Corporate issuers may reduce the expenses associated with annual shareholder meetings by taking advantage of the rules recently adopted by the Securities and Exchange Commission (SEC) permitting electronic proxy delivery. The following alert highlights key points and pitfalls that corporate counsel and other executives of publicly traded corporate issuers ought to consider in evaluating whether this new approach to the proxy process is right for their company.
The New E-Proxy Model: “Notice and Access”
On January 22, 2007, the SEC promulgated rules permitting public companies to follow new methods for delivering proxy materials to shareholders. Companies can now satisfy their delivery obligations under the SEC’s proxy rules by fi rst providing notice to shareholders of the electronic availability of the proxy materials and simultaneously posting those materials on a web site. This “notice and access” approach was adopted in an effort to reduce the expenses and burdens associated with the proxy solicitation process and to provide a more effi cient process for delivering proxy disclosure to shareholders.
Which Companies May Use the New Model?
Publicly traded corporations and other issuers subject to the SEC’s proxy solicitation rules. Soliciting persons other than the issuer also may rely on the new model.
What Materials May be Delivered Electronically?
- Notices of shareholder meetings.
- Schedule 14A proxy statements and consent solicitation statements.
- Forms of proxy (i.e., proxy cards).
- Schedule 14C information statements.
- Annual reports to security holders.
- Additional soliciting materials.
- Any amendments to such materials that are required to be furnished to shareholders.
When Does the New Model Become Available?
The new model may be used for meetings to be held on or after August 10, 2007. The notice to shareholders may be sent only on or after July 1, 2007.
Under the new model, issuers may choose to continue to distribute paper proxy materials. The SEC, however, recently proposed rules that would eventually require all issuers to post proxy materials on a web site (known as the “universal internet availability model”). The proposed rule would require large accelerated fi lers (issuers with an aggregate market value of common equity held by nonaffi liates of $700 million or more), other than registered investment companies, to comply with the “universal internet availability model” beginning on January 1, 2008. Other issuers would be required to comply with this rule beginning on January 1, 2009.
How It Works
Companies must send a notice of availability to shareholders 40 calendar days or more in advance of the shareholder meeting date and post proxy materials on a web site at the same time that the notice is sent to shareholders. This notice also must be fi led with the SEC.
Key Contents of the Notice of Availability
- A legend in bold face type providing the web site address where proxy materials may be accessed (specifi c web site address must lead shareholders directly to the proxy materials).
- The date, time and location of the meeting.
- List of matters to be acted on and the issuer’s recommendations regarding those matters.
- A toll-free telephone number, an e-mail address and a web site address where the shareholder may request paper or e-mail copies of the proxy materials.
- Instructions on how to access the proxy card (the instructions must not enable a shareholder to execute a proxy without having access to the proxy statement and annual report).
Web Site Requirements
- Must be a publicly accessible web site other than the SEC’s EDGAR web site.
- Must include at least one method of executing a proxy vote.
- Proxy materials must remain on the web site and accessible through the conclusion of the related shareholder meeting.
- Proxy materials must be available in formats that are convenient for both printing and viewing online and in a readily searchable format, such as HTML.
- Must be posted on the web site no later than the time when the notice is sent to shareholders.
- Cannot accompany initial notice of availability, but may mail a paper proxy card 10 calendar days or more after sending the initial notice of availability, along with another copy of the notice of availability.
- A copy of the notice of availability must accompany the proxy card if copies of the proxy statement and annual report do not precede or accompany the proxy card.
Copies on Shareholder Request
- Must send free paper or e-mail copies (at the option of the shareholder) of proxy materials within three business days after receiving the request.
- Must provide proxy materials to shareholders for one year after the conclusion of the meeting to which those materials relate.
If the notice of availability is sent by e-mail, the issuer must send a separate e-mail to each shareholder.
- Must follow new model if issuer requests.
- May direct shareholders to the issuer’s web site or its own web site to access proxy materials.
- Must deliver its own notice tailored to customers.
- Notice must contain the same information as the notice sent by the issuer with revisions to refl ect differences between registered holders and benefi cial owners.
- Should coordinate with the issuer and any agents to ensure that voting instructions will be available on a timely basis.
- Must respond to requests for paper or e-mail copies from benefi cial owners.
Companies that choose to follow the new model should be sure to review their annual meeting calendar. Particular attention should be given to: (i) the dates for delivery of the notice of availability, (ii) the time required to prepare a compliant web site, (iii) who will be involved in implementing the new model, (iv) whether a fi nancial printer, transfer agent or other provider should be used to assist with the proxy process, and (v) how long it will take to obtain shareholder consent for electronic delivery of proxy materials.
Potential Pitfalls and Other Issues to Consider
Will electronic delivery of proxy materials affect the response rate of shareholders?
Some corporate governance commentators believe that the electronic delivery of proxy materials might decrease vote turnout because shareholders must either request paper copies of proxy materials to vote or read the notice of availability and then log on to the internet to review the proxy materials and be able to vote.
How do I ensure that the notice of availability that is sent under the new model also satisfi es the state law requirements for meeting notices to shareholders?
If state law permits electronic delivery of shareholder meeting notices, the state law meeting notice may be integrated with the notice of availability required under the new model and sent electronically as a combined notice. Delaware, for example, permits electronic delivery of shareholder meeting notices if a shareholder consents to electronic delivery. Pennsylvania also permits electronic delivery of shareholder meeting notices. If applicable state law does not permit electronic delivery of shareholder meeting notices, you will need to mail a separate paper copy of the state law notice or combine the state law meeting notice and the notice of availability required under the new model and mail a paper copy.
How do I know how many paper copies of proxy materials to order?
You may send a communication to shareholders in advance of a proxy solicitation to estimate the number of paper copies that will be required. This communication would not be deemed a notice of availability under the new model. You also will need to ask intermediaries for the number of benefi cial owners who will require paper copies of the proxy materials. You should overestimate the number of paper copies that you will need at least for the first few years that you use the new model. Consider also the costs and time involved in asking your fi nancial printer to print additional copies, particularly given the requirement to send paper copies of documents within three business days after receipt of the request.
What process do I follow if I discover a misstatement or other problem with the disclosure in the proxy materials?
The release does not explicitly address this issue, but we believe that you should follow the same process that you follow now to address a misstatement or other problem with disclosure in the proxy materials.
Should I use a fi nancial printer, transfer agent or other provider to mail the notice?
Consider carefully whether and which fi nancial printer, transfer agent or other providers you will use to assist you in complying with the requirements of the new model. New providers likely will enter the industry as a result of the new model and you should ensure that you are comfortable with the fi nancial printer, transfer agent or other providers before you engage them to assist you with the proxy process. A few fi nancial printers, transfer agents and other providers, such as ADP and Computershare, already have products available to assist with the electronic delivery of proxy materials.
How long will it take for my company to obtain electronic delivery consents from shareholders?
Obtaining consents is likely to take signifi cant time; therefore, this item should be included early in a proxy calendar. Consider whether you will need to work with intermediaries, a fi nancial printer, transfer agent and other providers to obtain consents and e-mail addresses from shareholders. Keep in mind that you already have e-mail addresses for certain shareholders, such as your employees.
What if my web site goes down and shareholders cannot access the proxy materials? Is additional disclosure or another fi ling required?
The SEC rules do not address what a company should do if its web site goes down. In such an event, we recommend that issuers consider fi ling a Form 8-K and contacting the SEC to obtain a letter indicating that no enforcement action will be taken because the web site was temporarily unavailable. Consider also whether you should indicate on your web site that it was temporarily unavailable, but that it is now fully operational.