The Securities and Exchange Commission recently adopted amendments to the e-proxy rules in an effort to increase shareholder participation in the voting process.  Data indicates that, since the adoption of the e-proxy model, participation by retail shareholders has been lower when those shareholders receive only the Notice of Internet Availability rather than a full set of proxy materials.  Commentators have suggested, and the SEC agreed in its release, that this difference is due in part to shareholder confusion about the purpose and function of the Notice of Internet Availability, including whether it serves as a proxy card.  The SEC's amendments to the e-proxy rules are intended to reduce this confusion and discourage boilerplate mailings by providing companies additional flexibility in the content of the Notice of Internet Availability and by allowing companies to provide shareholders with explanatory materials.  The amendments go into effect March 29, 2010.

This Update summarizes the amendments to the e-proxy rules and provides practical tips.

Companies Can Choose How to Convey Information in the Notice of Internet Availability

Certain Topics Are Required in the Notice, but Wording Is Flexible. The e-proxy amendments replace the currently mandated legend of the Notice of Internet Availability with a shorter, bold-faced legend that states: "Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be Held on [meeting date]."  The Notice of Internet Availability must indicate that it is not a form for voting, which is a change intended to mitigate shareholder confusion on this point, and it must contain the other information currently required to be in the legend, but the language and format will no longer be prescribed.  Accordingly, the amended rules allow companies to determine the most effective way to communicate the following information that was previously required in the legend:

    • That the Notice of Internet Availability presents only an overview of the complete proxy materials, which contain important information and are available on the Internet or by mail;
    • That shareholders should access and review proxy materials before voting;
    • The Internet Web site address where proxy materials are available;
    • How shareholders may request a paper or email copy of the proxy materials; and
    • That unless shareholders make a request, they will not otherwise receive a paper or email copy of the proxy materials.

Notice Need Not Mirror Proxy Card.  The amended e-proxy rules continue to require companies to impartially identify each matter to be considered at the meeting, such as the election of directors or the ratification of auditors, but the SEC has confirmed that the Notice of Internet Availability does not need to have the same content or format as the proxy card.

Other Requirements Unchanged.  The amendments to the e-proxy rules leave unchanged the other items companies are currently required to address in the Notice of Internet Availability.

Explanatory Materials May Accompany the Notice of Internet Availability

To promote shareholder engagement and understanding of the e-proxy process, the amended rules permit companies to send shareholders separate explanatory materials.  Specifically, companies may distribute with the Notice of Internet Availability an explanation of:

    • The reasons for the company's use of the notice-only method of delivery; and
    • The process by which shareholders may receive and review proxy materials and cast their votes under the e-proxy rules.

Companies should view these explanatory materials as a tool for increasing shareholder voting.   The SEC has cautioned that the explanatory materials must be limited to the sanctioned topics and cannot be used as an opportunity to try to persuade shareholders to change the delivery method of proxy materials or to vote in a certain way.

Practical Tips

    • Use Explanatory Materials.  The importance of retail shareholder voting has generally increased with the recent New York Stock Exchange rule changes that affect all companies with securities listed on a national securities exchange and prohibit discretionary broker voting in director elections.  Companies, particularly those with majority voting requirements, should consider including explanatory materials with the Notice of Internet Availability to increase the likelihood of achieving required voting levels.
    • Review SEC Resources.  As companies draft explanatory materials to be included with the Notice of Internet Availability, they should review available SEC resources, which contain information about recent changes to voting rules and highlight the ways in which shareholders can exercise their rights, including the following:
    • Provide Additional Guidance to Shareholders.  Because the notice and access model is still relatively new to some shareholders, companies should consider posting a Q&A or other explanation of the e-proxy process on the investor relations section of their Web sites.  In addition, companies should be prepared to field questions about the Notice of Internet Availability and the voting process after they send materials to shareholders.  Companies should ensure that any guidance provided, any materials on their Web sites and any explanatory materials sent out with the Notice of Internet Availability are generally consistent. 

Time of Filing for Soliciting Persons Other Than the Issuer

The SEC's e-proxy rule amendments also revise the deadlines for distribution of the Notice of Internet Availability by third-party solicitors in order to increase the ability of those third-party solicitors to utilize the notice-only option.  A third-party solicitor choosing to send only a Notice of Internet Availability to shareholders must now send it by the later of:

    • 40 days before the shareholder meeting; or
    • The date on which the solicitor files its definitive proxy statement with the SEC, provided that the solicitor's preliminary proxy statement is filed with the SEC within 10 days of the issuer filing its definitive proxy statement.

Additional Information

This Update is only intended to provide a summary of the SEC's rules.  You can read the full text of the SEC's amendments to the e-proxy rules at http://www.sec.gov/rules/final/2010/33-9108.pdf.