Beginning this year, all public companies are required to comply with the “e-proxy” rules adopted by the SEC in 2007. While large accelerated filers were required to comply with respect to proxy solicitations commenced after January 1, 2008, all other issuers are required to comply with respect to proxy solicitations commenced after January 1, 2009. As a result, many issuers are currently wrestling with the e-proxy rules as they prepare for their upcoming annual meetings. This Legal Alert summarizes some practical considerations—and some of the different effects and consequences of the various proxy material delivery options—for an issuer that is currently evaluating the implementation of those e-proxy rules.
Brief Summary of E-Proxy Rules
The e-proxy rules require every issuer to do three principal things:
- post its proxy materials (i.e., its proxy statement and annual report) on a publicly-accessible Internet Web site (other than the SEC’s EDGAR Web site);
- notify its stockholders that those materials are available electronically; and
- explain how to access those materials.
The e-proxy rules also give an issuer two ways to satisfy its traditional proxy delivery requirements—the historical method of mailing a full paper copy of its proxy materials (the “full-set delivery” option), or if the issuer satisfies certain other requirements, mailing only a notice of the Internet availability of its proxy materials (the “notice-only” option)—and the delivery approach that is taken can vary on a stockholder-by-stockholder basis.
Internet Availability of Proxy Materials Is Mandatory for All Issuers
This year, all issuers must post their proxy materials on a publicly-accessible Internet Web site. Some issuers have been confused on this requirement, erroneously believing that it applied only if an issuer selected the notice-only delivery option for its proxy materials. Even for issuers that elect the full-set delivery option, all proxy materials must be posted to the Internet on or before the date that they are, or the notice of their electronic availability is, first sent to stockholders.
An issuer has broad discretion as to the presentation of its Internet proxy materials and the structure of the Web site on which it posts those materials, as long as the following requirements are met:
- the Web site must be separately maintained and must lead stockholders directly to the proxy materials without the need for further browsing (it can be hosted by the issuer or a third party but cannot be the SEC’s EDGAR system or a link to the EDGAR system);
- the posted proxy materials must be presented in a format (or formats) convenient for both reading online and printing on paper, and should be readily searchable; and
- the Web site must be maintained in a manner that does not infringe on the anonymity of a person accessing the Web site—e.g., it cannot track the identify of, or collect information about, persons accessing the proxy materials on the site.
These requirements raise a few practical concerns. First, in order to preserve the anonymity of persons who access an issuer’s proxy materials, the issuer’s Web site cannot track a user’s identity directly or indirectly, and therefore cannot require the user to install “cookies” or other similar tracking features. An issuer may find it difficult to ensure that its regular Web site meets these technical requirements, which may lead the issuer to engage a third party to host a Web site for its proxy materials. The added cost of engaging a third party to host the Web site may be significant for a smaller public company, and may exceed the costs of equipping the issuer’s own Web site to meet the special requirements of the e-proxy rules. In any event, the decision should be made thoughtfully with the issuer’s IT personnel and/or the third party host.
Second, developing a format for the presentation of proxy materials, especially a sophisticated set of proxy materials, can take a significant amount of time. Some larger issuers, such as Intel and IBM, have posted their proxy materials in an interactive online format (e.g., in HTML format). These versions contain hyperlinks, a linked table of contents and other sophisticated features that make them easy to read online, presenting the reader with an interactive experience. Other issuers may, however, take an opposite tack, choosing instead to post simple plain text versions of their proxy materials. Whatever the case, issuers should consider presentation factors, and develop their plan, early in the proxy statement process.
Third, some choices of presentation format may require the issuer to post multiple versions of its proxy materials. For example, while HTML documents may make for a better presentation online, they can be more difficult to download and print. If so, the materials would not meet all of the e-proxy requirements, and the issuer would also need to post a more convenient downloadable version of its proxy materials (e.g., a version in pdf format).
The Cost-Benefit Analysis
It appears that companies that implemented the notice-only model in 2008 have, for the most part, enjoyed significant cost savings. However, these savings can be difficult to estimate and, for some smaller companies, may not be so significant. This is largely because an issuer that chooses the notice-only model is still required, if requested, to mail to a stockholder hard copies of its proxy materials. To prepare for that event, an issuer using the notice-only model must print and store some number of sets of its proxy materials (we have seen recent estimates suggesting between 5–10% of traditional print quantities), and will thereby incur some printing costs.
For a larger issuer, the difference in cost between printing hundreds of thousands of proxy statements and annual reports and printing a smaller number of reserve copies will be significant. For these issuers, the basis for much of the cost savings associated with the notice-only model is clear. However, for a small issuer, there may be little meaningful difference between the cost of printing 6,000 annual reports and proxy statements and printing and storing 1,000 reserve copies. For these issuers, the difficulties associated with implementing the notice-only model may outweigh the small cost savings.
The notice-only model also has several inherent new costs, such as producing, printing and mailing the notice of Internet availability itself, storing paper copies of proxy materials to satisfy potential stockholder requests promptly, additional legal fees associated with navigating the notice-only requirements, and, if voter response is low, the costs of producing and mailing a second notice to stockholders and the costs of engaging, or otherwise increasing the efforts of, a proxy solicitor.
Issuers evaluating whether to “stratify” the delivery of their proxy materials (i.e., delivering their proxy materials through a mix of the notice-only and full-set delivery models) will need to consider the differing methods of stratification in their cost/benefit analysis. An issuer could stratify its delivery based on, among other things:
- share holdings—e.g., using the full-set delivery method for large or certain institutional stockholders and the notice-only method for smaller stockholders;
- prior voting history—e.g., using the full-set delivery method for all prior voters, and the notice-only method for all stockholders who did not vote in prior years; or
- geography—e.g., using the full-set delivery method for international stockholders and the notice-only method for domestic stockholders.
Many permutations are possible, and the stratification method chosen will affect other matters that implicate cost, such as the number of required sets of printed proxy materials, total mailing costs and the requisite level of sophistication of the issuer’s electronic proxy materials in order to achieve desired levels of voter response. Each of these variables will have a direct effect on an issuer’s overall proxy solicitation costs.
Most service providers (e.g., transfer agents) have developed cost comparison models that take into account agenda items, postage and print savings, stratification and other factors (and some are available publicly). These models can be illustrative when an issuer undertakes its cost/benefit analysis, and can be tailored by the service provider to the issuer’s particular situation (e.g., to compare a notice-only or stratified delivery model against the issuer’s actual full-set delivery numbers from a prior year). We recommend contacting your transfer agent to request a detailed cost comparison if you have not done so already.
The e-proxy rules require an issuer making use of the notice-only method to make its proxy materials available on the Internet, and to mail notices of Internet availability of its proxy materials, to stockholders of record at least 40 days before its annual meeting. Notably, brokers, banks and other intermediaries (e.g., Broadridge) must also meet a 40-day deadline in respect of the issuer’s beneficial holders. To ensure that the intermediaries are able to satisfy this requirement, issuers must furnish them with the information necessary to allow them to prepare and send their own notices of Internet availability well in advance of their 40-day deadline (typically five business days prior to their 40-day deadline). Add to this the time an issuer will spend developing an electronic version of its proxy materials and complying with the different technical requirements for posting proxy materials on the Internet, and it becomes clear that an issuer employing the notice-only method should plan to have its proxy materials in final (or nearly final) form several weeks before its, and its intermediaries’, 40-day notice delivery deadline.
For many issuers, this will be a significant departure from their prior-year proxy statement timeline. Reports suggest that many companies that used the notice-only method for their 2008 annual meetings found this new timetable to be one of the more challenging aspects of the e-proxy requirements.
Effect on Stockholder Response
Broadridge has noted that retail investors (i.e., non-institutional investors) who took delivery of proxy materials under the notice-only model in 2008 were significantly less likely to vote their shares. This may be the result of confusion on the retail investor’s part (for example, anecdotal evidence suggests that some retail investors mistook the notice of Internet availability for a proxy card). It also is likely that some retail investors chose not to take the extra steps necessary to access and download the issuer’s proxy materials. Regardless, we believe that issuers who utilize the notice-only model should expect lower voter participation, especially from retail investors.
As a result, issuers with non-routine annual meeting agendas—e.g., agendas with proposals that require a heightened vote requirement or for which beneficial owners must provide specific voting instructions to brokers or other street name record holders to avoid a broker non-vote—need to give careful consideration to the effect that the use of the notice-only model can have on voting. An issuer that wants to ensure that its proxy materials (and its message) reach its institutional and other important stockholders, or that wants to ensure the greatest level of participation by all stockholders, may opt to employ the full-set delivery method, or a stratified delivery approach, even if some cost savings may be afforded by the notice-only option.
For More Information
This Legal Alert addresses some specific points for consideration by an issuer evaluating the implementation of the SEC’s e-proxy rules, and is not intended as a full summary of the SEC’s e-proxy rules. The full text of the SEC’s e-proxy rule can be accessed at http://www.sec.gov/rules/final/2007/34-56135.pdf.