October 28, 2009
Previously published on October 22, 2009
The SEC has proposed changes to its “notice and access” rules aimed at increasing shareholder response rates and facilitating use by soliciting persons other than issuers.1 As adopted in 2007, these rules require issuers and others who solicit proxies to post their proxy materials on an Internet Web site. The materials may then be delivered using either the traditional “full-set delivery” method or a “notice-only” option — sending shareholders only a notice of the Internet availability of these materials — or using a combination of both methods.
While the notice and access rules were intended to promote the Internet as a cost-efficient and reliable means of delivering proxy materials, statistics have shown a significantly lower retail shareholder voting rate in solicitations made by the notice-only method. In addition, the rules have resulted in complications for solicitations by persons other than issuers who wish to use the notice and access model. To address these concerns, the proposed rules would permit greater flexibility in the wording of the required notice and would permit the inclusion of an explanation of the notice and access model and (for mutual funds) a summary prospectus. In addition, the proposed rules would change some of the notice deadlines for solicitations by persons other than the issuer.
Improved Clarity of the Notice
The notice required by Rule 14a-16(d) under the Securities Exchange Act of 1934 currently imposes strict requirements on both the content and the format of the required notice. Among other things, the rule requires a specific legend indicating that the document is an important notice regarding the Internet availability of proxy materials for a specified shareholder meeting, as well as specific wording indicating that it presents only an overview of the more complete proxy materials available to shareholders on the Internet, encouraging shareholders to access and review the proxy materials at a specified Web site address, and explaining how a shareholder may request a paper or e mail copy of the proxy materials.
The proposed changes would require issuers and others who solicit proxies to address the same topics, but would allow them more flexibility in the language they use. The SEC hopes that this flexibility will allow issuers to communicate more effectively and provide clearer guidance to shareholders.
Rule 14a-16(d)(3) currently requires the notice to clearly and impartially identify each separate matter to be voted on and the soliciting person’s voting recommendation. The SEC notes that some issuers have been interpreting this rule as requiring that the notice follow the SEC’s formatting and content requirements for proxy cards, and that some shareholders have attempted to vote by returning a marked-up copy of the notice. According to the release, this rule does not require that the notice mirror the proxy card, but provides more flexibility regarding its design.
Rule 14a-16(f) generally prohibits other materials from accompanying the required notice. The proposed rules would also permit issuers and other soliciting persons to accompany the notice with an explanation of the notice and access model — specifically, regarding the process of receiving or reviewing the proxy materials and voting.
These proposed changes are intended to permit better shareholder education about notice and access procedures. In addition the SEC has directed the Office of Investor Education and Advocacy and the Division of Corporation Finance to develop a program designed to educate retail shareholders about the notice and access model, and urges soliciting persons to better educate their shareholders.
Finally, Rule 14a-16(f)(2)(iii) currently permits registered investment companies to accompany the notice with a prospectus or shareholder report. The SEC recently adopted rules permitting mutual funds to satisfy their prospectus delivery obligations by means of a summary prospectus.2 A proposed change also would allow a mutual fund to accompany the proxy notice with a summary prospectus.
Among the topics on which the SEC requests comment are whether the notice and access model has actually lowered costs for issuers and soliciting persons, and, in particular, whether the fees charged by proxy distribution service providers, about which some issuers have expressed concern, have affected use of the notice and access model.
Changes to Notice Deadlines
Currently, Rule 14a-16 requires a soliciting person other than the issuer to send the required notice to shareholders by the later of 40 calendar days before the shareholder meeting, or 10 calendar days after the issuer first sends its notice or proxy statement to shareholders.
The 10 calendar day requirement has created compliance issues, as the staff of the Division of Corporation Finance reviews and comments on preliminary proxy materials filed in contested proxy solicitations, and the comment process may take more than 10 calendar days. For this reason, the practical effect of the rule has been to limit the use of the notice and access model by soliciting persons in proxy contests.
The proposed changes would address this issue by revising the 10 calendar day rule to instead require the soliciting shareholder to send its notice no later than the date the registrant files its definitive proxy statement, so long as the soliciting person’s preliminary proxy statement is filed within 10 days after the issuer files its definitive proxy statement.
Conclusions
Use of the notice and access model can result in cost savings and increased flexibility, but at the price of decreased retail shareholder response rates. While the proposed rule changes represent a first step by the SEC in addressing this issue, it is likely that issuers and others who solicit proxies will continue to need to balance the benefits of the flexibility afforded by the notice and access rules against their need to obtain sufficient votes. We expect that this tension will be even more acute as a result of the SEC’s recent adoption of amendments to New York Stock Exchange rules that will eliminate brokers’ discretionary voting of uninstructed shares in uncontested director elections, and the widening adoption of majority voting standards for uncontested director elections.
ENDNOTES
1 Amendments to Rules Requiring Internet Availability of Proxy Materials, Release Nos. 3309073, 34-60825, IC-29046, available at http://sec.gov/rules/proposed/2009/33-9073.pdf.
2 Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies, Release Nos. 33–8998, IC–28584, 74 Fed. Reg. 4656 (Jan. 26, 2009).
|