In anticipation of the upcoming proxy season, below is a summary of the “notice and access” rules, which allow electronic delivery of proxy materials and of a recently proposed amendment to those rules. It is not clear whether the amendment will be finalized and effective in time for the proxy season.
In 2007, in response to issuers’ concerns over the costs of proxy solicitations, the U.S. Securities and Exchange Commission (“SEC”) adopted a voluntary “notice and access” system under which issuers can satisfy their proxy delivery requirements by posting proxy materials on an Internet website, notifying shareholders of the availability of such materials, and sending paper or e mail copies of such materials upon request. These voluntary rules became effective on July 1, 2007. They do not apply to proxy solicitations in connection with business combinations. According to the SEC, the rules may be able to significantly lower the costs of their proxy solicitations that ultimately are borne by shareholders.
Notice and Access Rules
Under the current notice and access model put into effect in 2007, an issuer may satisfy proxy delivery requirements by posting its proxy statement, annual report and form of proxy on an Internet website, provided that the following requirement are met:
- Materials must be posted at or prior to the time shareholders are notified that such materials are available per the “Notice of Internet Availability” described below, and must remain posted through the conclusion of the shareholder meeting.
- Materials must be in a format that is easily printed and read online.
- After the materials are posted online, the issuer begins the solicitation process by mailing (or otherwise delivering in paper format) shareholders, at least 40 days prior to the meeting, a “Notice of
- Internet Availability” informing shareholders that the issuer’s proxy materials are available on the Internet.
- The Notice of Internet Availability must contain a legend and certain content specified by the SEC.
- The Notice of Internet Availability must include a list of the materials posted online, a toll-free telephone number, e mail address or Internet website address where shareholders can request paper copies of those materials, any necessary passwords and/or instructions for accessing an online proxy card (if any), and information on where to find directions for attending the meeting in person.
The proxy card may be either sent to the shareholders in paper form or made available to the shareholders electronically together with the materials posted online. Each method has unique requirements:
- A paper proxy card may not be sent to the shareholders until 10 calendar days after the Notice of Internet Availability. This is intended to ensure sufficient time for shareholders to access the online materials or request copies before executing the proxy card. However, a proxy card may be sent prior to the 10 day waiting period, provided that the annual report and proxy statement are sent in paper format simultaneously with or prior to the proxy card.
- A proxy card posted online may also be used. To use this method, the means to execute the proxy card must be carefully set up to ensure that the executing shareholder had access to the proxy statement and annual report at the time the proxy was executed. For example, access to the telephone number to be used to execute the proxy could be provided together with the proxy materials posted online, but could not be provided with the Notice of Internet Availability because there would be no way to ensure that the shareholders actually accessed the proxy materials before executing the proxy.
Notice and Access in Practice
According to the SEC, the original rules led to significantly decreased shareholder voting. Further, the SEC noted that there appears to have been some confusion among shareholders regarding the operation of the notice and access model, citing complaints received by the SEC’s Office of Investors Education and Advocacy.
In an effort to remedy these problems, the SEC released proposed amendments to the Notice and Access Rules on October 14, 2009. If adopted, these proposed amendments would:
- Provide additional flexibility regarding the format of the Notice of Internet Availability, requiring only a legend that states “Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be Held on [date],” as opposed to the detailed legend currently required.
- Permit those soliciting proxies to include with the Notice of Internet Availability an explanation of the process of receiving or reviewing the online proxy materials and voting under the Notice and Access Rules.
- Require a soliciting shareholder (as opposed to the issuer) using the notice-only method to file a preliminary proxy statement within 10 days after the issuer files its definitive proxy statement and to send its notice to shareholders no later than the date on which it files its definitive proxy statement with the SEC. Currently, a soliciting shareholder must send the notice by the later of 40 days prior to the meeting or 10 days after the issuer first sends its notice or proxy materials to shareholders. This can create potential compliance issues for soliciting shareholders if the SEC is unable to promptly provide comments on the preliminary proxy materials, making it impossible in certain circumstances for the soliciting shareholder to send its notice within 10 calendar days after the issuer first sends its notice or proxy, thus effectively precluding the shareholder’s use of the Notice and Access Rules.
The comment period for this proposed amendment ended on November 30, 2009. The SEC has given no indication of when final rules will be published or when they will become effective.
In summary, use of electronic delivery may significantly reduce cost but may come at a price of lower shareholder voting.
As a reminder, on December 16, 2009, the SEC announced its adoption of new rules
enhancing disclosures relating to risk, compensation and corporate governance. We
previously sent an update on these rules, which would be happy to resend upon request.