Changes proposed for the notice-and-access model for proxy solicitations

By Cydney Posner

Apparently, there is concern about the statistics reflecting a low percentage of retail vote when the notice-only model is used, and the SEC speculates that the rigidity of the rules regarding the contents and format of the Notice of Internet Availability just may have something to do with it. The current rules strictly prescribe the contents and format of the Notice that is sent to shareholders and strictly limit the types of materials that may accompany the Notice. The proposed revisions are intended to provide additional flexibility regarding the format of the Notice and to allow issuers and soliciting shareholders to include explanatory materials regarding the process of receiving and reviewing proxy materials and voting. In addition, the proposal would modify the timeframe for delivering a Notice to shareholders when a soliciting person other than the issuer relies on the notice-only option. The SEC is also soliciting comment on why the participation rates are lower for retail shareholders and how best to advance the SEC's regulatory interest in informed shareholder participation.

One problem that has been identified is that many shareholders seem to be confused about what to do with the Notice, with some submitting it like a proxy card. The proposed amendments are intended to remove some of the regulatory impediments that may have contributed to the problem. Under the proposal, instead of a prescribed legend that may seem like boilerplate to shareholders, the proposal would just require that the information appearing on the Notice address certain topics, without specifying the exact language to be used. This change is designed to allow issuers and others to develop a more effective explanation of the importance and effect of the Notice, such as by providing clearer guidance regarding how to access the proxy materials online, request a paper copy of the proxy materials and vote.

The SEC also speculates that the disclosure of matters to be acted upon in the Notice using the same format as the matters listed in the proxy card may have resulted in misunderstanding by some shareholders of the purpose of the Notice. The proposing release provides guidance that, because Rule 14a16(d)(3) allows more flexibility regarding the design of the Notice than Rule 14a-4, it is "not necessary that the Notice directly mirror the proxy card. Rather, the rule simply requires that the Notice identify each matter that will be considered at the meeting (e.g., election of directors; ratification of auditors; approval of a stock option plan, etc.)."

In addition, the proposal would permit issuers and other soliciting persons to accompany the Notice with an explanation of the notice-and-access model, but it must be limited to "the process of receiving or reviewing the proxy materials and voting." The proposed amendments would not allow the inclusion of materials designed to persuade shareholders to vote in a particular manner, change the method of delivery, or explain the basis for sending only a Notice to shareholders. Custom material could be developed for this purpose, but the SEC expects that most will use standardized educational materials that are expected to be developed by issuer representatives, intermediaries and proxy distribution service providers. The SEC's Office of Investor Education and Advocacy has also been directed to develop a program designed to educate and inform shareholders, especially individual shareholders, about the notice-and-access model.

Finally, the proposed amendments attempt to address a problem with the timing requirements for the notice-and-access model as applied to soliciting shareholders. Those timing requirements, when combined with staff review-and-comment process, can sometimes prevent a soliciting person other than the issuer from using the notice-only option for a proxy contest if that soliciting person's initial proxy statement filing is made in response to the issuer's definitive proxy statement filing. To improve implementation of the notice-and-access model, the SEC proposes to amend Rule 14a-16(l)(2)(ii) to require the soliciting shareholder relying on notice and access to file a preliminary proxy statement within 10 days after the issuer files its definitive proxy statement and send its Notice to shareholders no later than the date on which it files its definitive proxy statement with the SEC. While the proposed rule does not mandate a specific period of time before the meeting by which a soliciting person would need to mail the Notice, the soliciting person is advised to make the Notice and proxy materials available to shareholders with sufficient time for shareholders to review the materials and make an informed voting decision.