News

Final rules re "mandatory" e-proxy

News Brief
August 8, 2007

By Cydney Posner

The SEC has posted its final amendments to the proxy rules that provide shareholders with the ability to choose the means by which they access proxy materials. In essence, the new rule inverts the current voluntary e-proxy rules that went into effect in July by flipping the choice to investors as to whether to view their proxies online or on paper. However, under the new "notice and access" model, issuers can still elect whether to provide proxy materials to shareholders through the "notice only option" or the "full set delivery option." The amendments require issuers and other soliciting persons to post their proxy materials on an internet website and to provide shareholders with a notice of the internet availability of the materials. The issuer or other soliciting person may choose to furnish paper copies of the proxy materials along with the notice. If the issuer or other soliciting person chooses not to furnish a paper copy of the proxy materials along with the notice, a shareholder may request delivery of a copy at no charge to the shareholder. The new rules will go into effect for large accelerated filers beginning January 1, 2008 and for others beginning January 1, 2009 (although others are permitted to comply on a voluntary basis starting in 2008). However, Rules 14a-16(d)(3) and 14a-16(j)(3) will become effective October 1, 2007.

At the meeting of the SEC when these new rules were adopted, there was substantial concern expressed by the commissioners regarding the absence of data for the notice only model (the voluntary version of which had not yet gone into effect at the time), raising the question of whether adoption was premature. However, the staff contended that adoption was appropriate because the model would provide shareholders with enhanced choices while imposing no significant new obligations on issuers or other soliciting persons. That is, if issuers or other persons soliciting proxies wanted to continue the current practice of sending a complete set of proxy materials on paper, the only new obligations were that issuers or other soliciting persons were required to post their proxy materials on a website and include a Notice of Internet Availability of Proxy Materials with the full set of proxy materials (or incorporate the Notice information into the proxy statement and proxy). In addition, the staff maintained that the tiered system of implementation would provide a test group and significant time to make adjustments before the mandatory system would go into effect for all companies.

Companies considering which option to adopt will probably want to take into account three factors:

  •  Timeline: the notice only model requires that the Notice be sent at least 40 days before the meeting and that the proxy statement be electronically available at that time;
  • Cost: although the per-copy cost may increase using the notice-only model, the overall cost of printing and mailing should decrease, especially after the first couple of years when issuers are able to better gauge the number of paper proxy statements that will be requested; and
  • Agenda items: commentators speculate that there may be fewer shareholder votes in response to solicitations using the notice only model.

Some commentators have expressed concerns that the rules could create issues in light of California Corporations Code Section 1501(a) (applicable to domestic California companies and foreign corporations that have principal executive offices in California or that customarily hold Board meetings in California), which requires that an annual report be sent to shareholders not later than 120 days after the close of the fiscal year and requires consent (and, for individuals, consumer consent under the federal E-SIGN Act) for delivery by electronic transmission. The text of the release does not expressly address this issue.

Notice and Access Model for Issuers

The notice and access model allows an issuer to elect to provide proxy materials to shareholders through either the "notice only option" or the "full set delivery option," or to use both methods on a bifurcated basis for different shareholders. (For example, companies may want to devise distribution strategies to provide full sets to large holders to encourage voting, while opting for notice only for smaller holders. In addition, depending on the matters on the agenda, issuers may want to revisit the distribution strategy each year.)

The Notice Only Option. The requirements for the notice only option are essentially the same requirements as applicable under the current voluntary notice and access model, except for the changes noted below. (See my email pasted below, dated 1/24/07, which describes the current voluntary notice and access model.)

Under this model, the issuer must post its proxy materials on an internet website (other than EDGAR) and send a Notice to shareholders to inform them of the electronic availability of the proxy materials at least 40 days before the shareholders' meeting, or if no meeting is to be held, at least 40 calendar days before the date that votes, consents or authorizations may be used to effect a corporate action, indicating that the proxy materials are available on a specified internet website and explaining how to access those proxy materials. The issuer must then respond to shareholder requests for copies, including a shareholder’s permanent request for paper or email copies of proxy materials for all shareholder meetings.

The Notice must be in plain English and must contain the following information:

  • A prominent legend in bold-face type that states:
  • "Important Notice Regarding the Availability of Proxy Materials for the Shareholders' Meeting to Be Held on [insert meeting date].
  • This communication presents only an overview of the more complete proxy materials that are available to you on the internet. We encourage you to access and review all of the important information contained in the proxy materials before voting.
  • The [proxy statement] [information statement] [annual report to security holders] [is/are] available at [insert website address].
  • If you want to receive a paper or email copy of these documents, you must request one. There is no charge to you for requesting a copy. Please make your request for a copy as instructed below on or before [Insert a date] to facilitate timely delivery."
  • The date, time and location of the meeting or, if corporate action is to be taken by written consent, the earliest date on which the corporate action may be effected;
  • A clear and impartial identification of each separate matter intended to be acted on, and the issuer’s recommendations, if any, regarding those matters, but no supporting statements;
  • A list of the materials being made available at the specified website;
  • (1) A toll-free telephone number; (2) an email address; and (3) an internet website address where the shareholder can request a copy of the proxy materials for all meetings and for the particular meeting to which the Notice relates;
  • Any control/identification numbers that the shareholder needs to access his or her proxy card;
  • Instructions on how to access the proxy card, provided that such instructions do not enable a shareholder to execute a proxy without having access to the proxy statement; and
  • Information about attending the shareholders' meeting and voting in person.

An issuer also must provide shareholders with a method to execute proxies as of the time the Notice is first sent to shareholders. However, issuers are not required to establish internet voting platforms, but rather can satisfy this requirement through a variety of methods, including providing an electronic voting platform, a toll-free telephone number for voting or a printable or downloadable proxy card on the website. If a telephone number for executing a proxy is provided, the number may appear on the website, but not on the Notice because it would enable a shareholder to execute a proxy without having access to the proxy statement.

An issuer must provide paper or email copies at no charge to shareholders requesting copies and must allow shareholders to make a permanent election to receive paper or email in connection with future proxy solicitations and maintain records of those elections.. Rule 14a-16(j) requires that, upon receipt of a request from a shareholder for a copy of the proxy statement, annual report or proxy card, the issuer must send to the shareholder a copy (in paper or by email, as requested) of those proxy materials within three business days after receiving the request. The request may be made after the conclusion of the shareholders' meeting or corporate action to which the proxy materials relate, so long as it is made within one year after the conclusion. Paper copies sent in response to a shareholder request must be sent by first class mail or other reasonably prompt means of delivery, unless the request is received after the meeting. Further, the issuer must provide a toll-free telephone number, email address and website address where a shareholder can request a copy of the proxy materials or make a permanent election. The issuer also may include a pre-addressed, postage-paid reply card with the Notice that shareholders can use to request a copy of the proxy materials.

An issuer may not send a proxy card to a shareholder until 10 calendar days or more after the date it sent the Notice to the shareholder, unless the proxy card is accompanied or preceded by a copy of the proxy statement and any annual report, if required, to security holders sent via the same medium. This provision is intended to allow a kind of reminder notice to shareholders who have not responded to the issuer’s original request for proxy voting instructions.

The Full Set Delivery Option. Under the "full set delivery option," an issuer will follow the usual procedures for providing proxy materials on paper except that the issuer must:

  • Send a Notice accompanied by a full set of proxy materials or incorporate all of the Notice information into the proxy statement and proxy card; and
  • Post the proxy materials on a publicly accessible website no later than the date the Notice was first sent to shareholders.

A "full set" of proxy materials would contain (1) a proxy statement or information statement, (2) an annual report if one is required by Rule 14a-3(b) or Rule 14c-3(a), and (3) a proxy card or, in the case of a beneficial owner, a request for voting instructions, if proxies are being solicited. Under this option, issuers must send all, not just some, of the required documents. Issuers may still follow previous SEC guidance to send proxy materials to shareholders via email, which typically required obtaining affirmative consent from individual shareholders. (See Release No. 33-7233) Issuers may household the Notice and other proxy materials pursuant to Rule 14a-3(e).

Under this option, the information required in the Notice, which must be in plain English, includes the following:

  • A prominent legend in bold-face type that states:
  • "Important Notice Regarding the Availability of Proxy Materials for the Shareholders' Meeting to Be Held on [insert meeting date].
  • The [proxy statement] [information statement] [annual report to security holders] [is/are] available at [insert website address].
  • The date, time and location of the meeting or, if corporate action is to be taken by written consent, the earliest date on which the corporate action may be effected;
  • A clear and impartial identification of each separate matter intended to be acted on and the issuer’s recommendations, if any, regarding those matters, but no supporting statements;
  • A list of the materials being made available at the specified website;
  • Any control/identification numbers that the shareholder needs to access his or her proxy card; and
  • Information about attending the shareholders' meeting and voting in person.

There is no requirement under this option to provide paper or email copies upon request to shareholders to whom the issuer has already furnished proxy materials, nor is there any requirement to provide shareholders with a method to execute proxies other than the proxy card or request for voting instructions included in the full set of proxy materials. An issuer may, of course, subsequently choose to deliver another copy of the proxy card to shareholders who have not returned the card, but the reminder proxy card does not have to be accompanied by the Notice.

Requirements Applicable to Both Delivery Models. The Notices may contain only the information specified by the applicable rules, except that it may include any other information required by state law and a protective warning to shareholders advising them that no personal information other than the identification or control number is necessary to execute a proxy. The issuer must file its Notice with the SEC pursuant to Rule 14a-6(b) no later than the date that it first sends the Notice to shareholders.

The issuer must make all proxy materials identified in the Notice publicly accessible, free of charge, at the website address (which may not be EDGAR) specified in the Notice on or before the date that the Notice is sent to the shareholders. The issuer also must post any subsequent additional soliciting materials on the website no later than the date on which these materials are first sent to shareholders or made public. The proxy materials must be presented in a format, or formats, convenient for both reading online and printing on paper and must remain available on the website through the conclusion of the shareholders' meeting.

An issuer must maintain the website on which it posts its proxy materials in a manner that maintains the anonymity of the person accessing that website. An issuer may not use any email address that has been provided by a shareholder solely to request a copy of proxy materials for any purpose other than to send a copy of those materials to that shareholder or disclose a shareholder’s email address to any person, except to an agent or employee of the issuer solely for the purpose of facilitating delivery of a copy of the proxy materials by the agent or employee to a requesting shareholder. Under the rule, a company must refrain from installing cookies and other tracking features on the website on which the proxy materials are posted. This may require segregating those pages from the rest of the company’s regular website or creating a new website. However, the rule does not require the company to turn off the website’s connection log, which automatically tracks numerical IP addresses that connect to that website. Although in most cases, this IP address does not provide companies with sufficient information to identify the accessing shareholder, companies may not use these numbers to attempt to find out more information about persons accessing the website. In addition, shareholders still concerned about their anonymity can request copies from their intermediaries.

Differences Between the Full Set Delivery Option and the Notice Only Option. The full set delivery option varies from the notice only option as follows:

  • Under the full set delivery option, an issuer may accompany the Notice with a copy of the proxy statement, annual report to security holders, if required by Rule 14a-3(b), and a proxy card, while the notice only option does not permit an issuer to accompany the Notice with any other documents;
  • Under the full set delivery option, an issuer need not prepare a separate Notice if the issuer incorporates all of the Notice information into the proxy statement and proxy card;
  • Because, under the full set delivery model, the issuer has already provided shareholders with a full set of proxy materials, the issuer need not provide the shareholder with copies of the proxy materials upon request;
  • Because shareholders will not need extra time to request paper or email copies, the issuer need not meet the 40-days-in-advance deadline for sending the Notice and full set of proxy materials (and, as a result, if an issuer is unable or unwilling to meet the 40-day deadline, it may begin its solicitation after that deadline in compliance with the full set delivery option);
  • Because the full set of proxy materials includes a proxy card or request for voting instructions, the issuer need not provide another means for voting at the time the Notice is provided unless it chooses to do so; and
  • The issuer need not include the part of the prescribed legend relating to security holder requests for copies of the documents and instructions on how to request a copy of the proxy materials.

Reliance on the Notice and Access Model by Soliciting Persons Other Than the Issuer.

Under the amendments, a soliciting person other than the issuer may solicit proxies pursuant to the notice only option, the full set delivery option, or a combination of the two. However, a couple of different requirements apply to these soliciting persons. First, a soliciting person is not required to solicit every shareholder or to furnish an information statement to shareholders not being solicited, but may instead select the specific shareholders from whom it wishes to solicit proxies. For example, under the notice and access model, a soliciting person other than the issuer can choose to send Notices only to those shareholders who have not previously requested paper copies.

Second, if a soliciting person other than the issuer elects to follow the notice only option, it must send a Notice to shareholders by the later of:

  • 40 calendar days prior to the shareholder meeting date or, if no meeting is to be held, 40 calendar days prior to the date that votes, consents, or authorizations may be used to effect the corporate action; or
  • 10 calendar days after the date that the issuer first sends its proxy materials to shareholders.

This timing requirement does not apply to a solicitation pursuant to the full set delivery model.

If the soliciting person is not aware of all matters on the shareholder meeting agenda at the time the Notice is sent, the Notice must provide a clear and impartial identification of each separate matter to be acted upon at the meeting to the extent known by the soliciting person. The soliciting person’s Notice also must include a clear statement that there may be additional agenda items that the soliciting person is unaware of, and that the shareholder cannot direct a vote for those items on the soliciting person’s proxy card provided at that time. If the soliciting person sends a proxy card that does not reference all matters that shareholders will act upon at the meeting, the Notice must clearly state whether execution of the proxy card would invalidate a shareholder’s prior vote using the issuer’s card on matters not presented on the soliciting person’s proxy card.

Implications of the Notice and Access Model for Intermediaries

An issuer or other soliciting person must provide each intermediary with the information necessary to prepare the intermediary’s Notice in sufficient time to allow the intermediary to comply with the timeframes of the model. Thus, if the issuer complies with the notice only option, the intermediary must comply with that model and, therefore, must receive the information necessary to prepare and send its Notice and post the proxy materials on its website at least 40 calendar days before the shareholders' meeting date. If the issuer complies with the full set delivery option, the issuer need only provide the Notice information to the intermediary in sufficient time for the intermediary to prepare and send the Notice along with the full set of materials provided by the issuer. Under this option, as with the traditional method of delivering proxy materials, the intermediary must forward the issuer’s full set of proxy materials to beneficial owners within five business days of receipt from the issuer or the issuer’s agent.

The intermediary’s Notice generally must contain the same types of information as an issuer’s Notice, but must be tailored specifically for beneficial owners. Under the notice only option, in addition to sending the Notice, the intermediary must also forward paper or email copies of the proxy materials upon request, permit the beneficial owners to make a permanent election to receive paper or email copies of the proxy materials, keep records of beneficial owner preferences, provide proxy materials in accordance with those preferences and provide a means to access a request for voting instructions for its beneficial owner customers no later than the date the Notice is first sent. When the issuer is delivering full sets of proxy materials to beneficial owners, the intermediary must either prepare a separate Notice and forward it with the full set of proxy materials, or incorporate any information required in the Notice, but not appearing in the issuer’s proxy statement, in its request for voting instructions.

Clarifying Amendments

In response to questions and comments received regarding the voluntary model, the SEC is adopting several refinements of the existing rules:

No Requirement to Provide Recommendations. Rule 14a-16(d)(3) is being amended to make clear that the Notice is not required to include a recommendation for every matter, but only if the issuer or other a soliciting person chooses to make a recommendation on a particular matter to be acted upon by shareholders.

Deadline for Responding to Requests for Copies After the Meeting. The rules initially adopted did not distinguish between requests for copies received before or after the meeting date. In light of the lack of urgency after the meeting date has passed, Rule 14a-16(j)(3) is being revised to clarify that, with respect to requests for copies received after the conclusion of the meeting, an issuer is not required to use first class mail and is not required to respond within three business days.

Item 4 of Schedule 14A. Item 4 of Schedule 14A requires that an issuer or other soliciting person describe the methods used for soliciting proxies if not using the mails. Item 4 is being amended to clarify that issuers and other soliciting persons need not describe the notice and access model when they are using it to solicit proxies.

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