Proxy Solicitation Through the Internet

This post is based on a Sullivan & Cromwell LLP client memorandum.

The SEC has proposed to amend the Internet proxy delivery rules in order to increase retail shareholder participation in the proxy voting process and to improve the notice and access model. The proposed amendments would:

  • provide flexibility regarding the format and content of the Notice of Internet Availability of Proxy Materials;
  • permit issuers and other soliciting persons to accompany the Notice of Internet Availability of Proxy Materials with an explanation of the process of receiving and reviewing proxy materials and voting; and
  • permit a soliciting person other than the issuer to use the notice and access model and send its Notice of Internet Availability for Proxy Materials by the later of
    • 40 days before the shareholders meeting, or
    • the date on which the soliciting person files its definitive proxy statement if the soliciting person’s preliminary proxy statement is filed within 10 days of the issuer’s filing of its definitive proxy statement.

The SEC is providing an abbreviated comment period with comments due by November 20, 2009.

Background

In 2006, the SEC adopted rules permitting issuers and other soliciting persons to distribute proxy materials through the Internet on a voluntary basis. In 2007, the SEC adopted rules that mandated all proxy materials to be made available through the Internet. These rules established the notice and access model for the distribution of proxy materials, under which issuers and other soliciting persons may elect to deliver proxy materials to shareholders through either the “notice-only option” or the “full set delivery option.” [1]

Since the effectiveness of the Internet proxy delivery rules, the SEC has noted confusion among shareholders regarding the instructions contained in the required Notice of Internet Availability of Proxy Materials (the “Notice”) with respect to the proxy solicitation process. In particular, the SEC is concerned about a decline in the percentage of “retail shares” [2] voting at meetings when the notice-only option is utilized, as indicated by statistical data recently published by Broadridge Financial Solutions, Inc. [3] The SEC indicates that the data may reflect shareholder confusion due to the strict requirements regarding the content and format of the Notice and the inability of issuers under the current rules to accompany the Notice with other explanatory materials. The proposed amendments to Rule 14a-16 are designed to mitigate shareholder confusion and facilitate shareholder participation by creating flexibility in the content and format of the Notice and permitting explanatory materials to accompany the Notice. [4]

In addition, existing Rule 14a-16 requires that, in order for a soliciting person other than the issuer to use the notice-only option, the person must send its Notice to shareholders by the later of 40 days prior to the shareholders meeting or 10 days after the issuer first sends its Notice or proxy statement to shareholders. Such a soliciting person, however, cannot send its Notice to shareholders until it files its definitive proxy statement. Because a soliciting person may miss the 10-day deadline due to SEC staff review of its preliminary proxy materials, the SEC proposes to amend the rule to allow sufficient time for the completion of SEC staff review of the preliminary proxy materials.

Proposal to Facilitate Shareholder Voting

Under the proposed amendments, issuers and other soliciting persons would have more flexibility to choose the format and language in the Notice used to provide the information currently contained in the prescribed legend. The Notice would still be required to contain a legend, in bold font, that the Notice provides information regarding the availability of proxy materials for a specific shareholders meeting. However, as proposed, issuers and other soliciting persons would be able to describe in the language and format of their choice other information required in the Notice under current rules, including:

  • an indication that the Notice presents only an overview of the proxy materials, and that shareholders should review the proxy materials before voting;
  • the address of the website containing the proxy materials; and
  • the instructions on how to request a paper or email copy of the proxy materials.

The SEC believes that the proposed amendments will allow issuers and other soliciting persons to communicate with shareholders more effectively and provide clearer instructions to shareholders regarding the proxy voting process.

In addition, the SEC proposes to permit issuers and other soliciting persons to include in the Notice an explanation of the notice and access model, which is prohibited under current rules. As proposed, such explanation would be limited to the process of receiving or reviewing the proxy materials and voting. Materials designed to persuade shareholders to vote in a particular manner, change the method of delivery or explain the basis for sending only the Notice would not be permitted as part of such explanation. The SEC expects that the explanation will be brief (one or two paragraphs of text) and that standardized language will be developed through practice. [5]

Proposal to Facilitate Third-Party Solicitations

The SEC has also proposed an amendment to Rule 14a-16 that would allow a soliciting person other than the issuer to use the notice-only option by sending its Notice by the later of:

  • 40 days before the shareholders meeting, or
  • the filing date of the soliciting person’s definitive proxy statement, so long as the soliciting person files a preliminary proxy statement within 10 days of the issuer’s filing of its definitive proxy statement.

The current rule requires the soliciting person to send its Notice by the later of 40 days before the shareholders meeting or 10 days after the issuer first sends its Notice or proxy statement to shareholders. The SEC notes that, under its current practice, the SEC staff reviews preliminary proxy materials filed in the case of contested solicitations and that completion of these reviews may exceed 10 calendar days. As a result, due to unresolved SEC staff comments, a soliciting person may not be able to meet the current 10-day deadline for sending the Notice and thereby be excluded from relying on the notice-only option. Under the proposed amendment, the soliciting person would have sufficient time to respond to SEC staff comments and still use the notice-only option. The proposed rule does not provide a specific deadline for a soliciting person to send its Notice to shareholders, but the proposing release indicates that it should be sent early enough to provide shareholders with “sufficient time” to review the proxy materials and make an informed voting decision.

Solicitation of Public Comments

The SEC has solicited comments on all aspects of its notice and access model, including:

  • whether there are any other factors influencing shareholder participation in proxy voting;
  • whether there should be any limitation on an issuer’s discretion over choosing which shareholders are provided notice-only and full set delivery;
  • whether an issuer should only be allowed to use the notice-only option if its voting response rate has not decreased by a specified amount as a result of its use of the notice-only option;
  • whether voting recommendations should be prohibited on the Notice;
  • whether the 40-day Notice mailing requirement should be reduced; and
  • whether the notice and access rules should be suspended.

Comments are due by November 20, 2009.

Endnotes

[1] The previously adopted Internet proxy delivery rules are discussed in previous Sullivan & Cromwell LLP memos to clients, “SEC Adopts Final Rules Permitting the Internet-based Distribution of Proxy Materials and Proposed Rules to Require Internet Delivery of Proxy Materials,” dated February 13, 2007, and “SEC Mandates that Large Accelerated Filers Use the Internet to Distribute Materials for 2008 Proxy Season,” dated June 21, 2007.
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[2] Broadridge defines “retail shares” as any shares that are not either managed by an advisor or subject to a consent to electronic delivery of proxy materials.
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[3] Broadridge Notice and Access, Statistical Overview of Use with Beneficial Shareholders (as of June 30, 2009) is available at http://www.broadridge.com/notice-and-access/NAStatsStory.pdf.
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[4] The SEC’s new proposed changes are in Rel. Nos. 33-9073, 34-60825, IC-28946, Amendments to Rules Requiring Internet Availability of Proxy Materials (Oct. 14, 2009), available at http://www.sec.gov/rules/proposed/2009/33-9073.pdf.
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[5] In the case of registered open-end investment companies, the SEC has proposed to amend Rule 14a- 16(f)(2)(iii) to permit the delivery of a summary prospectus with the Notice. This change is intended to permit registered open-end investment companies to utilize the SEC’s recent rule change to permit the use of a summary prospectus. See Rel. Nos. 33-8998, IC-28584, Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies (Jan. 13, 2009), available at http://www.sec.gov/rules/final/2009/33-8998.pdf.
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