December was a significant turning point for shareholder activism, featuring the first campaign to make use of the universal proxy card. Activists and issuers alike may still be getting to grips with the new regulations, but it’s already evident that universal proxy will benefit minority slates while also increasing scrutiny surrounding the quality of individual directors.

“The first universal proxy fights indicate that the mechanics of universal proxy work just fine,” Richard Grossman, partner at Skadden, told Insightia in an interview. “Notably, fights focused heavily on the qualifications of director candidates, perhaps more so than in the past.”

What were due to be the first universal proxy fights, at AIM Immunotech and Argo Group International, were settled prior to a vote with mixed results. AIM agreed in November to appoint two new directors to its board “who bring diversity and additional biotechnology experience,” whereas Capital Returns Management’s campaign at Argo was abruptly withdrawn following adverse proxy adviser recommendations.

However, Land & Buildings’ minority slate proved successful at Apartment Investment and Management Co.’s (AIMCo) December 16 special meeting. In the first universal proxy campaign to go to a vote, the hedge fund’s dissident nominee James Sullivan won a board seat, receiving what the activist noted was “more than twice as many votes” as incumbent director Michael Stein.

Bad apples spoil the bunch

When Insightia Monthly discussed the potential implications of universal proxy back in September, the consensus was that the universal card will prove particularly advantageous for activists and shareholder advocacy groups proposing minority slates, moreso than majority slates that have traditionally benefited from the practical requirement to vote exclusively for the dissident’s candidates that came with the dual-card system.

Unlike before, investors now have the opportunity to examine each board member on a case-by-case basis and remove the bad apples from the cart. As such, the introduction of universal proxy “creates fertile ground for activists,” Lawrence Elbaum, co-head of Vinson & Elkins’ shareholder activism practice, told Insightia in an interview.

This renewed focus on director quality proved to act in Land & Buildings’ favor at AIMCo, with the $914 million hedge fund successfully replacing incumbent Stein with nominee Sullivan. With an 18-year board tenure at 73 years of age, Stein was an easy target for shareholders looking to enhance AIMCo’s governance.

Going forward, the onus will be on boards to proactively refresh their composition and promptly address shareholder concerns, with no incumbent directors being safe from the threat of being unseated.

Institutional Shareholder Services (ISS) warned companies of this shifting dynamic back in August, noting in a whitepaper that “under the [universal proxy] regime, they will be far less able to shield their weakest contributors.”

“I expect to see an increase in settlements because the universal proxy card shifted the balance of power, giving dissidents additional bargaining power,” Gabrielle Wolf, a director at Innisfree M&A, told Insightia.

A new voting paradigm

The introduction of universal proxy also suggests that asset managers will more readily vote in favor of incumbents, with Grossman of Skadden telling Insightia that shareholders need no longer worry about the unintended consequences of voting only on one card and limiting their options.

“Incumbents may win increased support as investors that opt to vote for dissidents will now be given their chance to also vote on incumbent directors,” Grossman said. “Institutional investors need no longer worry about disenfranchising themselves.”

With board refreshment made all the easier, cheaper, and accessible for activists, universal proxy could well instigate a resurgence in activist engagement across the U.S. in 2023.

“A whole new crop of companies previously believed to be activism-proof are now in the crosshairs,” Elbaum said.