The 2009 proxy season marks the first year in which all public companies must comply with the Securities and Exchange Commission's e-proxy rules.  These rules were effective for large accelerated filers, and on a voluntary basis for all other companies, as of January 1, 2008.  The experience of early adopters in 2008 provides valuable insight for companies implementing the e-proxy rules for the first time, as well as those companies that are looking for ways to improve their e-proxy experience over last year.  The lessons learned will help companies better anticipate challenges, establish informed expectations, and identify strategies for the upcoming proxy season.  This Update provides background information on e‑proxy rules and offers our "Top 8" lessons learned from the 2008 e-proxy season.

What Do the e-Proxy Rules Require?

The e-proxy rules require companies to post their proxy materials on a publicly available, "cookie free" Internet website.  Proxy materials include proxy statements, proxy cards, information statements, annual reports to security holders, notices of shareholder meetings, other soliciting materials, and amendments to these materials.  The e-proxy rules do not apply to proxy materials relating to business combination transactions.

There are two options for satisfying the e-proxy rules:  (1) the "notice only" option and (2) the "full set delivery" option.

• Notice Only.  In lieu of mailing full sets of printed materials to shareholders, the "notice only" option allows companies to post their proxy materials on a "cookie free" Internet website and mail shareholders a Notice of Internet Availability to inform them of how to access the online materials.  Companies are only required to mail or e-mail full sets of proxy materials to shareholders upon the request of a shareholder. 
• Full Set Delivery.  The "full set delivery" option is the same traditional paper model that companies followed prior to the e-proxy rules, but requires companies to post all proxy materials on a "cookie free" Internet website and send shareholders a Notice of Internet Availability (which may be included with the proxy statement and proxy card).

For more information about the e-proxy rules, please see our January 18, 2008 Update.

Eight Lessons Learned From the 2008 e-Proxy Season

1.  Consider the Impact of Choosing "Notice Only" Option on Voting and Quorum

According to a Broadridge Financial Solutions, Inc. survey, respondent companies that utilized the notice only option prior to June 30, 2008 experienced a significant decrease in the percentage of retail shares voted, from 34.28% in the previous year to 16.57%. Nevertheless, beneficial shares processed by Broadridge using the notice only option only experienced a slight drop in total shares represented at the meeting for quorum purposes, from 88% to 86%.  Companies with a larger base of retail shareholders could experience a larger decline in shares present for quorum purposes and even risk not reaching a quorum.

If a company cannot risk losing retail shareholder votes, the full set delivery option may be a better option.  Companies should conduct internal cost-benefit analyses to weigh the potential savings against the potential drawbacks (e.g., possible decreased percentage of retail votes and/or undesirable vote outcomes).

Companies should carefully consider the agenda items and proposals to be presented at the annual meeting.  If there is a particularly contentious proposal on the agenda, companies should examine their shareholder profile, try to anticipate the vote of major shareholders, and reach out to institutional or retail shareholders as needed.  Sending more full sets of printed materials may be necessary to obtain the proxies necessary for management's desired outcomes.  Given these considerations, companies with a non-controversial or routine agenda have been using the notice only approach more frequently.

2.  Coordinate Schedules With Service Providers to Meet SEC Deadlines

Anecdotal evidence suggests that the greatest challenge of implementing the e-proxy rules for early adopters has been coordinating schedules and meeting deadlines.  Companies using the notice only option are required to have their proxy materials available on their e-proxy websites and send Notices of Internet Availability to shareholders at least 40 days before the annual meeting.

Companies should coordinate schedules with service providers, such as web developers or web hosting companies, early on in the process.  Web design, document uploading, and troubleshooting are time consuming, and companies are advised to build extra time into their schedules to allow review and revision of the e-proxy website before it is operable.

3.  Your Internal Deadline Should Be More Than 40 Days Prior to the Annual Meeting

In order to take the steps necessary to comply with the requirement that companies send Notices of Internet Availability to shareholders at least 40 days before the annual meeting, companies must actually finalize proxy materials prior to the 40-day deadline.

The SEC requires that a company's proxy materials be available on an e-proxy website at the same time that the Notices of Internet Availability are sent to shareholders.  Therefore, website hosting companies and other service providers involved in implementing the e-proxy website will need to receive final proxy materials in sufficient time to have the e-proxy website operational prior to the 40-day deadline.  Companies should contact service providers directly as many have specific deadlines for delivery.

The SEC requires that intermediaries (i.e., broker-dealers and banks) also meet the 40-day deadline for sending the Notices of Internet Availability.  Therefore, a company must provide intermediaries with the information required in the Notice of Internet Availability in sufficient time for the intermediary to prepare, print, and send its own Notices of Internet Availability to the company's beneficial owners by the 40-day deadline, typically at least 47 days prior to the annual meeting.  Companies should contact intermediaries directly as many have specific deadlines for delivery.

Therefore, in order to ensure that all materials are ready for posting and delivery to the necessary third parties and that any technical problems are resolved in advance, companies using the notice only option should have their proxy materials finalized well in advance of the 40-day deadline.  For example, in 2008, many companies found that they needed to finalize their proxy materials two weeks prior to the 40-day deadline.

Although a company choosing the full set delivery option need not comply with the 40-day requirement, it may need to adjust its timeline as its proxy materials must be accessible on the e-proxy website at the same time that the Notices of Internet Availability are sent to shareholders.  And companies should not forget about state law requirements regarding the record date and notice of the annual meeting.

4.  If Using the Notice Only Option, Make Your Notice of Internet Availability User-Friendly to Prevent Confusion

In 2008, many shareholders who received Notices of Internet Availability found them confusing and difficult to understand.  Expecting to receive full sets of printed materials, many were unsure what to do with the Notice of Internet Availability.  Some shareholders even mistook the Notice of Internet Availability for a ballot and mailed it back to the company with their votes marked.

Although the SEC has strict requirements governing the language in the Notice of Internet Availability, companies can work within the framework of the rules to design and format the Notice of Internet Availability to help decrease shareholder confusion.  However, the initial Notice of Internet Availability may only include the information required by SEC rules and state law.

Because this is a learning process for many shareholders, companies should consider posting a Q&A or some additional explanation of the e-proxy process on the investor relations section of their websites.  Once materials are sent out, companies should be prepared to field shareholder questions and provide guidance and materials as needed.

5.  Be Prepared to Respond Quickly to Requests for Full Sets of Proxy Materials

If a company chooses the notice only option, it must deliver a paper or e-mail copy of the proxy materials, as requested by a shareholder, for no charge.  If requested before the date of the shareholder meeting, these materials must be sent to the requesting shareholder within three business days by first-class mail or some other reasonably prompt means of delivery or by e-mail, depending on the medium of the proxy materials.

Companies should develop a process for effectively responding to shareholder requests for proxy materials and related questions in a timely manner.  Some early adopters found that informing and training their transfer agent, investor relations personnel, and/or communications and legal personnel on the process for answering shareholder questions and the method for forwarding copies of proxy materials ensured that proxy materials were sent within the three-day time period.

Companies must provide the means – by toll-free telephone number, Internet website address, and e-mail address – for a shareholder to make an election to receive a paper or e-mail copy of the current proxy materials and the proxy materials relating to any future shareholder meetings.  Companies must also maintain records of these shareholder elections and should therefore develop an organized system to log shareholder preferences.

6.  Make an Informed Estimate of Potential Savings

Broadridge estimates that early adopters saved a total of $143 million in printing and postage costs, net of other service fees from July 1, 2007 to June 30, 2008.  However, the amount that companies will save varies widely depending on factors such as the makeup of a company's shareholder base and the costs of delivering hard copies.  The early adopters were likely some of the largest companies with sizeable numbers of shareholders and, accordingly, had significant savings opportunities.

Anecdotal evidence suggests that many early adopters who elected to utilize the notice only option (for delivery to at least a portion of its shareholders) did not realize the amount of savings that had been anticipated.  Cost savings were at times offset by other activities, such as hiring third-party service providers, incurring increased postage fees (e.g., for materials sent first-class rather than by bulk mail), sending a paper proxy card, stratifying the delivery approach, and sending second notices to shareholders.  Therefore, a company should consider the impact of these types of decisions on potential savings.

In 2008, many companies who chose the notice only option were concerned that many of the shareholders would also request printed copies of the proxy materials, thereby eroding some of the savings associated with the lower printing costs.  However, the Broadridge survey found that only 1.05% of shareholders who received a Notice of Internet Availability requested printed copies of proxy materials.  Despite this low percentage, companies should be prepared to provide printed materials to a greater number of shareholders because of the quick deadline to send printed materials upon request and the marginal cost of printing extra copies.

Companies should work with service providers to carefully estimate the potential savings so that an accurate estimate of cost savings can be weighed against any potential drawbacks of the notice only option.

7.  Take a Proactive Approach to Maintaining Shareholder Response Rates

Companies may find that the e-proxy rules provide a good opportunity to improve relationships with shareholders.  Since retail shareholder response rates will likely decrease as a result of the notice only option, companies should be proactive in keeping shareholders engaged.  Companies can alert shareholders to the new process by issuing press releases explaining the changes, posting information on the company's investor relations webpage, and training personnel to answer questions about the Notice of Internet Availability and the related e-proxy process.  These efforts may help orient shareholders to the new e‑proxy delivery methods and increase shareholder voting.

8.  Optimize the Shareholder Experience on the e-Proxy Website

The SEC requires that proxy materials posted on e-proxy websites be suitable for online reading and printing, but it has not set forth any specific requirements as to the design or format.  Therefore, companies have a lot of freedom when creating an e-proxy website.

Consider Cost/Benefit of Website Hosting.  Companies are allowed to host their own
e-proxy website instead of outsourcing to a third-party service provider.  Hosting the site allows for total control of the format, design, and content, and can be a part of a broader shareholder communication initiative.  However, the e-proxy website that the company uses to post proxy materials must preserve shareholder anonymity and, therefore, it must disable any "cookies" or other tracking software.  Many early adopters lacked the ability or desire to host an e-proxy website themselves and comply with the technical requirements.  Instead they opted to use service companies to host their websites.

Choose a "User-Friendly" Website URL.  The URL for an e-proxy website should be as short and obvious as possible.  Companies can use redirection to automatically send shareholders who type in the e‑proxy website URL to another website (which may have a longer URL).  For example, a shareholder who types in www.company.com/annualmeeting would automatically be redirected to a different website (with a different URL) that is hosting the proxy materials.

Document Formatting:  HTML or PDF?  To provide shareholders with meaningful access to proxy materials, materials must be presented on an e-proxy website in a format convenient for both reading online and printing on paper.  Materials posted, including charts, tables, and graphics, should look substantially identical to the paper version.  In addition, the SEC has noted that materials should be presented in a readily searchable format.  The SEC has also indicated a preference for user-friendly features such as hyperlinks from a table of contents to enable shareholders to quickly and easily navigate the documents.

Although HTML is more expensive and time-consuming to create than PDF and image-based documents, some commentators believe that it creates a more pleasant online viewing experience because, for example, documents are easier to read online and additional applications are not required to view them.  Commentators have also noted, however, that less than 10% of U.S. companies currently use HTML format to post online annual reports on their investor relations websites.  Early adopters using HTML have cautioned that, although investor responses were generally positive, more planning time is needed to code, proof, and troubleshoot the documents prior to the expected launch of the e-proxy website.  If a company chooses HTML, it should involve the web developer early in the planning timeline.

If the company does not choose to use HTML, bookmarked PDFs are another option that allows a document to be navigated with relative ease.  A bookmarked PDF lists topics within the document that, when clicked, bring the viewer to the desired page in the proxy materials. Commentators have suggested that many companies choose to use PDFs because it provides the benefits of navigation without the difficulties of converting the content into a different format.

Additional Information

This Update is only intended to provide general background on the SEC's rules.  You can read the full text of the SEC's final e-proxy rule release at http://www.sec.gov/rules/final/2007/34-56135.pdf.  You can find discussions of other recent cases, laws, regulations, and rule proposals of interest to public companies on our website.