The SEC has issued final rules to promote shareholder communications via electronic forums by creating a proxy solicitation exemption for such communications and by clarifying that each forum participant would only be liable under federal securities laws for their own statements and not that of other participants. The new rules are intended to foster the forums as an additional method of shareholder communication and do not limit shareholders’ ability to submit nonbinding proposals for inclusion in company proxy materials or to conduct proxy solicitations pursuant to existing proxy rules.
Rule 14a-2(b) under the Exchange Act has been amended to exempt from most of the federal proxy rules any communication made in an electronic shareholder forum as long as:
- The person making the communication is not seeking directly or indirectly any proxies and does not furnish or otherwise request (or act on behalf of another person who furnishes or requests) any form of revocation, abstention, consent or authorization; and
- The communication is made more than 60 days before the next shareholder meeting (which 60 days corresponds to the maximum time before a meeting that a Delaware company may fix the record date) or, if the company announces the date of the next shareholder meeting less than 60 days before the meeting date, not more than two days after such announcement.
Forum participants who rely on this exemption but later solicit proxies outside of such exemption will need to comply with the proxy solicitation rules, including evaluating whether the communications that were made in the forum under the exemption should be filed as soliciting materials. The SEC suggests that a forum operator might resolve this filing issue by allowing participants to delete their prior communications or having the forum “go dark” as of the 60 or 2- day cut-off time. If such accommodations are not available, forum participants who are considering possible proxy solicitations should review the content of their forum communications when they are made in light of possible filing requirements and also consider issues of timing (e.g., to account for the time required to prepare for the filing of such communications, if needed) when launching their proxy solicitation. Also, forum communications for the purpose of acquiring, holding, voting or disposing of equity securities could result in the formation of a group for Section 13D purposes or impact Schedule 13G eligibility.
New Rule 14a-17 states that companies, shareholders and third parties acting on their behalf may establish, maintain or operate an electronic forum to facilitate interaction among shareholders and the company, so long as the forum complies with applicable federal and state law and the company’s charter and bylaws. New Rule 14a-17 further specifies that no forum operator or participant would be liable under the federal securities laws for statements made or information provided to the forum by another participant. Forum participants would continue to be liable for their own statements under traditional liability theories under applicable federal or state law, including the antifraud provisions of the proxy solicitation rules (from which amended Rule 14a-2(b) does not provide an exemption). The rule release also notes that if companies use forums to disseminate information to shareholders, Regulation FD requirements should be considered.
The SEC has expressed a desire to encourage technical innovation in the electronic forums and acknowledged the potential for development of complex features, such as eligibility verification, share ownership level displays and anonymity, accountability and polling functions. Questions remain regarding the level of investor interest in such forums, given traditional concerns about Section 13D “group” formation. Whether companies, in turn, will invest the time to monitor, process and consider forum communications or to participate in the forums in light of their continuing obligations under the proxy and other securities laws and regulations, like Regulation FD, also remains to be seen.
The new rules will be effective February 25, 2008.