The SEC proposed amendments to reduce confusion caused by its “notice and access” proxy rules on October 14, 2009. The proposal is available at http://www.sec.gov/rules/ proposed/2009/33-9073.pdf. The notice and access rules were implemented in 2007 as an alternative to the traditional “full set delivery” model, under which public companies deliver complete paper copies of proxy statements and proxy cards to shareholders. Companies that choose to utilize the notice and access model instead send only a Notice of Internet Availability of Proxy Materials (a Notice) to shareholders indicating the manner by which those shareholders may access complete proxy materials via the Internet. These rules have thus far met at least one of their intended goals by generating substantial cost savings for many issuers.
The SEC has, however, become concerned by data suggesting that shareholders receiving a Notice are far less likely to respond to the proxy solicitation than shareholders receiving a complete set of proxy materials. This lower response rate is at odds with the SEC’s interest in informed shareholder participation. The SEC’s release proposes three rule changes designed to increase the effectiveness of notice and access solicitations: 1) create a more flexible format of the Notice; 2) permit issuers and other soliciting persons to include an explanation of the notice and access model in the Notice; and 3) revise the timeframe for a soliciting person other than the issuer to deliver a Notice to shareholders.
Format of the Notice
The proposed amendments would provide issuers and other soliciting persons with more flexibility to choose the format and language of the Notice. Exchange Act Rule 14a-16(d) currently imposes strict requirements regarding the content of the Notice. The Notice must include, along with other relevant information, a prominent legend containing specific wording that indicates that the document is an important notice regarding the availability of proxy materials for the specified shareholder meeting. The legend must further state that the Notice is only an overview of more complete proxy materials available on the Internet that shareholders are encouraged to view, provide a web address at which to view those materials, and explain how to request a paper or e-mail copy of the proxy materials.
The SEC is concerned that the bold-faced legend may seem like boilerplate language to many shareholders, who consequently bypass the information in the legend and thus fail to access and respond to proxy materials that those shareholders would have viewed had they received the full set disclosure by mail. The SEC has hypothesized that if issuers and other soliciting persons have more flexibility in the formatting and language of this portion of the Notice, shareholders may be more apt to pay closer attention to the information it contains. Under the SEC’s proposal, Notices would continue to include a bold-faced legend that states “Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to Be Held On [insert meeting date].” However, the additional information regarding proxy access would no longer be included in the legend; issuers would instead be permitted to provide their own explanation of the process of receiving and reviewing proxy materials, although the SEC anticipates that standardized materials would also be prepared for this purpose. The additional information required by the current Rule 14a-16(d)(2)-(10) (such as a clear and impartial identification of each separate matter to be acted upon and the soliciting person’s recommendations regarding those matters) would continue to be required under the proposed amendments. The SEC has also clarified that the identification of the separate matters to be acted upon need not directly mirror the proxy card.
Explanation of the Notice and Access Model
In addition to allowing more flexibility in the presentation of proxy access information, the SEC has proposed that issuers and other soliciting persons be permitted, but not required, to include with the Notice an explanation of the notice and access model. This explanatory information is not allowed under the current rules. The proposal would amend Rule 14a-16(f) to allow issuers to explain the process of receiving and reviewing the proxy materials and voting detailed in Rule 14a-16. Issuers and other soliciting persons would be able to provide their own explanation or utilize any standardized materials that become available for that purpose, or conversely may choose not to provide any such explanation. Any explanation provided must be strictly limited to a description of the proxy review and voting process. The SEC’s hope is that, if adopted, the newly permitted explanation will inform shareholders and increase shareholder participation in the proxy review and voting process.
Revised Timeframe for Non-Issuers to Deliver Notice
The final element of the SEC proposal would revise the timeframe for a soliciting person other than the issuer to deliver a Notice to shareholders. Under current rules, a third-party solicitor must send its Notice by the later of 40 calendar days before the shareholder meeting to which the Notice relates, or 10 calendar days after the issuer first sends its Notice or proxy statement to shareholders. Under the SEC’s current practice, the SEC staff reviews preliminary proxy materials filed by soliciting shareholders. This review may at times not be completed within 10 days; in such instances, a shareholder contesting the issuer’s proxy recommendations is effectively unable to deliver its own proxy materials in a timely manner.
The proposed amendment to Rule 14a-16(l)(2) would change the timeframe for a third party to provide a Notice to the later of 40 calendar days before the shareholder meeting, or the date on which that third-party solicitor files its definitive proxy with the SEC, provided it files its preliminary proxy statement within 10 days of the issuer filing its definitive proxy statement. The amendment would thus allow a grace period for thirdparty solicitations that is not limited by the SEC’s timeline for reviewing the preliminary materials. Even if the proposed new timeframe is adopted, shareholders should still receive the Notice with sufficient time to review the proxy materials and make an informed voting decision. The SEC anticipates that this proposal would improve the effectiveness of third-party solicitations under the notice and access model.
The official comment period for the proposed amendments concluded on November 20, 2009, and the overall response to the proposal has been generally positive. While some comments have questioned how effective the amendments are likely to be in spurring shareholder participation, there seems to be little concern that the amendments may be harmful to issuers or investors. Most commenters instead welcome the more flexible approach to proxy solicitation contemplated by this proposal. Notice and access remains a relatively new approach to the delivery of proxy materials, and with this proposal the SEC is demonstrating its commitment to working out the kinks in the notice and access model.