More and more activist shareholders are utilizing proxy campaign websites as a means of disseminating information to other shareholders when contemplating or actively pursuing a proxy contest. Such websites have proved a relatively low cost and highly efficient method of disseminating both the initial information regarding proposed changes activist investors seek to effectuate and the form of proxy later on.

As investor creativity increases the ways in which activists reach out to other shareholders, questions about compliance with the SEC rules arise. Many investors wish to include press releases, live streaming of analyst reports and hyperlinks to other sources discussing the state of the company or management’s performance. Such features raise legal concerns regarding liability for both the content of the communications and their form.

General Compliance Considerations

In terms of content, a website must, even in the early stages of a proxy contest, comply with Rule 14a-9 regarding the accuracy of the information it contains. The website must not contain any statements that, in light of the circumstances and time at which they were made, are false or misleading with respect to a material fact. Materiality depends on whether the information in question would have influenced a reasonable shareholder’s vote on the matter in question.1 The website must also not contain a statement which omits a material fact necessary to render that statement not misleading or false. Some areas of potentially misleading information are:

  •  Predictions as to specific future market values;
  • Material which directly or indirectly impugns character, integrity or personal reputation, or directly or indirectly makes charges concerning improper, illegal or immoral conduct or associations, without factual foundation;
  • Failure to so identify a proxy statement, form of proxy or other soliciting material of any other person or persons soliciting for the same meeting or subject matter; and
  • Claims made prior to a meeting regarding the results of a solicitation.2

It is advisable to periodically review and update the website to avoid inadvertently violating these rules through obsolete postings. Although the SEC has not directly imposed a duty to update in this context, it has expressed that “electronically delivered documents must be prepared, updated, and delivered consistent with the provisions of the federal securities laws in the same manner as paper documents.”3 Because a website can be viewed as continuously “republishing” the information it contains, its information should be accurate and not misleading at all times so long as the site is open. Nonetheless, as a precautionary measure, it is advisable to include a legend disclaiming the responsibility to update.

There are also several restrictions on the format of the website with which to comply. The user should, upon entering the website, be prompted to accept or reject a disclaimer regarding the purpose and intended use of the website, and there should be a legend on the site advising security holders to read the proxy statement when it becomes available.4 It is advisable that the website be accessible only to users who accept the disclaimer.

The SEC does not require pre-clearance of materials to be posted to the website. However, all soliciting material that is placed on the website or made accessible by hyperlink must be filed with the SEC (as well as any exchange on which the company’s shares are listed) not later than the date on which the material is first made available to shareholders on the website.5

In addition, security measures to protect the website from being accessed and changed without the activist investor’s consent should be instituted. The security systems should be reviewed and updated regularly and the website should be monitored to ensure that it remains accessible and has not been altered.6

Liability Regarding Third-Party Information and Hyperlinks

The SEC considers all materials posted to the website the responsibility of the activist investor posting them.7 This includes information produced by third parties (such as analyst reports and news reports) and external information accessed via hyperlinks.

The SEC has stated that inclusion of a hyperlink within a document required to be filed or delivered under the federal securities laws renders the posting party responsible for the hyperlinked information as if it were part of the document. The reasoning behind this requirement is that inclusion of the hyperlink demonstrates “the hyperlinking party’s intent to make the information part of its communication with investors, security holders and the markets.”8 Although this statement was issued in the context of Section 10 prospectus concerns, the SEC noted in the same release that:

“ some securities lawyers have raised similar issues concerning the use of a web site in connection with proxy solicitations, tender offers and other transactions that require documents to be filed or delivered under the federal securities laws. Although the guidance in this section focuses on issues relating to the registration process, it applies by analogy to all documents required to be filed or delivered under the federal securities laws.”9

In addition, the use of reprints or reproductions, in whole or in part, of previously published material must (1) state the name of the author and publication, the date of prior publication, and identify any person who is quoted without being named in the previously published material; (2) state whether or not the consent of the author and publication has been obtained for the use of the previously published material as proxy soliciting material, except where the quoted material is a public or official document;10 and (3) if any participant paid for the preparation or prior publication of the previously published material, state the circumstances of the arrangement.11

Further, the activist investor also should be aware that posting third-party content and including hypertext links to third-party (target) websites at which third-party content can be accessed raises issues under relevant copyright and unfair competition laws. For example, copyright law gives the owner of a copyrighted work the exclusive right to reproduce, distribute and publicly display the work. To legally post a copyrighted work to a proxy campaign website, therefore, the activist investor would either have to obtain the copyright owner’s express or implied consent or the use of the copyrighted work would have to constitute “fair use” under copyright law.

Allowing visitors to navigate to a third-party website or to an article contained on the inner page of a third-party website (“deep linking”) by clicking on a hypertext link also raises legal issues. Generally, it is presumed that there is an implied right to use a URL or a domain name link to a third party’s web page. However, use of a third party’s logo as a hyperlink would probably require consent, and deep linking may, in some circumstances, constitute unfair competition.12 Further, where a third-party website has a posted notice prohibiting deep linking or allowing it only under certain circumstances, failure to obey the posted policies or requirements can defeat a claim of implied license to deep link.

Accordingly, prior to posting any third-party content (e.g., newspaper articles or commentary) or providing hypertext links to websites containing such content, the activist investor should check to make sure that its use of such content or hypertext links is permitted and complies with any restrictions or requirements imposed by the copyright owner or target website operator.

Other features, such as applications encouraging viewers to leave their email addresses in order to receive news updates and other information, are common and normally acceptable.13 The SEC does not require the filing of copies of emails sent in response to inquiries from shareholders requesting further information. However, other unsolicited email messages that do more than request the return of previously solicited proxy forms must be filed.14

The insertion of a blog on a proxy campaign website presents special problems under the proxy rules. A blog is intended to be a forum for expression of opinions and concerns. As such, its inclusion is likely to attract statements from shareholders that would be in violation of the proxy rules or other laws.

The Communications Decency Act of 1996 protects any “provider or user of an interactive computer service” from being “treated as the publisher or speaker of any information provided by another information content provider.” Thus, Internet service providers are somewhat shielded from liability for postings on online bulleting boards. Such protection, however, focuses mainly on potential defamation and copyright liability and not on the violation of securities laws. Furthermore, the act has not been expanded beyond Internet service providers to protect companies operating bulletin boards on their websites. Even if the act were extended to such cases, it is unlikely that its protection would cover non-issuer proxy campaign websites, or aiding-and-abetting liability.15

Thus, to avoid liability, a blog needs to be reviewed regularly and edited significantly. The constant monitoring and editing of the blog may prove too burdensome to justify its presence on the website. It is also unclear whether every blog entry would have to be filed with the SEC. If true, such a requirement might also render the blog too burdensome for inclusion on the website. Some commentators also have questioned whether communication between investors over the Internet may turn such investors into a “group” under Section 13(d).16

Internet Publication of Proxy Materials Requirements

Rule 14a-16 was recently amended to require that, as of Jan. 1, 2008, issuers and other soliciting persons posting their proxy materials to a website provide notice to shareholders of the availability of these materials on the Internet.17 Should the activist investor decide to include such proxy materials on its website, there are additional features that must be implemented to avoid violation of this rule. For example, the website must not infringe on the anonymity of its viewers. Thus, the activist investor must refrain from installing cookies and other tracking features on the pages where the proxy materials are posted. While the rule does not require turning off the connection log, which automatically tracks numerical IP addresses that connect to that website, in most cases these IP addresses do not provide sufficient information to identify the accessing shareholders, and such data may not be used in an attempt to find out more information about persons accessing the website. 18 In addition, proxy materials should be available in both a searchable HTML version and a version convenient for reading and viewing graphics, such as PDF.19