Updated for the first time in more than a decade, the new guidance for proxy rules and statements provides significant changes to certain disclosure requirements in the context of proxy solicitations.
Recently, the Division of Corporation Finance released its first major overhaul of Staff guidance on proxy rules and proxy statements in more than 10 years. This new guidance comes by way of 45 newly-minted Compliance and Disclosure Interpretations (CDIs) relating to Proxy Rules and Schedules 14A and 14C, which Corp. Fin. states ”replace” the interpretations published in the Proxy Rules and Schedule 14A Manual of Publicly Available Telephone Interpretations and the March 1999 Supplement to the Manual of Publicly Available Telephone Interpretations. Per the Staff, only six of the 45 new CDIs operate as substantive changes to the Staff’s previously-published interpretations, while four CDIs reflect technical revisions and the remaining 36 reaffirm, or “reflect only non-substantive changes to,” prior interpretations.
Below we provide a comparison of the six CDIs that reflect substantive changes in the Staff’s interpretations with the prior guidance, as superseded by the new CDIs, as well as key takeaways relating to these changes.
Topic: Disclosure of Discretionary Authority on Proxy in Light of Cumulative Voting (Rule 14a-4)
Question: Rule 14a-4(b)(1) states that a proxy may confer discretionary authority with respect to matters as to which a choice has not been specified by the security holder, so long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified. If action is to be taken with respect to the election of directors and the persons solicited have cumulative voting rights, can a soliciting party cumulate votes among director nominees by simply indicating this in bold-faced type on the proxy card?
Answer: Yes, as long as state law grants the proxy holder the authority to exercise discretion to cumulate votes and does not require separate security holder approval with respect to cumulative voting. [May 11, 2018]
Superseded Telephonic Interpretation: Division of Corporation Finance’s Manual of Publicly Available Telephone Interpretations on Proxy Rules and Schedule 14A Item N. 9. Rule 14a-4
The authority to cumulate votes among directors, in the discretion of the proxy, need not be printed in bold-face type on the proxy card itself pursuant to Rule 14a-4(b)(1). There should, however, be appropriate disclosure of cumulative voting in the proxy statement.
Analysis and Key Takeaways
In the new CDI, the Staff takes the position that issuers must now state on the proxy itself that votes will be cumulated with respect to director elections. Under the Staff’s previous interpretation in telephone interpretation N. 9, the issuer was not required to print in bold-face type on the proxy card itself that the proxy would grant authority to cumulate votes. Rather, the proxy statement itself needed to otherwise include appropriate disclosure. While the new CDI does not restate that issuers must provide such disclosure elsewhere in the proxy statement, Item 6 of Schedule 14A requires such disclosure in the proxy to the extent that cumulative voting will be used for the election of directors.
Topic: Preliminary Proxy Material Filing Requirements (Rule 14a-4)
Question: The Division has permitted registrants to avoid filing proxy materials in preliminary form despite receipt of adequate advance notification of a non-Rule 14a-8 matter as long as the registrant disclosed in its proxy statement the nature of the matter and how the registrant intends to exercise discretionary authority if the matter was actually represented for a vote at the meeting. See Section IV.D of Release No. 34-40018 (May 21, 1998). Can a registrant rely on this position if it cannot properly exercise discretionary authority on the matter in accordance with Rule 14a-4(c)(2)?
Answer: No. [May 11, 2018]
Superseded Telephonic Interpretation: March 1999 Interim Supplement to Publicly Available Telephone Interpretations 7S. Rule 14a-4(c)(1), (c)(2)
(a) If a company receives timely and complete notice of a matter submitted by a shareholder in accordance with Rule 14a-4(c)(2)(i), the company does not have discretionary voting authority on the matter. Thus, if the company wants to vote its proxies on the matter at the annual meeting, it must include the matter on its proxy card and provide in its proxy statement the necessary disclosure, including, inter alia, information on how and why the company intends to vote on the matter. In this circumstance, the company may not rely on the discussion in Section IV(D) of Release No. 34-40018 (May 21, 1998) on filing proxy statements in preliminary form. The benefits of that interpretive position are available only when a company properly may exercise discretionary voting authority on a non-Rule 14a-8 matter. Here, because the company has received timely and complete notice, thereby precluding it from exercising discretionary authority, the company cannot file a plain-vanilla proxy statement under Rule 14a-6.
(b) If the notice is timely but deficient (i.e., does not comply with the requirements listed in Rule 14a-4(c)(2)(i) by, for example, failing to indicate that the proponent intends to deliver a proxy statement and form of proxy to holders of at least that percentage of the company’s voting shares necessary to approve the matter), the company would not be required to put the matter on its proxy card. However, the company’s ability to exercise discretionary authority is conditioned on including in its proxy statement advice on the nature of the matter and how the company intends to exercise its discretion to vote on that matter. The company's ability to file a plain-vanilla proxy statement pursuant to Rule 14a-6 will depend upon, among other factors, the extent of its comments on, or discussion in, its proxy material of any solicitation in opposition in connection with the meeting. [Superseded]
Analysis and Key Takeaway
In the new CDI, the Staff provides guidance that, to the extent an issuer cannot properly exercise discretionary authority in the context of a non-Rule 14a-8 shareholder proposal matter, the issuer should file preliminary proxy materials and a preliminary form of proxy with the SEC.
Topic: Preliminary Proxy Material Filing Requirements (Rule 14a-6)
Question: Is a registrant required to file a preliminary proxy statement in connection with a proposed corporate name change to be submitted for security holder approval at the annual meeting?
Answer: No. As set forth in Release No. 34-25217 (Dec. 21, 1987), the underlying purpose of the exclusions from the preliminary proxy filing requirement is “to relieve registrants and the Commission of unnecessary administrative burdens and preparation and processing costs associated with the filing and processing of proxy material that is currently subject to selective review procedures, but ordinarily is not selected for review in preliminary form.” Consistent with this purpose, a change in the registrant’s name, by itself, does not require the filing of a preliminary proxy statement. [May 11, 2018]
Superseded Telephonic Interpretation: Division of Corporation Finance’s Manual of Publicly Available Telephone Interpretations on Proxy Rules and Schedule 14A Item N. 11. Rule 14a-6(a)
The caller raised the question whether a preliminary proxy statement need be filed in connection with a proposed corporate name change to be submitted for shareholder approval at the issuer’s annual meeting, along with a shareholder proposal and the election of directors. While the latter two items fall within one of five Rule 14a-6(a) exclusions from the preliminary proxy filing requirement, a change in the issuer’s name to delete the surname of a long-dead founder that bore no relation to a change in the present membership of the board of directors would not appear to qualify for exclusion under the literal reading of the rule.
As set forth in Exchange Act Rel. No. 25217 (Dec. 21, 1987), the underlying purpose of these exclusions is “to relieve registrants and the Commission of unnecessary administrative burdens and processing costs associated with the filing the processing of proxy material that is currently subject to selective review in preliminary form.” Consistent with this purpose and the reason for the name change proposal, the Division staff advised the requestor that a preliminary proxy filing relating to the planned name change was not required.
Analysis and Key Takeaways
In the new CDI, the Staff takes the position that a corporate name change, in and of itself, will not require the issuer to file a preliminary proxy statement in connection with security holder approval at an annual meeting, thereby expanding the previous interpretation beyond just the narrow scope of removing a no-longer-relevant surname from the corporate name.
Topic: Disclosure in Proxy Solicitations Involving Stock Issuance and Acquisitions (Schedule 14A)
Question: A registrant solicits its security holders to approve the authorization of additional common stock for issuance in a public offering. While the registrant could use the cash proceeds from the public offering as consideration for a recently announced acquisition of another company, it has alternative means for fully financing the acquisition (such as available credit under an executed credit agreement in the full amount of the acquisition consideration) and may choose to use those alternative financing means instead. Would the proposal to authorize additional common stock “involve” the acquisition for purposes of Note A of Schedule 14A?
Answer: No. Raising proceeds through a sale of common stock is not an integral part of the acquisition transaction because at the time the acquisition consideration is payable, the registrant has other means of fully financing the acquisition. The proposal would therefore not involve the acquisition and Note A would not apply. By contrast, if the cash proceeds from the public offering are expected to be used to pay any material portion of the consideration for the acquisition, then Note A would apply. [May 11, 2018]
Superseded Telephonic Interpretation: March 1999 Interim Supplement to Publicly Available Telephone Interpretations 9S. Schedule 14A, Note A
Note A to Schedule 14A requires that information called for by Items 11, 13 and 14 be provided when security holders are asked to authorize the issuance of additional securities to be used to acquire another specified company when there will be no separate opportunity to vote on the acquisition. This would be the case even when the securities will be sold in a public offering for cash to finance the transaction. [Superseded]
Analysis and Key Takeaways
In the new CDI, the Staff takes the position that Note A of Schedule 14A and the attendant requirement to provide Items 11, 13, and 14 information is triggered if an acquisition will be funded by a “material portion” of the proceeds of the issuance of additional stock pursuant to security holder authorization. They also take the position that Note A is not applicable, however, where proceeds from the sale of such stock are not an essential component of an acquisition transaction because the issuer “has other means of fully financing the acquisition.” Previously, Item 9S only provided certainty that Item 11, 13, and 14 information would be required when the proceeds of the issuance were “to be used” in an acquisition.
Topic: New Plan Benefits Table in Proxy Solicitations (Item 10 of Schedule 14A)
Question: If a registrant is required to disclose the New Plan Benefits Table called for under Item 10(a)(2) of Schedule 14A, should it list in the table all of the individuals and groups for which award and benefit information is required, even if the amount to be reported is “0”?
Answer: Yes. Alternatively, the registrant can choose to identify any individual or group for which the award and benefit information to be reported is “0” through narrative disclosure that accompanies the New Plan Benefits Table. [May 11, 2018]
Superseded Telephonic Interpretation: Division of Corporation Finance’s Manual of Publicly Available Telephone Interpretations on Proxy Rules and Schedule 14A Item 29. Schedule 14A, Item 10(a)(2)
If the New Plan Benefits Table is required, all of the individuals and groups for which award or benefit information is required should be listed (including those for which the amount to be reported is "0").
Analysis and Key Takeaways
In the new CDI, the Staff clarifies that an issuer may include narrative disclosure to the New Plan Benefits Table to state that individuals or groups received no amount under the new plan. Prior Item 29 required quantitative disclosure in the New Plan Benefits Table even when individuals or groups received no benefit.
Topic: Information Requirements in Proxy Solicitations for Modification of Securities (Item 12 of Schedule 14A)
Question: Does a proxy statement seeking security holder approval for the elimination of preemptive rights from a security involve a modification of that security for purposes of Item 12 of Schedule 14A?
Answer: Yes. Accordingly, financial and other information would be required in the proxy statement to the extent required by Item 13 of Schedule 14A. [May 11, 2018]
Superseded Telephonic Interpretation: Division of Corporation Finance’s Manual of Publicly Available Telephone Interpretations on Proxy Rules and Schedule 14A Item 19. ** Schedule 14A **
A proxy statement requesting shareholder approval of the elimination of preemptive rights involves the modification of a security for purposes of Item 12 of Schedule 14A (and may be tantamount to creation of a new security, depending on the facts and circumstances, thereby raising an issue regarding Securities Act registration absent an exemption). Thus, the financial statement requirements of Item 13 would apply.
Analysis and Key Takeaways
In the new CDI, the Staff affirms that elimination of preemptive rights from a security is a modification of that security for purposes of Item 12 of Schedule 14A, thereby triggering Item 13 financial statement disclosure requirements. The superseded Item 19 was ambiguous on whether elimination of preemptive rights from a security was a modification of that security.
While Corp. Fin. left the majority of its previous guidance intact, the six CDIs outlined above provide significant changes to the Staff’s interpretations of disclosure requirements in the context of proxy solicitations. These new interpretations may significantly alter when and what information the Staff believes an issuer must file with the SEC in that context. Additionally, it remains to be seen whether and to what extent the Staff will issue additional interpretive guidance superseding the previously-relied upon Manual of Publicly Available Telephone Interpretations and its supplements.