All public companies must soon give shareholders the choice to receive proxy solicitations on the Internet. Companies are now permitted to post proxy materials on an Internet website instead of distributing them by mail. Bigger U.S. companies (large accelerated filers) have been required to provide website access since the beginning of 2008. All companies must comply for proxy solicitations commencing on or after January 1, 2009.1
This will save printing and mailing costs and should prompt creative use of the Internet’s dynamic communication techniques for investor relations. Even companies that do not use the “Notice Only” model of E-proxy may be forced to accommodate it, since shareholders soliciting proxies may use it.
You must start planning your annual meeting earlier than last year in order to evaluate your options and make arrangements. The Audit Committee and Board may need to approve the proxy materials sooner. An earlier record date may be required.
All companies and other solicitors subject to the E-proxy rules must post proxy materials on a website and send a notice of their availability to shareholders. You may rely primarily on that approach – the “Notice Only” model – or you may also mail hard copies as in the past – the “Full Set” model. You may want to “stratify” your solicitation, using different approaches for different shareholders. Companies that email proxy materials to employees and other consenting shareholders may continue to do that.
All Solicitations. All companies subject to the new rules must:
- Send shareholders a Notice of Internet Availability of Proxy Materials in the form prescribed by SEC Rule 14a-16 (the “Notice”) and
- Post a complete set of proxy materials (proxy statement, proxy card and annual report) on the Internet no later than the date the Notice is first sent.
- The materials must meet the formatting requirements and comply with the privacy protections described in “Preparing for Your Shareholder Meeting – Website Requirements” below.
The Full Set Model. Apart from the mandatory website posting, the Full Set model follows traditional practice. Under this approach, the company delivers a full set of proxy materials by mail or e-mail.2 The Notice may be incorporated into the proxy statement and proxy card instead of being sent separately. The Notice and proxy materials need not be sent by any particular deadline, although they must be provided to street name holders farther in advance of mailing than before. Follow-on (reminder) proxy cards may be sent out without any other materials.
The Notice Only Model. A company may decide not to deliver hard copy proxy materials except to shareholders who explicitly request them. Under this approach, the Notice must be sent to shareholders and filed with the SEC at least 40 days before the shareholder meeting.
- The Notice may not be accompanied by any substantive materials other than a required State law meeting notice.3
- The Notice may not include a proxy card or a telephone number to vote a proxy. However, shareholders must be given a method to execute proxies immediately. This may be satisfied through an electronic voting platform, a toll-free telephone number appearing on the website, or a proxy card that can be downloaded or printed from the website. This ensures that shareholders have had an opportunity to view the proxy materials before voting.
- The Notice must inform shareholders how to request delivery of the proxy materials in hard copy or by e-mail. They may do so at any time until one year after the meeting. The company would be required to comply with requests made before the meeting within three business days. The Notice must also give the shareholder the option to request hard copy or e-mail delivery of proxy materials for all future meetings.
- For follow-on solicitations, the company may send a proxy card with another copy of the Notice ten days after sending the initial Notice (or earlier if accompanied or preceded by a copy of the other proxy materials).
Responsibilities of Street Name Holders. The great majority of brokers and other “intermediaries” holding shares in street name use Broadridge Financial Solutions, formerly ADP, to solicit beneficial owners. Broadridge follows the Notice Only or Full Set model as directed by the company.
Broadridge prepares and sends its own Notice, designed for beneficial owners, at the same time as the company’s Notice is sent. Broadridge also maintains a website at which beneficial owners may provide their voting instructions. This website may provide access to the company’s proxy materials or may direct beneficial owners to the company’s or a third party’s website.
Beneficial owners requesting paper or email copies of the proxy materials must contact the intermediary rather than the company. Fulfilling such requests must meet a tight schedule.
Shareholder Solicitations. Shareholders and others soliciting proxies (typically in opposition to management) may use the Notice Only or Full Set models, or both, in generally the same manner as companies. These “other soliciting persons” will likely find creative ways to make use of the Internet’s features to mount cost-effective, flexible campaigns. Company IR departments will need to be equally creative in response. On the other hand, the longer notice deadlines may deter shareholder use of the Notice Only approach. (To date, there has been minimal use of E-proxy for solicitations in opposition to management.)
If the company provides its shareholder list to the other soliciting person, as it may elect to do under Rule 14a-7, it must identify those shareholders who have requested hard copy delivery, but (due to privacy concerns) it may not identify those who have requested e-mail delivery. If the company instead elects to send out the other soliciting person’s materials, it must comply with any use of the Notice Only model by the solicitor.
Preparing for Your Shareholder Meeting
Choosing the Model. In considering whether Notice Only or Full Set is the right approach for your company:
- It is clear from the 2007-08 experience that larger companies using Notice Only will save significant amounts. Smaller companies must analyze the comparative costs. (See “Preparing for Your Shareholder Meeting – Cost Analysis” below.)
- You may want to solicit shareholders in advance to ascertain preferences for hard copy or obtain consent to e-mail delivery. Such solicitation can take place throughout the year.
- You should consult with Broadridge about the preferences expressed by your beneficial owners, whom Broadridge has been soliciting since early 2007.
- You should analyze the composition of your shareholder base and determine whether it’s necessary or desirable to stratify the solicitation. See “Special Considerations – Stratification” below for a discussion of the issues.
- You should take into consideration the public relations impact of the differing approaches. The electronic approach may send a particular, desirable message for some kinds of companies. On the other hand, a consumer products company couldn’t use it to include product coupons or other special offers.
- Because website posting is required under either model, all companies should address the public relations benefits of preparing a user-friendly electronic annual report. (See “Special Considerations – Improving Shareholder Communications” below.)
- You should take into account the items expected to be on the meeting agenda.
- Some observers believe that sending a Full Set to retail voters will improve the pro-management vote on contested matters.
- The Notice Only model may not be used for solicitations related to business combinations.
Proxy advisory firms have developed experience with Notice Only and are aware of the voting tendencies of different shareholder groups. As a result, they can help companies decide among the various alternatives.
Timing. Preparation must start earlier than in prior years. Companies using Notice Only must file and mail the initial Notice at least 40 days before the meeting – before proxy materials are typically sent out. For all companies subject to the new rules, including those using the Full Set approach:
- You must finalize the proxy materials (in addition to the new Notice) a week or more earlier than in prior years so that intermediaries can prepare their Notices to send at the same time as the company’s. (Broadridge expects to receive your materials about 47 days before the meeting date.)
- The record date may need to be earlier than last year (although within the window allowed by your bylaws and state law).
- You may need to obtain Audit Committee and Board approvals of the proxy materials earlier than last year.
- Identity tracking tools that may be used on the company’s current Investor Relations web page may not meet the SEC’s privacy requirements under Rule 14a-16 (described in “Website Requirements” below). You may need to establish and test a new web page – whether in-house or outsourced.
- If you want an electronic voting platform, that must also be established and tested.
- You will need additional time to prepare the annual report for posting in searchable (and, preferably, user-friendly) form.
- If you know that a third party will solicit proxies, you may want to consider whether coordination is desirable to avoid conflicts on agenda items other than the one in issue.
- Minor changes may be required in the company’s existing householding program.
Each step in the solicitation process must be reviewed with the printer, the transfer agent and Broadridge to avoid problems once underway.
Website Requirements. Website posting of proxy materials is required whether you use the Full Set or the Notice Only model. The website may not be the SEC’s EDGAR site. It must be operational, free of charge, before the initial Notice is sent. You must maintain the proxy materials on the website until the conclusion of the shareholder meeting and must post any amendments or supplemental materials used in connection with the solicitation no later than the day on which they are first used. In addition:
- The website address given in the Notice must link directly to the proxy materials; shareholders may not be required to browse a site to find them.
- The company must present the materials in a format or formats “convenient for reading online” (i.e., searchable) and for printing on paper.
- This applies to the annual report to shareholders as well as the proxy statement. Companies that prepare a glossy annual report need to address the additional formatting and related time requirements early in the process.
- The SEC admonishes companies to consider whether the size or format of the files used will hinder access by shareholders without broadband connections.
- If special software is required to view the materials (e.g., Adobe Acrobat), you must provide a link to a free download.
- Investor Relations should consider whether this presents an opportunity to rethink your traditional presentation. (See “Special Considerations – Improving Shareholder Communications” below.)
- The website must be maintained “in a manner that does not infringe on the anonymity” of a person accessing it. In particular:
- The site may not track the identity of persons accessing it.4
- It may not install cookies that collect personal information about the user.5
- The company may not use the e-mail address of a shareholder requesting proxy materials for any other purpose.
- Since the company must provide the shareholder a means to execute a proxy immediately, using an electronic voting platform makes sense.
- You should pay attention to ease of use. For example, formatting the proxy materials using so-called “dynamic HTML” will enhance shareholder understanding, and providing a hotlink allowing the shareholder to toggle from inside the proxy statement to an electronic voting mechanism and back will increase vote production.
In the first year of E-proxy, many issuers used website hosting services offered by Broadridge or financial printers. These did not receive universal approbation. Before deciding to take that route, even though it may at first glance appear easier, you should carefully examine what’s involved, the results produced, and the actual costs. In the opinion of some observers, companies can produce more satisfactory results at lower cost by designing and posting the proxy materials on their own website.
Cost Analysis. Companies will need to assess the costs of complying with the website posting requirements and make a comparison between using the Full Set model or Notice Only. New costs will include those for:
- preparing and sending the company’s Notice;
- establishing and hosting a new website, if necessary, or modifying any current use of tracking tools on the company’s IR site to comply with the privacy requirements;
- formatting the proxy materials for website presentation, whether in-house or outsourced;
- intermediaries’ preparation and sending their Notices, which are on the company’s tab;
- Broadridge’s and printers’ costs for additional services; and
- an electronic voting platform, if desired.
Shareholders’ advance elections to receive hard copy must be taken into account in quantifying the print run. Stratification, discussed below, may be used to optimize the cost / vote production equation. Broadridge reports that companies electing the Notice Only model in 2007-08 still mailed full sets of proxy materials to an average of 11½% of accounts.
Shareholder requests for hard copies of the proxy materials in a Notice Only solicitation could be costly. One needs to weigh the costs of a follow-on printing to satisfy unexpected demand against those of printing a reserve initially. This includes determining the most efficient way to warehouse copies and fulfill requests – whether in-house, by intermediaries, by the printer, or by Broadridge. Furthermore, although the initial solicitation may be expected to save postage costs, any such shareholder requests must be satisfied by first class mail (if not emailed). That said, experience from the 2007-08 proxy season shows that only about 1% of all accounts requested hard copy after receiving a Notice.
In addition to Broadridge (whose offerings and fee structure may be reviewed at http://www.broadridge.com/notice-and-access/index.asp), the principal financial printers are participating in the new regime and provide dedicated website hosting and, in some cases, electronic voting platforms. Companies should weigh the convenience, results and costs of using such services against the control, results and costs of using independent web design services and keeping the hosting in-house.
Improving Shareholder Communications. One criticism from last season is that many shareholders were confused by the Notice (some thought it was a proxy card and tried to mark and return it), but that the SEC’s content limitations prevent more user-friendly formats. We understand that the SEC is considering whether to improve the situation by allowing new content. In the mean time, you should focus on making the Notice as clear and well-organized as possible. Among other things, you should provide a short, simple URL to access the designated web page.
E-proxy presents companies with a vehicle to improve shareholder communications, and a great excuse to reach out. This potential has hardly been realized. The first year’s experience with website presentation saw many annual reports and proxy statements that were unclear and awkward to navigate. Many of these were presented in PDF or image-based formats on slow websites hosted by third party service providers.6
By contrast, some companies – Intel prominent among them – produced dynamic, user-friendly materials that dramatically improved the shareholder’s experience.7 This can be done by smaller companies too, using available resources. Recommendations for annual report designers and other suggestions for user-friendly website presentations may be found at http://www.irwebreport.com/ and through other sources.
You may even go further than text and pictures, adding a multimedia presentation to the website version of the annual report. For example, you could include the CEO’s letter in audible format, video of the company’s products in use, or audio prompts directing the reader to other sections.
Stratification. During the 2008 proxy season, companies that used different approaches for different shareholder groups appeared to be more successful at optimizing the trade-off between retail vote generation and cutting costs than companies using Notice Only across the board.
- On average, retail voting at companies using the Notice Only model dropped to about 17% of shares held, compared with about 34% the previous year, and the per capita participation rate dropped even more. However, companies that sent a Full Set to retail holders experienced 65% retail share voting.8
- Some companies sliced the shareholder base further, using Notice Only for the smallest retail accounts or those that had no voting history, while sending a Full Set to larger retail holders.
- Some companies also sent a Full Set to international accounts, calculating that a followup hard-copy, first-class mailing on request would be too costly.9
- Participants in ERISA plans that hold company stock may also have to be treated differently, as discussed below.
Since diminished retail voting has not materially affected quorums because of the high proportion of shares held in institutional hands, a company may well put saving costs ahead of encouraging the marginal additional retail vote. However, it may be a good idea to take the long view and spend a bit more to preserve the retail franchise. Apart from philosophical reasons, loyalty in the more stable retail base may pay dividends for management in a future contested vote.
Employee and Benefit Plan Shareholders. You may already be providing employee and other benefit plan shareholders with proxy materials via email. The SEC and Department of Labor allow this without the affirmative consent that is required from other shareholders, so long as the employee regularly uses email in the course of employment. (Consent and certain disclosures are required for other employees.) The Notice Only model works well here if it includes a hyperlink to the posted proxy materials.
Unfortunately, it is not clear that companies may use a paper Notice Only approach for ERISA plan shareholders, since the DOL has historically required that such holders be provided the materials themselves. Unless the DOL confirms that Notice Only is acceptable, companies that do not deliver to these shareholders by email are advised to stratify them into a Full Set group.
Companies must begin planning now to comply with the new rules in the next proxy season. Internet-focused distribution presents novel possibilities for improving investor relations. Companies should take advantage of them.