February 22, 2007
The Securities and Exchange Commission ("SEC") recently issued final rules that amend the proxy rules to allow public companies and other soliciting persons the option of delivering proxy materials (including the proxy statement, a proxy card, the "glossy" annual report and any additional soliciting materials) to shareholders via the Internet. The SEC also proposed amendments to its proxy rules to require companies, other soliciting persons and intermediaries to post and notify shareholders of the availability of proxy materials on the Internet. Set forth below is a summary of the final and proposed rules, as well as practical advice for companies that may want to take advantage of the new rules later this year. The final rules are available at http://www.sec.gov/rules/final/2007/34-55146.pdf, and the proposed rules are available at http://www.sec.gov/rules/proposed/2007/34-55147.pdf.
Final Rules Regarding Internet Delivery of Proxy Materials
The SEC amended its proxy rules to allow public companies and other persons soliciting shareholders to post proxy materials on an Internet website and provide notice to shareholders of the availability of these materials. This "notice and access" model may be used with respect to any proxy solicitation except those relating to business combination transactions. The notice and access model is optional; it does not restrict a company from using existing methods for delivering proxy materials to shareholders. Moreover, a company that elects to use this model for one meeting is not required to use it for subsequent meetings. Public companies and other soliciting persons may take advantage of the new rules beginning July 1, 2007.
Notice and Access Model for Public Companies
The SEC’s final rules set forth the following procedures for public companies that elect to use the notice and access model:
Notice of Internet availability of proxy materials: Under the new rules, a public company now has the option to deliver proxy materials to shareholders by mailing a "Notice of Internet Availability of Proxy Materials" (a "notice"). The notice must be sent to shareholders at least 40 calendar days prior to a meeting and filed with the SEC as additional soliciting material no later than when it is first sent or given to shareholders. The notice must include a prominent legend prescribed by the rules and must provide in plain English the following information:
information about the meeting (including date, time, location), a description of matters to be acted on and the company’s recommendations regarding those matters;
a list of the materials available at the specified website;
a toll-free telephone number, an e-mail address and an Internet website address where shareholders can request a paper or e-mail copy of the proxy materials for all future meetings and for the particular meeting to which the notice relates;
instructions on how to access the proxy card online, provided that the instructions do not allow a shareholder to execute a proxy without having access to the proxy statement and annual report;
any control or access numbers that the shareholder needs to access his or her proxy card; and
information on how to obtain directions to attend the meeting and vote in person.
Website posting: Companies that use the notice and access model must post a proxy card on the designated website, along with the proxy statement and the annual report, no later than the date on which the notice is sent to shareholders. The proxy materials must be posted on a publicly accessible Internet website, other than the SEC’s EDGAR website. The posted proxy materials must be provided both in a format that is readily searchable, such as HTML, and in a format that provides a version of the materials that is substantially identical to the paper version of the materials and is convenient for printing and viewing online (e.g., a PDF version). Thus, companies may need to post the materials in two different formats. In addition, the final rules require that any additional soliciting materials required to be filed with the SEC must be posted on the same website no later than the day that these additional materials are first sent to shareholders or made public. The same website also must provide shareholders with at least one method of executing a proxy vote (e.g., by telephone or Internet), and this method must be accessible at the time the notice is sent to shareholders.
Proxy cards: Importantly, the final rules provide that no other materials may accompany the notice, other than any meeting notice that may be required under state corporation laws and a reply card for shareholders to request a free paper or e-mail copy of the proxy materials. This is a change from the proposed rules, which would have allowed a proxy voting card to accompany the notice. Instead, a company now may include in a subsequent mailing a proxy card and a copy of the notice (without the proxy statement and annual report) no sooner than 10 calendar days after mailing the initial notice. The 10-day waiting period is designed to give shareholders sufficient time to access the online proxy materials or request a copy of the proxy materials before receiving a proxy card without an accompanying proxy statement and annual report. A company need not wait 10 calendar days if it chooses to send a copy of the proxy statement and the annual report along with the proxy card.
Requests for paper/e-mail copies: Public companies that elect to use the notice and access option must provide a paper or e-mail copy of the proxy materials to shareholders (in the format requested) within three business days of receiving a request from a shareholder, even if the request is made after the date of the meeting. Shareholders can request to receive a paper or e-mail copy of the proxy materials for the particular meeting to which the notice relates, or permanently elect to receive a paper or e-mail copy of the proxy materials for all future meetings. The final rules allow shareholders to request a copy of the proxy materials until one year after the meeting.
Householding the notice: Public companies may "household" the notice – meaning that a company may send a single copy of the notice to multiple shareholders residing at the same address – so long as the SEC’s existing householding rules are satisfied (including that each household account must be able to execute separate proxies).
Notice and Access Model for Soliciting Persons Other than Public Companies
Shareholders and other soliciting persons may use the same notice and access procedures as public companies. However, if a soliciting person other than a public company intends to use this model, it must send its notice to shareholders by the later of 40 days prior to the meeting or 10 days after the public company sends out its proxy statement or notice to shareholders. The content of the notice sent by a soliciting person also may be different than what is required to be included in the public company’s notice. For example, if a soliciting person sends its notice before the public company has sent out its own proxy statement or notice, the soliciting person may not know the items on the company’s agenda. Thus, the soliciting person must include the agenda items in its notice only to the extent known. Moreover, a soliciting person (unlike a public company) may provide a partial proxy card. Submission of a partial proxy card typically revokes any previously-executed proxy, meaning the shareholder’s vote is lost on matters other than those matters presented on the soliciting person’s proxy card. Consequently, if a soliciting person provides only a partial proxy card, the soliciting person’s notice must clearly state whether execution of that card will invalidate the shareholder’s earlier vote on the other matters reflected on the company’s proxy card.
The new rules also allow a soliciting person other than a company to solicit proxies only from a select group of shareholders, such as those shareholders who have not previously requested a paper or e-mail copy of proxy materials. If a company provides its shareholder list to a soliciting person, the company must indicate which shareholders have permanently requested paper copies of proxy materials. In addition, the soliciting person must provide a paper or e-mail copy of the proxy materials upon request by any shareholder to whom it sends a notice.
Notice and Access Model for Intermediaries
Under the amendments, an intermediary (such as a broker or a bank who holds the shares on behalf of beneficial owners) is not permitted to independently elect to use the notice and access model, but is required to do so if requested by the company or other soliciting person. To facilitate this process, a company or other soliciting person must provide the information sufficiently in advance for the intermediary to prepare and send such notice at least 40 days before the meeting date.
With respect to a company’s election to use the notice and access model, an intermediary’s notice generally must contain the same information as the company’s notice but should be designed for beneficial, rather than registered, holders. For example, the notice must make it clear that a beneficial owner’s permanent election to receive paper or e-mail copies of the proxy materials for all future meetings applies to all securities in the beneficial owner’s account. In addition, the intermediary’s notice must contain instructions on how to access the request for voting instructions on the intermediary’s website. The notice may direct beneficial owners to the company’s website or a separate website set up by the intermediary. If the notice directs beneficial owners to the company’s website, the intermediary must make it clear that beneficial owners must submit voting instructions to the intermediary and in most cases cannot execute a company’s proxy card. As with companies, intermediaries are not permitted to include a request for voting instructions with the initial notice. At the company’s request, the intermediary must send beneficial owners a request for voting instructions 10 days or more after the intermediary sent the original notice. The request for voting instructions must be accompanied by either a copy of the proxy statement or the intermediary’s original notice.
A beneficial owner must request a paper or e-mail copy of the proxy materials from the intermediary. The intermediary must in turn request a copy of these materials from the company or other soliciting person, as applicable, within three business days of receiving the beneficial owner’s request. The intermediary then must forward the proxy materials to the beneficial owner within three business days after receiving the materials from the company or other soliciting person.
Proposal to Require Internet Availability of Proxy Materials
The SEC also proposed rules that would require companies, other soliciting persons and intermediaries to post and notify shareholders of the availability of proxy materials on the Internet for all proxy solicitations not related to business combination transactions. The purpose of the proposed rules is to give all shareholders the option to select how they will receive proxy materials: by paper, by e-mail or via the Internet. The proposed rules are nearly identical to the optional notice and access model described above except for one important difference: whereas the optional notice and access model does not allow other materials to accompany the notice (except for any notice of shareholder meeting required by state law and a reply card for shareholders to request a paper or e-mail copy of the proxy materials), the proposed rules would permit sending to shareholders a complete set of proxy materials, including a proxy card or request for voting instructions, along with the original notice. Given that the proposed rules would require companies, other soliciting persons and intermediaries to post and notify shareholders of the availability of proxy materials on the Internet, allowing a full set of proxy materials to accompany the notice would provide a means for companies that desire to deliver paper copies of the proxy materials in the first instance to do so without having to send the proxy materials separately in another delivery package. However, as with the final rules that were adopted, no other materials could accompany the initial notice unless the notice was sent along with a full set of proxy materials. For example, a company could not send only the initial notice and a proxy card without sending at the same time a full set of proxy materials. The 40-day deadline for sending the notice would not apply if the notice was accompanied by a complete set of proxy materials.
The proposed amendments would be effective, if adopted, for large accelerated filers on January 1, 2008, and for all other companies (including registered investment companies) on January 1, 2009. Comments on the proposed rules are due March 30, 2007.
Because a notice cannot be mailed before July 1, 2007 (and any notice must be delivered at least 40 days before the meeting date), the notice and access model effectively will not be available to companies holding 2007 annual meetings scheduled before August 10, 2007. However, companies holding annual meetings later in 2007 may want to consider whether to use the notice and access model this year. Moreover, companies faced with proxy contests later in 2007 and beyond should consider that the final rules made conforming changes to the procedures regarding a company’s obligation to either provide a shareholder list or send proxy materials on behalf of a shareholder.
Whenever a company considers implementing the notice and access model, some practical considerations to keep in mind include:
Talking to the company’s transfer agent and ADP (through whom materials will be directed to or by intermediaries) about their progress in implementing the notice and access model because it will require significant coordination by these parties.
Examining the annual meeting timetable to determine the feasibility of preparing the proxy statement, annual report to shareholders, and related materials earlier in order to allow sufficient time for the company and intermediaries to use the notice and access model (especially if shareholders will be asked to vote on matters that necessitate a preliminary proxy statement, which is subject to SEC review).
Reviewing the extent to which internal efforts in 2007 will need to focus on complying with the SEC’s new executive compensation and corporate governance provisions, thereby limiting the time that may be needed to focus on implementing the notice and access model.
Analyzing the number of non-institutional shareholders and the extent to which they already vote either on the Internet or by telephone as well as whether the company already households annual meeting materials.
Recognizing that the full cost savings of the notice and access model may not be achieved immediately because it will be difficult at the outset to estimate the number of printed materials that will need to be available if requested by shareholders.
You should also note that the New York Stock Exchange ("NYSE") recently amended its rules to accommodate the notice and access model. In August 2006, the SEC approved amendments to the NYSE’s rules that, among other things, repealed the requirement that listed companies distribute to shareholders a copy of the annual report containing financial statements. Instead, a listed company must (1) post its Form 10-K on or through the company’s website, (2) state on its website that paper copies of the audited financial statements are available upon request and free of charge, and (3) simultaneously issue a press release announcing the filing with the SEC of the Form 10-K and stating that the Form 10-K is available on the company’s website. However, the NYSE has stated that a domestic listed company will be deemed to satisfy the requirements above if it distributes its audited financial statements in compliance with the SEC’s proxy rules. Domestic public companies with annual meetings in the first part of 2007 cannot take advantage of the NYSE rule changes for now since SEC Rule 14a-3 continues to require physical delivery or (with a shareholder’s consent) electronic delivery of an annual report to shareholders.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or John F. Olson (202-955-8522, firstname.lastname@example.org), Brian J. Lane (202-887-3646, email@example.com), Ronald O. Mueller (202-955-8671, firstname.lastname@example.org), Amy L. Goodman (202-955-8653, email@example.com), James J. Moloney (949-451-4343, firstname.lastname@example.org), Michael Scanlon (202-887-3668, email@example.com), or Elizabeth Ising (202-955-8287, firstname.lastname@example.org).
© 2007 Gibson, Dunn & Crutcher LLP
The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.