E-Proxy Rules Take Effect for All Public Companies

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on Saturday January 3, 2009 at 12:48 pm
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Editor’s Note: This post from John F. Olson is based on a client memorandum by Lisa Fontenot, Michael Scanlon and Marcie Areias of Gibson, Dunn & Crutcher LLP.

I. E-Proxy Update

In 2007, the Securities and Exchange Commission (the “SEC”) adopted rules providing for proxy materials (including the proxy statement, a proxy card, the “glossy” annual report and any other soliciting materials) to be made available to shareholders via a publicly accessible Internet website other than the SEC’s EDGAR website (the “E-Proxy Rules“).[1] Starting January 1, 2009, all public companies must comply with the E-Proxy Rules.[2] As a result, all companies conducting proxy solicitations will have to post materials on the Internet and can choose among the delivery options for proxy materials available under the E-Proxy Rules: the “notice and access option,” the “full set delivery option,” or a hybrid of these options.

A. Notice and Access
Under the notice and access option, a company can satisfy the proxy delivery requirements by delivering a Notice of Internet Availability of Proxy Materials (a “Notice of Internet Availability”) to shareholders at least 40 calendar days before the annual meeting date and posting proxy materials on an Internet website.[3] The information that can be included in the Notice of Internet Availability is limited and must conform to specified criteria set forth in the SEC rules.[4] The Notice of Internet Availability may not be accompanied by a proxy card or other information. Even though proxy materials are electronically delivered under this option, issuers must deliver proxy materials to any shareholder upon request.[5]

An intermediary (such as a broker or a bank who holds the shares on behalf of beneficial owners) may not independently elect to use the notice and access option, but is required to do so if requested by the issuer. To facilitate this process, an issuer must provide required information to intermediaries sufficiently in advance for the intermediary to prepare and send a Notice of Internet Availability at least 40 days before the date of the annual meeting.[6]

According to Broadridge Financial Services, Inc., as of June 30, 2008, 653 issuers used the notice and access model for distribution of their proxy materials.[7]

B. Full Set Delivery
Under the full set delivery option, issuers can use existing methods to deliver copies of proxy materials in paper or electronic form, however, they must also post a copy of such materials on the Internet.[8] The delivery must include all proxy materials., i.e., proxy statement, proxy card and annual report. The proxy materials either must (i) be accompanied with a Notice of Internet Availability or (ii) incorporate the information required in a Notice of Internet Availability in the proxy and the form of proxy. When using this delivery method, issuers need not comply with the 40-day notice period required under the notice and access option.

C. Hybrid Option
Under the E-Proxy Rules, the notice and access and full set delivery options are not mutually exclusive. Issuers may implement a stratified approach under which issuers can use the notice and access option for certain shareholders, and the full set delivery option for other shareholders. Of the 634 companies that had implemented the notice and access option by May 31, 2008, approximately 10% used some sort of hybrid approach based on factors such as numbers of shares, share class, zip code, domestic vs. foreign shareholders, and whether an account had voted in the last 12 months.[9]

D. Confidentiality
Under the E-Proxy Rules, shareholders’ use of a issuer’s website for access to documents must not infringe on the anonymity of users by collecting information about the user.[10] Email addresses provided solely for the purpose of requesting a proxy may not be used for any other purpose and may not be disclosed to others by an issuer. Moreover, an issuer’s website must not contain any technologies with tracking features, such as cookies, that infringe on the anonymity of shareholders.[11]

II. E-Proxy’s Practical Implications

With E-Proxy Rules applicable to all public companies, issuers need to consider a variety of factors when deciding which option is best for their company.

A. Certain E-Proxy Advantages
In determining which option to use, an issuer should evaluate the potential cost savings provided by the notice and access or a hybrid approach. Electronic delivery decreases the printing and postage costs associated with delivery of a full set of proxy materials to shareholders. Broadridge estimates that issuers using notice and access saved approximately $143 million through June 30, 2008, excluding service fees.[12] Additionally, the decrease in paper delivery can support corporate “green” or sustainability initiatives while facilitating faster “delivery” of proxy materials to shareholders.

However, an issuer’s ability to secure these advantages requires consideration and planning to address the practical implications discussed below.

B. Timing and Mechanics
When implementing the notice and access option, issuers must be aware of the E-Proxy Rules’ timing requirements. Under this option, issuers must send out a Notice of Internet Availability at least 40 days before the annual meeting.[13] However, if an issuer is filing a preliminary proxy with the SEC, the preliminary proxy must be filed at least 10 days prior to the date on which proxy materials are first made available to shareholders, and thus, the filing of the preliminary proxy would need to be made at least 50 days from the date of the annual meeting.[14] Also, if an issuer wants to send a proxy card to some or all shareholders after sending out the Notice of Internet Availability, it must wait 10 days after mailing such notice before it can do so.[15]

When using the notice and access option, issuers should assess the functionality of their websites to ensure they comply with the SEC’s rules. The proxy materials must be posted on a publicly accessible website, other than the SEC’s EDGAR website, in a format convenient for both reading online and printing on paper, and must remain available on the website through the conclusion of the meeting.[16] Any subsequent additional soliciting materials must be posted on the website on the date they are made public.

C. Quorum and Voting
In 2008, retail votes declined significantly for issuers using the notice and access option, in some cases creating a risk of failure to achieve sufficient support for a proposal being voted upon or possibly even achieving a quorum necessary for the annual meeting. Broadridge reports that the number of retail accounts voting dropped from approximately 20.6% to 5.5%, and the number of retail shares voted dropped from 34.3% to 16.7%.[17] To counteract this problem, some companies adopted a hybrid approach using the full set delivery option for some or all of their retail shareholders and, in some cases, for international shareholders. Also, to facilitate voting, a small number of issuers sent out a second Notice of Internet Availability 10 days after sending out the first notice, including a proxy card in certain cases.

Companies should analyze potential voting implications in the context of whether matters proposed for vote at an annual meeting are routine or non-routine. When matters voted upon are routine in nature, the notice and access option may be more likely to suffice in obtaining the requisite quorum of the meeting and vote, however, non-routine matters may be more difficult, causing a company to consider additional measures, such as the hybrid approach. As of June 30, 2008, 371 out of the 653 issuers adopting the notice and access option reviewed only had routine proposals on their agenda, while 201 had at least one non-routine management proposal and 81 had at least non-routine proposal submitted by shareholders.[18]

D. Other Legal Considerations
Issuers also should consider other laws impacted by the E-Proxy Rules, including relevant state laws. In the E-Proxy Rules adopting release, the SEC indicated that the E-Proxy Rules were not intended to supersede any state laws requiring delivery of notice.[19] The Notice of Internet Availability can serve as the notice of annual meeting required by Delaware law to satisfy its delivery requirements. In 2008, California amended Section 1501(a) of the California Corporations Code on annual report delivery requirements to clarify that electronic delivery compliant with the proxy rules is sufficient for state law delivery requirements.

Other federal laws also require consideration. Compliance with notice and access is not likely to satisfy the requirements for electronic delivery of materials under the U.S. Department of Labor standards for participants in ERISA-covered defined contribution plans, such as 401(k) plans and employee stock ownership plans. Section 404(c) of ERISA permits electronic delivery only if a participating employee has the ability to effectively access documents furnished in electronic form at any location where the participant is reasonably expected to perform his or her duties as an employee and for whom access to the employer’s information system is an integral part of the employee’s duties (e.g., a networked desktop computer at work), or if the employee provides written consent accepting delivery of information electronically. As a result, although an issuer may rely on notice and access for permitted employees and consenting employees, other employee participants should receive paper delivery of proxy materials. However, the notice and access rules do not change the SEC’s stated guidance on implied consent for electronic delivery to employee shareholders of proxy materials.

E. Conclusion
In light of the E-Proxy Rules, issuers should determine which option would work best for their company: notice and access, full set delivery or a hybrid of the two. Action items include the following:

- Make plans for posting proxy materials on the Internet, taking into consideration shareholder anonymity requirements.
- Analyze the types of shareholders of the company and nature of the proposals to be voted upon.
- Promptly address with the company’s internal team and advisors possible approaches considering the timing requirements under the E-Proxy Rules and functionality of the company’s website.
- Consult with the company’s proxy solicitor, if one will be used.
- Remember that E-Proxy is also available for non-issuer proponents of proposals.
- Expect to see an increase in the use of the notice and access and hybrid options by both issuers and other parties in 2009, as parties will be increasingly comfortable with using technological advantages and securing the cost advantages offered by the notice and access model.

——————————————————————————–

[1] Shareholder Choice Regarding Proxy Materials, Release No. 34-56135 (July 26, 2007), available at http://www.sec.gov/rules/final/2007/34-5…, (the “Shareholder Choice Release”). Compliance with these rules was mandatory only for accelerated filers.

[2] Rule 14a-16.

[3] Rule 14a-16(a)(2).

[4] Rule 14a-16(d).

[5] Issuers must send a paper copy of all proxy materials requested by shareholders within three business days after receiving a request for a paper copy. Rule 14a-16(j).

[6] If an issuer decides to use its own transfer agent for internet delivery to some shareholders (such as registered holders) and use another intermediary for street holders, then two different Notices of Internet Availability would be involved, but the instructions applicable for each Notice of Internet Availability can be included on the same proxy card.

[7] Available at:  http://www.broadridge.com/notice-and-acc….

[8] Rule 14a-16(n).

[9] Available at (login/password required):
 http://www.thecorporatecounsel.net/membe….

[10] Rule 14a-16(k).

[11] The Shareholder Choice Release at 15.

[12] Available at:  http://www.broadridge.com/notice-and-acc….

[13] Rule 14a-16(a).

[14] Rule 14a-6(a).

[15] Rule 14a-16(h).

[16] Rule 14a-16(b), (c).

[17] Available at:  http://www.broadridge.com/notice-and-acc….

[18] Available at:  http://www.broadridge.com/notice-and-acc….

[19] Section II.5 of the Shareholder Choice Release.

  1. A grassroots initiative could dramatically increase the number of retail shareowners and the voting clout of high profile funds by making it easy for shareowners to vote based on the “brand” reputation of participating funds.

    Brokers, Broadridge and others concerned with the low voter turnout under e-proxy should encourage retail shareowners to make use of Proxy Democracy (PD), which aggregates, displays and automatically e-mails to subscribers proxy votes announced in advance by respected shareholder activist funds like CalPERS, Florida SBA, AFSCME and others. This allows retail shareowners, such as the members or investors in these funds, to copy the voting behavior of these trusted “brands.”

    • PD also rates funds based on resistance to management (a rather primitive scale indeed) and allows users to create their own more sophisticated ratings based on fund voting behavior. Such ratings can be held private or shared with other site users.

    • PD is working to display all the votes by funds on a single page or cluster of pages. Then a fund member or investor could click one button to see all the fund’s votes and the rationale, if provided by the fund.

    • PD is also working to allow shareowners to vote directly though PD and/or have PD vote on their behalf, based on shareowner values and how they align with the votes of respected funds. Users will be able to override any PD vote made on their behalf.

    The more funds that announce their votes in advance, the more brands are available, the more influence funds will have over otherwise mostly apathetic potential voters. Readers of the Harvard Law School Corporate Governance Blog should encourage the mutual funds they invest in, their pension funds, and university endowments to announce their proxy votes in advance and to get listed on PD.

    Comment by James McRitchie — January 3, 2009 @ 3:22 pm

  2. Sorry, I should have mentioned in my comment that you can learn more about PD on the Harvard Blog at http://blogs.law.harvard.edu/corpgov/2008/06/02/proxydemocracyorg or by directly visiting their site at http://proxydemocracy.org

    Comment by James McRitchie — January 3, 2009 @ 3:59 pm

  3. I never realized that proxy sites were regulated and had so many laws placed on them

    Comment by joel — February 6, 2009 @ 8:39 pm

  4. [...] and Visiting Professor, Georgetown Law Center on The Harvard Law School Corporate Governance Blog: E-Proxy Rules Take Effect for All Public Companies. Thanks for visiting. You can subscribe and have future articles sent to [...]

    Pingback by SEC Requirements for Online Annual Reports and Proxy Statements — June 22, 2010 @ 1:53 pm

 

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