01.18.2008

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Updates

In 2007 the Securities and Exchange Commission adopted amendments to the proxy rules that will require companies to post their proxy materials on a publicly available Internet website. Proxy materials include proxy statements, proxy cards, information statements, annual reports to security holders, notices of shareholder meetings, additional soliciting materials, and any amendments to such materials. The e‑proxy rules do not apply to proxy materials relating to business combination transactions.

When Are the e-Proxy Rules Effective?

For Large Accelerated Filers—Mandatory in 2008. Large accelerated filers (generally, companies that, as of the end of their respective fiscal years, have an aggregate market capitalization of $700 million or more) must comply with the new rules beginning January 1, 2008.

For All Other Companies—Voluntary in 2008 and Mandatory in 2009. For all other companies, persons who are not companies and registered investment companies, the rules are voluntary until January 1, 2009, at which point they become mandatory.

The Notice and Access Model for Proxy Delivery: Two Options

A company may elect either of the following two options to provide proxy materials to its shareholders.

  •  Notice Only. The "notice only option" allows the posting of proxy materials on an Internet website and requires the company to send shareholders only a notice of the availability of the materials on the Internet website (this is referred to as a Notice of Internet Availability of Proxy Materials); or
  • Full Set Delivery. The "full set delivery option" permits delivery of a full set of paper copies of proxy materials (as companies have done in the past) but still requires the company to post the proxy materials on a website and send a Notice of Internet Availability of Proxy Materials to shareholders.

The Notice Only Option

Under the notice only option, a company will:

  • Post all proxy materials on an Internet website.
  • Send a Notice of Internet Availability to shareholders at least 40 calendar days before the date of the shareholder meeting (or before a corporate action can be effected) to inform shareholders of the electronic availability of the proxy materials.
  • Upon the request of a shareholder, send paper or e-mail copies of the proxy materials to the shareholder within three business days of the request.
  • Permit shareholders to make a permanent election to receive paper or e-mail copies of the proxy materials.

Practical Tip

Update Your Annual Meeting Calendar for the New Deadlines. You may need to adjust your proxy season time and responsibility schedule to meet the new deadlines of the notice only option. Under this option, the Notice of Internet Availability must be sent at least 40 days prior to the meeting of shareholders, and all related proxy materials must be available on your website on or prior to the date the notice is first sent to shareholders. This will affect your schedule in two ways. First, you need to allow time to prepare all your normal proxy materials and (for the first time) a Notice of Internet Availability, and the notice will need to be delivered to brokers (or other intermediaries who hold shares on behalf of beneficial owners) sufficiently in advance to permit them to meet the 40-day mailing requirement. Second, you need to allow time to prepare (again, for the first time) the website that will contain the proxy materials. You will want to allow sufficient time to ensure that your website is designed to be user‑friendly for all your shareholders.

The Notice of Internet Availability. The Notice of Internet Availability, which must be filed with the SEC no later than the day it is first sent to shareholders, will indicate that the company's proxy materials are available on a specified website and explain how to access the materials. In addition, the Notice of Internet Availability must include:

  • A prominent SEC-required legend in bold-face type (see Exhibit A for the required language).
  • The date, time and location of the meeting or, if corporate action is to be taken by written consent, the earliest date on which the corporate action may be effected.
  • A clear and impartial description of each matter intended to be acted on, and the company's recommendations, if any, regarding those matters, but no supporting statements.
  • A list of materials made available on the specified website.
  • A toll-free telephone number, an e-mail address and an Internet website address where a shareholder can request a copy of the proxy materials relating to all the company's future meetings and the particular meeting to which the Notice of Internet Availability relates.
  • Any control/identification numbers that the shareholder needs to access the proxy card as well as instructions on how to access the proxy card (provided that the instructions do not enable a shareholder to execute a proxy without having access to the proxy statement).
  • Information on how to obtain directions to be able to attend the meeting and vote in person.

The Notice of Internet Availability must be written in plain English. It may only contain the information specified by the rules, except that it may also contain information required by state law, if the company combines the Notice of Internet Availability with any shareholder meeting notice that state law requires.

In addition, the Notice of Internet Availability may contain a protective warning to shareholders advising them that no personal information other than the identification or control number is necessary to execute a proxy. See Exhibit A for a sample Notice of Internet Availability.

Practical Tip

Don't Forget to Check State Law Notice Requirements. Consult your local legal counsel regarding notice requirements under state corporate law where your company is incorporated. For example, in some states, shareholders must explicitly consent to receive notices by electronic transmission. As a result, incorporating the state law meeting notice into the proxy materials posted on the website would be ineffective for shareholders who have not "opted-in" for electronic transmission. However, companies in some states may choose the notice only option under the SEC e-proxy rules since those rules permit the state law meeting notice to accompany, or even be incorporated into, the Notice of Internet Availability. In other words, companies in certain states who choose the notice only option can continue to physically deliver the state law meeting notice because that notice will accompany or be incorporated into the Notice of Internet Availability required under the SEC's e-proxy rules. If your company is incorporated in one of these states, you will want to make sure that your Notice of Internet Availability also complies with all state law notice requirements. Again, the SEC's e-proxy rules specifically permit the Notice of Internet Availability to contain this information.

Control and Design of the Website. The proxy materials referred to in the Notice of Internet Availability must be available on a website, free of charge, on or before the date on which the Notice of Internet Availability is sent to shareholders. The proxy materials must remain on the website until the shareholder meeting is concluded. The website may not be the SEC's EDGAR website, and the website address must be specific enough to take the user directly to the proxy materials, rather than to a home page or another section of the company's or third party's website. A company also must post any subsequent additional soliciting materials on the website no later than the date on which the materials are first sent to shareholders or made public. A company must present the materials on the website in a format that is convenient for both reading online and printing on paper.

Practical Tip

Make Your Website User‑Friendly to Prevent Frustrating Shareholders and to Avoid Delay in Obtaining Votes. Consider these tips for designing a user‑friendly website:
  • Consider Your File Size. You may want to consider the size of the proxy material files because some of your shareholders will not have broadband connection. While some types of files may be suitable for persons with high-speed Internet access, the readability and printability of a document may be affected significantly by the time it takes to download the document.
  • HTML v. PDF? Many large companies currently post their annual reports in PDF format; however, some commentators believe that HTML is the preferred method for shareholder use because, compared to a PDF‑formatted document, an HTML document loads more quickly, is easier to read online, does not require a particular application to view, does not take as much memory and CPU power (which may be a problem for older computers), and does not take as much time to download. Many commentators have suggested that the simplest and most effective way to set up an HTML website is to put the entire annual report or proxy statement on a single web page with a table of contents on the left-hand side of the screen (in a frame or inline frame so that the table of contents is always visible, no matter where the user navigates within the document).

Trap for the Unwary

This Is Not an Opportunity to Collect Shareholder Information. The website a company uses to post proxy materials must maintain the anonymity of a shareholder accessing the website. For example, a company may not install "cookies" or other tracking features on the website. Moreover, you may not use any e‑mail address provided by a shareholder solely to request a copy of proxy materials for any purpose other than to send a copy of those materials to that shareholder. You also may not disclose a shareholder's e‑mail address to any person other than your employees or agents solely for the purpose of facilitating delivery of a copy of your proxy materials by the agent or employee to the shareholder requesting a copy of the materials.

Providing a Means to Vote. A company must provide shareholders a method for executing proxies as of the time the company first sends the Notice of Internet Availability. The rules do not require an Internet voting platform; rather, a company can satisfy this requirement by providing a toll-free telephone number for voting, placing a printable or downloadable proxy card on the website, or by providing an electronic voting platform. If a telephone number for executing proxies is provided, the number may appear on the website but not in the Notice of Internet Availability because it would enable a shareholder to execute a proxy without having access to the proxy statement.

Proxy Card Delivery. Under the notice only option, a company must wait at least 10 days after sending the Notice of Internet Availability before sending a paper or e-mail copy of the proxy card, unless the other required proxy materials precede or accompany the card, in which case delivery of a proxy card can occur before the 10 days have elapsed. The rationale behind the 10-day wait period is to give shareholders time to access the proxy materials online or request paper copies before the company sends a proxy card without accompanying proxy materials.

Practical Tip

To Print or Not to Print? How Many Paper Copies Will It Take to Satisfy Shareholder Requests? The notice only option provides your company an opportunity to save money on printing costs. Nevertheless, you will need to make an educated guess as to how many paper copies to print to satisfy the hard‑copy requests of shareholders. When thinking about how many paper copies you will need, consider printing fewer copies if you are a technology company or if your shareholders are tech savvy. Consider printing more copies if your company is likely to have shareholders who may be less inclined to access your website. Anecdotal evidence so far suggests that printing paper copies to cover 20% of shareholders was conservative in light of actual request rates of around 1-2%. Making too few copies can negate printing costs saved earlier because of the additional fees incurred for delivering paper copies within three days of a shareholder's request. In addition to delivery fees, a company will incur other new fees when complying with the e-proxy rules, including the cost of web hosting.

The Full Set Delivery Option

The full set delivery option is the same as the traditional paper model of proxy delivery except, in addition to providing a full set of paper copies of the proxy materials, a company must do two things.

  • Post Proxy Materials on a Website.
  • Include a Notice. This notice is similar to the Notice of Internet Availability provided to shareholders under the notice only option, and may be incorporated into the proxy statement or proxy card.

Under the full set delivery option, the full set of proxy materials and notice does not need to be sent at least 40 days prior to any meeting or corporate action. In addition:

  • Companies do not need to provide paper or e-mail copies of the proxy materials upon request from shareholders since the shareholders have already been sent the proxy materials under this option.
  • The requirements of the website design are essentially the same as those under the notice only option.
  • Shareholders must have a method to execute proxies as of the time the notice is first sent, which may generally be satisfied by delivery of the proxy card or, for beneficial owners, a request for voting instructions.
  • Companies may deliver another proxy card without any waiting period because the shareholders already have been sent a full set of proxy materials.
  • Companies do not need to include language in the notice relating to instructions on how to request copies of proxy materials.

Additional Information

This Update is only intended to provide a general summary of the new e-proxy rules. You can read the full text of the SEC's final 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 on our website.

 

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