On July 24, 2008, California Senate Bill No. 1409 became law permitting California corporations to fully harness e-proxy rules recently adopted by the Securities and Exchange Commission. Under the new law, consistent with SEC Rule 14a-16, a public California corporation may utilize the Internet to deliver an annual report to shareholders.
Section 1501 of the California Corporations Code establishes annual report standards for corporations with their principal executive office in California or that hold frequent board meetings in California. Previously, a California corporation could only effectuate electronic delivery if shareholders consented in advance. By contrast to that opt-in model, the SEC’s e-proxy rules in 2007 permitted public companies to employ an opt-out model of disseminating proxy materials, including the Rule 14a-3(b) annual report. The New York Stock Exchange and NASDAQ modified their listing standards to conform with the SEC e-proxy rules. Now, effective immediately as a result of Bill No. 1409, publicly held California corporations also may proceed with electronic dissemination of the annual report.
Prior to the adoption of Bill No. 1409, whether the SEC’s e-proxy rules preempted California law was uncertain. The new law clarifies that California’s annual report delivery requirement “shall be satisfied if a corporation with an outstanding class of securities registered under Section 12 of the Securities Exchange Act of 1934 complies with [Rule 14a-16] with respect to the obligation of a corporation to furnish an annual report to shareholders pursuant to [Rule 14a-3(b)].” Generally, the SEC’s e-proxy rules require certain public companies to post their proxy materials and annual reports online, and either (i) follow the traditional model of delivering a full set of paper proxy materials and annual reports, or (ii) deliver a notice only containing specific information including the website address where the proxy materials and annual reports are posted.
Although the new California law has eliminated legal uncertainty, e-proxy is not ideal for all California corporations. While e-proxy reduces printing and mailing costs, it typically also results in lower shareholder participation rates. Publicly held California corporations considering e-proxy should carefully weigh the economic and governance costs when determining whether and to what extent to electronically disseminate proxy materials and annual reports to shareholders.