Increasingly over the years, proxy contests have offered activist investors an effective means of advocating or implementing change at public companies in which they have ownership interests. However, the signifi cant cost involved has been a deterrent to mounting such challenges. The total cost required for launching a proxy contest can range from the low six fi gures into the seven fi gures depending on the scale and scope of the contest, including related litigation, and activist shareholders have to expend their own funds, while incumbents have at their disposal the corporate treasury.1
New Proxy Rules
New rules adopted by the Securities and Exchange Commission (the “SEC”) have the potential of reducing some of these costs. On Jan. 22, 2007, the SEC adopted amendments to the proxy rules under the Securities Exchange Act of 1934 (the “New Proxy Rules”)2 to provide public companies and others soliciting proxies with an alternative method of furnishing proxy materials to shareholders in certain circumstances: posting the materials on the Internet. Issuers and dissidents wishing to take advantage of this new option must (i) send shareholders a notice (the “Notice”) informing them that proxy materials are available electronically on a publicly accessible Internet web site and (ii) make paper copies of the proxy materials available to shareholders upon their request free of charge. The New Proxy Rules, which take effect on July 1, 2007, spell out the processes of this “notice and access” proxy model.
While this newly available process will not eliminate all printing and mailing expenses or other costs, such as preparation of solicitation materials, proxy solicitor fees and legal fees, it does offer a more cost-effective option for conducting proxy solicitations. Additionally, activist shareholders’ existing ability to limit the scope and scale of the solicitation (for example, to shareholders with signifi cant holdings) will be unaffected by the New Proxy Rules.
‘Notice and Access’
An activist shareholder wishing to follow this “notice and access” model is required under the New Proxy Rules to send out a Notice informing shareholders of the availability of the proxy materials by the later of: (i) 40 calendar days prior to the relevant shareholder meeting date; or (ii) 10 calendar days after the issuer fi rst sends out its proxy statement or Notice to shareholders. All proxy materials to be furnished through the “notice and access” model, other than additional soliciting materials, must be posted on a specifi ed Internet web site by the time the Notice is sent to shareholders. These materials must remain on such web site and be accessible to shareholders through the conclusion of the relevant shareholder meeting, at no charge to the shareholder. The Notice must identify clearly and by recitation of the full direct link citation, the web site address at which the proxy materials are available. The web site must be a publicly accessible web site other than the SEC’s EDGAR web site.
The Notice must also contain information including: (i) a prominent legend advising of the availability of the proxy materials on the Internet, (ii) a list of the materials being made available at the specifi ed web site, (iii) a toll-free telephone number, e-mail address and web site where the security holder can request a copy of the proxy statement and form of proxy and (iv) instructions on how to access the form of proxy, provided that such instructions do not enable a security holder to execute a proxy without having access to the proxy statement. Shareholders must have a means of executing their proxies as of the time the Notice is sent. The initial delivery of the Notice may not be incorporated into, or combined with, another document, including the form of proxy, except the notice of a shareholder meeting as may be required by state law.3 Furthermore, the Notice may not contain any information not specifi cally required under the New Proxy Rules or, if combined with the notice of the shareholder meeting, applicable state law.
The soliciting person may not send a form of proxy to security holders until 10 calendar days or more after the date it sent the Notice to security holders, unless the form of proxy is accompanied or has been preceded by a copy of the proxy statement through the same delivery medium. If the soliciting person sends a form of proxy after the expiration of such 10-day period and the form of proxy is not accompanied or preceded by a copy, via the same medium, of the proxy statement, then another copy of the Notice must accompany the form of proxy. The Notice must be fi led with the SEC no later than the date that the soliciting person fi rst sends it to security holders.
The New Proxy Rules require the soliciting person following the “notice and access” model to post any additional soliciting materials on the same web site on which the proxy materials are posted no later than the day on which the additional soliciting materials are fi rst sent to shareholders or made public. As desired, the soliciting person may also utilize additional means of disseminating such materials, including any print and/or electronic means. In addition, the New Proxy Rules require the issuer to indicate to soliciting persons, in responding to a request for the shareholder list, which of its shareholders have permanently requested paper copies of proxy materials.4 This would facilitate, as permitted by the New Proxy Rules, conducting targeted solicitations to shareholders who have not elected to receive paper copies, although any shareholder receiving a solicitation may elect to receive paper copies of the proxy materials at any time before the conclusion of the relevant shareholder meeting even if it had not previously made such a request. The New Proxy Rules do not, however, allow for conditional “electronic only” proxy solicitations whereby the soliciting shareholder would solicit proxy authority only from shareholders willing to electronically access its proxy materials.5
In conclusion, the New Proxy Rules provide for a costeffi cient means of distributing proxy materials for activist shareholders in proxy contests. The rules do, however, contain important limitations and conditions. For example, the “notice and access” method is not available in the context of business combinations. The rules also introduce additional detailed procedural requirements beyond those described in this article for those electing to utilize the “notice and access” method. It is also important to note that the New Proxy Rules do not alter certain SEC fi ling requirements or applicable state law requirements currently in effect. For these reasons, cautious planning is advised before conducting a “notice and access” proxy contest.