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. In
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. We understand that even 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 potentially affected S&P 1500
registrants, we estimate that approximately 55 percent have a majority
standard in director elections, but also that in approximately 87
percent of cases in which a majority voting standard is in place, a
plurality standard applies in the case of a contested election.\230\
---------------------------------------------------------------------------

    \230\ Estimates based on staff analysis of governance data for
S&P 1500 companies from ISS as of calendar year 2014.
---------------------------------------------------------------------------

    Another governance characteristic that can affect the impact of
changes to the proxy system is the presence of multiple share classes.
Some registrants have adopted a dual-class share structure, where one
class of shares has greater voting rights than the other. In these
regimes, insiders tend to hold shares with greater voting rights,
effectively entrenching the control of the company in the hands of
these insiders and reducing other shareholders' influence in matters
formally put to a vote, including director elections.\231\ Thus, the
proposed amendments to the proxy rules would be less likely to have an
effect on voting outcomes in registrants with a dual-class share
structure. We have access to data on the use of a dual-class structure
for potentially affected S&P 1500 registrants and estimate that
approximately 6 percent of these registrants have a dual-class share
structure.\232\
---------------------------------------------------------------------------

    \231\ See, e.g., Paul A. Gompers, Joy L. Ishii & Andrew Metrick,
Extreme Governance: An Analysis of Dual-Class Firms in the United
States, 23 Rev. Fin. Stud. 1051, 1056 (2009) (finding that for a
sample of public U.S. dual-class companies between 1995-2002, 85
percent tend to have at least one untraded class of common stock,
and that insiders on average own approximately 60 percent of the
voting rights in dual-class companies, primarily through ownership
of the class with superior voting rights).
    \232\ Estimates based on staff analysis of governance data for
S&P 1500 companies from ISS as of calendar year 2014. We do not have
ready access to this data for other registrants.
---------------------------------------------------------------------------

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 corporation 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.
d. Directors
    We note that reputational concerns may be an important
consideration for directors and potential directors.\233\ Research has
found that proxy contests may affect the reputation of incumbent
directors, in that such contests appear to have a significant adverse
effect on the number of other directorships they hold.\234\ 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 board
in the future.
---------------------------------------------------------------------------

    \233\ 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).
    \234\ 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
    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).\235\ In contrast, a shareholder that attends an annual
meeting may vote for any combination of registrant and dissident
nominees.
---------------------------------------------------------------------------

    \235\ While 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, the staff has seen
this tactic used only in two contests in recent years, one of which
did not ultimately proceed to a vote. This option is not available
to the dissident. In addition, we are not aware of any recent cases
where one party's nominees were included on the opposing party's
proxy card based on their voluntary consent.
---------------------------------------------------------------------------

a. Data Regarding Proxy Contests
    We identify 102 proxy contests \236\ that were initiated through
the filing of preliminary proxy statements by dissidents in calendar
years 2014 and 2015 (51 in 2014 and 51 in 2015) across all registrants
subject to the proxy rules other than funds and BDCs.\237\ On a yearly
basis, this number of contests is similar to the average yearly number
of proxy contests since the middle of the 1990s that has been reported
in past studies.\238\ Of the proxy contests identified in 2014 and
2015, we estimate that 72 (37 in 2014 and 35 in 2015) involved an
election contest with competing slates of director nominees at an
annual meeting of shareholders.\239\ In one case, there were two
dissidents with separate slates of nominees. Approximately 26 percent
(19 cases out of 72) of the contests with competing slates were
contests for majority control of the board. This percentage is somewhat
larger than the percentage documented by a study of contested

elections from 1994 to 2012, which found that approximately 22 percent
of contested elections were for majority control.\240\ Most of the
contests with competing slates were in smaller to midsize companies:
Only four were S&P 500 companies and 46 were outside the S&P 1500.
---------------------------------------------------------------------------

    \236\ 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. This total
number of proxy contests does not include exempt solicitations which
are discussed in Section IV.B.3. infra.
    \237\ Based on staff review of EDGAR filings in calendar years
2014 and 2015.
    \238\ See, e.g., Vyacheslav Fos, The Disciplinary Effects of
Proxy Contests, Manag. Sci., at 1 (July 2015), (forthcoming),
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1705707 (``Fos Study'') (estimating that the
average number of proxy contests was 56 per year from 1994 through
2012). This rate of proxy contests is higher than in earlier years.
See, e.g., Harold Mulherin & Annette Poulsen, Proxy Contests and
Corporate Change: Implications for Shareholder Wealth, 47 J. Fin.
Econ. 279, 287 (1998) (``Mulherin & Poulsen Study'') (estimating an
average of 17 proxy contests per year from 1979 through 1994).
    \239\ The 30 proxy contests identified in 2014 and 2015 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,
contests involving ``vote no'' campaigns, and proposals on issues
other than director nominees. Special meeting elections and ``vote
no'' campaigns are discussed in Section IV.B.3 infra.
    \240\ See Fos Study, at 11.
---------------------------------------------------------------------------

    A study of U.S. proxy contests from 1994-2012 found that targets of
proxy contests have smaller market capitalization relative to other
publicly traded companies, have lower ratios of market value to book
value, and have had poor stock performance. Importantly for
understanding the implications of the proposed amendments, companies
subject to proxy contests were also found to have higher percentages of
institutional and activist hedge fund ownership in comparison to non-
targets.\241\ The same study also found that dissidents in proxy
contests are most often activist hedge funds, followed by groups of
shareholders, other corporations, and former insiders or
employees.\242\ In particular, the study notes that the proportion of
contests sponsored by activist hedge funds has increased from 38
percent in the 1994-2002 period to 70 percent in the 2003-2012
period.\243\ Our staff's review of the filings for the 72 proxy
contests involving elections initiated in 2014 and 2015 found that
activist investors (mainly hedge funds) were dissidents in more than 86
percent of the contests, whereas former or current insiders and
employees or groups of shareholders made up the remainder of the
dissidents.
---------------------------------------------------------------------------

    \241\ Id. at 19. We note that the sample in this study includes
proxy contests concerning all issues and not just those involving
contested director elections. However, director election contests
constitute 88 percent of the sample. Id. at 37.
    \242\ Id. at 38 (finding that, for proxy contests including
contested elections as well as a much smaller number of issue
contests from 1994 to 2012, 57 percent of dissidents were activist
hedge funds, 20 percent were groups of shareholders, 11 percent were
corporations, and 11 percent were prior insiders and employees).
    \243\ Id. at 13. The study also notes that all the other
categories of sponsors declined over the same time. In particular,
corporations sponsored 20 percent of contests in the 1994-2002
period but only 5 percent in the 2003-2012 period.
---------------------------------------------------------------------------

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, many registrants have advance notice bylaws
that apply in proxy contests.\244\ For example, one common form of
advance notice bylaw provision requires dissidents to provide notice of
their intent to nominate candidates during the 30-day period ending no
later than 90 days before the anniversary of the previous year's
meeting date.\245\ Further, we understand that the latest date on which
notice may be provided under advance notice bylaws generally ranges
from 60 to 120 days before the anniversary of the meeting date.\246\
---------------------------------------------------------------------------

    \244\ 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).
    \245\ See supra note 114.
    \246\ See, e.g., Kevin Douglas, Stephen Hinton & Eric Knox,
Advance Notice Bylaws: The Current State of Second Generation
Provisions, Deal Lawyers (July-Aug. 2011), at 15, 19 (finding that,
in a review of 100 Delaware corporations that had amended their
advance notice bylaws since 2008, including large-cap, mid-cap and
small-cap companies, 80 percent of the surveyed bylaws had a window
period of 30 days and, among those that had a window period of 30
days tied to the date of the previous year's meeting, 84 percent of
those provide for a notice period of 90-120 days prior to the
meeting, 9 percent provide for a notice period 60-90 days prior to
the meeting and 7 percent provide for a notice period of 120-150
days prior to the meeting).
---------------------------------------------------------------------------

    Advance notice bylaws are common among registrants. For example, at
the end of 2014, 95 percent of S&P 500 registrants had advance notice
provisions, and 90 percent of the Russell 3000 had such
provisions.\247\ Our staff's review of filings related to director
election contests initiated in 2014 and 2015 found that approximately
88 percent of dissidents either announced or preliminarily communicated
their intent to nominate directors at least 60 days before the annual
meeting date. Further statistics on the distribution of the timing for
initial announcements and filing of preliminary proxy statements are
shown in Table 2 below.
---------------------------------------------------------------------------

    \247\ See supra note 116.
    \248\ Based on staff analysis of the contested elections sample.
See supra note 115.

       Table 2--Timing of Initiation of Election Contests and Filing of Preliminary Proxy Statements Relative to Meeting Dates, in 2014-2015 \248\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Percentage
                                         ------------------------------------------------
                                            At least 45     At least 60     At least 90        Mean           Median            Min             Max
                                               days            days            days
--------------------------------------------------------------------------------------------------------------------------------------------------------
Days between first announcement or                  94.3            88.6            62.9             107              93              29             213
 communication of election contest
 intent and annual meeting date.........
Days between dissident filing                       71.4            44.3            10.0              60              56              23             203
 preliminary proxy statement and annual
 meeting date...........................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    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 60 percent of
dissidents solicited all shareholders in a sample of recent proxy
contests.\249\ Among those recent contests in which dissidents did not
solicit all shareholders, the median percentage of shares held by
solicited shareholders was approximately 95

percent of the outstanding voting shares of the registrant.\250\ We
estimate that in approximately 97 percent of these proxy contests the
dissident solicited shareholders representing more than 50 percent of
the outstanding voting shares.\251\ Furthermore, dissidents in the
contests discussed above sent full sets of proxy materials to each of
the shareholders solicited.\252\ 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 access
solicitations.\253\
---------------------------------------------------------------------------

    \249\ Based on industry data provided by a proxy services
provider for a sample of 35 proxy contests from June 30, 2015,
through April 15, 2016.
    \250\ Id.
    \251\ Id.
    \252\ Id.
    \253\ 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.
---------------------------------------------------------------------------

    In proxy contests, both registrants and dissidents incur costs of
solicitation.\254\ 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 generally exceed the costs
associated with a shareholder meeting in the absence of a contested
election. Both dissidents and registrants are required to provide
estimates of the costs of solicitation in their proxy statements. As
shown in Table 3 below, based on a review of proxy contests initiated
in 2014 and 2015, the median reported estimated total costs were
approximately $800,000 for registrants and approximately $250,000 for
dissidents.
---------------------------------------------------------------------------

    \254\ 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).
    \255\ Based on staff analysis of EDGAR filings in calendar years
2014 and 2015.

        Table 3--Reported Estimates of Solicitation Expenses in Election Contests in 2014 and 2015 \255\
----------------------------------------------------------------------------------------------------------------
                                                       Mean           Median          Minimum         Maximum
----------------------------------------------------------------------------------------------------------------
Estimated Total Costs:
    Registrant (beyond usual costs).............      $2,092,096        $800,000         $25,000     $15,400,000
    Dissident...................................         741,733         250,000          25,000       8,000,000
Estimated Fees Paid to Proxy Solicitor:
    Registrant (beyond usual costs).............         296,016         100,000           6,500       2,000,000
    Dissident...................................         188,687         100,000          10,000       1,485,895
----------------------------------------------------------------------------------------------------------------

    A study of the solicitation costs in proxy contests from 2006 to
2012 found that the total estimated solicitation costs reported by
registrants ranged from approximately $20,000 to approximately $20
million, and that the estimated costs reported by registrants tended to
increase with their market capitalization. In contests where costs were
disclosed by both parties, the study found that the median estimates of
total solicitation costs was $477,500 for registrants and $275,000 for
dissidents.\256\ The largest recorded estimate of total solicitation
costs for a dissident in this period was approximately $9 million.\257\
---------------------------------------------------------------------------

    \256\ See Adam Kommel, Proxy Fight Fees and Costs Now Collected
by SharkRepellent: MacKenzie Partners and Carl Icahn Involved in
Largest Fights, SharkRepellent.net (Feb. 20, 2013), available at
https://www.sharkrepellent.net/request?an=dt.getPage&st=undefined&pg=/pub/rs_20130220.html.
    \257\ Id.
---------------------------------------------------------------------------

    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). 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.\258\
---------------------------------------------------------------------------

    \258\ 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 \259\ 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 proxy statements and undergoing
the staff review and comment process for that filing. However, a
dissident in a nominal contest would not be likely to 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 dissidents do not always report estimates of their solicitation
expenses in their proxy materials.
---------------------------------------------------------------------------

    \259\ 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 72 proxy contests initiated in 2014 and 2015 found
that approximately 33 percent (24 contests) 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.\260\ Among the 48 proxy contests initiated in 2014
and 2015 that proceeded to a vote, dissidents were at least partially
successful (i.e., achieved some board representation) in about 52

percent (25) of these contests.\261\ In 21 of these contests, the end
results was a ``mixed-board'' with directors elected from both slates.
In four contests, the dissident's nominees were elected to fill all
positions of the board. Between settlements and voted contests,
dissidents achieved at least some board representation in half of the
director election contests (36 out of 72).
---------------------------------------------------------------------------

    \260\ The percentage of director election contests initiated in
2014 and 2015 not proceeding to a vote is lower than what has been
reported in previous research for earlier years. See, e.g., Fos
Study, at 39 (finding that, for proxy contests including contested
elections as well as a much smaller number of issue contests from
1994 to 2012, about 53 percent did not make it to a vote, where 25
percent were settled, 15 percent were withdrawn, 6 percent ended
with a delisting or a takeover, and 7 percent did not make it to a
vote for other reasons).
    \261\ The estimated percentage of voted director election proxy
contests that lead to dissident board representation is consistent
with previous research. See, e.g., Fos Study, at 13 (finding that
for voted proxy contests including contested elections as well as a
much smaller number of issue contests from 1994 to 2012, dissidents
achieved at least one of their formal goals (i.e., obtaining board
seats or passing proposals) in about half of the cases).
---------------------------------------------------------------------------

    Contests differ in the closeness of voting outcomes. 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 48 contests initiated in 2014 and 2015 that
proceeded to a vote, registrants disclosed full voting results in Form
8-K filings in 38 contests. In these contests, the median director
elected with the fewest votes received 57 percent more votes compared
to 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 voting shares was approximately 16
percent, and more than 26 percent of the contests (10 out of 38) had a
difference in votes received as a percentage of outstanding shares of
five percent or less. In these same contests, the elected director who
received the fewest votes received no more than 11.5 percent more votes
than the non-elected nominee who received the greatest votes. We
consider these to be close contests, in which 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 only
do so 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,
which is especially likely to be the case for small shareholders and
retail investors.\262\ 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 more available to large shareholders than small
ones. We solicit comment on the prevalence, availability, costs and
benefits of these practices below.
---------------------------------------------------------------------------

    \262\ See, e.g., Rulemaking Petition (describing in-person
attendance as ``generally an expensive and impractical
proposition''). 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. Moreover, we are unaware of any proxy contest that
has culminated in a virtual shareholder meeting. See, e.g., Jena
McGregor, More Companies are Going Virtual for Their Annual
Shareholder Meetings, Wash. Post (Mar. 17, 2015), available at
https://www.washingtonpost.com/news/on-leadership/wp/2015/03/17/more-companies-are-going-virtual-for-their-annual-shareholder-meetings/ (finding that in 2011, 21 companies held virtual-only
meetings using the primary provider of online shareholder meeting
technology, and that this number grew to 53 in 2014.)
---------------------------------------------------------------------------

    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.\263\
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.
---------------------------------------------------------------------------

    \263\ 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.
---------------------------------------------------------------------------

    Figure 1 shows the average percentage, across registrants, of the
total outstanding shares held by institutions that each meet a given
threshold of minimum voting power. 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 the
institutional holders may have enough voting power to give them the
incentive to arrange split-ticket voting if preferred. For example, the
average percentage of the total outstanding shares held by institutions
that each have 0.5 percent or more of the total votes is around 27
percent for non-S&P 1500 registrants, 42 percent for S&P 600
registrants, 39 percent for S&P 400 registrants, and 33 percent 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. If we consider average
total ownership by institutions that are larger block holders
(individually owning 5 percent or more of shares) and therefore are
more likely to be pivotal voters, the average percentage of the total
outstanding shares held by these institutions is approximately 11
percent for both non-S&P 1500 and S&P 600 registrants, 7 percent for
S&P 400 registrants, and 6 percent for S&P 500 registrants. Because we
are only able to consider ownership by institutions required to report
their holdings on Form 13F and that have voting authority over these
holdings, these statistics represent an estimate of the lower

bound of the percentage of outstanding shares held by owners with
possible incentives to currently arrange split-ticket voting.
[GRAPHIC] [TIFF OMITTED] TP10NO16.000

    Even a large voting stake in a company may not currently be enough
to incent 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 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
institutions that each meet a given threshold of minimum dollar stake
in the registrant. For example, for institutional owners 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 around 50 percent for all registrants belonging to one of the S&P
1500 component indexes. By contrast, the corresponding average
percentage of outstanding shares among non-S&P 1500 registrants is
approximately 28 percent. If we instead consider only institutional
owners that each hold stock worth $10 million or more, the average
percentage of outstanding shares held by these institutions is 48
percent for S&P 500 registrants, 43 percent for S&P 400 registrants, 35
percent for S&P 600 registrants, and 18 percent for non-S&P 1500
registrants. Overall, the estimates in Figure 2 suggest that a
substantial portion of shares in registrants are held by institutions
that have a significant financial interest. This is particularly so for
relatively larger registrants.
---------------------------------------------------------------------------

    \264\ The estimates in the figure are based on staff analysis of
Form 13F filings related to potentially affected registrants
(excluding registered investment companies) from the last available
quarter of 2015 in the Thomson Reuters Form 13F database. The
analysis reflects only holdings for which institutions have voting
authority in contested director elections.

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[GRAPHIC] [TIFF OMITTED] TP10NO16.001

3. Other Methods To Seek Change in Board Representation
    Beyond typical 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. We broadly refer to these methods
throughout this economic analysis as shareholder interventions.
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    \265\ 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.
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    First, a shareholder could make recommendations for director
candidates directly to the nominating committee of the board. It is
then generally left to the board's discretion whether or not such
candidates are accepted for nomination. While we do not have direct
evidence about the extent to which this approach is used or is
effective, a board may be relatively more likely to nominate candidates
recommended by a shareholder with a large stake in the registrant than
candidates recommended by smaller shareholders because a large
shareholder would have a greater interest in the oversight and
strategic direction of the registrant and because a large shareholder
might be perceived to be more likely to run a proxy contest absent
registrant cooperation.
    Second, a dissident could call for a special meeting to try to
replace all or some of a registrant's directors with the dissident's
own candidates, to the extent permitted under the registrant's bylaws.
Such an intervention would typically require a two-step process.
Initially, the dissident would generally need to obtain the consent of
shareholders representing a certain threshold of shares outstanding to
call the meeting.\266\ Next, the dissident would put to a vote, either
by proxy or in person at the special meeting, a proposal to remove
certain directors and elect certain other nominees. Attempting to
change the board in this manner at a special meeting is different from
a contested election at an annual meeting because the issue put to a
shareholder vote is the removal of specific incumbent directors and
their replacement by specific dissident director candidates. This means
that regardless of whether a shareholder votes by proxy or in person,
there is no possibility for a shareholder to vote ``for'' a combination
of dissident and registrant nominees because only the dissident
proposes nominees (to fill the vacancies that would result from the
removal of certain incumbent directors if the dissident's removal
proposal is successful). In addition, because attempting to replace
directors through a special meeting is subject to registrant bylaws
and, if such bylaws are available, requires the dissident to first
gather enough shareholder support to call the meeting, this alternative
may be either unavailable or more burdensome for the dissident compared
to initiating a proxy contest at an annual meeting.
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    \266\ The criteria for how and when a special meeting can be
called vary both by state law and corporate bylaws.
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    Third, if the shareholder base of a registrant is significantly
concentrated, a dissident may be able to pursue the election of
alternative director nominees at the annual meeting through an exempt
solicitation. Rule 14a-2(b)(2) provides that the rules generally
applicable to dissident proxy solicitations do not apply where the
total number of persons solicited is not more than ten. Thus,
dissidents using this approach would be able to obtain proxies from up
to 10 persons in support of their candidates, and may receive
additional support for their candidates from shareholders attending

the meeting in person. Based on staff experience, we understand that
this approach is used only infrequently.
    Fourth, some registrants have recently adopted proxy access bylaws
that would allow certain qualifying shareholders to nominate a limited
number of director candidates for inclusion in the registrant's proxy
statement.\267\ We are unaware of any cases to date in which a proxy
access bylaw has been used to nominate a candidate for the board. Using
a proxy access bylaw differs from engaging in a proxy contest in
several ways. In particular, while proponents of proxy access nominees
could engage in some forms of shareholder outreach efforts, current
proxy access bylaws typically restrict the proponents from soliciting
votes on a separate proxy card.\268\ Proxy access candidates would be
included on the registrant's proxy card, and information about those
candidates would be included in the registrant's proxy statement. In
contrast, dissidents engaged in proxy contests produce their own proxy
materials and bear the cost of any solicitation in support of their
nominees. Additionally, current bylaws generally limit the number of
proxy access candidates to 20 or 25 percent of the board.\269\ Also, a
proxy access bylaw generally only provides access to the proxy for
shareholders meeting certain criteria.\270\ Thus, while relying on the
provisions of a proxy access bylaw to nominate candidates is likely to
involve lower solicitation costs than proxy contests (because, for
example, the proxy access shareholder proponent does not produce or
disseminate its own separate proxy statement), it also is more limited
in its potential to change the composition of the board. We expect
similar distinctions to apply in the case of state or foreign law
provisions that provide shareholders a form of proxy access.
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    \267\ See, e.g., S&C April Report, supra note 91 (stating that
200 public companies had adopted some form of proxy access since the
2015 proxy season, compared to 15 companies prior to 2015).
    \268\ See, e.g., Sidley Austin LLP, Proxy Access Momentum in
2016, at 19 (June 27, 2016), available at http://www.sidley.com/~/
media/update-pdfs/2016/06/final-proxy-access-client-update-june-
2016.pdf.
    \269\ See, e.g., S&C April Report, supra note 91.
    \270\ Under most current proxy access bylaws, the shareholder
generally has to meet a passive holder requirement as well as
specific share ownership thresholds and holding period requirements
in order to qualify to use proxy access, with most bylaws requiring
the shareholder using proxy access to have held either a three
percent or five percent ownership stake for a three-year holding
period. See, e.g., S&C April Report, supra note 91; S&C August
Report, supra note 114.
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    Other shareholder actions targeted at changes in board composition
include 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. Such campaigns are relatively
low in cost but may have a more limited direct effect on boards than
proxy contests or the use of proxy access bylaws because, while they
can express shareholder dissatisfaction, such campaigns do not directly
put forth alternative candidates for election. Nonetheless, such
campaigns may have an effect on some registrants. One study of 112
formal ``vote no'' campaigns found that about 20 percent of ``vote no''
campaigns have achieved substantial voting support and ``vote no''
campaigns are associated with a CEO turnover rate of about 25 percent
in the year after the campaign, or over three times the turnover rate
for a sample of comparable registrants.\271\
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    \271\ See Diane Del Guercio, Laura Seery & Tracie Woidtke, Do
Boards Pay Attention When Institutional Investor Activists ``Just
Vote No''?, 90 J. Fin. Econ. 84, 85 (2008).
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    Finally, shareholders may also seek a change in board composition
by making nominations from the floor of a meeting, without soliciting
proxies. However, we understand that such nominations are rare,\272\
and generally unlikely to succeed, given the applicability of advance
notice bylaws and our understanding that most shareholders vote in
advance of meetings via the proxy process.
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    \272\ Based on the staff's discussions with independent
inspectors of elections.
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C. Broad Economic Considerations

    The proposed amendments would change the proxy solicitation and
voting process at registrants other than funds and BDCs to allow all
shareholders of the company to use the proxy system to vote for their
preferred combination of director candidates in a contested election.
These changes are likely to improve the efficiency of the voting
process in certain contested elections. It is possible that the
proposed amendments could also affect the cost to registrants and
dissidents of contested elections, and the outcomes and incidence of
these elections. To the extent that such effects, if any, change the
degree to which the risk of attracting a future proxy contest provides
either discipline or a distraction to boards, the proposed amendments
may affect managerial decision-making and the relationship between
shareholders and management. Although the likelihood as well as the
direction and extent of these effects is difficult to predict for
reasons discussed below, we cannot rule out the possibility that any
such effects could be significant.
    Our economic analysis of the proposed 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 amount of
influence that shareholders exercise over the firms they own. 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 of contested elections
may be either mitigated or magnified by changes in the use or
effectiveness of other mechanisms. This section describes these issues
in more detail and provides context for the discussion of potential
economic effects that follows.
    The proposed amendments involve a fundamental aspect of corporate
governance: The process by which directors for the boards of
registrants are elected. Appropriate mechanisms to allow shareholder
input into the nomination and election of directors can be important to
maintaining the accountability of directors to shareholders.\273\ In
turn, the accountability of directors to shareholders can play an
important role in addressing the agency problems that arise from the
separation of registrant ownership and control, especially when share
ownership is widely dispersed. In particular, boards of directors can
monitor, discipline and replace the officers of registrants, who have
control over registrants' operations, on behalf of dispersed
shareholders. Boards of directors can thereby play a key role in
managing potential conflicts that may result from divergent interests
between these officers and shareholders.\274\ The effectiveness of a
board can be judged by its ability to adequately perform this
monitoring role, and also by its performance across other dimensions,

such as its ability to provide valuable advice to the officers of the
registrant.\275\
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    \273\ The nature of the mechanisms by which shareholders vote is
affected by a number of different sources, including state law and a
registrant's governing documents as well as Commission rules
regarding the proxy process.
    \274\ See, e.g., Adolf Berle & Gardiner Means, The Modern
Corporation and Private Property (1932).
    \275\ See, e.g., Renee Adams & Daniel Ferreira, A Theory of
Friendly Boards, 62 J. Fin. 217 (2007) (theoretically exploring the
interaction between the monitoring and the advisory role of boards,
and how effectiveness in monitoring may or may not be related to
effectiveness in advising).
---------------------------------------------------------------------------

    The selection of board members generally involves input from
existing board members and from shareholders. Under most circumstances,
the incumbent board nominates a slate of candidates to fill upcoming
vacancies and shareholders vote on each of these candidates. The
board's choice of nominees may reflect a number of factors, including
board member preferences, information board members have learned about
the registrant, board members' past experience, and recommendations
from shareholders. In the case of a contested election, dissidents may
nominate directors for shareholder consideration in addition to those
nominated by the board. Shareholders then vote to determine which
nominees are elected.
    The proxy system is the principal means by which shareholders in
public companies exercise their voting rights. It is therefore
important that this system functions efficiently and in a manner that
adequately protects the interests of shareholders and does not impede
them from exercising their rights under state law. Researchers have
noted that details of the proxy process may affect the amount of
influence that shareholders can exercise over the firms they own.\276\
Under current rules, and as discussed in Section IV.A above,
shareholders who vote by proxy in a contested election often have a
more constrained set of voting choices than shareholders who vote in
person at the meeting. Alleviating these constraints could enhance the
influence of shareholders on board composition by allowing all
shareholders to cast votes in contested director elections that best
reflect their preferences, thus facilitating the exercise of the rights
that state law provides to shareholders. Furthermore, any changes in
shareholder voting behavior, or other changes in the nature of the
proxy process, could also have indirect effects on the nature of the
relationship among shareholders, directors, and managers.
---------------------------------------------------------------------------

    \276\ See, e.g., Stuart L. Gillan & Jennifer E. Bethel, The
Impact of the Institutional and Regulatory Environment on
Shareholder Voting, 31 Fin. Manage. 29 (2002); Lucian A. Bebchuk,
The Myth of the Shareholder Franchise, 93 Va. L. Rev. 675 (2007).
---------------------------------------------------------------------------

    It is difficult to predict whether any such changes would enhance
or detract from board effectiveness and registrants' efficiency and
competitiveness. Strong shareholder rights have been associated with
higher firm valuations and better-developed equity markets.\277\
However, there are trade-offs between the degree of shareholder
oversight and the level of director autonomy in managing the affairs of
a registrant. For example, sufficient autonomy of the board and
management may be important for fostering an environment focused on
initiative, innovation and the registrant's long-term interests.\278\
Increasing the influence of shareholders may also empower specific
groups of shareholders, who may use their increased influence to
advance their own interests at the expense of other shareholders or who
may advocate for changes for the benefit of all shareholders.\279\ It
is therefore unclear what level of shareholder influence would maximize
the efficiency and competiveness of registrants, and this optimal level
of shareholder influence is likely to vary across registrants.
Similarly, research is inconclusive as to what board structure and what
combination of director types would maximize the effectiveness of a
board, and the ideal board and governance structure likely varies
across registrants.\280\
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    \277\ See, e.g., Paul A. Gompers, Joy L. Ishii & Andrew Metrick,
Corporate Governance and Equity Prices, 118 Q. J. Econ. 107, 128
(2003); Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer
& Robert Vishny, Investor Protection and Corporate Governance, 58 J.
Fin. Econ. 3, 15 (2000).
    \278\ See, e.g., Jonathan Karpoff & Edward Rice, Organizational
Form, Share Transferability, and Firm Performance, 24 J. Fin. Econ.
69 (1989); Philippe Aghion & Jean Tirole, Formal and Real Authority
in Organizations, 105 J. Polit. Econ. 1 (1997).
    \279\ See, e.g., Jonathan B. Cohn, Stuart L. Gillan & Jay C.
Hartzell, On Enhancing Shareholder Control: A (Dodd-) Frank
Assessment of Proxy Access, 71 J. Fin. 1623, 1624 (2016), available
at http://onlinelibrary.wiley.com/doi/10.1111/jofi.12402/full
(providing evidence that proxy access, which the authors use as a
measure of increased shareholder control, may be relatively more
valuable at companies with activist shareholders but relatively less
valuable at companies with greater ownership by labor-friendly
shareholders).
    \280\ For a discussion of the inconclusiveness of existing
research on what constitutes an optimal board structure, as well as
how the observed variation in the structure and function of boards
may be an appropriate response to the specific governance and
operational issues faced by different companies, see, e.g.,
Ren[eacute]e B. Adams, Benjamin E. Hermalin & Michael S. Weisbach,
The Role of Boards of Directors in Corporate Governance: a
Conceptual Framework and Survey, 48 J. Econ. Lit. 58 (2010).
---------------------------------------------------------------------------

    It is also difficult to predict how the various participants
involved in director elections may alter their behavior in reaction to
any changes in the process by which directors are selected.
Shareholders could change their voting behavior along many dimensions--
for example, they could become more or less likely to support
registrant candidates, more or less likely to support dissident
candidates, or more or less likely to support a combination of
registrant and dissident candidates without consistently favoring
either type of candidate. Director candidates may react by becoming
more or less willing to be nominated based on reputational concerns. If
the nature of elections were expected to change, registrants and
dissidents may change the amount of resources they invest in elections
or change their approach to negotiations. Because of the range of
actions that any of the involved parties could choose, and the fact
that other parties could change their own behavior in reaction to any
such actions, the outcome of any changes to the election process is
difficult to predict, although we have attempted to assess them to the
extent possible in the discussion below.
    Finally, it is important to note that proxy contests represent one
particular corporate governance mechanism that may substitute for or
complement other governance mechanisms. In the case of substitute
mechanisms, increasing the usefulness of one mechanism is likely to
reduce the use of its substitute. For example, increasing the frequency
of buses may reduce the likelihood that commuters drive. In the case of
complementary mechanisms, increasing the usefulness of one mechanism is
likely to increase the use of complementary mechanisms. For example,
improving the quality of roads may increase the likelihood that
commuters drive. Similarly, researchers have found that some governance
mechanisms are substitutes for or complements to each other.\281\ As a
result, changes affecting proxy contests may affect the efficacy and
use of governance mechanisms that can substitute for or complement such
contests. Adjustments in the degree to which different governance
mechanisms are used are likely to reflect a new equilibrium in the
relationship between shareholders and management.\282\ Such changes may
either magnify or mitigate

any potential effects of changes in the nature of proxy contests.
---------------------------------------------------------------------------

    \281\ See, e.g., Stuart Gillan, Jay Hartzell & Laura Starks,
Tradeoffs in Corporate Governance: Evidence from Board Structures
and Charter Provisions, 1 Q. J. Fin. 667 (``Gillan, Hartzell &
Starks Study'') (finding that certain governance mechanisms are
substitutes); Martijn Cremers & Vinay Nair, Governance Mechanisms
and Equity Prices, 60 J. Fin. 2859, 2862 (2005) (finding that
certain governance mechanisms are complements).
    \282\ See, e.g., Gillan, Hartzell & Starks Study (discussing
substitute and complementary governance mechanisms and how
equilibrium governance choices may be determined given the
interrelation among mechanisms).
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D. Discussion of Economic Effects

    The economic benefits and costs of the proposed amendments,
including impacts on efficiency, competition and capital formation, are
discussed below. For purpose of this economic analysis, we first
address the effects of the proposed changes to the proxy process
together as a package, including both benefits and costs. In
particular, we discuss the anticipated effects of the proposed
amendments on shareholder voting and then consider anticipated effects
with respect to the costs, outcomes, incidence, and perceived threat of
contested elections at registrants other than funds and BDCs. We then
discuss the economic effects that can be attributed to specific
implementation choices in the proposed amendments, to the extent
possible, and the relative benefits and costs of the principal
reasonable alternatives to these implementation choices.
1. Effects on Shareholder Voting
    By mandating the use of a universal proxy in contested elections,
the proposed amendments would allow all shareholders to vote through
the proxy system for the combination of director nominees of their
choice. This change is expected to increase the efficiency with which
shareholders vote in contested elections. In particular, universal
proxies would result in benefits in the form of cost savings for
shareholders who would otherwise expend time and resources to attend a
shareholder meeting 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. Also, with a
universal proxy, some shareholders would be able to vote for dissident
nominees despite not being solicited by the dissident or receiving the
dissident's proxy card because they would be able to vote for those
nominees using the registrant's proxy card.
    Shareholders voting by proxy are typically restricted to voting
only for nominees chosen by one or the other of the parties to the
contest. At least some investors have expressed dissatisfaction with
these constraints on their ability to vote by proxy.\283\ We also note
that proxy advisory services have often recommended voting for
candidates that have appeared on different proxy cards in contested
elections, leading to additional concern among shareholders as to how
to cast such votes.\284\ Finally, we are aware that registrants and
dissidents have creatively (but imperfectly) sought to facilitate vote-
splitting in recent years, further demonstrating demand for a
generally-applicable solution that would permit split-ticket voting by
proxy.\285\
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    \283\ See, e.g., Rulemaking Petition; Roundtable Transcript,
comments of Anne Simpson, Senior Portfolio Manager and Director of
Global Governance, CalPERS, at 35-36.
    \284\ See, e.g., John Wilcox, Shareholder Nominations of
Corporate Directors: Unintended Consequences and the Case for Reform
of the U.S. Proxy System, Shareholder Access to the Corporate Ballot
(Lucian Bebchuk ed. 2005).
    \285\ See, e.g., Richard J. Grossman & J. Russel Denton, Never
Mind Equal Access: Just Let Shareholders ``Split Their Ticket'', The
M&A Lawyer (Jan. 2009) (discussing a contest in which shareholders
interested in splitting their votes were instructed to vote on both
proxy cards, dating them with the same date, and adding a special
notation that neither card was intended to invalidate the other, and
noting a concern that such split votes could be challenged in
court); Liz Hoffman, Tessera Proxy's Write-In Option Draws SEC's
Eye, Law360 (May 20, 2013), available at http://www.law360.com/articles/442878/tessera-proxy-s-write-in-option-draws-sec-s-eye
(discussing a contest in which the registrant included a write-in
slot on its proxy card and instructed shareholders interested in
splitting their votes to vote on its card and write in the names of
dissident nominees, and noting that Commission staff objected to
this approach on the basis that it would violate the bona fide
nominee rule).
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    Under the proposed amendments, shareholders who want to vote by
proxy for a full complement of directors would no longer be limited to
voting only for nominees chosen by the registrant or only for nominees
chosen by the dissident.\286\ Also, the ability to vote for dissident
nominees by proxy would no longer be limited to shareholders solicited
by the dissident.\287\ Instead, all shareholders could use a universal
proxy to vote for the combination of directors of their choice, as they
are able to do in person at a shareholder meeting.
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    \286\ 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.
    \287\ 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.
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    Although some shareholders are able to use existing approaches to
implement split-ticket votes, such as by attending a shareholder
meeting in person, these existing approaches are generally associated
with costs beyond the usual costs of voting by proxy. These costs may
include the time and expense required to obtain a legal proxy from
one's broker (if required) and travel to and attend (or send a
representative to attend) a meeting.\288\ Even when alternatives
besides in-person voting are made available to some shareholders,
taking advantage of such accommodations may entail costs. For example,
in the case in which a proxy solicitor acting on behalf of a party to
the contest arranges for an in-person representative for a large
shareholder, this shareholder is likely to spend some incremental time
contacting and coordinating with the proxy solicitor. While these costs
may be minimal in some cases, any of the incremental time and resources
currently expended to implement split-ticket votes would no longer be
required in the case of universal proxies, resulting in greater
efficiency in vote submission. We do not currently have data regarding
how many shareholders implement split-ticket voting, to what extent the
different approaches are used, and the degree of incremental costs
borne to implement such votes, in order to estimate the potential cost
savings. We request comment below on current voting practices,
including data about costs to implement split-ticket voting.
---------------------------------------------------------------------------

    \288\ Shareholders with many different holdings may also face
logistical constraints, in that annual meetings for different
companies often overlap and it may therefore not be feasible to
attend all such meetings in person. These logistical constraints can
potentially be overcome at a cost. In particular, while proxy
contests are relatively infrequent, to the extent that two
registrants subject to proxy contests have meetings on the same
date, or a shareholder has other reasons to prefer attending a
conflicting meeting in person, shareholders may be able to arrange
for a representative to attend one of these meetings on their
behalf.
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    We expect that institutional shareholders and large shareholders
are relatively more likely than other shareholders to be able to
implement a split-ticket vote using one of the existing approaches and
would thus be more likely to experience cost savings under the proposed
amendments. As discussed above, institutional shareholders hold a
majority of the shares in U.S. public companies and are much more
likely to vote than retail shareholders.\289\ We expect that
shareholders with large stakes in the

registrant \290\ would also generally be more likely to vote than
smaller shareholders because of the greater influence they may have on
the outcome of the election and their greater economic interest in this
outcome. For these same reasons, we expect that large shareholders that
prefer to vote a split-ticket would have a particularly strong
incentive to find a way to implement such a vote. Institutional and
large shareholders may also be more likely to have access to the
existing approaches for split-ticket voting. That is, they are more
likely than other shareholders to have the resources required to vote
in person, and may also be more likely to have access to any
accommodations made to facilitate split-ticket voting, as when a party
to the contest arranges for an in-person representative to attend a
meeting on behalf of a shareholder.
---------------------------------------------------------------------------

    \289\ See infra Section IV.B.1.
    \290\ See Figure 1 and Figure 2 in Section IV.B.2 for the
distribution of institutional holders by the size of their stakes in
potentially affected registrants for which this data is available.
---------------------------------------------------------------------------

    The availability of universal proxies would also expand the voting
alternatives of shareholders for whom it would not otherwise be
practical or feasible to vote for their preferred combination of
candidates. The existing approaches to implementing a split-ticket vote
discussed above are likely to be cost prohibitive or unavailable to
many shareholders, particularly retail shareholders and small
shareholders. That is, shareholders that have a limited economic
interest and voting power in the registrant may not have a sufficiently
high financial incentive to bear the costs required to attend or send a
representative to a meeting. Retail and small shareholders may be
unable or unwilling to bear these costs, and may be unlikely to be
proactively offered alternative accommodations (such as an in-person
representative being arranged by a proxy solicitor). To the extent that
such shareholders are interested in splitting their ticket, the
availability of universal proxies would enable them to vote for the
combination of directors of their choice and thus may result in a
greater number of split-ticket votes than under the current system.
    In addition, because dissidents are not required to solicit all
shareholders, many shareholders might not receive the dissident's proxy
card and thus be able to vote for dissident candidates in a substantial
fraction of proxy contests.\291\ In particular, smaller shareholders,
such as those holding fewer than 1,000 shares in the registrant, are
less likely to be solicited by dissidents.\292\ The proposed
requirement that registrants, as well as dissidents, use universal
proxies would 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.
---------------------------------------------------------------------------

    \291\ Based on industry data provided by a proxy services
provider for a sample of proxy contests from June 30, 2015 through
April 15, 2016, we estimate that there are some shareholders that
dissidents do not solicit in approximately 40 percent of contested
elections, while all shareholders are solicited by dissidents in the
remainder of contested elections. 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.
    \292\ Based on industry data provided by a proxy services
provider for a sample of proxy contests from June 30, 2015 through
April 15, 2016, in contests in which fewer than all shareholders
were solicited, the shareholders to be solicited were chosen based
on the size of their shareholdings. Specifically, only those
accounts holding a number of shares of the registrant equal to or
exceeding a minimum threshold were subject to solicitation by the
dissident. The minimum threshold in these cases ranged from 100 to 1
million shares, but was most often between 500 and 1,000 shares.
---------------------------------------------------------------------------

    Thus, the proposed amendments would allow shareholders who would
not currently find it practical or feasible to vote for their preferred
candidates, by using a universal proxy, to split their ticket or
support the dissident slate. We expect that retail and small
shareholders are more likely than other shareholders to change the
votes they would submit upon the availability of universal proxies
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.\293\ For these shareholders, the proposed amendments are
not likely to result in direct cost savings, but would 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.\294\
---------------------------------------------------------------------------

    \293\ Retail shareholders vote 28 percent 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.
    \294\ See infra Sections IV.D.3 and IV.D.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. This
may give rise to minor costs to some shareholders in contested
elections, particularly less sophisticated shareholders, 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 would be mitigated by the
presentation and formatting requirements of the proposed amendments, as
discussed in Section IV.D.5 below.
2. Potential Effects on Costs of Contested Elections
    The proposed amendments may directly impose minor costs on
registrants and dissidents that engage in proxy contests, relative to
the current costs that these parties bear in proxy contests.\295\ The
proposed 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 proposal's 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 proposed amendments.
---------------------------------------------------------------------------

    \295\ The potential direct cost savings resulting from the
proposed amendments for certain shareholders are discussed in
Section IV.D.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 proposed
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 proposed amendments.
    We first consider the direct cost implications of the proposed
amendments. For dissidents that would have engaged in typical proxy
contests even in the absence of the proposed amendments, the proposed
requirement to solicit shareholders representing at least a majority of
the voting power entitled to vote on the election of directors may
impose a small incremental cost in some infrequent cases. In most
cases, however, we expect that this requirement should not result in a
change in costs to dissidents or require any further action on their
part. In particular, as noted in Section IV.B.2. above, we estimate
that in approximately 97 percent of recent proxy contests the dissident
solicited a number of shareholders that exceeded the threshold that
would be required under the proposed solicitation requirement.\296\ For
this reason, we believe that any dissidents who would not otherwise
have initiated a contest but may decide to engage in a typical proxy
contest as a result of the proposed amendments would also generally not
bear any incremental costs as a direct result of the proposed
solicitation requirement, though they likely would bear total
solicitation costs comparable to those borne in other typical proxy
contests (for which the median total solicitation cost was, as
discussed above, $250,000 for dissidents initiating contests in
2015).\297\ Below, we separately discuss the potential cost
implications for nominal proxy contests, which are different from
typical proxy contests in that the dissidents incur little more than
the minimum required cost to contest an election.
---------------------------------------------------------------------------

    \296\ See supra note 251 and accompanying text.
    \297\ See supra Section IV.B.2.
---------------------------------------------------------------------------

    Even in the infrequent cases in which dissidents in a typical proxy
contest may currently not solicit shareholders holding a majority of
the shares eligible to vote in the registrant, dissidents are likely to
solicit shareholders holding a significant fraction of these shares in
order to have a chance of winning any board seats.\298\ Within a sample
of recent proxy contests, we estimate the number of accounts that one
would have to solicit in order to meet the proposed solicitation
requirement ranges from about 0.1 percent to 10 percent of the
outstanding shareholder accounts, with the median number of accounts
required equaling about one percent of the total shareholder
accounts.\299\ Given that even those dissidents that would not
currently meet the proposed solicitation requirement have still
solicited shareholders representing a large fraction (though less than
50 percent) of the shares eligible to vote, as well as our
understanding that the number of accounts required to reach a majority
of the shares eligible to vote is generally expected to be a small
fraction of the total accounts outstanding, we expect that the
incremental cost of the solicitation requirement to a dissident, if
any, should be minor relative to the total costs incurred by dissidents
in proxy contests.
---------------------------------------------------------------------------

    \298\ Based on industry data provided by a proxy services
provider for a sample of proxy contests from June 30, 2015 through
April 15, 2016, the sole dissident in the sample of 35 contests that
solicited less than a majority of the shareholders solicited
accounts representing 31.5 percent of the outstanding shares.
    \299\ Based on industry data provided by a proxy services
provider for a sample of proxy contests from June 30, 2015 through
April 15, 2016.
---------------------------------------------------------------------------

    Specifically, in the infrequent case in which a dissident would
otherwise have solicited shareholders representing a substantial
fraction, but not a majority, of the shares eligible to vote, we
preliminarily estimate that such a dissident would bear an incremental
cost of approximately $1,000 if using the least expensive approach
\300\ to expand solicitation to meet the proposed minimum solicitation
requirement.\301\ The level of any such incremental cost would be
driven by any shortfall in the number of shareholders that would
otherwise be solicited compared to the number that would be required to
be solicited to meet the proposed majority 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.
---------------------------------------------------------------------------

    \300\ 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
depending on the total size of the dissident's proxy materials.
    \301\ This estimate was derived by 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 single
case out of the 35 contests from June 30, 2015 through April 15,
2016 for which information was provided in which less than a
majority of shareholders was solicited by the dissident. The
required increase in expenses to solicit a majority of shareholders
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. For the purpose of the
nominee coordination fee, staff used information from other proxy
contests for which information was provided (specifically focusing
on those in which less than all shareholders were solicited) to
interpolate 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 incremental
solicitation cost of approximately $1,000 includes nominee
coordination fees of $22 for each of the additional nominees
expected to be involved, plus basic processing fees, notice and
access and preference management fees and postage totaling $1.57
(for suppressed accounts, such as those that have affirmatively
consented to electronic delivery) to $1.70 (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 is 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 estimate these costs. We request
comment on this estimate and data that could allow staff to obtain a
more precise estimate below.
---------------------------------------------------------------------------

    In sum, we do not expect the proposed solicitation requirement to
impose a large incremental cost burden on dissidents in typical proxy
contests in which the dissident engages in substantial solicitation
efforts. In the vast majority of cases, we expect dissidents that would
have engaged in proxy contests even in the absence of the proposed
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,
discussed below) as a result of the proposed 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. In the infrequent cases in which dissidents may be
required to expand their solicitation in order to meet the proposed
requirement, our estimate of an incremental cost of approximately
$1,000 represents less than one percent of the median total
solicitation cost reported in 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).\302\
---------------------------------------------------------------------------

    \302\ The median total solicitation cost reported in proxy
statements by dissidents in proxy contests in 2014 and 2015 is
approximately $250,000, in line with the estimates in a study of
such costs over a longer horizon. See supra Section IV.B.2.
---------------------------------------------------------------------------

    Registrants may also incur minor incremental costs in typical proxy
contests as a direct result of the proposed amendments in order to
implement the required changes to their proxy cards. For example, under
the proposed 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 proposed 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, rather than 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.\303\
---------------------------------------------------------------------------

    \303\ See infra Section V for estimates for purposes of the
Paperwork Reduction Act (``PRA'') of the incremental burden that may
be required to prepare proxy materials under the proposed
amendments.
---------------------------------------------------------------------------

    We next consider indirect effects of the proposed amendments on the
costs of proxy contests. For both registrants and dissidents in typical
proxy contests, other effects of the proposed amendments have the
potential to result in more significant changes in costs than the
effects related to revising proxy materials or the proposed
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 proposed amendments may bring about in the 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 in 2015 was approximately $250,000, we
estimate that the median basic cost of soliciting shareholders, namely
the proxy distribution fees and postage costs for the first mailing,
was approximately $11,000.\304\ The large expenditures on solicitation
beyond the basic costs of soliciting shareholders (a median incremental
expenditure of over $239,000), demonstrate the potential for
substantial increases or decreases in costs if a party were to change
their 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 proposed amendments would affect their likelihood of
gaining or retaining seats and the potential impact of solicitation
efforts.\305\
---------------------------------------------------------------------------

    \304\ Our estimate of total solicitation costs is based on costs
reported in proxy statements in 2014 and 2015. See supra Section
IV.B.2. Our estimate of proxy distribution fees and postage costs is
based on industry data provided by a proxy services provider for a
sample of 35 proxy contests from June 30, 2015 through April 15,
2016, and excludes dissident printing costs (for which we do not
have relevant data to estimate these costs).
    \305\ 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 26
percent of proxy contests in 2014 and 2015 were close. See supra
Section IV.B.2.
---------------------------------------------------------------------------

    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 where 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. 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. We solicit comment
below from registrants and dissidents as to whether they anticipate
that their solicitation costs would likely increase or decrease under
the proposed amendments and why, including specific cost estimates.
b. Nominal Proxy Contests
    The proposed amendments may also have implications for nominal
contests, in which the dissidents incur little more than the basic
required costs to pursue a contest. 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, such as through
full set delivery, use of a proxy solicitor, and other outreach, as
they 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 \306\ but could
become more or less attractive as a result of the proposed amendments,
as discussed in Section IV.D.4.b. below.
---------------------------------------------------------------------------

    \306\ Based on staff experience. See supra Section IV.B.2.b.
---------------------------------------------------------------------------

    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 proposed
amendments, such a dissident would also be required to bear the cost of
meeting the solicitation requirements of the proposed amendments. We
preliminarily estimate that it may cost approximately $6,000 at a
median-sized (based on the number of accounts in which its shares are
held) registrant using the least expensive approach \307\ to meet the
proposed minimum solicitation requirements through an
intermediary,\308\ which is significantly

less than the total solicitation expenses incurred by a dissident in a
typical proxy contest. As noted above in Section IV.B.2, reported proxy
solicitation expenses for dissidents in recent contests range from
$25,000 to $8 million, with a median of $250,000. 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 because of 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 to hire a proxy solicitor to perform additional
outreach.
---------------------------------------------------------------------------

    \307\ See supra note 300.
    \308\ The median-sized registrant was determined based on the
number of beneficial accounts in which shares in the registrant are
held. The cost estimate was 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 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 indicates that there are
approximately 4,500 total accounts at the median registrant. Since
the shareholder base is likely composed of some large shareholders
and many more small shareholders, staff assumed that two percent of
these accounts, or a total of 90 accounts, would have to be
solicited to reach a majority of the voting power. This assumption
is consistent with the average shareholder concentration at the
seven registrants with a total number of accounts between 3,000 and
5,000 that are included in the sample of contests for which we were
provided industry data by a proxy services provider. Staff also
assumed that the number of brokers and banks involved for the
purpose of determination of the nominee coordination fee is equal to
45. The estimated solicitation cost of approximately $6,000 includes
intermediary unit fees, which apply with a minimum of $5,000, plus
nominee coordination fees of $22 per bank or broker considered a
``nominee'' under NYSE Rule 451, plus basic processing fees, notice
and access and preference management fees and postage totaling $1.57
(for suppressed accounts, such as those that have affirmatively
consented to electronic delivery) to $1.70 (for other accounts) per
account. Staff assumed that half of the accounts in question 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 is not expected to significantly affect the overall
estimate of costs). This estimate does not include printing costs
for the notice, for which we do not have relevant data to estimate
these costs. We request comment on this estimate and data that could
allow staff to obtain a more precise estimate below.
---------------------------------------------------------------------------

    The basic required cost to contest an election at a given
registrant may also be affected by the dissident's own voting stake in
the registrant and the characteristics of the shareholder base, such as
whether share ownership is widely dispersed or more concentrated in a
given registrant. In particular, these costs may be substantially lower
in cases where a dissident can meet the proposed solicitation
requirement by disseminating materials on its own, without hiring a
proxy services provider or similar intermediary, as in the case of a
registrant with a very concentrated shareholder base and majority
owners that are known and easily contacted. These costs would be
substantially higher at registrants at which the total number of
shareholder accounts that would be required to reach a majority of the
shares entitled to vote is very high, as at registrants with highly
dispersed ownership.
    To the extent that the proposed amendments may result in an
increased incidence of nominal contests, we expect that registrants
that are the subject of such additional contests would bear incremental
costs. We expect these costs to be higher than in the case of current
nominal contests, for which we believe that the costs borne by
registrants are minimal, but significantly lower than in the case of a
typical proxy contest. In particular, registrants may revise their
proxy materials and increase their solicitation expenditures to explain
the appearance of the names of dissident nominees on their proxy cards
and urge shareholders not to support the dissident's nominees. However,
we do not expect solicitation expenditures to rise as much as they
would in the average typical proxy contest because the registrant, in
its solicitation efforts, would not be competing with a dissident that
is spending significant resources on solicitation. For these reasons,
we estimate that the cost borne by a registrant facing a nominal proxy
contest may be approximately $25,000, based on the lowest incremental
solicitation cost reported by registrants in recent proxy
contests.\309\
---------------------------------------------------------------------------

    \309\ See supra Section IV.B.2. We request comment on this
estimate below.
---------------------------------------------------------------------------

3. Potential Effects on Outcomes of Contested Elections
    By mandating the use of a universal proxy in contested elections,
the proposed amendments would allow every shareholder to vote by proxy
for the combination of directors of their choice. In addition to
reducing costs for certain shareholders who would submit split ticket
votes even in the absence of universal proxies, universal proxies may
result in additional shareholders submitting split-ticket votes or, for
those not solicited by dissidents, supporting the dissident slate or
some dissident nominees. Such changes in voting behavior could be
significant enough to affect election outcomes in the contests that
would have occurred even in the absence of the proposed amendments, as
well as to change the incentive to initiate contests.\310\ In
particular, either more registrant nominees or more dissident nominees
might be elected than under the baseline, where vote splitting is
harder to achieve and some shareholders do not receive a proxy card
that includes the dissident slate. Any resulting changes in board
composition or changes in control of the board may impose costs and
yield benefits for shareholders, registrants, and dissidents. However,
these effects are uncertain because it is difficult to predict the
extent or direction of any changes in voting behavior as a result of
the proposed amendments and to evaluate whether any resulting changes
in the members of the board will lead to more or less effective board
oversight.
---------------------------------------------------------------------------

    \310\ The potential incidence of additional contests that would
not have occurred in the absence of the proposed amendments is
discussed in Section IV.D.4 infra.
---------------------------------------------------------------------------

    There may be elections in which universal proxies would result in
changes to the percentage of the vote obtained by each director
candidate, but in which the changes in vote totals would not be
sufficient to change the ultimate election results. We preliminarily
believe that this would be the likely outcome for the majority of
contested elections that would have taken place in the absence of the
proposed amendments. We estimate that approximately three-quarters of
recent contests were not very close and would require shareholders
holding significant voting power (greater than five percent) to change
their voting behavior in order to lead to a different election
result.\311\ We also note that the voting power represented by
shareholders that may potentially change their voting behavior is
limited due to the fact that some shareholders, particularly large
shareholders, are currently able to send representatives to shareholder
meetings or use other mechanisms to implement split-ticket votes when
desired. We do not expect the votes submitted by these shareholders to
change as a result of the proposed amendments. The extent to which
other shareholders are interested in splitting their tickets or, for
those not solicited by dissidents, in voting for the dissident slate,
is unclear, particularly as the option has not generally been available
to them (without additional cost) under the current rules.\312\ We
solicit comment on this point below.
---------------------------------------------------------------------------

    \311\ Based on staff review of contested elections initiated in
2014 and 2015, votes representing greater than 5 percent of the
total outstanding voting power would have to change in order to
change the result in about 74 percent of the elections. Within that
74 percent, almost two-thirds of the elections would have required a
change in votes representing greater than 20 percent of the
outstanding voting power to result in a change in the election
outcome.
    \312\ For example, it has been asserted that retail
shareholders, when they vote, tend to support management. See, e.g.,
Neil Stewart, Retail Shareholders: Looking out for the Little Guy,
IR Magazine (May 15, 2012), available at http://www.irmagazine.com/articles/shareholder-targeting-id/18761/retail-shareholders-looking-out-little-guy/ (stating that ``as a rule, retail investors tend to
support management''); Mary Ann Cloyd, How Well Do You Know Your
Shareholders?, Harvard Law School Forum on Corporate Governance and
Financial Regulation Blog, June 18, 2013, available at https://corpgov.law.harvard.edu/2013/06/18/how-well-do-you-know-your-shareholders/ (stating that ``retail shareholders support
management's voting recommendations at high rates''). In contrast, a
recent survey of 801 retail investors found that the majority of
these retail investors believe activists add long-term value, and
may thus be more likely to support activists than generally thought.
See Brunswick Group, A look at Retail Investors' Views of
Shareholder Activism and Why it Matters (July 2015), available at
https://www.brunswickgroup.com/media/597919/Brunswick-Group-Retail-Investors-Views-of-Shareholder-Activism-Summary-of-Results.pdf.

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

    However, there may be contests in which universal proxies, by
allowing additional shareholders to vote split tickets or vote the
dissident slate, affect which director nominees are elected. In
general, any changes in voting behavior due to universal proxies are
most likely to affect election outcomes in those contests that would
otherwise have been very close. In close contests, changes in even a
small number of votes may affect which director nominees are elected.
We estimate that in about one-fourth of recent election contests, the
director elected with the fewest votes received no more than 11.5
percent more votes than the non-elected nominee with the most votes,
and that the vote differential in these cases represented no more than
five percent of the total outstanding voting power.\313\ In such cases,
universal proxies may be more likely to affect the election outcome. We
note that close contests may be more likely to occur at registrants
with cumulative voting.\314\
---------------------------------------------------------------------------

    \313\ See supra Section IV.B.2.c.
    \314\ Under cumulative voting, each shareholder is generally
allowed to cast as many votes as there are nominees and may allocate
more than one vote to certain nominees, which may lead to a more
concentrated distribution of votes. In contrast, close contests may
be relatively less likely at registrants with majority voting
standards that do not revert to a plurality standard in the case of
a contested election, or with high levels of incumbent board
ownership. We estimate that approximately 5 percent of registrants
have cumulative voting, approximately 7 percent of registrants have
majority voting standards that do not revert to a plurality standard
in a proxy contest, and approximately 8 percent of registrants have
incumbent directors who together own a majority of the outstanding
shares. See supra Section IV.B.1.
---------------------------------------------------------------------------

    A recent study uses an alternative approach to estimate the
percentage of contests in which universal proxies may be more likely to
affect the election outcome.\315\ This study estimates that it is
possible that universal proxies would have led to different election
outcomes in up to 22 percent of cases in a sample of proxy contests
from 2008 through 2015.\316\ This statistic is comparable to our
estimate that close contests may represent approximately one-fourth of
recent contests. However, we note that the study makes several
assumptions in arriving at this statistic, and it is unclear whether
these assumptions can be relied upon.\317\
---------------------------------------------------------------------------

    \315\ See Hirst study.
    \316\ See Hirst study, at 48 (finding that 17 out of 77 proxy
contests examined may have had outcomes that were distorted as a
result of barriers to split-ticket voting).
    \317\ For example, the estimates in this study are based on an
assumption that facilitating split-ticket voting through the
availability of universal proxies could only result in changes in
votes that were otherwise marked as ``withheld'' from a candidate,
while votes ``for'' any candidate would be assumed not to change.
Also, the study assumes that the degree of increase in ``for'' votes
for any given candidate upon facilitating split-ticket voting would
be limited to the number of votes withheld from a single opposing
candidate, while votes withheld from a different opposing candidate
would be assumed not to switch to be in favor of this candidate. See
Hirst study, at 35 n.96, 39 n. 105. We are unable to test the
reliability of these assumptions because we do not have data that
would allow us to predict how voting behavior might change with the
availability of a universal proxy.
---------------------------------------------------------------------------

    To the extent that changes in voting behavior lead to different
election outcomes, it is not clear how this would affect the
composition of directors elected to the board. There may be either more
registrant nominees or more dissident nominees elected to boards, or
there may be no change, on average, in the types of nominees
elected.\318\ Also, there may be either fewer changes in control or
more changes in control, or there may be the same frequency of changes
in control as under the baseline. The impact of forcing shareholders to
choose between one proxy card or the other in an election contest
depends on the dynamics of the particular contest. On the one hand,
where dissatisfaction with current management is greater, shareholders
who would otherwise prefer to split their vote may be more likely under
the current proxy system to utilize the dissident's card and forego the
opportunity to vote for some registrant nominees, to send the message
that board change is needed. This choice will no longer be necessary
under the proposed amendments, which may lead to a greater likelihood
that one or more registrant nominees retain their seats. On the other
hand, there also may be cases in which the registrant nominees would,
in the absence of the proposed amendments, have retained all of their
seats. Currently, we observe that registrant nominees retain all of the
seats up for election in half of the contests that proceed to a
vote.\319\ In such cases, an increase in split-ticket voting, as well
as any incremental votes for the full dissident slate by shareholders
not solicited by the dissident, may increase the likelihood of
dissident nominees gaining one or more of those seats.
---------------------------------------------------------------------------

    \318\ One study finds that universal proxies are unlikely to
overwhelmingly favor one side over the other, in that they may
result in dissident nominees being elected in place of management
nominees and management nominees being elected in place of dissident
nominees at similar rates. See Hirst study. However, this conclusion
is based on several critical assumptions about how shareholder
behavior may change upon the availability of universal proxy, and we
are unable to test the reliability of these assumptions. See supra
note 317.
    \319\ See supra Section IV.B.2.c.
---------------------------------------------------------------------------

    Given some of these possible dynamics, we preliminarily believe
that the election of mixed boards, or boards including registrant as
well as dissident nominees, would be somewhat more likely under the
proposed amendments than under the current proxy system. We estimate
that approximately 40 percent of recent contests that proceeded to a
vote resulted in a mixed board being elected.\320\ However, we cannot
predict whether any increase in mixed boards would be the result of one
or more registrant nominees retaining seats when a board composed of
only dissident nominees would otherwise have been elected or one or
more dissident nominees gaining seats when all registrant nominees
would have retained their seats, nor can we predict how frequently such
a mixed board would occur compared with under the current system.\321\
Also, we note that it is not necessarily the case that any such changes
in outcomes would more accurately reflect shareholder preferences, even
though these outcomes may be the product of removing constraints on the
combination of nominees that shareholders can vote for, because of
limitations in the way that voting rules can communicate
preferences.\322\
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    \320\ Id.
    \321\ One study questions whether universal proxies would result
in a substantial increase in mixed board outcomes, based on an
analysis indicating that mixed board outcomes could increase by no
more than approximately three percent of the contests studied. See
Hirst study. However, this analysis and conclusion is based on
several critical assumptions about how shareholder behavior may
change upon the availability of universal proxies, and we are unable
to test the reliability of these assumptions. See supra note 317.
    \322\ For example, consider a registrant with 100 voting
shareholders, three director seats up for election, and a dissident
with two nominees. Assume that 54 of the shareholders prefer to
elect the dissident nominees but are indifferent about which
registrant nominee retains the third seat. On a universal proxy,
each of these shareholders therefore votes for one registrant
nominee, with equal probability across the three registrant
nominees. The remaining 46 prefer the full registrant slate. In this
case, with a universal proxy, 54 votes would be earned by each of
the dissident nominees, but 64 votes (46 plus one-third of 54 votes)
would be earned by each of the registrant nominees, leading to the
registrant slate winning the election even though a majority of
shareholders prefer that the dissidents gain two seats. For further
discussion of the limitations of voting rules, see, e.g., Kenneth
Arrow, Social Choice and Individual Values (1st ed. 1951).

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    Universal proxies may therefore result in either an increase or
decrease in changes in control of a board, and in either dissidents or
management winning more seats on the board, or a change in voting
percentages without a change in the board composition. We expect that
dissidents and registrants would take these potential impacts into
consideration in their approach to potential proxy contests. For
example, as discussed in more detail in the following section, if the
parties to a contest anticipate that changes in voting behavior
associated with universal proxies may change the number of seats that
they expect to win, these expectations may affect the likelihood that
they enter into a settlement agreement that results in changes to the
board or other concessions. Such changes to board composition and
concessions may either enhance or reduce, or have no significant effect
on, the efficiency and the competitiveness of registrants.
    It is also possible that parties would take measures to reduce the
likelihood of changes in election outcomes. For example, proxy
statements and other related communications could include additional
disclosures intended to deter shareholders from voting split-tickets,
such as emphasizing the importance of a unified board and clarifying
whether some or all of one party's nominees might not agree to serve if
their party does not hold a majority of board seats. Such disclosures
might reduce the likelihood of split-ticket voting and limit any
potential increase in mixed boards. Another potential tactical response
may involve the adoption by registrants of additional defenses to
shareholder interventions. For example, registrants might adopt
director qualification bylaws or might limit the indemnification or
committee membership of dissident-nominated directors.\323\ Such
changes could limit the likelihood of dissident nominees being elected
or limit their impact if they are elected. Similarly, if dissidents
anticipate that the proposed amendments could result in fewer dissident
nominees being elected, they may choose to rely more heavily on other
types of interventions, such as soliciting consents to replace some
board members with their own nominees at a special meeting. Also,
dissidents interested in minority representation may nonetheless choose
to run longer slates of candidates, to the extent it could increase the
likelihood that at least some of their nominees are elected.
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    \323\ See, e.g., J.W. Verret, Defending Against Shareholder
Proxy Access: Delaware's Future Reviewing Company Defenses in the
Era of Dodd-Frank, 36 J. Corp. Law 391, 404-06 (2011).
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    While the measures discussed above would serve to blunt the effect
of the proposed amendments on election outcomes, the effect of other
potential responses may serve to magnify these effects. For example,
the parties to a contested election may change what they spend on
solicitation. Some parties may increase these expenditures in order to
further capitalize on an advantage that they anticipate the proposed
amendments would give them, or to mitigate a disadvantage they
perceive. If so, that may result in a greater likelihood of the
parties' candidates being selected.
    The composition of boards may also be affected by changes in the
set of potential nominees that may result from effects that the
proposed amendments could have on the incentives of directors. As
discussed above, reputational concerns may be an important
consideration for directors and potential directors, and research has
found that proxy contests may have an adverse effect on a director's
reputation.\324\ For this reason, some potential directors may be
relatively less willing to be nominated if they believe that universal
proxies would reduce the likelihood that they are elected to a seat or
retain their seat on a board. While we do not have specific data that
suggests the proposed amendments would result in an increase in the
reluctance of directors to serve, and it is unclear whether any such
reluctance would be more likely to affect more qualified or less
qualified candidates, any incremental increase in the reluctance of
directors to serve may affect the ability of registrants to recruit
individuals with the different skill sets needed to compose an
effective board.
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    \324\ See supra Section IV.B.1.d.
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    Overall, the proposed amendments may have some effect on the
composition or control of boards. The effects of any such changes on
board effectiveness or on registrant performance are difficult to
predict. On the one hand, if more dissident nominees are elected or
dissidents are more likely to gain control, it could result in greater
efficiency and competitiveness to the extent dissident-nominated
directors may be more effective monitors.\325\ On the other hand, if
more registrant nominees retain their seats or are more likely to
retain control, the board may be better able to focus on long-term
value creation, because a lower risk of board turnover may reduce the
risk that directors unduly focus on short-term metrics.\326\ Also, a
lower chance of changes in control may reduce the risk that expensive
change in control provisions in debt covenants and other material
contracts and agreements are triggered.\327\ Universal proxies may lead
to more mixed boards with directors from both parties than under the
current proxy system, but it is unclear whether such boards would be
more or less effective than more homogenous boards. Mixed boards may
increase the effectiveness of boards, such as through a reduction of
``groupthink'' and benefits stemming from inclusion of directors with
diverse backgrounds,\328\ particularly because shareholders voting on
universal proxies would have the ability to vote for the combination of
directors that they believe provides the best mix of backgrounds given
the specific circumstances of the registrant.

However, mixed boards may also lead to more frequent internal conflicts
and result in less efficient decision-making within boards.\329\
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    \325\ See, e.g., Ian Gow, Sa-Pyung Sean Shin & Suraj Srinivasan,
Activist Directors: Determinants and Consequences, Harv. Bus. Sch.
Working Paper No. 14-120 (June 2014), available at http://www.hbs.edu/faculty/Pages/item.aspx?num=47599 (finding that activist
interventions that result in new directors being appointed to the
board are associated with significant strategic and operational
actions by firms, as well as with positive stock reactions and
improved operating performance).
    \326\ See, e.g., Martijn Cremers, Lubomir P. Litov & Simone M.
Sepe, Staggered Boards and Long-Term Firm Value, Revisited, working
paper (Mar. 14, 2016), available at SSRN: http://ssrn.com/abstract=2364165 (providing evidence suggesting that a greater
likelihood of longer director tenure can serve as a longer-term
commitment device with positive effects on longer-term value
creation).
    \327\ For example, one study found in its sample of debt issues
that over half of the debt issued in 2012 contained change in
control covenants that gave bondholders an option to require the
issuer to offer to purchase all of the bonds (typically at 101
percent of their par value) if, at any time, the majority of the
board of directors ceased to be those who were directors at the time
of issuance or those whose election was approved by a majority of
the continuing directors. See Frederick Bereskin & Helen Bowers,
Poison Puts: Corporate Governance Structure or Mechanism for
Shifting Risk?, working paper (Sept. 8, 2015), available at http://irrcinstitute.org/wp-content/uploads/2015/09/FINAL-Poison-Puts-Research-Sept-2015.pdf. Triggering such covenants, often referred to
as ``proxy puts,'' can result in companies repurchasing their own
debt at a loss as well as having to incur expenses to refinance with
a new debt issue. Such covenants are more binding when they are of
the ``dead hand'' variety, which prevents the board from approving
dissident-nominated directors in order to avoid triggering the
covenant. See F. William Reindel, Dead Hand Proxy Puts--What You
Need To Know, Harvard Law School Forum on Corporate Governance and
Financial Regulation Blog, June 10, 2015, available at https://corpgov.law.harvard.edu/2015/06/10/dead-hand-proxy-puts-what-you-need-to-know/.
    \328\ See, e.g., Jeffrey Coles, Naveen Daniel & Lalitha Naveen,
Board Groupthink, working paper (2015), available at https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=AFA2016&paper_id=1137; David Carter, Betty
Simkins & Gary Simpson, Corporate Governance, Board Diversity, and
Firm Value, 38 Fin. Rev. 33 (2003).
    \329\ See, e.g., Anup Agrawal & Mark Chen, Boardroom Brawls: An
Empirical Analysis of Disputes Involving Directors, working paper
(2011), available at http://ssrn.com/abstract=1362143 (studying
boardroom disputes that are disclosed upon directors resigning or
declining to stand for re-election and finding that directors who
are likely to be more independent of management are more likely to
be involved in the dispute).
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4. Potential Effects on Incidence and Threat of Contested Elections
    As discussed in Sections IV.D.2 and IV.D.3 above, the effects of
the proposed amendments on the outcomes and costs to registrants and
dissidents of contested elections are uncertain, but could be
significant. In this section, we consider how any such effects of the
proposed amendments may change the incentives of dissidents to initiate
proxy contests and the manner in which registrants react to the
possibility of a contested election (the perceived ``threat'' of a
contest), even in the absence of a contest.
    We first consider the incidence and perceived threat of typical
proxy contests, in which the dissident expends significant resources on
solicitation. Then we consider the potential incidence or perceived
threat of nominal contests in which dissidents, taking advantage of the
proposed mandatory use of universal proxies, may engage in a proxy
contest in which they invest significantly fewer resources than in a
typical proxy contest.\330\ Any changes in the incidence of contested
elections of these different types, or, even in the absence of a
contest, in managerial decision-making or the relationship between
shareholders and management as a result of the threat of such contests,
may result in costs and benefits for shareholders, registrants, and
dissidents. However, any such effects are uncertain because the extent
and direction of the effects of the proposed amendments on the outcomes
and costs of contested elections are unclear, because it is difficult
to predict how different parties will respond to such effects, and
because it is difficult to evaluate whether changes in the incidence or
perceived threat of contests would have positive or negative effects on
board or registrant performance.
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    \330\ We also note that there may be effects on the incidence
and threat of ``late-breaking'' proxy contests, or contests
initiated close to the meeting date, because of the notice
requirement and the proxy statement filing deadline prescribed by
the proposed amendments. These timing requirements and their
potential effects are discussed in more detail in Section IV.D.5
infra.
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a. Typical proxy contests
Effects Related to Anticipated Changes In Outcomes
    Any effects on the expected outcomes of typical proxy contests may
affect the incidence of such contests as well as the likelihood that a
registrant makes changes (whether in board composition or with respect