SEC Amends Rules Requiring Internet Availability of Proxy Materials
In 2007 the Securities and Exchange Commission adopted the current “notice and access” regime for the distribution of proxy materials. In general, the SEC’s rules require all issuers to post their proxy materials on an internet web site and either provide shareholders with a Notice of Internet Availability of Proxy Materials (“Notice”) under a “notice-only option” or deliver a traditional full-set of proxy materials under a “full-set option,” which includes the Notice. Subsequent statistics have indicated that use of the notice-only option has resulted in significantly lower shareholder response rates than when the full-set option was utilized. In contrast to the traditional full-set delivery option, the notice-only option mandated the use of relatively precise words in a confusing and somewhat sterile format, thereby increasing the likelihood that shareholders would dispose of, rather than respond to, proxy solicitations. The Amendments to Rules Requiring Internet Availability of Proxy Materials, which the SEC adopted on February 22, 2010, become effective on March 29, 2010 and attempt to address these concerns. We believe that these amendments are beneficial to companies using the notice-only option.
Revisions to the Notice Requirements and Inclusion of Explanatory Materials
The amendments to Rule 14a-16 provide issuers additional flexibility in formatting and selecting the language to be used in the Notice. We believe the amendments will create a more effective Notice by providing shareholders with additional guidance as to how to access the proxy materials online, request a paper copy of the proxy materials and vote their shares. Previously, issuers were restricted from including any materials with the Notice, other than a pre-addressed, pre-paid reply card to request proxy materials and a copy of any notice of a shareholder meeting required by state law. Amended Rule 14a-16 now permits issuers to accompany the Notice with (i) an explanation of the process of receiving and reviewing proxy materials and voting under the notice and access proxy rules and (ii) an explanation of the reasons for the use of the notice and access rules.
In addition, rather than requiring that the Notice include a detailed boilerplate legend that served little purpose and probably was seldom read by shareholders, the amendments require only that the Notice address certain topics, without specifying the exact language. Accordingly, companies need only prominently include the single-line, bold-face legend that states “Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be Held on [insert meeting date]” and address the following topics:
- an indication that the communication is not a form for voting and presents only an overview of the more complete proxy materials, which contain important information and are available on the Internet or by mail, and encouraging a security holder to access and review the proxy materials before voting;
- the internet web site address where the proxy materials are available; and
- instructions regarding how a security holder may request a paper or email copy of the proxy materials at no charge, including the date by which they should make the request to facilitate timely delivery, and an indication that they will not otherwise receive a paper or email copy.
As was the case with prior Rule 14a-16, however, materials designed to persuade shareholders to vote in a particular manner or change the method of the delivery of proxy materials are still not permitted under the revised rule.
Finally, although the other informational requirements of the Notice remain unchanged, revised Rule 14a-16 now provides that it is no longer necessary for the Notice to directly mirror the proxy card. Rather, the Notice must clearly and impartially identify each separate matter intended to be acted on that will be considered at the meeting. We are hopeful that this will reduce the significant number of instances in which shareholders have mistaken the Notice for a proxy card and have signed and returned it.
Amendment to Notice Deadlines for Soliciting Persons Other Than Issuer
In order to improve the workability of the notice and access rules that apply to soliciting persons other than the issuer, the SEC also amended Rule 14a-16(l)(2)(ii). Previously, soliciting persons were required to send the Notice to shareholders ten calendar days after the date that the issuer first sent its proxy materials to shareholders. The SEC review process, however, potentially could result in outstanding comments on a soliciting person’s preliminary proxy statement more than ten calendar days after the soliciting person originally filed the preliminary proxy statement. The practical effect of the previous requirement was to limit the soliciting person’s ability to use the notice-only option if the soliciting person was unable to file its definitive proxy statement within the time period required. In order to eliminate this effect, the SEC amended Rule 14a-16(l)(2)(ii) to require soliciting persons relying on the notice-only option to file a preliminary proxy statement within ten calendar days after the issuer files its definitive proxy statement and send its Notice to shareholders no later than the date on which it files it definitive proxy statement with the SEC.
Actions the SEC Declined to Enact at This Time
The SEC noted that some commentators on the proposed rules had raised additional concerns with the proxy system and the lack of shareholder participation that the SEC was not addressing at this time. In particular, the SEC noted that some commentators believe that the amendments also should address:
- Reducing the amount of time required for sending the Notice prior to the meeting from 40 days to 30 days;
- Permitting issuers to send a proxy card and business reply envelope with the Notice; and
- Addressing the notice and access processing fee structure, the lack of competition for proxy service providers and issuers’ inability to negotiate the fees, which results in limitations on the amount of the cost savings from switching to the notice and access model.
Although the SEC did not address such broader concerns, it confirmed that it is conducting a comprehensive review of the mechanics by which proxies are voted and the way in which information is conveyed to shareholders and is preparing a concept release to seek public comment on these issues. The SEC also did not address whether an issuer that mails proxy materials prior to the effective date can utilize the amended rules. Typically, however, guidance of this nature is provided shortly after rules are finalized.
We increasingly are concerned that the impact of the amendment of NYSE Rule 452 to eliminate broker voting in most situations will be to reduce shareholder participation and correspondingly increase the impact of shareholder activists who may or may not reflect the views of the shareholders as a whole. As a result, we welcome the amendments to Rule 14a-16 as we believe that such amendments will permit issuers to be more creative in drafting their Notices, thereby enabling issuers to encourage greater shareholder participation in the voting process.