SEC posts final rules regarding electronic shareholder forums

By Cydney Posner

The SEC has posted its final rules regarding electronic shareholder forums, designed to encourage experimentation, innovation and greater use of the Internet to further shareholder communications and to better reinforce shareholders’ state law rights, including their rights to elect directors. The new rules are cast as amendments to the proxy rules, creating new Rule 14a-17 and adding a new exemption to Rule 14a-2. The amendments provide that participation in an electronic shareholder forum, which otherwise could potentially constitute a solicitation subject to the proxy rules, is exempt from most of the proxy rules if all of the conditions to the exemption are satisfied. The amendments also provide that a shareholder, company, or third party acting on behalf of a shareholder or company, that establishes, maintains or operates an electronic shareholder forum will not be liable under the federal securities laws for any statement or information provided by another person participating in the forum. The new rules will become effective 30 days after publication in the federal register.

The SEC's vision is that electronic shareholder forums could be used to facilitate shareholder participation and communication throughout the year, rather than only during the period prior to annual meetings. Shareholders might also use an electronic forum to poll the views of management or other shareholders on potential actions. The SEC believes that electronic shareholder forums can be designed to provide both accountability and privacy by identifying a participant’s share ownership, as of a particular date, without disclosing that participant’s name, address or other identifying information. A company-sponsored forum could be used by management to communicate with shareholders and gauge their interest in various actions. The SEC believes that historic reluctance to establish electronic forums is due to concerns regarding potential illegal solicitations and possible liability for the statements made by others participating in the forum. To address these impediments, the SEC has adopted amendments to Rule 14a-2 and new Rule 14a-17 substantially as proposed.

The amendments are intended to provide an additional means for shareholders to communicate and do not restrict a shareholder’s ability to submit a non-binding proposal under Rule 14a-8. In addition, the amendments neither mandate nor preclude private communications in electronic shareholder forums (although the antifraud provisions of Rule 14a-9 could require a participant to identify itself in an otherwise anonymous forum if failure to do so in the circumstances would result in the omission of a "material fact necessary in order to make the statements therein not false or misleading").

New Rule 14a-2(b)(6)

The amendments to Rule 14a-2 exempt certain communications in an electronic shareholder forum from a number of rules otherwise applicable to "solicitations." The term "solicitation" is broadly defined, encompassing efforts to seek to influence the voting of proxies, regardless of whether the person is seeking authorization to act as a proxy, including any communication that, under the totality of circumstances, is considered "part of a continuous plan ending in a solicitation and which prepare(s) the way for its success." The new exemption, Rule 14a-2(b)(6), states that Rules 14a-3 through 14a-6 (other than Rule 14a-6(g)), Rule 14a-8 and Rules 14a-10 through 14a-15 do not apply to solicitations in an electronic shareholder forum if all of the conditions to the exemption are satisfied.

Most significant of these conditions is that the solicitation be by or on behalf of a person who does not seek, directly or indirectly, either on its own or another’s behalf, the power to act as proxy for a shareholder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization in a properly established electronic shareholder forum. The forum must be established, maintained or operated by a company, shareholder or a third party acting on a company’s or shareholder’s behalf. To limit the potential for abuse, the exemption provides that the solicitation must occur more than 60 days prior to the date announced by the company for its annual or special meeting of shareholders. If the company announces the meeting fewer than 60 days before the meeting date, the solicitation may not occur more than two days following the company’s announcement. A person who participates in an electronic shareholder forum and makes solicitations in reliance on the new exemption will be eligible to solicit proxies after the date that the exemption is no longer available, or is no longer being relied upon, provided that the solicitation complies with Reg 14A (contrary to the exemption available in Rule 14a-2(b)(1), which would prohibit a subsequent solicitation). With regard to stored communications, shareholders who post communications on forums in reliance upon Rule 14a-2(b)(6) and later solicit proxies will need to determine whether the earlier postings must be filed as soliciting materials if they remain available to shareholders and are not within another exemption. The SEC suggests that one approach might be to give participants the opportunity to delete their postings as of the 60-day cut-off or have the forum "go dark" during this period.

The persons providing information to or making statements on the forum will remain liable for their communications under the antifraud provisions (such as Rules 10b-5 and 14a-9) against primary or secondary participation in fraud, deception or manipulation, as well as any other applicable federal or state law. For example, any person relying on Rule 14a-2(b)(6) would need to assess whether compliance with other SEC rules and regulations is required, such as whether communications among shareholders for the purpose of acquiring, holding, voting or disposing of the equity securities might result in the formation of a group for purposes of Reg 13D or may impact the eligibility to file a Schedule 13G.

New Rule 14a-17

New Rule 14a-17 was adopted to address concerns by potential forum sponsors regarding possible liability for the statements of others participating in the forum. The rule clarifies that a shareholder or company (or third party acting on behalf of a shareholder or company) that establishes, maintains or operates an electronic shareholder forum is not liable under the federal securities laws for statements made by another person participating in the forum; however, the forum must be conducted in compliance with the federal securities laws, including Section 14(a), applicable federal and state laws and the company’s charter and bylaws.

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