Proxy Solicitation Through The Internet

On February 22, 2010, the SEC adopted amendments to 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 amendments will:

• 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 reasons for the use of the notice and access model and 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 of 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 amendments, which were adopted largely as proposed in October 2009, become effective 30 days following publication in the Federal Register. The SEC staff has indicated to us informally that they are considering whether early compliance with the new rules will be permitted.

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. In October 2009, the SEC proposed amendments to Rule 14a-16 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] The SEC adopted these rules on February 22, 2010, with some modifications made in response to public comment to provide additional flexibility to explain the reasons for use of the notice-only option. [5]

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 amended the rule, consistent with its proposal, to allow sufficient time for the completion of SEC staff review of the preliminary proxy materials.

The SEC announced the adoption of the new rules as part of a broader initiative to educate investors about the corporate election process and support greater investor participation in elections. The press release announcing the adoption [6] also announced a new Investor Alert and a dedicated SEC web page that provide investors with information on the mechanics of proxy voting, the e-proxy rules, corporate elections and proxy matters generally. The SEC’s efforts are a response, in part, to concerns that the elimination of broker discretionary voting in uncontested director elections beginning with the 2010 proxy season makes retail participation in director election more important. [7]

Amendments to Facilitate Shareholder Voting

Under the amended rules, issuers and other soliciting persons will have more flexibility to choose the format and language in the Notice. The Notice will 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, issuers and other soliciting persons will be able to describe in the language and format of their choice other information required in the Notice, including:

• an indication that the Notice is not a form for voting [8] and 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 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.

Consistent with the proposal, the amendments will permit issuers and other soliciting persons to include in the Notice an explanation of the process of receiving or reviewing the proxy materials and voting, which is prohibited under current rules. Following the recommendations of a number of commenters (including Sullivan & Cromwell LLP), the amendments will also allow an explanation of the reasons for the use of the notice-only option. Materials designed to persuade shareholders to vote in a particular manner or change the method of delivery would not be permitted as part of such explanation. [9]

Amendments to Facilitate Third-Party Solicitations

The SEC also amended Rule 14a-16 to allow a soliciting person other than the issuer to use the noticeonly 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 amended rules, the soliciting person will have sufficient time to respond to SEC staff comments and still use the notice-only option. The amendment does not provide a specific deadline for a soliciting person to send its Notice to shareholders, but the Adopting 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.

Endnotes

[1] The previously adopted Internet proxy delivery rules are discussed in our 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 proposed amendments to the Internet proxy delivery rules are discussed in our memo to clients, “SEC Publishes Proposed Amendments to Rules Requiring Internet Availability of Proxy Materials,” dated October 19, 2009.
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[5] The SEC’s amendments to the notice and access rules are in Rel. Nos. 33-9108, 34-61560, IC-29131, Amendments to Rules Requiring Internet Availability of Proxy Materials (Feb. 22, 2010), available at http://www.sec.gov/rules/final/2010/33-9108.pdf.
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[6] This press release, dated February 22, 2010, is available at http://www.sec.gov/news/press/2010/2010-23.htm.
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[7] The New York Stock Exchange rule changes eliminating broker discretionary voting in uncontested director elections are described in more detail in our memorandum to clients, dated July 2, 2009, entitled “SEC Approves NYSE Rule Eliminating Broker Discretionary Voting in Director Elections and Proposes Rules Expanding Compensation and Corporate Governance Disclosure and Establishing Shareholder Say-on-Pay Requirements for TARP Recipients.”
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[8] In response to comments recommending that the Notice should clearly indicate that it is not a proxy card and may not be voted, the final rules require issuers and other soliciting persons to indicate that the Notice is not a form for voting.
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[9] In the case of registered open-end investment companies, the SEC amended 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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