The staff of the Division of Corporation Finance of the Securities and Exchange Commission recently issued updated compliance and disclosure interpretations ("C&DIs") of proxy rules and related Schedules 14A and 14C. These C&DIs replace and consolidate prior staff guidance 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. All current C&DIs, including these updated proxy rules interpretations, are available here.
The C&DIs are generally consistent with the prior Telephone Interpretations, with 35 of the 45 new C&DIs reflecting only non-substantive changes. Another four C&DIs reflect technical revisions to the Telephone Interpretations (See C&DIs 126.04, 126.05, 158.01 and 158.03). However, the remaining six C&DIs reflect what the staff considers "substantive changes" to the Telephone Interpretations, which we discuss below:
Although much of the guidance has not substantively changed from the existing Telephone Interpretations in the new C&DIs, it is helpful to companies to have staff guidance consolidated for ease of reference. The staff has also stated that it is in the process of updating other previously published interpretations relating to the proxy rules, so registrants should continue to monitor the C&DI updates going forward for any additional modifications to existing guidance.
- Discretionary Authority for Cumulative Voting.C&DI 124.01 provides that a security holder may give its proxy not just to vote in a director election, but also to allocate cumulative votes among director nominees. Rule 14a-4(b)(1) states that a proxy may confer authority to vote in the proxy holder's discretion (i.e., for, against or abstain) instead of specifying how to vote, so long as the form of proxy states in bold-faced type how the proxy intends to vote. The C&DI explains that in an election of directors where security holders have cumulative voting rights, a proxy holder may, subject to applicable state law, cumulate votes among director nominees by simply indicating in bold-faced type on the proxy card that it may do so.
- Preliminary Proxy Statement for Non-Rule 14a-8 Matters. C&DI 124.07 states that a company cannot rely on prior staff guidance to avoid filing preliminary proxy materials (and thereby avoid delaying the definitive proxy filing or selective staff review) despite adequate advance notice of a shareholder's intent to propose a non-Rule 14a-8 matter at a shareholder meeting if the company does not have discretionary voting authority over the matter. Existing staff guidance permitted some registrants to avoid filing preliminary proxy materials in response to non-Rule 14a-8 matters (e.g., matters to be proposed from the floor of the shareholder meeting but not included in the proxy statement) so long as the proxy statement disclosed the nature of the matter and how the company intended to exercise its discretionary voting authority should the matter be presented for a vote at the meeting. However, C&DI 124.07 explains that if the company does not have discretionary voting authority over the non-Rule 14a-8 matter, such as if the shareholder proponent timely informs the company that it intends to deliver its own proxy statement, then the company cannot rely on the prior staff guidance and must file preliminary proxy materials.
- Corporate Name Changes.C&DI 126.02 effectively adds a mere corporate name change to the list of proposals that are expressly excluded from requiring the company to file preliminary proxy materials. We welcome the staff's helping to streamline the proxy statement process for straightforward proposals that should not require selective staff review or the additional time, effort and expense of a preliminary proxy filing.
- Issuance of Additional Securities.C&DI 151.01 relieves a company of the obligation to include certain acquisition-related information under Note A of Schedule 14A in its proxy statement when soliciting security holders to authorize the issuance of additional common stock in a public offering to raise proceeds to finance an acquisition if the company can otherwise fully finance the acquisition. The staff rationale is that such a proposal to issue additional common stock is not an integral part of the acquisition, even though the proceeds may be used to finance the acquisition, because it is not the only means to finance the acquisition. This relief is significant--it applies even when the company's security holders would not otherwise have a separate opportunity to vote on the transaction. The additional acquisition information that would otherwise have been required could include information specified in Item 11, Authorization or issuance of securities otherwise than for exchange (including a description of the securities offered and the offering), Item 13, Financial and other information (including acquisition and pro forma financials required under Rule 3-05 and Article 11 of Regulation S-X); and Item 14, Mergers, consolidations, acquisitions and similar matters (including certain information regarding negotiation history, pro forma financial information and the target). Nevertheless, the staff notes that if the cash proceeds from the common stock issuance are expected to be used to fund any material portion of the acquisition consideration, Note A would apply and the company may need to make the additional acquisition disclosures.
- Omitting Persons from New Plan Benefits Table.C&DI 161.03 relates to the New Plan Benefits Table under Item 10(a)(2) of Schedule 14A. While many registrants were hoping the staff would remove the New Plan Benefits Table requirement altogether, C&DI 161.03 permits a company to omit an individual or group whose award or benefits would be listed as "0" from the New Plan Benefits Table so long as the company instead provides that information about that individual or group through narrative disclosure.
- Elimination of Preemptive Rights. C&DI 163.01 rewords prior Telephone Interpretation guidance in connection with the elimination of preemptive rights to highlight that the financial statements specified in Item 13, Financial and other information of Schedule 14A are not required if not material. Specifically, the prior Telephone Interpretations stated that the elimination of preemptive rights involves the modification of a security under Item 12 of Schedule 14A, and "[t]hus, the financial statements requirements of Item 13 would apply." C&DI 163.01 now states the "financial and other information would be required...to the extent required by Item 13...." We also note that the staff did not include in C&DI 163.01 the express reminder found in the applicable Telephone Interpretations that the elimination of preemptive rights "may be tantamount to the creation of a new security, depending on the facts and circumstances, thereby raising Securities Act registration issues absent an exemption." By negative implication, the staff suggests that a mere elimination of preemptive rights would not constitute the creation of a new security requiring separate registration absent an exemption. However, companies should take care to note that the elimination of preemptive rights is often coupled with other changes to the security that may, when taken as a whole, lead to a different result.