Issuers and third parties will soon be able to solicit proxies for annual meetings by posting proxy materials on an Internet website. This is intended to reduce the cost of proxy solicitations. We expect that it will have a substantial impact on the balance of power between issuers and shareholder activists. The new rules may lead to an increase in proxy contests, dissident director slates and other shareholder proposals and may result in more effective dissident opposition to management proposals.
Soliciting proxies requires the delivery of a proxy or information statement with or prior to the solicitation. Currently, proxy materials, including the annual report in the case of an issuer solicitation for an annual meeting, are generally delivered in paper form. They may only be delivered electronically (i.e., by email) if the shareholder consents in advance. Under new rules adopted by the Securities and Exchange Commission (the “SEC”) on January 22, 2007, an issuer will be able to use the Internet to satisfy its proxy statement and annual report delivery obligations for annual meetings. Internet posting of proxy materials will not be permissible for solicitations related to business combinations. The SEC has also proposed to make Internet posting of proxy materials mandatory, beginning with “large accelerated filers” on January 1, 2008.
Because of the time required to make the necessary arrangements, as well as the extended notice periods required by the new rules, issuers should begin planning for next year’s annual meetings earlier than in prior years.
Solicitations by Issuers
Under the newly adopted rules (the “Notice and Access Model”), issuers will be permitted to furnish proxy materials to shareholders by:
- sending a paper notice (the “Initial Notice”) of the availability of proxy materials on the Internet to shareholders at least 40 days before the scheduled meeting date; and
- posting the proxy materials on a publicly accessible Internet website (other than the SEC's EDGAR website).
The Initial Notice must be written in plain English and include the following:
- a prominent legend in bold-face type that states:
“Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be Held on [insert meeting date].
- This communication presents only an overview of the more complete proxy materials that are available to you on the Internet. We encourage you to access and review all of the important information contained in the proxy materials before voting.
- The [proxy statement] [information statement] [annual report to security holders] [is/are] available at [insert website address].
- If you want to receive a paper or e-mail copy of these documents, you must request one. There is no charge to you for requesting a copy. Please make your request for a copy as instructed below on or before [insert a date] to facilitate timely delivery.”
- a clear and impartial description of the matters to be considered at the meeting, along with the issuer's voting recommendation regarding those matters;
- information about the Internet website and how to access the proxy card and other materials;
- a toll-free phone number, an e-mail address and a website that shareholders may use to request paper or email copies of the proxy materials at no cost; and
- the date, time, and location of the meeting and information on how to obtain directions to the meeting and vote in person.
The Initial Notice may not contain any information beyond what is permitted by the rules (except as required by state law), nor can it be accompanied by other types of shareholder communications.
Issuers are prohibited from including a proxy card with the Initial Notice. Ten or more days after sending the Initial Notice, an issuer may send a paper proxy card along with another copy of the Initial Notice. The purpose of this ten-day waiting period is to allow shareholders sufficient time to access electronic copies of the proxy materials or request paper copies if they so desire.
The website on which the proxy materials are posted must be operational prior to sending the Initial Notice. It will have to display the proxy materials in a “print-like” format, such as portable document format (.pdf). Once an issuer has sent out the Initial Notice, it must maintain the proxy materials on the website until the conclusion of the related shareholder meeting and must continue to post any amendments or supplemental materials it uses in connection with the solicitation on the same website no later than the day on which the additional soliciting materials are first sent to shareholders or made public.
After receiving the Initial Notice, a shareholder may request receipt of all future proxy materials in paper form or by e-mail, instead of accessing the materials through the Internet. This election will remain in effect until changed by the shareholder. If a shareholder makes such a request, an issuer would be required to provide paper or e-mail copies of proxy materials, as requested by the shareholder, within three business days.
Solicitations by Third Parties
The Notice and Access Model will permit third parties to furnish proxy materials to shareholders by posting proxy materials on the Internet in substantially the same manner as issuers, except:
- a third party’s notice must be sent to shareholders by the later of (a) 40 days before the meeting or (b) 10 days after the issuer files its proxy materials; and
- a third party may limit its solicitation to shareholders who have not previously requested paper copies of the proxy materials. According to commentary provided by the SEC, this timing concession has been included in the new rules in recognition of the fact that that certain proxy contests are initiated in response to proposals or other information appearing in an issuer’s proxy statement.
Similar to an issuer’s obligations under the new rules, if a third party soliciting proxies sends a notice of Internet availability of proxy materials to a shareholder, it must also send that shareholder a paper or e-mail copy upon request.
Brokers, Banks and Similar Intermediaries
The new proxy rules require brokers, banks and similar intermediaries, upon the request of an issuer or third party solicitor, to furnish proxy materials to beneficial owners using the Notice and Access Model. If an issuer or third party does not request intermediaries to follow the Notice and Access Model, an intermediary may continue to rely on any other permitted method of furnishing proxy materials to beneficial owners, but the intermediary is not permitted to follow the Notice and Access Model on its own initiative.
When an issuer or third party elects to use the Notice and Access Model, it would be required to provide each broker, bank or similar intermediary with all information necessary for preparation of the intermediary’s notice in sufficient time for its notice to be sent to beneficial owners at least 40 days prior to the meeting date. The intermediary’s Initial Notice will generally contain the same information as an issuer’s Initial Notice, with certain revisions to reflect the differences between registered holders and beneficial owners.
The intermediary may choose whether to direct beneficial owners to the issuer’s or third party’s website or to its own website to access the proxy disclosure materials. If the intermediary directs beneficial owners to its own website, access to that website must be free of charge. If it directs beneficial owners to the issuer’s or third party’s website, the intermediary must inform beneficial owners that they must submit voting instructions to the intermediary, and that the beneficial owners cannot execute a proxy directly in favor of the issuer or third party unless the intermediary has executed a proxy in favor of the beneficial owners.
A beneficial owner who elects to receive a paper or e-mail copy of the proxy materials must direct such a request to the intermediary, rather than to the issuer or third party. If a beneficial owner requests a copy of the proxy materials from the intermediary, the intermediary must in turn request such a copy from the issuer or third party within three business days of receiving the request from the beneficial owner. The intermediary then would be required to forward the materials to the beneficial owners within three business days after receipt thereof from the issuer or third party. In such a case, the intermediary will be permitted to charge the issuer or third party the cost it incurs in forwarding the copy of the proxy materials to the requesting beneficial owner.
The newly adopted rules have a compliance date of July 1, 2007, and may not be relied on prior to that date. In practical terms, due to the 40-day notice requirement, the new rules cannot be used for meetings scheduled before August 10, 2007.
Proposed Mandatory Internet Use
In addition to adopting the Notice and Access Model, which is permissive, the SEC also proposed amendments to the proxy rules that require issuers and third parties to furnish proxy materials to shareholders by posting proxy materials on an Internet website for all solicitations not related to a business combination. The proposed rules are substantially similar to the Notice and Access Model; however, in order to provide flexibility to the soliciting person regarding how it conducts its proxy solicitation, the Initial Notice may be accompanied by a complete set of paper or e-mail proxy materials (including the proxy statement, the annual report, and the proxy card). An issuer or third party that sends a complete set of proxy materials with the Initial Notice will not be required to comply with the notice deadlines set forth above. Accordingly, an issuer or third party who is unwilling or unable to meet such deadlines may still begin its solicitation after the deadline provided that it accompanies the Initial Notice with a complete set of proxy materials and complies with any state-imposed deadlines.
The SEC is considering making these proposed rules effective for large accelerated filers, not including registered investment companies, on January 1, 2008, and for all other filers, including registered investment companies, on January 1, 2009.
The SEC has solicited comments on the proposed rules, which may be submitted until March 30, 2007.