On January 18, 2008, in an effort to promote the use of electronic shareholder forums, the Securities and Exchange Commission (the "SEC") adopted new Rule 14a-17, and amended Rule 14a-2,1 under the Securities Exchange Act of 1934 (the "Exchange Act"). The purpose of Rule 14a-17, and the amendment to Rule 14a-2, is to facilitate the use of the Internet to further communications among shareholders, and between shareholders and companies, by use of electronic shareholder forums, which may be a more effective and less expensive means for such communications. The amendments encourage the development of electronic shareholder forums by removing obstacles that have previously prevented the use of electronic shareholder forums.
Current Obstacles Preventing Use of Electronic Shareholder Forums
Shareholders and companies have been hesitant to use, establish, maintain or operate electronic shareholder forums due to the following obstacles:
- A concern that any statement made by a forum participant will be deemed a solicitation under the proxy rules, thereby making all such statements subject to the SEC's filing and disclosure requirements2 based on the SEC's broad definition of "solicitation"3 and the requirements of Section 14(a)4 of the Exchange Act; and
- A concern that the party who establishes, maintains or operates an electronic shareholder forum will be liable for statements made by participants in the forum.
Amendments to Remove Current Obstacles and Facilitate Electronic Shareholder Forums
In response to the first concern, the new exemption, Rule 14a-2(b)(6), provides in general that the proxy rules (other than the anti-fraud provisions of Rule 14a-9) will not apply to solicitations made in an electronic shareholder forum if the following conditions are satisfied:5
- The solicitation in an electronic shareholder forum must occur more than 60 days prior to the meeting date announced by the company for its upcoming annual or special meeting of the shareholders; and
- If the company announces the meeting less than 60 days before the meeting date, the solicitation cannot occur more than two days following the company's announcement of the meeting.
Any communications made within an electronic shareholder forum that fall outside the conditions described above, for example, those that occur less than 60 days prior to the annual or special meeting or more than two days after the announcement of the meeting if the announcement is made less than 60 days prior to the meeting date, will continue to require compliance with the Regulation 14A proxy rules.
The SEC also distinguished current Rule 14a-2(b)(1) from the new exemption, Rule 14a-2(b)(6). Once a person makes a solicitation in an electronic shareholder forum in reliance on Rule 14a-2(b)(6), that person remains eligible to later request proxy authority, after the exemption period has passed, so long as the solicitation is in compliance with Regulation 14A. Under Rule 14a-2(b)(1), prior to the addition of Rule 14a-2(b)(6), once a solicitation is made, the person making the solicitation is not eligible to later request proxy authority.
In response to the second concern, the SEC added new Rule 14a-17. Under new Rule 14a-17, a shareholder or company, or third party acting on behalf of a shareholder or of a company, that establishes, maintains or operates an electronic shareholder forum will not be liable for statements made by other forum participants provided that the forum is operated in compliance with federal securities laws, applicable state law and the company's charter and bylaws.6 However, forum participants of an electronic shareholder forum who provide information or make statements will remain liable for the content of such communications under the anti-fraud provisions of the federal securities laws.
Electronic Shareholder Forums Are in Addition to Current Communication Methods
The SEC explains in the Release that the amendments do not limit the ability of a shareholder to utilize Rule 14a-8 to submit non-binding proposals to a company to be included in the company's proxy materials. Thus, electronic shareholder forums are an option for additional means of communication, rather than a substitute for current means of communication.
Benefits and Drawbacks of Electronic Shareholder Forums
Electronic shareholder forums offer both benefits and drawbacks to their participants. The Release reports that the benefits of electronic shareholder forums, in general, include an overall less expensive method for more effective communication among shareholders and between shareholders and companies. Further, because more information will be available to shareholders, Rule 14a-17 and Rule 14a-2(b)(6) may reduce the cost of monitoring issues among the shareholders.
The Release further provides benefits of electronic shareholder forums that are specific to shareholders, which include:
- Shareholder communication throughout the entire year, as opposed to only during the time frame leading up to the company's annual shareholder meeting; and
- Use of the forum as a polling mechanism to obtain the company's managers or other shareholders' views on potential upcoming actions.
The Release also provides benefits of electronic shareholder forums that are specific to companies, which include:
- Surveying shareholder interest as to a variety of topics; and
- Using the forum as a tool where management can communicate with shareholders by posting press releases, providing notice of record dates and sharing views of the company's board of directors and management.
Despite the benefits of electronic shareholder forums, they are not without drawbacks and potential risk. The drawbacks of electronic shareholder forums for both companies and shareholders include an immediate cost of establishing the forum itself and, thereafter, a cost to maintain and operate the forum. Further, as with any change in the method of communication, it will take time to determine the best means by which to utilize electronic shareholder forums.
A potential drawback specific to shareholders is that they may experience less complete information available to evaluate proposals due to the solicitations encouraged by Rule 14a-2(b)(6) that no longer require extensive additional disclosure under the proxy rules.
A main drawback for companies, in addition to the immediate cost of establishing an electronic shareholder forum, is management of the forum itself. A poorly managed forum may lead to serious risks for the company, which include:
- An inadvertent release of material non-public information. If this were to occur, the company would be at risk of violating Regulation FD; and
- Communications made during the exemption period of Rule 14a-2(b)(6) may be later construed as solicitations requiring compliance with the proxy rules. The SEC indicated that postings made during the exemption period of Rule 14a-2(b)(6), which remain in the forum once the exemption period passes, may later be construed as a solicitation7 that would require compliance with the proxy rules, unless such communications fall within another exemption. One solution, as the SEC suggests, is to provide participants the opportunity to delete postings or simply have the forum "go dark" during this period.8
Effective Date for Rule 14a-17 and the Amendment to Rule 14a-2 Is February 25, 2008
On and after February 25, 2008, shareholders and companies will have the option to use electronic shareholder forums without the concerns of the prior obstacles to electronic shareholder forums.