information necessary to provide a reasonable estimate.
For example, we are unable to quantify the

potential change in the number of mixed-board outcomes at contests as a
result of the final amendments. We are also unable to quantify the
change in the instance of proxy contests that may result from the final
amendments.
    Although many commenters supported the mandated use of universal
proxy in contested director elections, some commenters raised a number
of economic concerns with the proposed amendments and also suggested
alternatives in some cases. We have considered those concerns and,
where appropriate, have expanded our economic analysis to address those
concerns and alternatives.

B. Baseline

    To assess the economic impact of the final amendments, we are using
as our baseline the current state of the proxy process. Our baseline
includes existing Commission rules, state laws, and corporate governing
documents that jointly govern the ability to solicit proxies in support
of director nominees other than the registrant nominees and the manner
in which contested elections are conducted. This section discusses the
parties involved in director election contests under the current legal
framework, current proxy voting practices, and the means available to
shareholders to influence the composition of boards of directors.
1. Affected Parties
    We consider the impact of the final amendments on shareholders,
registrants, dissidents in contested elections (who are typically also
shareholders), and directors.
a. Shareholders
    Different types of shareholders exhibit different degrees of
involvement in voting on matters up for a vote at the companies they
invest in. In particular, a study by a proxy services provider found
that there are, on average, large differences in involvement by
institutional investors compared to retail investors.\185\
Institutional and retail investors also face different levels of
difficulty and resource constraints to vote for their preferred choices
of nominees in contested director elections under current rules.\186\
As a result, the final amendments are likely to have a differential
impact with respect to the costs of voting and feasible voting choices
for these two types of shareholders.
---------------------------------------------------------------------------

    \185\ See Broadridge and PwC, Proxy Pulse 2020 Proxy Season
Review (2020), available at https://www.broadridge.com/_assets/pdf/broadridge-proxypulse-2020-review.pdf (``Proxy Pulse 2020'').
    \186\ See infra Section IV.B.2.d for a discussion on different
shareholders' current ability to arrange split-ticket voting.
---------------------------------------------------------------------------

    The number of beneficial shareholder accounts for U.S. public
companies varies significantly by company market capitalization: The
average (median) number of beneficial shareholder accounts is
approximately 3,900 (1,400) for companies with less than $300 million
in market capitalization, approximately 11,000 (5,700) for companies
with between $300 million and $2 billion in market capitalization,
approximately 28,300 (16,500) for companies with between $2 billion and
$10 billion in market capitalization, and approximately 279,000
(102,700) for companies with market capitalization above $10
billion.\187\ Among all companies, we estimate that 91% of account
holders are retail investors.\188\ For U.S. public companies that held
their annual meetings in the main 2020 proxy season (i.e., between
January 2020 and June 2020), a study by a proxy services provider found
that retail investors held approximately 29% of shares held in
brokerage accounts and institutional investors held 71%.\189\ An
earlier study by the same proxy services provider for U.S. public
companies that held their annual meetings in the main 2016 proxy season
(i.e., between January 2016 and June 2016), found that the percentage
of ownership by retail investors varies significantly with company
size, and was estimated to be 67% in companies with less than $300
million in market capitalization, 32% in companies with between $300
million and $2 billion in market capitalization, 23% in companies with
between $2 billion and $10 billion in market capitalization, and 27% in
companies with market capitalization above $10 billion.\190\
---------------------------------------------------------------------------

    \187\ Based on industry data provided by a proxy services
provider. Note that an individual shareholder may have more than one
account, so the number of beneficial shareholders likely is lower
than the number of beneficial shareholder accounts. For the purpose
of estimating costs related to distribution of proxy materials, the
number of accounts is the more relevant number because dissemination
costs such as intermediary and processing fees apply on a per
account basis per NYSE Rule 451. The data is based on domestic
companies that held shareholder meetings between July 1, 2018 and
June 30, 2019.
    \188\ Id.
    \189\ See Proxy Pulse 2020.
    \190\ See Broadridge and PwC, Proxy Pulse 2016 Proxy Season
Review (3d ed. 2016), available at https://www.broadridge.com/proxypulse/_assets/docs/broadridge-proxypulse-3rd-edition-2016.pdf
(``Proxy Pulse 2016'').
---------------------------------------------------------------------------

    Retail and institutional shareholders exhibit very different voting
behavior. In the main 2020 proxy season, while institutional investors
voted 92% of their shares, retail investors voted only 28% of their
shares.\191\ Based on an earlier study of the main 2015 proxy season,
the voting propensity of retail investors does not vary significantly
by the size of the registrant.\192\ By contrast, institutional
investors vote a significantly smaller portion of their shares in
registrants with less than $300 million in market capitalization (72%)
than in larger registrants (91% to 93%),\193\ which may be a function
of the types of institutions that invest in companies of different
sizes.
---------------------------------------------------------------------------

    \191\ See Proxy Pulse 2020. We acknowledge that the voting
participation of retail shareholders in particular could increase in
the case of a contested election, because of greater media coverage
and expanded outreach efforts, but we do not currently have data
that would allow us to separately estimate the degree of retail
participation in contested elections.
    \192\ See Broadridge and PwC, Proxy Pulse 2015 Proxy Season
Wrap-up (3d ed. 2015), available at http://media.broadridge.com/documents/ProxyPulse-Third-Edition-2015.pdf.
    \193\ Id.
---------------------------------------------------------------------------

    Retail and institutional investors may also have differential
access to resources that can be expended in order to cast a vote, and
may have different levels of incentive to expend such resources. In
general, we expect retail investors to face greater resource
constraints than institutional investors. Differences across
shareholders in the ability to take advantage of different approaches
to voting and in the resources expended on voting are discussed in more
detail in Sections IV.B.2.d and IV.C.1 below.
b. Registrants
    The final amendments mandating the use of universal proxy cards in
director election contests will apply to all registrants that have a
class of equity securities registered under Section 12 of the Exchange
Act and are thereby subject to the Federal proxy rules, except funds.
The amendments will not apply to foreign private issuers or companies
with reporting obligations under only Section 15(d) of the Exchange
Act, whose securities are not subject to the Federal proxy rules. As of
December 31, 2020, we estimate that approximately 5,400 registrants had
a class of securities registered under Section 12 of the Exchange Act
and will be subject to the amendments mandating the use of a universal
proxy card in contested director elections.\194\

We also are adopting some changes to the form of proxy and proxy
statement disclosure requirements applicable to all director elections.
Because these changes apply to all registrants subject to the Federal
proxy rules, they will also apply to registered funds. As of September
30, 2021, there were 14,062 registered management investment companies
that were subject to the proxy rules: (i) 13,347 Open-end funds, out of
which 2,497 were Exchange Traded Funds (``ETFs'') registered as open-
end funds or open-end funds that had an ETF share class; (ii) 701
closed-end funds; and (iii) 14 variable annuity separate accounts
registered as management investment companies.\195\ In addition, as of
June 2021, we identified 99 BDCs that were subject to the proxy
rules.\196\
---------------------------------------------------------------------------

    \194\ We are able to estimate the number of registrants with the
class of securities registered under Section 12 of the Exchange Act
by reviewing all Forms 10-K and 10-K amendments filed during
calendar year 2020 with the Commission. After reviewing all forms,
we then count the number of unique registrants that identify
themselves as having a class of securities registered under Section
12(b) or Section 12(g) of the Exchange Act. Foreign private
registrants that filed both Forms 20-F and 40-F, as well as asset-
backed registrants that filed Forms 10-D and 10-D/A during calendar
year 2020 with the Commission are excluded from this estimate. This
estimate also excludes BDCs; see infra note 196.
    \195\ We estimate the number of unique registered management
investment companies based on Forms N-CEN filed between December
2020 and September 2021 with the Commission. Open-end funds are
registered on Form N-1A, while closed-end funds are registered on
Form N-2. Variable annuity separate accounts registered as
management investment companies are trusts registered on Form N-3.
    \196\ BDCs are entities that have been issued an 814-reporting
number. Our estimate includes 82 BDCs that filed Form 10-K in 2020,
as well as 17 BDCs that were not traded.
---------------------------------------------------------------------------

    There is substantial variation across registrants in
characteristics such as incumbent executive and director ownership and
governance structure, which may affect the degree to which different
registrants are affected by the final amendments.
Incumbent Executive and Director Ownership
    We expect that incumbent executives and directors would vote in
support of the registrant's slate of nominees in a director contest at
the annual meeting,\197\ and that the mandated use of a universal proxy
card is unlikely to change this expected voting behavior. We therefore
think that the percentage of total voting power held by a registrant's
incumbent executives and directors can have an effect on the impact of
the final amendments on the incidence and outcome of contested director
elections.
---------------------------------------------------------------------------

    \197\ Note that in the case of a dissident who is also an
insider (such as an incumbent director), this may not be the case.
---------------------------------------------------------------------------

    Table 1 below reports estimates of the average combined vote
ownership by incumbent executives and directors for a broad sample of
3,841 potentially affected registrants, as well as for several size-
related sub-samples of registrants: Those included in the S&P 500 index
(``large-cap stocks''), in the S&P 400 index (``mid-cap stocks''), in
the S&P 600 index (``small-cap stocks''), and outside the S&P 1500
index that is composed of these three indices (and which tend to be
smaller than those registrants in the S&P 1500). The average (median)
percentage is 14.6% (5.8%) for all registrants, and this percentage is
greatest for registrants outside the S&P 1500 index. We also estimate
the percentage of registrants for which incumbent executives and
directors hold a majority of the voting power, and hence can control
who is elected to the board in most circumstances. Overall, incumbent
executives and directors hold a majority of votes in 8.1% of
registrants. This percentage ranges from 2.0% for S&P 500 registrants
to 11.4% for non-S&P 1500 registrants.
    The data in Table 1 indicates that to the extent incumbent
executives and directors tend to vote for the registrant's slate of
director nominees in contested elections, the impact of such behavior
on the economic effects of the final amendments is likely to be more
important in the non-S&P 1500 category of smaller registrants.

      Table 1--Incumbent Executive and Director Vote Ownership of Registrants Subject to Proxy Rules \198\
----------------------------------------------------------------------------------------------------------------
                                             Incumbent executive and director vote ownership (%
                                                           of total voting power)                Percentage with
                                            ----------------------------------------------------     majority
                                                              25th                      75th        ownership
                                                 Mean      percentile     Median     percentile
----------------------------------------------------------------------------------------------------------------
All registrants............................         14.6          1.8          5.8         18.8              8.1
S&P 500 registrants........................          4.4          0.3          0.8          2.3              2.0
S&P 400 registrants........................          6.8          1.0          2.0          5.5              2.0
S&P 600 registrants........................          9.5          1.8          3.4          8.4              4.1
Non-S&P 1500 registrants...................         19.3          4.0         10.4         27.8             11.4
----------------------------------------------------------------------------------------------------------------

Governance Structure
---------------------------------------------------------------------------

    \198\ Estimates based on staff analysis of director and senior
executive vote ownership data from Institutional Shareholder
Services Inc. (``ISS'') as of calendar year 2019. This data is
available for 3,841 of the potentially affected registrants and may
include ownership through options exercisable within 60 days. The
sample represents over 70% of potentially affected registrants. It
is our understanding that the registrants for which data is missing
in the ISS database tend to be the smallest registrants in terms of
market capitalization, and therefore the data presented may not be
representative for these registrants. In particular, we believe it
is likely that incumbent management ownership for this group of
registrants is on average even greater than for the non-S&P 1500
registrants listed in Table 1.
---------------------------------------------------------------------------

    Registrants' governance characteristics may affect the incidence
and outcomes of proxy contests currently as well as the effects, if
any, of potential changes in the proxy rules on the incidence and
outcomes of proxy contests.\199\ For example, as discussed in more
detail in the Proposing Release, the presence of a staggered board
structure in a registrant will mitigate the impact on board composition
of any final amendments to the proxy rules by prolonging the time over
which any changes in board composition would occur.\200\ We estimate
that approximately 42% of registrants have a staggered board.\201\ This
percentage varies substantially across market capitalization
categories: Approximately 14% for S&P 500 registrants, 38% for S&P 400
registrants, 43% for S&P 600 registrants, and 48% for non-S&P 1500
registrants.\202\
---------------------------------------------------------------------------

    \199\ In the Proposing Release, we also discussed the use of
dual class shares, where one class of shares has greater voting
rights than the other, as a mechanism that could potentially
concentrate the voting control of a registrant in the hands of
insiders (see Section IV.B.1.b of the Proposing Release). However,
the potential impact of such dual class share structures on the
economic effects of the final amendments would ultimately flow
through the vote ownership of insiders, which we discuss above.
    \200\ See Section IV.B.1.b of the Proposing Release.
    \201\ 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.
    \202\ Id.
---------------------------------------------------------------------------

    As discussed in more detail in the Proposing Release, cumulative
voting for directors may increase the ability of

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 registrant's or the dissident's 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\
---------------------------------------------------------------------------

    \205\ Estimates based on staff analysis of governance data for
S&P 1500 companies from ISS as of calendar year 2020.
---------------------------------------------------------------------------

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 registrant's
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 registrant's board in the future.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\ By contrast, a shareholder that attends an annual
meeting may vote for any combination of registrant and dissident
nominees.
---------------------------------------------------------------------------

    \208\ However, it may be possible for a registrant to require a
dissident's nominees to consent to be named on the registrant's card
pursuant to the director questionnaires required under a
registrant's advance notice bylaw provisions. As noted above, 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.
---------------------------------------------------------------------------

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 2017-2020 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

business combinations made up the rest of the dissidents.\212\
---------------------------------------------------------------------------

    \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 registrant's proxy material
pursuant to Rule 14a-8. See 17 CFR 240.14a-6(a), 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 2017-2020 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.
    \212\ Based on information from Factset's SharkRepellent
database and staff's review of EDGAR filings.
---------------------------------------------------------------------------

    Approximately 30% of the contests with competing slates were
contests for majority control of the board.\213\ However, because less
than a majority of board seats were up for election in approximately
31% of the contests due to staggered board structures, dissidents
sought majority control in 43% of contests where it was possible to do
so (30 out of 70 cases). Among the 31 cases where less than a majority
of seats were up for election, dissidents nominated candidates for all
of the seats that were up for election in 48% of contests (15 cases).
Overall, dissidents nominated candidates for all of the seats that were
up for election in approximately 25% of contests (25 cases out of 101).
---------------------------------------------------------------------------

    \213\ This percentage is somewhat larger than the 26% reported
in the Proposing Release for 72 board contests initiated in years
2014 and 2015.
---------------------------------------------------------------------------

b. Notice, Solicitation, and Costs of Proxy Contests
    The Commission's proxy rules do not currently require dissidents to
provide notice to registrants of their intention to solicit votes for
their nominees. However, as discussed, advance notice bylaws are common
among registrants. For example, at the end of 2020, 99% of S&P 500
registrants had advance notice provisions, and 95% of the Russell 3000
had such provisions.\214\ We understand that the latest date on which
notice may be provided under advance notice bylaws typically ranges
from 90 to 120 days before the anniversary of the meeting date.\215\
---------------------------------------------------------------------------

    \214\ See WilmerHale M&A Report. An advance notice bylaw can
generally be waived by a registrant's board of directors at their
discretion, though we do not have data that would allow us to
determine the frequency with which such bylaws are waived. If not
waived, such bylaws may also be challenged in court (such as in the
case of ``inequitable circumstances''). See, e.g., AB Value
Partners, L.P. v. Kreisler Mfg. Corp., No. 10434-VCP, 2014 WL
7150465 (Del Ch. Dec. 16, 2015).
    \215\ See S&C 2015 Report.
---------------------------------------------------------------------------

    Among the 101 director election contests initiated in years 2017-
2020, approximately 90% of dissidents either publicly announced or
communicated their intent to nominate directors to the registrant at
least 60 days before the anniversary of the previous year's annual
meeting date (or 60 days before the annual meeting date if the
registrant did not hold an annual meeting during the previous year, or
if the date of the meeting had changed by more than 30 calendar days
from the previous year).\216\ Further statistics on the distribution of
the timing for initial nomination communications and filing of
preliminary proxy statements are shown in Table 2 below.
---------------------------------------------------------------------------

    \216\ Based on information from Factset's SharkRepellent
database and staff's analysis of EDGAR filings. When available,
staff gathered information on the timing of dissidents' direct
communications to registrants of their intent to nominate directors
from the parties' proxy filings, which frequently list such
information as part of the solicitation background descriptions.
Such communications are not always immediately publicly disclosed.
    \217\ Id. For 37 of the 101 director contests initiated in 2017-
2020, the announcement and filing days are measured relative to the
annual meeting date rather than the anniversary of the previous
year's meeting date, because either the registrant did not hold an
annual meeting during the previous year or the date of the meeting
changed by more than 30 calendar days from the previous year.

    Table 2--Timing of Initiation of Election Contests and Filing of Preliminary Proxy Statements Relative to
                        Anniversary of Previous Year's Meeting Dates, in 2017-2020 \217\
----------------------------------------------------------------------------------------------------------------
                                                Percentage
                                    ---------------------------------
                                      At least   At least   At least     Mean      Median      Min        Max
                                      45 days    60 days    90 days
----------------------------------------------------------------------------------------------------------------
Days between first announcement or          93         90         65        108         93         16        377
 communication of election contest
 intent and anniversary of previous
 year's meeting date...............
Days between dissident filing               75         43         13         65         56          7        369
 preliminary proxy statement and
 anniversary of previous year's
 meeting date......................
----------------------------------------------------------------------------------------------------------------

    For the contests where dissidents ultimately file a definitive
proxy statement (74 cases), approximately 80% of dissident definitive
statements are filed at most 50 days before the anniversary of the
previous year's annual meeting date (or 50 days before the annual
meeting date if the registrant did not hold an annual meeting during
the previous year, or if the date of the meeting had changed by more
than 30 calendar days from the previous year).\218\ In addition, more
than 82% of dissidents' definitive statements are filed 25 days or more
before the actual annual meeting date.\219\
---------------------------------------------------------------------------

    \218\ Based on data from Factset's SharkRepellent database and
staff analysis of EDGAR filings.
    \219\ Id.
---------------------------------------------------------------------------

    While dissidents in proxy contests are required to make their proxy
statements publicly available via the EDGAR system, they are not
currently subject to any requirements as to how many shareholders they
must solicit. When dissidents actively solicit shareholders they have
the choice of sending shareholders a full package of proxy materials
(``full set'') or sending only a one-page notice informing them of the
online availability of proxy materials (``notice and access'' or
``notice-only''). We estimate that approximately 52% of dissidents
solicited all shareholders in a sample of recent proxy contests.\220\
Furthermore, the dissidents in this sample of contests sent full sets
of proxy materials to each of the shareholders solicited.\221\ The use
of the full set delivery method may be driven by findings that such
solicitations are associated with a higher rate of voting than notice-
only solicitations.\222\ Among those contests in which dissidents did
not solicit all shareholders, the average (median) percentage of shares
held by solicited shareholders was approximately 95% (96%) of the
outstanding shares of the registrant eligible to vote, and the minimum
(maximum) percentage of the outstanding shares eligible to vote held by
solicited shareholders was approximately 83% (99.9%).\223\ The average
(median) percentage of shareholder accounts solicited in these contests
was approximately 20% (14%), and the minimum (maximum) percentage of
accounts solicited was 1% (71%).\224\
---------------------------------------------------------------------------

    \220\ Based on industry data provided by a proxy services
provider for a sample of 31 proxy contests for annual meetings held
between July 1, 2018 and June 30, 2019.
    \221\ Id.
    \222\ See, e.g., Broadridge, Analysis of Traditional and Notice
& Access Issuers: Issuer Adoption, Distribution and Voting for
Fiscal Year Ending June 30, 2013 (Oct. 2013), available at http://media.broadridge.com/documents/Broadridge-6-Yr-NA-Stats-Report-2013.pdf.
    \223\ Based on industry data provided by a proxy services
provider for a sample of 31 proxy contests for annual meetings held
between July 1, 2018 and June 30, 2019.
    \224\ Id.

---------------------------------------------------------------------------

    In proxy contests, both registrants and dissidents incur direct
costs of solicitation.\225\ These costs may include, for example, fees
paid to proxy solicitors, expenditures for attorneys and public
relations advisors, and printing and mailing costs. We understand that
for registrants, the costs of solicitation in proxy contests generally
exceed the solicitation costs associated with a shareholder meeting
without a contested election. Both dissidents and registrants are
required to provide estimates of the costs of solicitation in their
proxy statements.\226\ As shown in Table 3 below, based on a review of
proxy contests initiated in years 2017-2020, the median reported
estimated total costs were approximately $1,650,000 for registrants and
approximately $750,000 for dissidents.\227\
---------------------------------------------------------------------------

    \225\ In some cases, dissidents may seek reimbursement of their
expenses from registrants. Such potential reimbursement is governed
by state law and is more likely in the case of a successful proxy
contest. The proxy rules require dissidents to disclose whether
reimbursement will be sought from the registrant, and, if so,
whether the question of such reimbursement will be submitted to a
vote of shareholders. See 17 CFR 240.14a-101, Item 4(b)(5).
    \226\ Registrants may, but do not have to, exclude from the
total estimated solicitation costs the amount normally expended for
a solicitation for an election of directors in the absence of a
contest, and costs represented by salaries and wages of regular
employees and officers, provided a statement to that effect is
included in the proxy statement. It is our understanding that most
registrants exclude such costs from their estimated total costs.
    \227\ This represents a substantial increase in median (and
average) reported solicitation expenses for both registrants and
dissidents compared to earlier years, as reported in the Proposing
Release (see Section IV.B.2.b of the Proposing Release for data on
estimated solicitation expenses in earlier years).
    \228\ Based on data from Factset's SharkRepellent database and
staff analysis of EDGAR filings in calendar years 2017-2020.

     Table 3--Reported Estimates of Solicitation Expenses in Election Contests Initiated in 2017-2020 \228\
----------------------------------------------------------------------------------------------------------------
                                                       Mean           Median          Minimum         Maximum
----------------------------------------------------------------------------------------------------------------
Estimated Total Costs:
    Registrant..................................      $3,891,886      $1,650,000         $65,000     $35,000,000
    Dissident...................................       1,812,938         750,000          20,000      25,000,000
Estimated Fees Paid to Proxy Solicitor:
    Registrant..................................         540,486         300,000          10,000       3,500,000
    Dissident...................................         278,614         125,000          12,500       2,500,000
----------------------------------------------------------------------------------------------------------------

    Beyond these estimated solicitation expenses, proxy contests may be
associated with other indirect costs, such as the cost of management or
dissident time spent in the process of conducting the contest and
expenses associated with any discussions held between management and
the dissident(s) or other participants who could influence the outcome
(e.g., large investors and proxy advisor firms). We do not have data on
these indirect costs. One study that considers the cost of earlier as
well as later stages of engagement between management and activist
hedge fund dissidents, which eventually culminate in a proxy contest,
estimates that a campaign ending in a proxy contest has a total (direct
and indirect) average cost to the dissident of approximately $10
million over the full period of engagement.\229\
---------------------------------------------------------------------------

    \229\ See Nickolay Gantchev, The Costs of Shareholder Activism:
Evidence from a Sequential Decision Model, 107 J. Fin. Econ. 610,
624 (2013).
---------------------------------------------------------------------------

    In addition to the typical proxy contests \230\ discussed above, on
rare occasions, there have also been ``nominal contests,'' in which the
dissidents incur little more than the basic required costs to pursue a
contest. In particular, a dissident engaging in a nominal proxy contest
would have to bear the cost of drafting a proxy statement and
undergoing the staff review and comment process for that filing.
However, a dissident in a nominal contest would not expend resources on
substantial solicitation, such as to disseminate its proxy materials
through full set delivery to a substantial percentage of shareholders
versus only to select shareholders, to hire the services of a proxy
solicitor, or to engage in other broad outreach efforts, as would be
the case in a typical proxy contest. Based on staff experience in
administering the proxy rules, nominal contests are very rare, and the
staff is unaware of any nominal contest that has resulted in the
dissident gaining seats for its nominees. We do not have data that is
well-suited for empirically identifying nominal contests, in part
because a contest is sometimes settled or withdrawn before the
dissident has filed its definitive proxy statement and no estimates are
included in the preliminary proxy statement.
---------------------------------------------------------------------------

    \230\ For ease of reference, we use ``typical proxy contests''
to refer to contested elections of directors other than the nominal
contests described below.
---------------------------------------------------------------------------

c. Results of Proxy Contests
    A proxy contest may result in several possible outcomes. Our
staff's review of 101 proxy contests initiated in 2017-2020 found that
approximately 53% (54 cases) did not make it to a vote. In these cases,
registrants may have settled by agreeing to nominate or appoint some
number of the dissident's candidates to the board of directors or by
making other concessions, the dissident may have chosen to withdraw in
the absence of any concessions, or other events may have precluded a
vote.\231\ Among the approximately 47% (47 cases) of proxy contests
initiated in 2017-2020 that proceeded to a vote, dissidents were at
least partially successful (i.e., achieved some board representation)
in about 38% (18 cases) of these contests.\232\ In six voted contests
where dissidents achieved board representation, only some of the
nominees on the dissident's slate were elected to the board, which
represents a ``split-ticket'' outcome in around 13% of the contests
that went to a vote. In 17 of the voted contests where dissidents
achieved board representation, the end result was a ``mixed board''
with directors elected from both slates, whereas the dissident's
nominees were elected to fill all positions of the board in one
contest. Between settlements and voted contests, dissidents achieved at
least some board

representation in a bit more than half of the director election
contests (53 out of 101), and achieved majority control in
approximately 20% of contests.
---------------------------------------------------------------------------

    \231\ This percentage of director election contests not
proceeding to a vote is higher than the 33% that we found in the
Proposing Release for a sample of 72 contests initiated in 2014 and
2015. However, it is in line with what has been reported in previous
research for contests prior to 2014. See, e.g., Vyacheslav Fos, The
Disciplinary Effects of Proxy Contests, 63 Manag. Sci. 655 (2017)
(``Fos study'') (finding that, for proxy contests including
contested elections as well as a much smaller number of issue
contests from 1994 to 2012, about 53% did not make it to a vote,
where 25% were settled, 15% were withdrawn, 6% ended with a
delisting or a takeover, and 7% did not make it to a vote for other
reasons).
    \232\ The estimated percentage of voted director election
contests that lead to dissident board representation is somewhat
less than what has been found for contest samples from earlier
years, where dissidents won board representation in about half of
the cases that went to a vote at the annual meeting. See Section
IV.B.2.c of the Proposing Release.
---------------------------------------------------------------------------

    Contests differ in the closeness of voting outcomes. The staff has
analyzed the difference in votes between the elected director with the
lowest number of votes and the nominee who came closest to being
elected. Out of the 47 contests initiated in 2017-2020 that proceeded
to a vote, registrants disclosed full voting results in Form 8-K
filings in 41 contests. In these contests, the median director elected
with the fewest votes received 73% more votes than the nominee with the
next highest number of votes. The median difference in votes received
between the director elected with the fewest votes and the nominee with
the next highest number of votes as a percentage of total outstanding
votes was approximately 19%, and around 24% of the contests (10 out of
41) had a difference in votes received as a percentage of outstanding
votes of 5% or less. In the contests where the difference in votes
received was 5% or less of total outstanding votes, the elected
director who received the fewest votes received no more than 13% more
votes than the non-elected nominee who received the greatest votes. For
the purpose of our analysis below, we define ``close contests'' as
those where the difference in votes received between the director
elected with the fewest votes and the nominee with the next highest
number of votes is 5% or less of total outstanding votes, because in
such contests a relatively small number of shareholders could have been
determinative of the outcome.
    We are unaware of any nominal contest that has resulted in the
dissident gaining seats for their nominees. Dissidents may nevertheless
choose to initiate nominal contests to pursue goals other than changes
in board composition, such as to publicize a particular issue or to
encourage management to engage with the dissident. However, we do not
have data that would allow us to measure success along those other
dimensions.
d. Split-Ticket Voting
    Shareholders have the option of voting a split ticket but can do so
only by attending the shareholder meeting in person and voting their
shares at that meeting. In practice, however, in-person meeting
attendance may be limited due to cost and other logistical
constraints,\233\ which may be especially likely for small shareholders
and retail investors. We understand that in certain elections, the
parties to the contest and their agents (e.g., proxy solicitors) will
help some shareholders ``split their ticket'' by arranging for an in-
person representative to vote these shareholders' shares at the meeting
on the ballots used for in-person voting. We do not have data on the
number or characteristics of shareholders that are arranging to vote a
split ticket through current practices, but our understanding is that
these practices are available only to relatively large shareholders.
---------------------------------------------------------------------------

    \233\ See, e.g., letter from the Council of Institutional
Investors dated Jan. 8, 2014, available at https://www.sec.gov/rules/petitions/2014/petn4-672.pdf (describing in-person attendance
as ``generally an expensive and impractical proposition''). See also
letter from CII dated Dec. 28, 2016; letter from Fidelity; letter
dated Dec. 23, 2016 from Hermes (``Hermes''); letter from Trian. The
burden of attending a meeting for the purpose of voting a split
ticket may be significantly lower in the case of a virtual
shareholder meeting but such online meetings are still relatively
rare.
    \234\ See Francois Brochet, Roman Chychyla & Fabrizio Ferri,
Virtual Shareholder Meetings, European Corporate Governance
Institute--Finance Working Paper No. 777/2021, at 10 (July 1, 2021),
available at https://ssrn.com/abstract=3743064 (retrieved from SSRN
Elsevier database) or http://dx.doi.org/10.2139/ssrn.3743064.
---------------------------------------------------------------------------

    We recognize that the monetary costs and other burdens of attending
a meeting in person will likely be lower to shareholders if the meeting
is held virtually, because the time and expenses associated with
travelling to the meeting would be eliminated. However, there may still
be time or other resource constraints that would affect a shareholder's
ability to attend a virtual meeting. Before the COVID-19 pandemic,
fully virtual or hybrid annual meetings were a small fraction of annual
meetings, but growing steadily. For example, one recent study of
shareholder meetings by U.S. registrants found that virtual or hybrid
shareholder meetings grew from 20 in 2011 to 285 in 2019, with about 60
to 70 new companies adopting meetings with a virtual component each
year after 2015.\234\ The arrival of the COVID-19 pandemic in the
United States in March 2020 caused many registrants to switch to a
virtual format for their shareholder meetings, and one study found that
more than 2,300 annual meetings were held virtually in 2020. Based on
1,957 virtual meetings hosted by one proxy services provider in 2020,
the average number of shareholders voting at virtual meetings (rather
than voting in advance by proxy), held in 2020 was 13 shareholders for
meetings with shareholder proposals (218 cases) and 2 shareholders for
meetings without shareholder proposals.\235\ Thus, in-person voting
appears to have been rare also in virtual meetings, suggesting
shareholder still have a strong preference for voting by proxy, or face
barriers to attending and voting at the meeting, even when meetings are
held virtually. It is our understanding that virtual meetings are still
in widespread use this year (2021) as we are still in the COVID-19
pandemic. It remains to be seen to what extent registrants that were
forced to switch to virtual meetings during the current pandemic will
continue to hold virtual meetings going forward. Moreover, among the
101 proxy contests initiated from 2017-2020, staff analysis found that
only 13 annual meetings were held virtually, and all of those were held
after March 2020 (making up approximately 59% of the meetings in the
sample that were held after March 2020).
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    \235\ See Broadridge, Virtual Shareholder Meetings 2020 Facts
and Figures (April 2021), available at https://www.broadridge.com/_assets/pdf/vsm-facts-and-figures-2020-brochure-april-2021.pdf.
---------------------------------------------------------------------------

    For shareholders that do not have ready access to other
arrangements, the decision of whether or not to attend a meeting or
seek other arrangements for splitting their ticket is likely to depend
on having the ability and resources to do so, as well as having the
incentive to incur the associated costs. To the extent an individual
investor believes vote splitting is beneficial, the larger its
ownership stake is, the greater the financial incentives to incur the
current costs of arranging a split-ticket vote. However, beyond the
direct financial incentives from a larger ownership stake, a large
investor also has a voting impact commensurate with that stake, which
increases the likelihood that its votes are determinative. This in
turn, increases the large investor's incentives to arrange for vote
splitting when deemed beneficial. We believe institutions are more
likely than retail shareholders to have both the resources and the
incentives to currently vote a split ticket (if they have the
preference to do so).
    Because the incentive to arrange a split-ticket vote when such a
vote is preferred is dependent on having both a sizable financial
stake, in dollar terms, as well as significant voting influence, in
percentage terms, we consider the distribution of both of these factors
for institutional shareholders. We use data from Form 13F filings to
estimate these distributions, which limits us to considering
institutions required to report their holdings on Form 13F.\236\

Moreover, we only consider shares over which these institutions have
voting authority in contested director elections. We do not have
comparable data for other institutional shareholders or for retail
shareholders.
---------------------------------------------------------------------------

    \236\ Non-exempt institutional investment managers that exercise
investment discretion over $100 million or more in Section 13(f)
securities are required to report their holdings on Form 13F with
the Commission.
---------------------------------------------------------------------------

    We first consider the potential incentive to arrange split-ticket
vote based on voting influence, as measured by fraction ownership of
voting shares. Figure 1 shows the average percentage, across
registrants, of the total outstanding shares held by Form 13F filers
that each meet a given minimum threshold of ownership of voting shares.
The average percentage of the total outstanding shares is calculated
across all registrants within different size categories. As in previous
analyses, registrant size is approximated by reference to the S&P
index. The data suggest that there is currently a substantial portion
of outstanding shares for which institutional holders may have enough
individual voting influence to incentivize them to arrange split-ticket
voting if preferred. For example, if we consider average total
ownership by Form 13F filers that are larger block holders
(individually owning 5% or more of shares) and therefore are likely to
be pivotal voters, the average percentage of the total outstanding
shares held by these institutions is approximately 14% for non-S&P 1500
registrants, 21% for S&P 600 registrants, 16% for S&P 400 registrants,
and 11% for S&P 500 registrants. The large difference in ownership
between S&P 600 and non-S&P 1500 registrants, despite both groups being
relatively small registrants, is due to a smaller number of
institutions holding stock (of any amount) in the non-S&P 1500
registrants. Figure 1 also shows the average total ownership of shares
held by Form 13F filers meeting lower minimum thresholds of ownership
of voting shares (0.5%, 1.0%, and 2.5% respectively), in case ownership
less than 5% may provide sufficient voting influence to incentivize an
institution to arrange split-ticket voting. Because we are only
considering ownership by institutions required to report their holdings
on Form 13F, there may be additional owners with incentives to arrange
split-ticket voting (for any given minimum ownership threshold) that
are not captured in the data presented in Figure 1.
[GRAPHIC] [TIFF OMITTED] TR01DE21.005

    Even a large voting stake in a company may not currently be enough
to incentivize a shareholder to incur the costs of attending the annual
meeting to vote a split ticket if the investment is low in dollar
terms. Therefore we also consider the combined voting power by
institutions filing Form 13F that individually have a substantial
dollar investment in a registrant. In particular, Figure 2 shows the
average percentage, across registrants, of the total outstanding shares
held by Form 13F filers that each meet a given threshold of minimum
dollar stake in the registrant. For example, for Form 13F filers that
hold stock worth $1 million or more in a given registrant, the average
percentage of the total outstanding shares held by these institutions
is above 50% for all registrants belonging to one of the S&P 1500
component indexes. By contrast, the corresponding average percentage of
outstanding shares held among non-S&P 1500

registrants is approximately 31%. If we instead consider only Form 13F
filers that each hold stock worth $10 million or more, the average
percentage of outstanding shares held by these institutions is 47% for
S&P 500 registrants, 47% for S&P 400 registrants, 38% for S&P 600
registrants, and 19% for non-S&P 1500 registrants. Overall, the
estimates in Figure 2 suggest that a substantial portion of voting
shares in registrants are held by institutions that have a significant
financial interest. This is particularly so for relatively larger
registrants.
---------------------------------------------------------------------------

    \237\ The estimates in the figure are based on staff analysis of
Form 13F filings related to potentially affected registrants from
the first quarter of 2020 in the Thomson Reuters Form 13F database,
which is the most recent time period we had access to for this
analysis. The analysis reflects only holdings for which institutions
have voting authority in contested director elections.
[GRAPHIC] [TIFF OMITTED] TR01DE21.006

3. Other Methods To Seek Change in Board Representation
---------------------------------------------------------------------------

    \238\ Id. Financial interest is estimated as the market value of
all shares held by the individual institution in a specific
registrant. For the average percentage of outstanding shares, we
only considered holdings for which institutions had voting authority
in contested director elections.
---------------------------------------------------------------------------

    As discussed in more detail in the Proposing Release,\239\ beyond
proxy contests culminating at annual meetings, we note that under the
baseline, there are a number of other methods shareholders currently
can use to potentially affect changes to the composition of a board of
directors. Such shareholder interventions could be in the form of (i)
making recommendations for director candidates directly to the
nominating committee of the board,\240\ (ii) pursuing consent
solicitations,\241\ (iii) pursuing exempt solicitations at the annual
meeting, (iv) taking advantage of proxy access provisions in corporate
bylaws to nominate a limited number of director candidates for
inclusion in the registrant's proxy statement, (v) withholding votes
from (or voting against) directors in uncontested elections as well as
waging formal ``vote no'' campaigns to encourage other shareholders to
do so, or (vi) seeking a change in board composition by making
nominations from the floor of a meeting, without soliciting proxies.
---------------------------------------------------------------------------

    \239\ See Section IV.B.3 of the Proposing Release.
    \240\ See letter from NACD (stating that ``NACD actively
encourages such shareholder participation on director nomination.
Indeed, contested elections will likely become less common as boards
continue to improve their work in creating optimal boards and in
communicating their methods for achieving them.'').
    \241\ Consent solicitations may take the form of a two-step
procedure where a dissident first obtains sufficient support from
shareholders to call a special meeting or sufficient voting
ownership to call a special meeting, and then puts to a vote, either
by proxy or in person at the special meeting, a proposal to remove
certain directors and elect certain other nominees. The criteria for
how and when a special meeting can be called vary both by state law
and corporate bylaws and governing documents (e.g., certificate of
incorporation). Depending on state law and governing documents, a
dissident may alternatively be able to perform a consent
solicitation in one step, in which it seeks support for a proposal
to remove certain directors and elect certain other nominees purely
through written consent by shareholders.
---------------------------------------------------------------------------

C. Discussion of Economic Effects

    The economic benefits and costs of the final amendments, including
impacts on efficiency, competition, and capital formation, are
discussed below. We first address the effects of the changes to the
proxy process together as a package, including both benefits and costs.
In particular, we discuss the anticipated effects of the final
amendments on shareholder voting and then consider anticipated effects
with respect to the costs, outcomes, incidence, and perceived threat of
contested elections at affected registrants. We then discuss the
economic effects that can be attributed to specific implementation
choices in the final amendments, to the extent possible, and the
relative benefits and costs of the principal reasonable

alternatives to these implementation choices.
    Our economic analysis of the final amendments reflects our
consideration of a number of broad issues related to corporate
governance and the proxy system. First, the design of the voting
process, as a primary mechanism through which shareholders provide
input into the composition of boards, can affect the ability of
shareholders to exercise one of their most fundamental rights--to
select and hold accountable the fiduciaries responsible for overseeing
their investments. Second, it is difficult to predict how the various
parties involved in contested elections are likely to respond to any
changes to the proxy process, complicating the evaluation of whether
such changes would enhance or detract from board effectiveness and
registrants' efficiency and competitiveness. Third, corporate
governance involves a number of closely interrelated mechanisms, so any
effects on contested elections may be either mitigated or magnified by
changes in the use or effectiveness of other mechanisms. These issues
are discussed in more detail in the Proposing Release and provide
context for the discussion of potential economic effects that
follows.\242\
---------------------------------------------------------------------------

    \242\ See Section IV.C in the Proposing Release.
---------------------------------------------------------------------------

1. Effects on Shareholder Voting
    By mandating the use of a universal proxy in contested elections,
the final amendments will allow all shareholders to vote through the
proxy system for the combination of director nominees of their choice,
as they will no longer be limited to voting for only nominees chosen by
the registrant or for only nominees chosen by the dissident.\243\ In
addition, the ability to vote for dissident nominees by proxy would no
longer be limited to shareholders solicited by the dissident because
any shareholders not solicited by the dissident would still be able to
vote for those nominees using the registrant's proxy card.\244\ This
change is expected to increase the efficiency with which shareholders
vote in contested elections. In particular, universal proxies will
result in benefits in the form of cost savings for shareholders who
would otherwise expend time and resources to attend a shareholder
meeting in person or otherwise arrange to vote for a combination of
candidates that could not be voted for by proxy. Other shareholders may
be newly able to vote for their most preferred candidates. That is,
there may be shareholders who would vote for a combination of
management and dissident candidates if a universal proxy were available
but who do not currently do so because it is not feasible (and in
particular cost-effective) to undertake such a vote. In the Proposing
Release, we discussed in more detail the current cost or inability for
investors to vote for their preferred mix of director candidates from
both slates of nominees, as well as investors' express demand for
split-ticket voting.\245\
---------------------------------------------------------------------------

    \243\ Nominees ``chosen'' by the dissident may include certain
registrant nominees. The short slate rule permits a dissident in
certain circumstances to solicit votes for some of the registrant's
nominees through the use of its proxy card where the dissident is
not nominating enough director candidates to gain majority control
of the board in the contest, thereby allowing shareholders using the
dissident's proxy card to split their vote. However, shareholders
voting on the dissident's proxy card would still be limited to
voting for those registrant nominees selected by the dissident,
rather than any registrant nominee of their choice.
    \244\ For shareholders not solicited by the dissident, while the
registrant's universal proxy card would allow them to support
dissident nominees, they would still need to seek out the
dissident's proxy statement in the EDGAR system (as directed by the
registrant's proxy statement) to obtain information about the
dissident nominees.
    \245\ See Section IV.D.1.a in the Proposing Release.
---------------------------------------------------------------------------

    Several commenters expressed general support for the use of
universal proxy to enable split-ticket voting, arguing that split-
ticket voting is currently either too costly or outright impossible to
achieve for most shareholders given currently available
approaches.\246\ By contrast, one commenter argued against the mandated
use of universal proxy and claimed that there already exist less costly
``work arounds'' for investors who want to be able to choose candidates
from both slates without voting in person.\247\ We acknowledge ``work
arounds'' exist, but as discussed above, such approaches may still be
too costly or are not generally available to all shareholders who wish
to split their ticket, whereas mandated use of universal proxy will
ensure all shareholders--regardless of time, resources, sophistication,
or ability to use other approaches--have access to a comparatively low-
cost alternative for split-ticket voting.
---------------------------------------------------------------------------

    \246\ See, e.g., letters from CII dated Dec. 28, 2016; Fidelity;
Hermes; Trian.
    \247\ See letter from Society dated Jan. 10, 2017.
---------------------------------------------------------------------------

    As described in Section IV.B.2.d, the increased use of virtual
meetings can reduce the cost for shareholders to vote a split-ticket at
the annual meeting by eliminating the time and expenses associated with
travelling to physically attend the meeting. However it is unclear how
widespread the use of virtual meetings will be after the current COVID-
19 pandemic is over, especially for meetings with contested director
elections. Despite the lower cost of attending virtual meetings, voting
by proxy card is likely to be less time-consuming and gives
shareholders the flexibility to fill out the card with their votes at a
time of their choosing, compared to having to attend a virtual meeting
at one specific point in time. Supporting this, the evidence on
shareholder attendance and voting at virtual meetings show that a vast
majority of shareholders rely on the proxy process to vote even when
the meeting is held virtually.\248\
---------------------------------------------------------------------------

    \248\ See supra note 235 and accompanying text.
---------------------------------------------------------------------------

    For reasons discussed in more detail in the Proposing Release, we
expect that institutional shareholders and large shareholders are
relatively more likely than other shareholders to implement a split-
ticket vote under current rules, and therefore will experience cost
savings by being able to do so more easily via the proxy process under
the final amendments adopted in this document.\249\
---------------------------------------------------------------------------

    \249\ See Section IV.D.1.a of the Proposing Release. See supra
Section IV.B.1.a and IV.B.1.d for updated data on shareholders,
including ownership statistics.
---------------------------------------------------------------------------

    As discussed in more detail in the Proposing Release, the
availability of universal proxies would also expand the voting
alternatives of shareholders, such as retail shareholders or other
small shareholders, for whom it would not otherwise be practical or
feasible to vote for their preferred combination of candidates.\250\ To
the extent that such shareholders are interested in splitting their
ticket, the availability of universal proxies may result in a greater
number of split-ticket votes than under the current system.
---------------------------------------------------------------------------

    \250\ One commenter particularly highlighted increased access to
split-ticket voting for retail investors and other small
shareholders as a benefit of mandating the use of universal proxy;
see letter from CII dated Sep. 7, 2017 (stating that ``Importantly,
requiring a universal proxy would benefit retail investors and
institutional investors with relatively smaller positions by
allowing them to choose among all board nominees without attending
the shareholder meeting, which can involve travel and other costs
that may be prohibitive.'').
---------------------------------------------------------------------------

    In addition, because dissidents currently are not required to
solicit all shareholders, we observe that, in a substantial fraction of
proxy contests, many shareholders do not receive the dissident's proxy
card and thus cannot vote by proxy for dissident candidates.\251\ The
requirement in the

final amendments that registrants, as well as dissidents, use universal
proxies will allow shareholders who are not solicited by dissidents to
nonetheless vote for some or all of the dissident nominees through the
proxy process, by using the registrant's universal proxy card.
---------------------------------------------------------------------------

    \251\ Based on industry data provided by a proxy services
provider for a sample of proxy contests from July 1, 2018 through
June 30, 2019, we estimate that there are some shareholders that
dissidents do not solicit in approximately 48% of contested
elections, while dissidents in the remainder of contested elections
solicit all shareholders. In contests in which fewer than all
shareholders were solicited, only those accounts holding a number of
shares of the registrant that exceeded a minimum threshold of shares
were subject to solicitation by the dissident.
---------------------------------------------------------------------------

    Thus, by providing for a universal proxy card, the final amendments
will allow all shareholders to vote for their preferred candidates. We
expect that retail and small shareholders are more likely than other
shareholders to vote differently under a universal proxy system than
under the current system because they currently have limited access to
other means of voting a split-ticket and a lower likelihood of being
solicited by dissidents. However, we also note that such shareholders
may be less likely to vote in general.\252\ For these shareholders, the
final amendments are not likely to result in direct cost savings, but
will allow them to submit votes that better reflect their preferences.
The indirect benefits or costs of their expanded voting options depend
on whether such changes in voting behavior are widespread enough to
change actual or expected election outcomes, and the nature of these
changes in outcomes, as discussed below.\253\
---------------------------------------------------------------------------

    \252\ Retail shareholders vote 28% of their shares on average,
though their participation rate could be higher in the case of a
contested election, because of factors such as increased media
coverage, expanded outreach efforts, and greater shareholder
interest in the contest. See supra Section IV.B.1.a.
    \253\ See infra Sections IV.C.3 and IV.C.4.
---------------------------------------------------------------------------

    There is also a possibility that universal proxies could lead some
shareholders to be confused about their voting options and how to
properly mark the proxy cards to accurately reflect their choices, as
noted by some commenters.\254\ This may give rise to minor costs to
some shareholders in contested elections, if it increases the time
required by these shareholders to mark and submit a proxy card. It may
also increase the risk that some shareholders submit proxy cards that
do not accurately reflect their intentions or that could be invalidated
because they are improperly marked. However, we believe that the risk
of any such confusion will be mitigated by the presentation and
formatting requirements of the final amendments, as discussed in
Section IV.C.5.b below.
---------------------------------------------------------------------------

    \254\ See, e.g., letters from BR; Broadridge Financial
Solutions, Inc.; Society.
---------------------------------------------------------------------------

    Finally, to the extent shareholders currently erroneously believe
they can vote for a mix of nominees from the competing slates by using
both the registrant's and the dissident's card, universal proxies are
likely to mitigate any such behavior among shareholders.
2. Potential Effects on Costs of Contested Elections
    The final amendments may directly impose minor costs on registrants
\255\ and dissidents that engage in proxy contests, relative to the
current costs that these parties bear in proxy contests.\256\ The final
amendments may also have effects on the expected outcomes of contested
elections that could result in either a net increase or net decrease in
the total costs that either registrants or dissidents incur in
contested elections, primarily because of strategic changes in
discretionary solicitation expenditures. The extent and direction of
such indirect changes in costs incurred are difficult to predict. We
also consider the amendments' cost implications in the context of
nominal contests, in which the dissidents incur little more than the
basic required costs to pursue a contest, which are currently rare but
could become more or less frequent under the final amendments.
---------------------------------------------------------------------------

    \255\ Note that costs on registrants are borne by the
registrants' investors.
    \256\ The potential direct cost savings resulting from the final
amendments for certain shareholders are discussed in Section IV.C.1
supra.
---------------------------------------------------------------------------

a. Typical Proxy Contests
    The total cost borne by a registrant or dissident in a typical
proxy contest would generally include solicitation costs, such as basic
proxy distribution and postage costs, expenditures on proxy solicitors,
attorneys and public relations advisors, and any time spent by the
parties or their staff on outreach efforts. The total cost to
registrants would also reflect items such as any additional time spent
by staff on determining and implementing a strategy in response to the
contest and any costs of revising their proxy materials given the proxy
contest. The total cost to dissidents would also reflect time spent by
the dissident to pursue a contest, the cost to seek nominees and gain
their consent to be nominated, and the cost of drafting a preliminary
and definitive proxy statement and undergoing the staff's review and
comment process for those filings. These total costs are difficult to
estimate because the components of these costs (other than estimated
solicitation expenditures) are not specifically required to be
disclosed and may vary significantly across contests. However, we note
that many of the components of these costs are not likely to be
affected by the final amendments. In much of the discussion that
follows, we focus primarily on solicitation costs because we believe
that these costs are most likely to be affected by the final
amendments.
    We first consider the direct cost implications of the final
amendments. As discussed in more detail in the Proposing Release,\257\
we do not expect the solicitation requirement to impose a large
incremental cost burden on dissidents in typical proxy contests in
which the dissident engages in substantial solicitation efforts. We
continue to expect this even though the final rule, in a modification
of the proposed rule, raises the solicitation threshold from a majority
of the voting power to 67% of the voting power. Our continued
expectation is based on staff analysis of data that show most
dissidents in director election contests currently solicit at least 67%
of the voting power even in the absence of any solicitation
requirement.\258\ Therefore, in the vast majority of cases, we expect
dissidents that would have engaged in proxy contests even in the
absence of the final amendments not to bear any incremental direct
costs due to the solicitation requirement. Similarly, for dissidents
that newly decide to engage in a typical proxy contest (as opposed to a
nominal contest) as a result of the final amendments, we do not expect
the solicitation requirement to change the costs that they would expect
to bear relative to the costs of any other typical proxy contest.\259\
---------------------------------------------------------------------------

    \257\ See Section IV.D.2.a of the Proposing Release.
    \258\ In particular, as noted above, all dissidents solicited a
number of shareholders that exceeded the 67% threshold of shares
entitled to vote in a sample of 31 recent proxy contests. See supra
notes 220 and 223 and accompanying text. In addition, data provided
by a proxy services provider for an earlier sample of 35 proxy
contests from June 30, 2015 through April 15, 2016, which we used in
the economic analysis in the Proposing Release, show that only two
dissidents (around 6% of this sample) solicited less than 67% of the
shares entitled to vote in elections.
    \259\ The median total solicitation cost was approximately
$750,000 for dissidents initiating contests in years 2017-2020. See
supra Section IV.B.2.b.
---------------------------------------------------------------------------

    In the infrequent cases in which dissidents in a typical proxy
contest may currently not solicit shareholders holding 67% of the
voting power, dissidents are still likely to solicit shareholders
holding a significant proportion of these shares to have a chance of
winning any board seats.\260\ In addition, the number of accounts
required to reach the minimum

solicitation requirement in typical contests is generally a small
fraction of the total accounts outstanding. For example, within a
sample of recent proxy contests, we estimate the number of accounts
that one would have had to solicit to meet the 67% minimum solicitation
requirement ranges from about 0.1% to 13% of the outstanding
shareholder accounts, with the median number of accounts required
equaling about 1.4% of the total shareholder accounts.\261\ Based on
our sample, we expect that the incremental cost to a dissident
currently soliciting less than the required 67% of the voting power
will be minor relative to the total costs incurred by dissidents in
typical proxy contests. However, because of the increase in the minimum
solicitation requirement compared to the proposal, any such incremental
costs will be larger under the final amendments compared to what they
would have been under the proposed majority of the voting power
requirement.
---------------------------------------------------------------------------

    \260\ Based on data provided by a proxy services provider for a
sample of 35 proxy contests from June 30, 2015 through April 15,
2016, the two dissidents that solicited less than 67% of shares
entitled to vote solicited accounts representing 31.5% and 60% of
the shares, respectively.
    \261\ Based on industry data provided by a proxy services
provider for a sample of 31 proxy contests from July 1, 2018 through
June 30, 2019.
---------------------------------------------------------------------------

    Specifically, in the infrequent case in which a dissident would
otherwise have solicited shareholders representing a substantial
fraction, but not 67%, of the voting power, we estimate that such a
dissident would bear an incremental cost of approximately $5,400, if
using the least expensive approach,\262\ to expand solicitation to meet
the minimum 67% solicitation requirement.\263\ This estimated
incremental cost is larger than the $1,000 incremental cost we
estimated in the Proposing Release for dissidents not meeting the
proposed majority solicitation requirement. However, it is still minor
compared to the median total solicitation expenses estimated for
dissidents in director election contests, representing less than one
percent of the median total solicitation cost reported in recent proxy
statements by dissidents (which may include expenditures for proxy
solicitors, attorneys, and public relations advisors as well as the
more basic proxy distribution fees and postage costs).\264\ The level
of any such incremental cost will be driven by any shortfall in the
number of shareholders that would otherwise be solicited compared to
the number that will be required to be solicited to meet the 67% voting
threshold. Factors that may affect this shortfall include the size of
the dissident's own voting stake in the registrant and the demographics
of the shareholder base, such as whether share ownership is widely
dispersed or more concentrated in a given registrant.
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    \262\ As in the Proposing Release, staff assumed that the
dissident would use the least expensive approach (i.e., notice and
access delivery) to solicit additional accounts given that the
dissident would not have chosen to solicit these accounts but for
the proposed minimum solicitation requirement. To the extent that
dissidents were to use an approach other than the least expensive
approach to solicit additional shareholders to meet this
requirement, their incremental costs would likely be higher than
estimated here. Such approaches may include using full set rather
than notice and access delivery, soliciting more than the minimum
required number of shareholders, or incurring additional
solicitation expenditures on phone calls or other forms of outreach.
It is difficult to estimate how much more these approaches would
cost than the least expensive approach because of the variety of
approaches that could be used and because of the degree of variation
in expenses, such as postage and printing costs, that would depend
on the total size of the dissident's proxy materials.
    \263\ This estimate was derived by the staff based on the NYSE
Rule 451 fee schedule and industry data provided by a proxy services
provider. In particular, staff based this estimate on the two cases
out of the 35 contests from June 30, 2015 through April 15, 2016 for
which information was provided in which less than 67% of the shares
eligible to vote were solicited by the dissident. The required
increase in expenses to solicit 67% of the shares eligible to vote
was estimated based on the number of additional accounts that would
have to be solicited and the applicable fees under NYSE Rule 451 and
postage costs for notice and access delivery. The staff also used
the provided data on the proxy contests to estimate the increase in
the number of banks or brokers considered ``nominees'' under NYSE
Rule 451 that might be involved at the higher solicitation level.
The estimated average incremental solicitation cost of approximately
$5,400 includes nominee coordination fees of $22 for each of the
additional nominees expected to be involved, plus basic processing
fees, notice and access fees, preference management fees, and
postage totaling $1.57 (for suppressed accounts, such as those that
have affirmatively consented to electronic delivery) to $1.80 (for
other accounts) per additional account to be solicited. Staff
assumed that half of the additional accounts to be solicited are
suppressed and that none of these accounts requested full set
delivery by prior consent or upon receipt of the notice (because
such delivery requirements may apply to only a small fraction of
accounts and are not expected to significantly affect the overall
estimate of costs). Additional notice and access fees of $0.25 per
account were assumed to be required for each account that was
solicited prior to increasing the level of solicitation because of
the use of notice and access delivery for some accounts. Given the
number of accounts involved, no additional intermediary unit fees
were expected to apply. This estimate does not include printing
costs for the notice, for which we do not have relevant data to make
an estimate.
    \264\ The median total solicitation cost reported in proxy
statements by dissidents in proxy contests in years 2017-2020 is
approximately $750,000. See supra Section IV.B.2.b.
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    It is possible dissidents in future typical contests could target
companies more similar to the general population of registrants rather
than the type of target companies we have observed in recent contests.
Based on aggregated data provided by a proxy services provider for more
than 5,000 operating companies holding shareholder meetings from July
1, 2018 through June 30, 2019, we have information on the average
distribution of shares by account size within four different size (in
terms of market capitalization) categories of registrants. Using this
data, we estimate that in the broader population of operating
companies, the average fraction of accounts needed to be solicited to
meet the minimum requirement ranges from approximately 0.2% for
companies with more than $10 billion in market capitalization to
approximately 1% for companies with less than $300 million in market
capitalization. These estimated fractions fall within the range of the
observed solicited fractions of accounts in the sample of recent proxy
contests, which further supports our expectation that the solicitation
requirement is unlikely to impose a large incremental cost burden on
dissidents in typical proxy contests in which the dissident engages in
substantial solicitation efforts.
    Registrants may also incur minor incremental costs in typical proxy
contests as a direct result of the final amendments to implement the
required changes to their proxy cards. For example, under the final
amendments, registrants must list dissident nominees on their proxy
cards and provide disclosure about the consequences of voting for a
greater or lesser number of nominees than available director positions.
In addition, both registrants and dissidents may incur costs to make
additional changes to their proxy statements in reaction to the final
amendments, such as additional disclosures urging shareholders not to
support their opponent's candidates using their card and expressing
their views as to the importance of a unified or a mixed board. These
costs are expected to be minimal in comparison to the total costs that
registrants and dissidents bear in a typical proxy contest.\265\
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    \265\ See infra Section V for estimates for purposes of the
Paperwork Reduction Act of 1995 of the incremental burden that may
be required to prepare proxy materials under the final amendments.
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    We next consider indirect effects of the final amendments on the
costs of proxy contests. As noted in the Proposing Release, for both
registrants and dissidents in typical proxy contests, other effects of
the final amendments have the potential to result in more significant
changes in costs than the effects related to revising proxy materials
or the solicitation requirement. This is because the greatest potential
impact on the cost of proxy contests is likely related to strategic
increases or decreases in discretionary solicitation efforts in
response to any changes that the final amendments may bring about in
the (actual or perceived)

likelihood of the different potential outcomes of the contest. Changes
in discretionary solicitation efforts may include increases or
decreases in expenditures on proxy solicitors or the degree of outreach
through phone calls or mailings to convince shareholders to vote for a
party's candidates. In particular, while we estimate that the median
total solicitation cost for dissidents was approximately $750,000, we
estimate that the median basic cost of soliciting shareholders, namely
the proxy distribution fees and postage costs for the first mailing,
was approximately $14,000.\266\ The large expenditures on solicitation
beyond the basic costs of soliciting shareholders (an estimated median
incremental expenditure of over $736,000), demonstrate the potential
for substantial increases or decreases in costs if a party were to
change its approach to discretionary solicitation activities. However,
it is difficult to predict the extent or direction of this potential
effect because any changes in discretionary solicitation expenditures
are highly dependent on the particular situation and the parties' own
views as to how the final amendments would affect their likelihood of
gaining or retaining seats and the potential impact of solicitation
efforts.\267\
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    \266\ Our estimate of total solicitation costs is based on costs
reported in proxy statements in calendar years 2017-2020. See supra
Section IV.B.2.b. Our estimate of proxy distribution fees and
postage costs is based on industry data provided by a proxy services
provider for a sample of 31 proxy contests from July 1, 2018 through
June 30, 2019, and excludes dissident printing costs (for which we
do not have relevant data to make an estimate).
    \267\ Effects on strategic discretionary expenditures, whether
increases or decreases, are more likely in the case of what would
otherwise be close contests. We estimate that approximately 24% of
proxy contests that went to a vote in 2017-2020 were close contests,
as defined in supra Section IV.B.2.c.
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    For example, registrants that expect that a universal proxy may
otherwise result in more dissident nominees being elected may incur
additional costs to increase outreach to shareholders in an effort to
limit support for dissident nominees. Similarly, dissidents may
increase solicitation expenditures in cases in which they expect the
use of universal proxies and any corresponding increase in split-ticket
voting to result in more registrant nominees retaining seats than
otherwise expected. At the same time, registrants or dissidents may
reduce solicitation expenditures in cases in which they believe that
any increased split-ticket voting related to universal proxies would
result on average in more support for their own nominees, given that
they may therefore be able to achieve the same expected outcome at a
lower cost than in the absence of universal proxies.\268\ They may also
reduce their expenditure if the use of universal proxies is more likely
to lead to a less consequential outcome (for example, an expected
mixed-board outcome instead of an expected change in majority control),
or if the expenditure were less likely to change that outcome than
under the current rules.
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    \268\ That said, such registrants or dissidents could
alternatively decide to increase solicitation expenditures relative
to what they would otherwise have spent if they think that they may
actually be able to gain or retain more seats than would otherwise
have been feasible.
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    Supporting the possibility of no change in discretionary expenses
at all, one commenter expressed doubt that dissidents or registrants
will materially alter solicitation expenditures under the amendments,
with the argument that proxy fights already put a premium on each side
getting its message out to investors and that letting shareholders vote
by proxy for their preferred mix of candidates will not alter this
equation.\269\
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    \269\ See letter from CII dated Dec. 28, 2016.
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b. Nominal Proxy Contests
    The final amendments may also have implications for nominal
contests, in which the dissidents incur little more than the basic
required costs to pursue a contest by refraining from material
solicitation efforts, such as arranging for full set delivery, use of a
proxy solicitor, and other outreach. As discussed in the Proposing
Release, despite the fact that there may be a low chance of succeeding
in obtaining a board seat if a dissident does not undertake substantial
solicitation efforts as it would in a typical proxy contest, dissidents
may nevertheless choose to initiate nominal contests to pursue goals
other than changes in board composition. Such contests are currently
rare \270\ but could become more or less attractive as a result of the
final amendments, as discussed in Section IV.C.4.b below.
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    \270\ Based on staff experience. See supra Section IV.B.2.b.
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    A dissident engaging in a nominal proxy contest currently must bear
the cost of drafting a preliminary proxy statement and undergoing the
staff's review and comment process for that filing. Under the final
amendments, such a dissident would also be required to meet the notice
requirements and bear the cost of meeting the solicitation requirements
of the final amendments. Using aggregated data on average share account
distributions by account size for registrants in four different size
(market capitalization) categories,\271\ we estimate the average cost
of using the least expensive approach \272\ to meet the 67% minimum
solicitation requirement through an intermediary for each of these
categories of registrants.\273\ Specifically, we estimate that the
average cost for a dissident to meet the solicitation requirement is
approximately $5,300 at companies with less than $300 million in market
capitalization, approximately $5,800 at companies with between $300
million and $2 billion in market capitalization,

approximately $6,300 at companies with between $2 billion and $10
billion in market capitalization, and approximately $9,800 at companies
with market capitalization above $10 billion.\274\ These estimated
average costs are significantly less than the average total
solicitation expenses incurred by a dissident in a typical proxy
contest. As noted above in Section IV.B.2.b, reported proxy
solicitation expenses for dissidents in recent contests range from
$20,000 to $25 million, with an average (median) of approximately $1.8
million ($750,000). These expenses substantially exceed the estimated
cost of a nominal contest in part because a dissident in a typical
proxy contest would generally incur higher proxy dissemination costs
through the use of full set delivery and the solicitation of a larger
fraction of the shareholders entitled to vote, but also because of
substantial additional expenditures on solicitation beyond the cost of
proxy dissemination, such as the expense of hiring a proxy solicitor to
perform additional outreach.
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    \271\ Based on aggregated industry data provided by a proxy
services provider for more than 5,000 operating companies holding
shareholder meetings from July 1, 2018 through June 30, 2019. The
four different categories for which we have data on operating
companies' average distribution of shares are: (i) Less than $300
million in market capitalization, (ii) between $300 million and $2
billion, (iii) between $2 billion and $10 billion, and (iv) above
$10 billion.
    \272\ See supra note 262.
    \273\ The cost estimates were derived by staff based on the NYSE
Rule 451 fee schedule and industry data provided by a proxy services
provider. The required cost to meet the proposed solicitation
requirement was estimated based on the number of accounts that would
have to be solicited on average at a registrant in each of four
market capitalization categories and the applicable fees under NYSE
Rule 451 and postage costs for notice and access delivery.
Specifically, industry data provided by a proxy services provider