The SEC adopted its E-Proxy Rules in 2007 permitting public companies to make proxy materials available via the Internet in lieu of mailing a paper copy. The E-Proxy Rules outlined two permitted methods of delivering proxy materials—(1) the “notice and access option” and (2) the “full set delivery option”- but also contemplate a hybrid delivery method. This update provides a brief overview of the E-Proxy Rules and offers some insight on how the E-Proxy Rules can be used by companies to potentially influence shareholder voting patterns.
Notice and Access Option. Instead of mailing a full set of printed materials to shareholders, this option allows companies to post their proxy material on a “cookie free” website that may not track or gather any information about shareholders. To do this, a company must mail shareholders a “Notice of Internet Availability” to inform them how to access the appropriate website at least forty days prior to the annual meeting. Shareholders can then go to the website, authenticate themselves, review the proxy materials and execute a form of proxy. Nevertheless, companies are still required to mail printed proxy materials if requested by a shareholder.
Full Set Delivery Option. While the full set delivery option is the same traditional paper model that companies followed prior to adoption of the E-Proxy Rules, there are several additional requirements. In addition to delivering proxy materials in a printed format, companies must also post all proxy materials to a cookie free website and send shareholders the information required in a Notice of Internet Availability. The Notice of Internet Availability does not need to be sent ahead of proxy materials under this option unlike the forty day notice period required under the notice and access option.
Hybrid Option. The notice and access and full set delivery options are not exclusive. Many companies elect to use the notice and access option for some shareholders and the full set delivery option for other shareholders. In this way, companies can stratify the delivery method utilized and, for example, send paper copies to their largest shareholders and use notice and delivery for the rest, or could send paper copies to their record holders and use notice and access for beneficial owners
Delivery Choice and E-Proxy Rules as a Vote Driver. Since the E-Proxy Rules have gone into effect, the notice and access option has been shown to lead to a significant decrease in the number of shares that are voted at the meeting. Companies with a large base of retail shareholders have experienced a decline in shares present for quorum purposes and higher levels of non-voting shares. Many companies may decide that they still want to deliver paper to boost the level of votes to ensure a quorum or because they think their shareholders value receiving the glossy annual report and proxy statement via “snail mail.”
Nevertheless, the use of e-delivery of proxy materials increased in 2013 due to the significant cost savings it provided for many companies. One proxy delivery company reported that its clients who used e-delivery methods saved approximately $280 million. Furthermore, some companies that have utilized e-delivery methods in the past reported increased shareholder participation and response rates compared to prior years. This may indicate that shareholders are becoming more familiar and comfortable with the e-proxy delivery method, and are becoming more willing to participate.
After several years of experience complying with the rules, companies should consider reassessing whether to use the notice and access methodology and whether their current use is optimal by considering:
- If your company uses notice and access, how has your shareholder participation rate been affected?
- Is a certain shareholder demographic, such as large or smaller shareholders, less likely to vote if notice and access is used?
- If your company uses notice and access, how much money is being saved?
- What is the cost-benefit analysis to improving voter participation?
- If your company uses notice and access, has it received any recent bids from financial printers to determine the current cost of printing proxy and annual report materials in greater quantities?
With e-proxy trends differing from company to company, a company may be able to better determine which delivery option is best for it by knowing the answers to such questions. A company may even be able to improve support for a close vote by using the hybrid delivery option. For example, if a company believes that a proposal may be met with shareholder opposition from a certain class or demographic of shareholders, and the results from past elections indicate a higher vote response when paper copies are sent, the board may decide to send paper copies to the shareholder demographics most likely to support its proposal or to all shareholders. Thus, after several years of e-proxy delivery, companies should reassess their use or non-use of the notice and access methodology permitted by the E-Proxy Rules. .