On January 1, 2009, all issuers and others who file proxy statements with the Securities and Exchange Commission became subject to the SEC’s electronic proxy delivery rules (referred to as the “e-proxy rules”). Previously, only Large Accelerated Filers1 were required to comply with the e-proxy rules. Under the e-proxy rules, issuers and other persons soliciting proxies may choose to conduct their solicitation using one of two methods, the “notice only option” or the “full set delivery option.”
The Notice Only Option
Under the notice only option, issuers are not required to mail a paper copy of their proxy statement and annual report to shareholders. Instead, issuers may post these proxy materials on an Internet website2 and send a notice of availability of proxy materials to shareholders informing them of the Internet availability of the proxy materials. The e-proxy rules require that the proxy materials be posted on a website and that the notice to shareholders be mailed at least 40 calendar days before the annual meeting. Generally, the notice of availability of proxy materials must (1) identify the specific website where proxy materials are posted; (2) provide specified information about the upcoming shareholder meeting (including identification of the matters to be acted on at the meeting); (3) include a list of the proxy materials available on the website and instructions on how to obtain or access the proxy card (including any control/identification numbers that the shareholder needs to do so). Rule 14a-16 under the Securities Exchange Act of 1934, as amended, sets forth these requirements in detail.
An issuer must provide shareholders with a method to execute proxies as of the time the notice of availability of proxy materials is first sent to shareholders and the proxy materials are posted on the website. These methods may include an Internet voting platform, a toll-free telephone number or a printable or downloadable proxy card available on the website. If a telephone number or website for executing a proxy is provided, the telephone number may appear on the website, but not in the notice of availability of proxy materials. An issuer may not send a paper or e-mail copy of the proxy card to a shareholder until at least 10 calendar days after the date it has first sent the notice of availability of proxy materials to its shareholders.
Under the notice only option, shareholders can request that the issuer provide them with a paper copy of the proxy materials.
The Full Set Delivery Option
Under the full set delivery option, issuers generally follow the traditional method for mailing a copy of the proxy statement and annual report to shareholders. Issuers are not required to mail a notice of availability of proxy materials to shareholders in addition to the mailing of proxy materials. Under the proxy rules, there are a few changes to the traditional proxy statement preparation and mailing process. The proxy statement must include much of the same information that is required to be included in the notice of availability of proxy materials. The issuer also is required on the date of mailing to post the proxy statement and annual report on a website that conforms to the requirements of the website used to post proxy materials under the notice only option. Since it is not necessary for the issuer to give shareholders sufficient time to access the proxy materials online or to request a paper copy, the 40-day deadline for mailing the notice of availability of proxy materials and website posting of proxy materials does not apply to the mailing of proxy materials under the full set delivery option.
Issuers May Use a Combination of Both Options
The e-proxy rules allow issuers to use both the notice only option and the full set delivery option for the same solicitation. We have seen companies that have used the notice only option for their institutional shareholders and the full set delivery option for their retail shareholders.
Considerations When Choosing a Delivery Option
Cost. Utilizing the notice only option may be more cost effective than the full set delivery option because of the savings in printing and postage costs. The cost savings generally increase as the number of shareholders solicited increases. It should be noted that in 2008 approximately 1.05 percent of all shareholders requested companies to provide them with a paper copy of the proxy materials and as many as 11.4 percent of all shareholders of companies using the notice only option received a printed set of proxy materials because they indicated their preference to always receive printed materials or because the company also mailed proxy materials to a segment of its shareholders (e.g., retail shareholders).3 Issuers should remain cognizant of the printing and postage costs associated with fulfilling these requests when deciding which method to use.
Earlier deadlines. If the notice only option is used, the notice of availability of proxy materials must be mailed no later than 40 calendar days before the date of the meeting and the proxy materials must be posted on the Internet on this date. However, Broadridge and other intermediaries generally request to receive the notice approximately seven days prior to the mailing date. Under the traditional full set delivery option, proxy materials are generally not mailed until approximately 20 business days prior to the meeting date.
Reduced retail voting. Broadridge found that the percentage of total retail shares that voted dropped from 34.28 percent to 16.57 percent from 2007 to 2008 for companies that used the notice only option for the first time in 2008.4 The average quorum size and retail shareholder voting response rates also declined for companies that used the notice only option. Issuers should consider their shareholder base and the proposals that will appear on the ballot at the annual meeting when deciding whether to use the notice only option.5 Because brokers cannot vote on “nonroutine” matters, if the approval of an equity compensation plan or another nonroutine matter is going to appear on the ballot, issuers should consider whether the loss of retail shareholder votes could jeopardize approval of the proposal.
Proxy Fights May Be Less Costly Using the Notice Only Option
The e-proxy rules do not apply only to issuers. Any person who solicits votes by proxy and that is required to file a proxy statement with the SEC can use the notice only option. As a result, dissident shareholders may more easily be able to mount a proxy fight since they do not have to incur the cost of printing and mailing a complete proxy statement and a proxy card to each shareholder. Moreover, dissident shareholders are not required to solicit every shareholder or to furnish proxy materials to every shareholder. For companies with a large institutional shareholder base where the retail vote is not consequential, the notice only option could be a particularly effective method for a dissident shareholder to conduct a proxy contest.