The Securities and Exchange Commission (the “SEC”) recently adopted amendments to the proxy rules under the Securities Exchange Act of 1934, as amended, that require companies and other persons conducting proxy solicitations to make proxy materials available on an internet website. Companies and other soliciting persons may choose to follow one of the two options below for all types of solicitations except for those related to business combination transactions.
Notice Only Option
Under the “notice only option,” companies and other soliciting persons may distribute proxy materials by posting them on an internet website and sending shareholders a Notice of Internet Availability of Proxy Materials (“Notice”). While potentially more costly in the first years of implementation due to continued shareholder requests for paper copies, this “notice and access” model is ultimately intended to provide companies and other persons with a more costeffective means of soliciting proxies.
Full Set Delivery Option
Companies and other soliciting persons may also choose the “full set delivery option,” under which they may continue to rely on traditional means of proxy delivery, with two additional requirements. First, the company or other soliciting person must provide the information required in the Notice in its proxy materials or in a separate Notice that would accompany the full set of proxy materials.1 Second, the soliciting party must post its proxy materials on an internet website.
All soliciting parties may use the “notice only” option, which consists of the “notice and access model” described below, on a voluntary basis beginning July 1, 2007 for shareholder meetings to be held not earlier than August 10, 2007. Large accelerated filers (other than registered investment companies) must use either the “notice only option” or the “full set delivery option” beginning on or after January 1, 2008, with all other companies (including registered investment companies) and other soliciting persons to follow on or after January 1, 2009. This mandatory e-proxy model is intended to give the shareholder, rather than the soliciting party, the option to choose between paper and electronic delivery.
Application to Investment Companies
Business development companies and other types of investment companies must also comply with the mandatory e-proxy rules on or after January 1, 2009 and may voluntarily choose to use the notice and access model prior to that time. However, the SEC has acknowledged that use of the notice and access model may result in decreased levels of proxy voting by shareholders. Because investment companies tend to have a higher proportion of retail shareholders than most operating companies and because retail shareholders are less likely than institutional shareholders to vote their proxies, investment companies face greater challenges in achieving a quorum. As a practical matter, it may therefore be necessary for investment companies that use the notice and access model to engage in additional solicitations to achieve a quorum, which may negate any potential cost savings.
Notice and Access Model / Notice Only Option for Companies
Under current proxy rules, all companies are required to physically mail proxy materials to shareholders. Under the amended rules, companies will be required to satisfy the requirement of Rule 14a-3 to furnish proxy materials to all shareholders by posting them on the internet and providing shareholders with notice of the availability of such materials. The notice and access model is available for all types of solicitations except for those related to business combination transactions.
The Notice must be sent to shareholders at least 40 days before the shareholder meeting date and must be filed with the SEC as additional soliciting material no later than the date on which it is first sent to shareholders. The Notice must be written in plain English and must contain the following:
1. A prominent legend in bold-face type as prescribed by the SEC;2
2. The date, time, and location of the meeting or, if corporate action is to be taken by written consent, the earliest date on which the corporate action may be effected;
3. A clear and impartial identification of each separate matter intended to be acted on and the company’s recommendations regarding those matters without any supporting statements;
4. A list of the proxy materials being made available at the specified website;
5. (a) A toll-free telephone number; (b) an e-mail address; and (c) an internet website address where the shareholder can request a printed/written copy of any proxy materials, for all meetings and for the particular meeting to which the Notice relates;
6. Any control/identification numbers that the shareholder needs to access his or her proxy card;
7. Instructions on how to access the proxy card, provided that such instructions do not enable a shareholder to execute a proxy without having access to the proxy statement and annual report; and
8. Information on how to obtain directions to be able to attend the meeting and vote in person.
The Notice may only contain the information described above, unless it is being sent concurrently with any notice of meeting required under state law. Also, in order to reduce the risk of fraudulent notices used to gain confidential information from shareholders, the Notice may, but is not required to, contain a statement informing shareholders they are not obligated to provide any personal information other than their control/identification numbers in order to execute a proxy.
The website address to which shareholders are directed must be specific enough to lead shareholders directly to the proxy materials, rather than to the company’s homepage or other section of the website, so that shareholders do not have to search the site to find the materials. The address may not be the SEC’s EDGAR website. The proxy materials must be provided both in a format that is readily searchable and viewable online and in a format that is substantially identical to the paper version of the materials. The SEC advised in the final rule release that under current technology, the materials may have to be posted in two formats, such as HTML and PDF.
Companies must take care not to infringe on shareholders’ privacy and cannot require the installation of “cookies” or otherwise track shareholders’ information. In addition, if shareholders provide an e-mail address to which they would like their proxy materials sent, this address may be used only for that purpose and may not be transferred without the express written consent of the shareholders.
Companies may not send a proxy card with the initial Notice but must post the proxy card on the designated website along with the proxy statement and any annual report no later than the date on which the Notice is sent to shareholders. The website must provide shareholders with a means of immediately executing their proxy, either electronically or via telephone. Companies may choose to re-solicit shareholders who have not yet voted by sending them additional soliciting materials. These materials may include a proxy card if sent ten calendar days or more after sending the Notice.
Amendments and Additional Soliciting Materials
If a company amends its proxy materials, it must send a new Notice to its shareholders addressing the internet availability of the amended materials. Additional soliciting materials, which must be filed with the SEC but which are not required to be furnished to shareholders, must be posted on the website no later than the first day the materials are sent to shareholders or otherwise made public. If the company chooses to send a proxy card with any additional soliciting materials, it must be accompanied by either the Notice or a copy of the proxy statement and annual report.
Shareholder Requests for Copies
A company that uses the notice and access model to furnish proxy materials to shareholders has a separate requirement to deliver a copy of the proxy statement, annual report and proxy card to a requesting shareholder. Instructions for making such a request must be included in the Notice. A company must send such materials to the requesting shareholder, in paper or electronic format, as requested, within three business days of receiving the request. This requirement must be complied with even if the request is received after the annual meeting, for a period of one year following the meeting. Shareholders must also be given the option to permanently elect to receive physical or e-mail copies of the proxy materials. However, footnote 86 of the release specifically makes clear that a company may not only continue to request that a shareholder accept electronic delivery or the notice and access model but may provide incentives for the shareholder to do so.
Companies may “household” the Notice, meaning that they may send a single notice to multiple shareholders residing at the same address. Each individual shareholder, however, even if at the same address, must be given a separate control/identification number to execute his or her own proxy.
Notice and Access Model / Notice Only Option for Soliciting Persons Other than the Issuer
Shareholders and soliciting persons other than the issuer may also voluntarily use the notice and access model beginning July 1, 2007 and will be required to comply with the mandatory e-proxy regime on or after January 1, 2009. The requirements are similar to those for companies with a few exceptions. Notably, shareholders and other soliciting persons do not have to send their Notices until the later of (1) 40 calendar days prior to the annual meeting or (2) ten calendar days after the company sends its Notice or proxy statement to shareholders. As previously proposed, the Notice sent by such persons need only include the agenda items known to them as well as a clear statement that there may be additional agenda items that they are not aware of and for which they therefore cannot direct a vote. If the soliciting person provides a partial proxy card, the Notice must indicate whether execution of his/her proxy card will invalidate a shareholder’s prior vote on other matters using the company’s proxy card. Other soliciting persons may choose to selectively solicit proxies only from those shareholders who have not requested to receive paper copies of the proxy materials. Thus, when a company provides other soliciting persons with a list of shareholders, it must indicate which shareholders have elected to receive paper copies of the proxy materials furnished by the company. Other soliciting persons may not, however, solicit proxies only from those shareholders who are willing to access the proxy materials electronically. As a result, other soliciting persons will be required to send paper copies of the proxy materials to any shareholder who requests them upon receipt of the applicable Notice.
Notice and Access Model / Notice Only Option for Intermediaries
Under the new rules, banks and other intermediaries will be required to select either the notice only option or the full set delivery option on or after January 1, 2009. However, between July 1, 2007 and January 1, 2009, an intermediary may use the notice and access model to distribute proxy materials to beneficial owners of shares only if the company requests it to do so. Intermediaries are also required to send proxy materials to beneficial owners on behalf of soliciting persons other than the company.
Intermediaries must prepare and send their own Notices, with changes appropriate to reflect the difference between registered holders and beneficial owners of shares. Intermediaries may choose whether to direct beneficial owners to their own websites or to the company’s website to access the proxy materials. If the intermediary chooses to direct beneficial owners to the company’s website, they must inform the beneficial owners that they cannot submit a proxy to the company but must instead provide voting instructions to the intermediary. Intermediaries must also provide instructions in the Notice as to how beneficial owners may request electronic or paper copies of the proxy materials from the intermediary rather than from the company and give the beneficial owner the opportunity to make a permanent election to receive paper or electronic copies. The intermediary must forward any such request to the company within three days of receiving it, and then forward the electronic or paper copies to the beneficial owner within three days of receipt from the company. Under the amendments, intermediaries are permitted to pass on to the company or other soliciting person the cost of forwarding copies of the proxy materials to beneficial owners.
As with companies, intermediaries must also send their Notices at least 40 calendar days before the annual meeting. In order to enable compliance with this deadline, the SEC requires that companies provide intermediaries with the appropriate information in advance of the 40-day period, which is currently estimated to be five business days.
Full Set Delivery Option
Beginning on January 1, 2008 for large accelerated filers and on January 1, 2009 for all other companies and other soliciting persons, soliciting parties must choose either the full set delivery option or the notice only option. As noted above, the full set delivery option adds two requirements to traditional methods of proxy delivery. First, soliciting parties must post their proxy materials on an internet website. Second, they must include the information required in the Notice in the proxy materials or send their own Notice with the full set of proxy materials. Under the voluntary notice and access model, the Notice may not be accompanied by any other documents except for any notices of shareholder meetings required under state law. However, the full set delivery option permits companies and other soliciting persons to send other proxy materials with the Notice, so long as those other materials contain a full set of proxy materials. As previously proposed, soliciting persons selecting the full set delivery option may delete from the Notice any reference to a shareholder’s right to request copies of the materials. In addition, soliciting parties do not have to comply with the timing deadlines applicable under the notice only option. Thus, as previously proposed, companies and other soliciting persons may begin their solicitation after the applicable deadline (e.g., 40 days before the meeting date for companies) has passed, provided that the Notice is accompanied by a full set of proxy materials.
In the proposing release, the SEC noted that a registered investment company would be permitted to send its prospectus and/or report to shareholders together with the Notice, with or without the proxy statement and form of proxy.
Considerations in Deciding to Use the Notice Only Option
The most important issues a company should consider in deciding whether to use the notice only option are cost and timing. In preparing a timetable for their annual meetings, companies should keep in mind that use of the notice and access model will require them to have their proxy materials ready 40 days in advance of the meeting, and approximately 45 days in advance of the meeting if sending proxy materials through intermediaries. Companies should also carefully analyze all costs under both traditional methods of proxy distribution and the notice and access model. While the notice and access model may ultimately prove more costeffective, in the first years of use it may be more costly, as it is difficult to determine how many shareholders will request paper copies of the proxy materials. Please also note that companies are obligated to send copies to requesting shareholders for up to one year following the meeting.
Lastly, companies should consider shareholder perception and effect on voting in deciding which option to follow. Shareholders of a large, high-tech company such as Google Inc. may find it odd if the company opted not to use the notice only option. Also, as noted above, companies that have a high proportion of retail shareholders may have difficulty meeting voting thresholds with the notice and access model and may therefore have to engage in additional solicitations, which may mitigate any cost-savings gained by use of the notice and access model.
Text of Releases
The final rule release on the voluntary use of the notice and access model may be found on the SEC’s website at the following link: http://www.sec.gov/rules/final/2007/34-55146.pdf. The final rule release on the mandatory e-proxy rules has not yet been released but the text of the proposed rule can be found on the SEC’s website at the following link:
http://www.sec.gov/rules/proposed/2007/34-55147.pdf. We will update this Legal Alert as necessary when the final rule has been released.
The items summarized above are only a few of the specific issues addressed by the releases. We urge you to read the releases in their entirety and contact any of the individuals listed below if you have questions on any of the items.