Last week, the Securities and Exchange Commission adopted amendments to its proxy rules to require public companies and other soliciting persons to furnish proxy materials to shareholders using the Internet. All large accelerated filers except mutual funds must comply beginning January 1, 2008. All other companies and other soliciting persons, including mutual funds, must comply beginning January 1, 2009.

The e-proxy rules are intended to decrease the cost of proxy solicitations and make it more cost-effective for persons other than the company to undertake their own solicitations. Under rules adopted in December 2006, companies will first be permitted to make e-proxy solicitations beginning July 1, 2007, but are not required to do so. Many commentators and some of the SEC's Commissioners had hoped the SEC would delay making e-proxy solicitation mandatory until the voluntary system had been tried and proven successful.

How the Mandatory Rules Will Work. Under the new rules, companies must comply with the “notice and access” method for Internet delivery of proxy materials (other than in the context of business combinations) in much the same manner as permitted beginning July 1, 2007. However, companies would be permitted to deliver a full set of proxy materials on paper along with the notice to shareholders, so long as they also make their proxy materials available on a web site and notify shareholders of this fact.

While the final rules have not yet been published by the SEC, it is expected that under the “notice and access" model companies would post proxy materials on a web site and send notice to shareholders at least 40 days before the meeting date. This initial notice, which may not include a proxy card, must be in plain English and must advise shareholders of the date, time and place of the meeting, the availability of e-proxy materials, the matters to be considered at the meeting and a toll-free number, e-mail address and website that shareholders may use to request paper or e-mail copies of proxy materials. Companies must provide paper or e-mail copies within three business days of a shareholder request. Once a shareholder makes a request for paper or e-mail copies, it will remain in effect for future solicitations for that shareholder. Brokers, banks and similar intermediaries will be responsible for delivery of notices and paper or e-mail copies of materials to beneficial owners of street-name shares.

Persons other than the company who wish to make e-proxy solicitations will be required to comply with similar "notice and access" rules, but may limit solicitations to shareholders who have not previously requested paper or e-mail copies of materials.

What This Means for Proxy Solicitations. Beginning July 1, 2007, when voluntary e-proxy solicitations become available, companies will have the opportunity to assess the "real world" effect of e-proxy solicitations, including the impact on shareholder voting and whether actual cost savings are realized. They will also be able to see whether any shift in the balance of power between public companies and shareholder activists occurs, such as a significant increase in dissident director slates and other proposals or in the effectiveness of dissident opposition to management proposals.

The SEC staff''s statement at the open meeting on June 20, 2007, describing this action is available on the SEC’s website here. The final rules, when available, will be posted on the SEC's website here.

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