The Securities and Exchange Commission (SEC) recently amended the proxy rules to permit issuers and other persons to distribute proxy materials and annual reports by posting them on a publicly accessible Internet site and sending shareholders a notice of the posting. This "notice and access" model is intended to provide issuers a streamlined and cost-effective process of proxy distribution. However, because the process also provides a cost-effective means for other persons to solicit proxies, it reduces the potential cost of waging a proxy contest and may make proxy contests more likely. In addition to adopting rules permitting the voluntary use of the notice and access model, the SEC also proposes requiring Internet availability of proxy materials. The rules permit use of the notice and access model beginning July 1, 2007, for shareholders meetings to be held not earlier than August 10, 2007.
Notice and Access Model for Issuers
Under the current proxy rules, all issuers are required to distribute to shareholders, prior to their annual meeting of shareholders where directors are to be elected, a "glossy" annual report and, if proxies are being solicited, a proxy statement and proxy card. Currently, these materials must be physically mailed to shareholders, either directly by the issuer or its transfer agent or, if the shareholders hold their shares in street name, by intermediaries, such as a broker-dealer, bank or other entity that exercises fiduciary powers.
Under the amendments to the proxy rules, issuers may instead (but are not required to) satisfy their delivery requirements by:
- Posting the materials on a free, publicly accessible Internet site (other than the SEC's Edgar website), and
- Sending shareholders a notice alerting them to the availability of the materials on such Internet site.
This notice and access model, however, is not available where the proxy materials relate to a vote with respect to a business combination.
Internet Posting. Companies using the notice and access model must post on the designated website all of the proxy materials, including the annual report, proxy statement and proxy card (or information statement, if proxies are not being solicited), and any additional soliciting materials, at or prior to the time when the notice is sent to shareholders. The materials must be posted both in a format that is readily searchable and viewable online and a format that is substantially identical to the paper version of the materials. The SEC states that this means that, under currently available technology, companies may have to post the materials both in HTML and PDF formats. The materials must remain on the site through the date of the meeting (or, in the case of an information statement, through the date of the corporate action to which the information statement pertains).
Notice. In addition to posting the materials on the website, the issuer must send shareholders a Notice of Internet Availability of Proxy Materials, which is intended to inform shareholders of the designated website where the proxy materials may be accessed. The SEC specifies that the website address listed in the Notice must lead directly to the materials; a general address, such as the address of the issuer's home page or investor relations page, is not sufficient. The Notice must be sent at least 40 days prior to the date of the meeting, and must be filed with the SEC as additional soliciting material no later than the date it is sent to shareholders. The Notice must be written in plain English and must contain the following information:
- a prominent legend in bold-face type stating that the Notice provides only an overview of the proxy materials available on the Internet; that shareholders are "encourage[d]" to review all of the proxy materials; the website address; and that shareholders may request paper or e-mail copies of the proxy materials at no charge;
- the date, time and location of the meeting or, if corporate action is to be taken by written consent, the earliest date on which the corporate action may be effected;
- a clear and impartial identification of each separate matter intended to be acted on and the issuer's recommendations regarding those matters, but no supporting statements;
- a list of the materials being made available at the specified website;
- a toll-free telephone number, an e-mail address and an Internet website address where the shareholder can request a physical or e-mail copy of the proxy materials;
- any control/identification numbers that the shareholder needs to access his or her proxy card and instructions on how to access the proxy card; and
- information on how to obtain directions to be able to attend the meeting and vote in person.
The Notice may not contain any information other than the information specified above, other than a written notice of meeting, if required by state law, and a reply card for requesting a paper or e-mail copy of the proxy materials. In addition, the Notice may not be accompanied by any other shareholder communications.
Proxy Card. In particular, the SEC expressly states that a proxy card may not be sent accompanying the Notice (unless also accompanied by a proxy statement and, if applicable, an annual report). The issuer must instead provide on the designated website a means of immediately executing a proxy, either through a link to an electronic proxy card or by providing on such website a telephone number for executing a proxy by telephone. The issuer may, but is not required to, send physical proxy cards to shareholders after a 10-day waiting period following the date the initial Notice is sent to shareholders. Such physical proxy cards must be accompanied by either physical copies of the proxy materials or an additional copy of the Notice. The SEC requires such waiting period to ensure that shareholders have sufficient time to access the website before the issuer sends a proxy card without the accompanying proxy materials. For similar reasons, the SEC prohibits including in the Notice a telephone number for executing a proxy by telephone.
Additional Soliciting Materials. If the issuer uses any additional soliciting materials (i.e., materials in addition to the proxy statement and proxy card) following the date the initial proxy materials are posted on the designated website, the additional materials must also be posted on the designated website (no later than the day such materials are first sent to shareholders or made public), in addition to being filed with the SEC as under current practice. However, no additional Notice is required to be sent to shareholders alerting them to the posting of the additional material.
Requests for Paper or E-mail Copies. Companies using the notice and access model are required to deliver a physical copy of the proxy materials (or, if requested, an e-mail copy) to any shareholder who requests them, for up to one year after the date of the meeting to which the materials pertain. These materials must be sent within three business days after receipt of the request and, in the case of physical copies, by first-class mail. In addition, shareholders must be given the option to permanently elect to receive physical or e-mail copies of the proxy materials so that they do not have to make similar requests year after year. The SEC acknowledges that this obligation may diminish the cost savings expected to be realized from use of the notice and access model, and notes that companies may send questionnaires to shareholders to determine the demand for paper copies.
Householding. The amendments to the proxy rules do not affect existing "householding" rules. Accordingly, a single copy of the Notice may be sent to a household that contains multiple shareholders if such rules are satisfied. However, in such case, provision must be made to give each household account separate identification or control numbers so that each may execute separate proxy cards.
Intermediaries and "Street Name" Holders
The notice and access model is similarly available with respect to shareholders who hold their shares in "street name" by an intermediary. Under current proxy rules, intermediaries are required to forward to beneficial owners all proxy materials they receive from issuers. Intermediaries are also subject to certain other requirements, such as a requirement to provide the issuer with the number of customers of the intermediary that are beneficial owners of the shares held of record by the intermediary. In addition, since most state statutes require the intermediary to formally execute the proxy, intermediaries generally ask the beneficial owners for voting instructions.
The amendments provide that intermediaries may use the notice and access model only when the issuer requests it do so (and if the issuer so requests, the intermediary must use notice and access). If an issuer requests that the intermediary use the notice and access model, the intermediary must prepare and forward to beneficial owners its own Notice of Internet Availability of Proxy Materials. The Notice to be prepared by the intermediary is similar to the Notice prepared by the issuer but with changes to reflect relevant differences, such as referring to a request for voting instructions rather than a proxy. Similar to issuers, intermediaries are not permitted to include with the Notice a means for submitting voting instructions without the shareholder having had access to the proxy materials. Like issuers, intermediaries must send their Notices prior to 40 days before the date of the meeting. To allow enough time for the intermediary to prepare its Notice, the SEC requires issuers to provide to intermediaries all necessary information for the intermediaries' Notices sufficiently ahead of the 40-day deadline.
Intermediaries have the option to direct beneficial owners either to the issuer's website or to the intermediary's own website to view the proxy materials. If the intermediary directs beneficial owners to the issuer's website, it must also notify the beneficial owners that they cannot submit a proxy directly to the issuer but must instead submit voting instructions to the intermediary. The Notice must contain instructions as to how such voting instructions are to be submitted.
The intermediary's Notice must also include instructions as to how a beneficial owner may request physical or e-mail copies of the proxy materials from the intermediary rather than directly from the issuer. The intermediary must apply such a request across all of the beneficial owners' holdings at the intermediary, so that the beneficial owner does not have to provide separate requests with respect to all of the securities it holds through the intermediary. If the beneficial owner makes such a request for physical or e-mail copies, the intermediary must forward that request to the issuer within three business days, and then forward the physical or e-mail copies back to the beneficial owner within three business days after it receives them from the issuer.
Solicitations in Opposition to the Issuer
The SEC provides that the notice and access model would be similarly available to persons other than the issuer (even if the issuer does not use the notice and access model). This may significantly decrease the cost of proxy contests and thereby lead to more solicitations in opposition to those by the issuer's board of directors. To use the notice and access model, such other soliciting persons would be required to post opposition proxy materials to a designated website and send shareholders a Notice, similar to solicitations by issuers. (As under current rules, the other soliciting person may elect to have the issuer send the opposition Notice for them. In such case, the issuer must adhere to the other soliciting person's request to use the notice and access model.) Like issuers, other soliciting persons are required to provide physical copies of the proxy materials to shareholders upon request. However, there are certain differences between the requirements applicable to issuers and those applicable to other soliciting persons.
Timing of Delivery of Notice. The deadline by which other soliciting persons must send Notices is the later of 40 days before the meeting and 10 days after the issuer has sent out its Notice (or physical proxy materials, if the issuer isn't using the notice and access model). This permits persons to choose to use the notice and access model to solicit in opposition to solicitations that have already been commenced by issuers.
Content of Notice and Proxy. Other soliciting persons may not know the full agenda of a shareholders meeting if the solicitation in opposition is launched before the issuer distributes its proxy materials. In such case, the other soliciting person must include the agenda items only to the extent known. In addition, if the other soliciting person sends or posts only a partial proxy card (i.e., a card that has some, but not all, of the matters to be considered by shareholders), the Notice must clearly state whether the execution of that proxy card will invalidate an earlier vote by the shareholder on the other matters reflected on the issuer's proxy card.
Partial Solicitations. As under the current proxy rules, other soliciting persons (unlike issuers) are not required to solicit all shareholders. They may send a Notice only to shareholders of their choosing. Accordingly, to reduce the cost of a proxy contest, persons soliciting in opposition to an issuer may exclude sending materials to persons who have requested of the issuer that they receive physical copies of the proxy materials. To facilitate this, when issuers provide other soliciting persons with a shareholder list, they must indicate which shareholders have elected to receive physical copies of the proxy materials.
Under the new rules, no issuer or other soliciting person may send a Notice prior to July 1, 2007. Because such date must be at least 40 days prior to the date of the applicable shareholders meeting, this means that the notice and access model may be used only with respect to shareholders meetings on or after August 10, 2007.
Proposal to Require Internet Availability of Proxy Materials
In addition to the final rules adopting the voluntary use of the notice and access model, the SEC also proposes to make Internet availability of proxy materials mandatory. As proposed, issuers and others persons making solicitations would be required to post all proxy materials to a website and send shareholders a Notice notifying them of their availability on the website. However, such persons could voluntarily choose to send physical copies of the proxy materials along with the Notice. If the physical copies of the proxy materials are sent together with the Notice, the 40-day deadline would be waived and the issuer or other soliciting person could send a proxy card at the same time as the Notice. Under the proposal, mandatory Internet availability would be effective for large accelerated filers (other than registered investment companies) as of January 1, 2008, and for others as of January 1, 2009.
Considerations in Deciding to Use the Notice and Access Model
Issuers considering using the notice and access model should keep several things in mind.
- Because intermediaries must send their own Notices to beneficial owners prior to the 40-day deadline, considerably more coordination between the issuer and its intermediaries will be required. Issuers should contact intermediaries well ahead of the deadline to ensure timely delivery of information.
- As a result of the issuer's obligation to provide shareholders with physical copies of proxy materials upon request for up to a year after the meeting, the cost savings to be gained from use of the notice and access model may not be clear. Because issuers must send proxy materials to shareholders on request by first-class mail, issuers will not be able to take advantage of economies of scale associated with bulk mailing. Before deciding to use the model, issuers may wish to take advantage of the ability to survey their shareholders as to the desire for physical copies.
- Given the 40-day deadline and additional lead time necessary to provide intermediaries with information, issuers should review their timeline for preparing their proxy statement and annual report, which are typically now completed closer to the meeting date. This is especially the case where a preliminary proxy must be filed with the SEC and subject to SEC review.
- Issuers that do not already permit shareholders to vote proxies via the Internet may wish to consider doing so in connection with use of the notice and access model, so as to allow shareholders to engage in a completely Internet-based proxy experience.