The Proxy Statement

Prior to each shareholders’ meeting, a public company solicits a proxy from each of its shareholders by providing a proxy statement and a proxy card (or voting instructions). A proxy is a power of attorney allowing the company’s management (or another designee) to vote the shares owned by a shareholder as directed by the shareholder or at the designee’s discretion. The proxy solicitation process allows shareholders to exercise their voting rights without being physically present at the shareholders’ meeting. The proxy statement informs shareholders about the items of business to be voted on at a shareholders’ meeting, provides certain other SEC-required disclosures and solicits a proxy from each shareholder entitled to vote at the meeting.

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The Annual Meeting of Shareholders

In connection with a public company’s annual meeting of shareholders, a public company provides its shareholders with a proxy statement and an annual report to shareholders, which together play a critical role:

  • They provide an annual, formal communication from management to the company’s shareholders; and
  • They serve as an annual corporate governance checkup.

Typical annual meeting matters include director elections, say-on-pay proposals and ratification of independent auditors. Other matters to be voted on may include approval of equity incentive plans and qualified shareholder proposals.

Special Shareholders’ Meetings

A public company may also hold a special meeting of shareholders for a variety of reasons, including seeking shareholder approval for a sale of the company or certain other major transactions involving the company. In connection with these special meetings, a company provides its shareholders with a proxy statement containing, among other things, information regarding the matter to be voted on at the meeting.

Regulations Governing the Proxy Statement

Regulation 14A of the 1934 Act governs any communication by a public company reasonably calculated to cause a shareholder to grant, withhold or revoke a proxy. Regulation 14A requires a public company to disclose relevant material information and prohibits fraud in connection with a proxy solicitation. State corporate law, as well as the provisions of each company’s certificate or articles of incorporation and bylaws, also govern aspects of the proxy solicitation process. 

The Proxy Statement as a Solicitation Tool

With the increasing influence of shareholder activists and proxy advisory firms (such as Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co. LLC (Glass Lewis)), the proxy statement has evolved from a pure SEC disclosure document to become a solicitation tool that savvy companies use to connect with shareholders to tell their companies’ story. In addition to the required disclosures, many companies focus on making their proxy statements clearer and more user-friendly through the use of executive summaries, graphics and other techniques. See the “Proxy Statement Usability” Practical Tip later in this chapter for our suggestions about using your proxy statement to tell a compelling story.

Information Included in the Proxy Statement

Schedule 14A outlines the information that a public company must include in a proxy statement. Companies typically include, for example, many Form 10-K-required disclosures in the proxy statement and incorporate them by reference into the Form 10-K. (Form 10-K permits this so long as the company files its proxy statement within 120 days after its fiscal year-end.) Mandatory Schedule 14A disclosures include:

  • The Meeting. The date, time and location of the shareholders’ meeting.
  • Voting Information. A description of the shareholder vote required for approval of each matter to be voted on at the shareholders’ meeting, the record date for determining the holders of shares entitled to be voted and the method for counting votes. 
  • Board Elections. Detailed background information about the director nominees and incumbent directors.
  • Executive Compensation. Detailed tabular and narrative information about the company’s compensation for its principal executive officer, principal financial officer and three other most highly compensated executive officers (the named executive officers), as well as a compensation discussion and analysis (CD&A) of how and why the company decided on the types and amounts of compensation paid during the last completed fiscal year, and the ratio of CEO annual compensation to that of the company’s median employee.
  • Say-on-Pay Proposals. A nonbinding shareholder vote on the compensation disclosed for the company’s named executive officers (required every one, two or three years) and a separate nonbinding vote (at least every six years) on how frequently to hold the say-on-pay vote. 
  • Related Person Transactions. A description of certain transactions between the company and any director, director nominee, executive officer or 5% shareholder or any of their immediate family members, and the company’s procedures for approving these types of transactions.
  • Corporate Governance. Detailed information regarding director independence, committee governance and composition, director compensation, the Board nomination process and Board leadership
  • Risk Management. The Board’s role in risk oversight and the company’s risk management for any material compensation-related risks. 
  • Beneficial Ownership and Section 16 Compliance. The identity of shareholders who beneficially own 5% or more of the company’s shares, the share ownership of the company’s directors, named executive officers, and directors and all executive officers as a group, and any failures by these persons to timely comply with the reporting requirements of Section 16(a) of the 1934 Act.
  • E-Proxy Disclosures. How to access the company’s proxy materials online.

Dodd-Frank Act’s Impact on Proxy Voting and Proxy Statement Disclosures

The Dodd-Frank Act, which became law in 2010, has significantly impacted annual shareholders’ meetings and proxy statement disclosures, including say-on-pay and say-on-frequency votes, CEO pay ratio disclosure, company policies on hedging of company securities by directors and employees, and disclosures regarding Compensation Committee independence and the use of compensation advisors. As of the time this Handbook went to press in 2021, the SEC had proposed but not yet adopted rules to implement two other provisions under the Dodd-Frank Act that will impact proxy statement disclosures: the relationship between executive pay and company performance, and mandatory clawbacks for some executive incentives, which will then require further NYSE and Nasdaq rulemaking.

Executive Compensation

Compensation Discussion and Analysis (CD&A). The CD&A is principles-based, similar to the MD&A in the Form 10-K, and must discuss the material information necessary to understand the objectives of a company’s compensation for its named executive officers for the last completed fiscal year. This means that each company must determine, in light of its particular facts and circumstances, what elements of the company’s compensation policies and decisions are material to investors’ understanding. In addition, the proxy statement CD&A must answer these questions:

  • What are the objectives of the company’s compensation program?
  • What is the compensation program designed to reward?
  • What is each element of compensation?
  • Why does the company choose to pay each element?
  • How does the company determine the amount (and any formula) for each element?
  • How do each element and the company’s decisions regarding that element fit into the company’s overall compensation objectives and affect decisions regarding other elements?
  • Did the company consider the results of the most recent say-on-pay vote in determining compensation policies and decisions, and if so, how?

The SEC rules also provide a nonexclusive list of topics a company should address in the CD&A for the last completed fiscal year if material and necessary to an understanding of the company’s policies and decisions for compensation of its named executive officers. Compensation actions or decisions taken before or after the last completed fiscal year should also be addressed, if necessary, to present a “fair understanding” of the named executive officers’ compensation for the last completed fiscal year. 

Due to proxy advisory firm and investor focus on executive compensation, the CD&A also often includes disclosures that go well beyond SEC requirements and the above-listed items. Such disclosures are typically aimed at more clearly explaining the executive compensation program’s link to company financial and market performance with an eye toward soliciting support for the say-on-pay proposal.

Compensation Committee Report. A Compensation Committee Report, which accompanies the CD&A and is followed by the name of each member of the Committee, confirms that the Committee has reviewed and discussed the CD&A with management and recommended to the Board that the CD&A be included in the proxy statement.

Practical Tip: Aim Carefully! Disclose Performance Targets
Your company must generally disclose company and individual performance targets for incentive compensation in the year covered by the CD&A as well as the actual achievement levels matched against the targets. You must include these targets if they are material elements of your company’s compensation policies and decisions, unless you can demonstrate that the disclosure would result in competitive harm to the company. The SEC, through comment letters, imposes a stringent standard of review on omitted performance goals. It rarely accepts “competitive harm” arguments for corporate-level financial performance targets for completed fiscal periods. If your company omits performance targets, you must discuss in your CD&A with meaningful specificity how difficult it will be to achieve the undisclosed targets. In addition, proxy advisory firms are often critical of companies that fail to clearly disclose executive compensation performance targets.

Executive Compensation Tables and Related Narrative Disclosures
. A series of required tables and supplemental narrative disclosures follow the CD&A, showing compensation of named executive officers in three categories:

  • All compensation paid, earned or awarded in the last completed fiscal year and the two preceding fiscal years, with a specific breakdown of equity and nonequity plan-based awards during the last completed fiscal year;
  • Equity holdings as of the end of the last completed fiscal year and realizations from the exercise of options or vesting of equity awards during the last completed fiscal year; and
  • Post-employment compensation, including pension plans, nonqualified deferred compensation and other plans and benefits, including payments relating to severance, retirement and change of control.

Narrative disclosure provides the context for the compensation tables. By contrast, the narrative in the CD&A focuses on the broader “how” and “why” issues behind the company’s compensation policies and programs.

Analysis of Risk Related to Compensation for All Employees

Companies must specifically discuss and analyze employee compensation policies and practices to the extent that the policies or practices create risks that are reasonably likely to have a material adverse effect on the company.

Practical Tip: Look Out! Disclose Process and Conclusions Regarding Risk Analysis
The proxy disclosure rules do not require you to affirmatively state that your company has determined that the risks arising from your compensation policies and practices are not reasonably likely to have a material adverse effect on your company. However, consider this: affirm both your risk analysis conclusion and the process by which you arrived at that conclusion. If you do this, discuss the policies or practices (such as clawbacks or minimum stock ownership guidelines) that mitigate those risks that your incentive compensation programs create. If you discuss these risk-mitigation elements, set them off under a separate, identifiable heading to make it clear that you are not including these elements in the executive compensation covered by the say-on-pay vote. You should also consider including details regarding the consideration of risk for named executive officer compensation policies and practices within the CD&A.

Say-on-Pay and Say-on-Frequency

Public companies holding a shareholders’ meeting to elect directors also conduct nonbinding advisory votes on both the compensation paid to named executive officers (the say-on-pay vote) and, at least once every six years, whether the say-on-pay vote should be held every one, two or three calendar years (the say-on-frequency vote).

Say-on-Pay Vote. The say-on-pay vote seeks approval of executive compensation as disclosed in the proxy statement.

Although SEC rules require no specific language or form of resolution, generally a company must:

  • Indicate that the vote is to approve the compensation of named executive officers as disclosed in the proxy statement, including the CD&A, the compensation tables and the related narrative disclosures;
  • Disclose that a say-on-pay vote is being presented pursuant to the SEC’s proxy rules and explain the general effect of the vote (i.e., the nonbinding nature of the vote); and
  • After the initial say-on-pay and say-on-frequency votes, disclose in subsequent proxy statements when the next say-on-pay and say-on-frequency votes will In addition, companies must disclose in future CD&As how the results of the most recent say-on-pay vote have been considered in determining compensation policies and decisions.

Say-on-Frequency Vote. The purpose of the say-on-frequency vote is to ask, at least every six years, how often shareholders would prefer future say-on-pay votes to occur. The proxy card should give shareholders four alternatives: every one, two or three years or abstain. Companies must disclose that they are providing a separate say-on-frequency vote pursuant to the SEC’s proxy rules and explain the nonbinding nature of the vote. Although a company’s Board may include a recommendation on how shareholders should vote, the proxy statement should be clear that shareholders are not voting to approve or disapprove the Board’s recommendation.

Practical Tip: Preserve Your Discretion to Vote Uninstructed Say-on-Frequency Proxy Cards

When drafting your proxy card, you can carefully preserve your ability to vote uninstructed proxy cards in accordance with management’s recommendation for the say-on-frequency vote if you:

  • Include a recommendation for the frequency of the say-on-pay votes in the proxy statement; and
  • Include language in bold on the proxy card regarding how management intends to vote uninstructed shares. 

Form 8-K Disclosure
. Companies disclose the voting results for the say-on-pay and say-on-frequency votes under Item 5.07 of Form 8-K within four business days following the date of the shareholders’ meeting. This may include the Board’s decision on how frequently to hold future say-on-pay votes, although this decision can also wait until an amendment to the Form 8-K is filed within 150 days of the shareholders’ meeting or, if earlier, 60 calendar days before the deadline for the submission of shareholder proposals under Rule 14a-8 under the 1934 Act for the next annual meeting.

Pay Ratio Disclosure

U.S. public companies are required to disclose the annual compensation of their median employee, the annual total compensation of their CEO, and the ratio of these two amounts. Emerging growth companies and smaller reporting companies are exempt from this disclosure.

To identify the median employee, companies may select a methodology based on their own facts and circumstances. For example, a company could use its total employee population, a statistical sampling of that population or other reasonable methods. In performing its pay ratio calculation, subject to limited exceptions, a company is required to include all personnel – U.S. and non-U.S., full-time, part-time, temporary and seasonal – employed by the company and any of its consolidated subsidiaries on any date of the company’s choosing within the last three months of its last completed fiscal year.

In identifying the median employee, a company may rely on a compensation measure that uses the same rules that apply to the CEO’s compensation, or any other compensation measure that is consistently applied to all employees included in the calculation, such as information from its tax or payroll records. Once the median employee has been identified, however, a company must calculate the annual total compensation for that employee using the same rules that apply to the CEO’s compensation as disclosed in the summary compensation table. 

A company is permitted to identify its median employee once every three years, unless there has been a change in its employee population or employee compensation arrangements such that the company reasonably believes would result in a significant change to its pay ratio disclosure. A brief description of the methodology used to identify the median employee, and any material assumptions, adjustments or estimates used to identify the median employee or to determine annual total compensation, must be provided.

Hedging Policy Disclosure

U.S. public companies are required to disclose in proxy statements any practices or policies they have adopted regarding the ability of any company employee, officer or director to engage in any transaction to hedge or offset any decrease in the market value of company equity securities granted to the individual as compensation or held by the individual directly or indirectly.

Companies must provide a “fair and accurate” summary of the practices or policies (whether written or unwritten) or disclose the practices and policies in full. Any disclosure must include the categories of persons covered and the categories of hedging transactions that are specifically permitted or disallowed. If the company does not have any hedging policies or practices, it must disclose that fact and state, if accurate, that hedging transactions are generally permitted.

Practical Tip: Proxy Statement Usability

Drafting your proxy statement with “usability” in mind allows it to serve as your company’s voice in presenting your executive compensation and governance story to investors and proxy advisory firms. It also allows you to keep up with your peers in the ever-evolving world of shareholder engagement efforts. We suggest the following as ways to enhance proxy statement usability:

  • Consider your target audience(s) for the current year in order to address particular shareholder or proxy advisory firm concerns or a specific area of shareholder engagement. The target audience may extend beyond shareholders to other stakeholders, particularly given the focus on ESG topics and engagement. 
  • Understand that proxy statement design and disclosure is now a “race to the top,” with companies of all sizes focused on creating user- friendly proxy statements that are more like shareholder outreach/solicitation documents than pure legally required disclosure filings.
  • Kick off the proxy statement with an executive summary or overview as well as an executive summary of the CD&A, as these are often the most-read sections of the proxy statement and investors may review the summaries instead of full sections. 
  • Include user-friendly navigation tools such as a detailed table of contents and headings and subheadings with live links as important guideposts.
  • Consider making your proxy statement more interactive with a letter from the Board. 
  • Include details about any shareholder engagement the company participated in during the year, what the issues were and the results of the engagement. 
  • Describe key compensation and governance policies, including stock ownership guidelines, clawback policies, perquisite policies and severance and postretirement Consider including these in a “What We Do” and “What We Don’t Do” list format.
  • Because most proxy statements are read online, consider how to inexpensively make the layout of the online version more interesting and reader- friendly though the use of color or formatting. 
  • Consider adding a chart or matrix illustrating Board skills, tenure and diversity in response to investor interest on these topics. For example, in 2018, the New York City comptroller issued a letter suggesting best practices for Board skill and diversity matrixes and included a number of See Chapter 10 for a discussion of new Nasdaq rules relating to Board diversity disclosures.
  • Include pictures of Board
  • Endeavor to clearly but concisely explain and highlight the alignment between the company’s pay and performance as part of your say-on-pay story.
  • Use graphs, tables and color, especially in the CD&A and executive summary, to break up text and better tell your story, but avoid overly complex or misleading graphics. 
  • Consider explaining your compensation program mechanics and performance over multiple years rather than presenting a single year in a vacuum. Bar charts are a good way to show trends over time.
  • Draft in plain English and avoid legalese whenever possible.

Most “leaders” in proxy statement disclosures have evolved over time. Starting from scratch on proxy statement usability requires a long lead time and can be cost-intensive. An alternative approach is to consider a few items to improve each year with an eye toward gradual and achievable long-term improvements.

Board and Corporate Governance

SEC disclosure requirements for annual reports and proxy statements highlight the composition and role of the Board and corporate governance generally. Key governance disclosures include:

  • Director Independence and Meeting Attendance. Both the NYSE and the Nasdaq listing standards require a majority of a listed company’s Board to be independent (as defined by the applicable exchange). The company must identify its independent directors in its proxy In addition, all non- management directors must meet in regular executive sessions, and NYSE companies must disclose in the proxy statement the name of the director who presides over these executive sessions. (We discuss NYSE listing standards in Chapter 9 and Nasdaq listing standards in Chapter 10.) A company must also disclose the total number of Board meetings held during the last fiscal year and identify directors who attended fewer than 75% of the aggregate of the total number of their Board and committee meetings. A company must also disclose its policy on director attendance at the annual meeting and the number of directors who attended the prior year’s meeting.
  • Board Leadership Structure and Role in Risk Oversight. The proxy statement describes the Board leadership structure and explains why the Board believes its chosen structure is most appropriate in light of the nature and current circumstances of the company. In particular, if the roles of CEO and chair of the Board are combined and a lead independent director conducts the meetings of the independent directors, the company must disclose why it has a lead independent director and describe the specific role the lead independent director plays in the leadership of the company. The proxy statement discusses the Board’s role in risk oversight and answers questions such as whether risk oversight is performed by the whole Board or by a separate risk committee. 
  • Transactions with Related Persons. The proxy statement provides an annual highlight of certain related person transactions and relationships that were considered by the Board in determining a director’s Companies also describe their policies and procedures for the review and approval or ratification of potential related person transactions.
  • Board Committees. The proxy statement discloses whether the Board has each of the customary standing Board committees: Audit, Nominating & Governance and Compensation Committees (or a committee performing similar functions). Disclosure identifies the function of each committee and the directors who serve on each, confirms their independence, discloses whether each committee has a written charter and indicates where the charter is There are also specific disclosures required for each committee, such as whether the Audit Committee includes an Audit Committee financial expert.
  • Compensation Consultants. The proxy statement describes the engagement and role of compensation consultants in determining or recommending the amount or form of executive and director Companies generally must disclose additional information if the consultant provides other services to the company resulting in fees greater than $120,000 during the company’s fiscal year. If a compensation consultant has raised any conflict of interest, companies also must disclose the nature of the conflict and how the conflict is being addressed.

Practical Tip: Integrate ESG Disclosure into the Proxy Statement
Stakeholder focus on environmental, social and governance (ESG) topics continues to influence companies of all sizes across industries. Many companies provide ESG disclosure in separate reports, often called sustainability reports or corporate responsibility reports, but include limited disclosures in their SEC filings. While the required SEC proxy statement disclosures address many governance items, given that the proxy statement is a main form of stakeholder engagement, companies should consider highlighting their environmental and social efforts by adding such disclosure to the proxy statement. At a minimum, proxy advisors expect S&P 500 companies to explicitly disclose the Board’s role in overseeing environmental and social issues, and many other ESG-related disclosures regarding human resources, compensation and the Board may fit naturally in the proxy statement. See Chapter 3 for more information about stakeholder engagement on ESG topics.

Director Nominations. A detailed description of the director nomination processes in the proxy statement, to give shareholders an understanding of Board operations, includes:

  • “Minimum Qualifications” of Director Candidates. The proxy statement sets out the “minimum qualifications” needed by a director nominee to be recommended by the Nominating & Governance Committee. Companies then describe the experience, qualifications, attributes or skills of each director and nominee, including service on other public company and registered investment company Boards during the preceding five years.
  • Shareholder-Recommended Director Candidates. The proxy statement describes the policy, if any, for consideration of shareholder-recommended director candidates and the procedures for recommending them. (And if there is no such policy? Then, the proxy statement needs to explain why not.)
  • Source and Evaluation of Director Candidates. A description of the Nominating & Governance Committee’s process for identifying and evaluating potential director nominees includes an explanation of any differences in the process for shareholder- recommended candidates.
  • Board Diversity. The critical diversity section discusses whether and, if so, how the Nominating & Governance Committee or Board considers diversity when identifying potential director nominees. The disclosure includes whether the Nominating & Governance Committee or Board has a policy on diversity for director selection and, if so, how it implements the policy and assesses its effectiveness.
  • 5% Shareholder-Recommended Director Candidates. If a 5% or greater shareholder or group that has owned its position for at least a year timely recommends a director candidate, the proxy statement, with the individual’s consent, discloses the name of the candidate, the name of the shareholder and whether the company nominated the individual.

Communications with the Board. A company must describe whether and how shareholders (and for NYSE companies, other interested parties) can send communications to the Board or to specific individual directors (and for NYSE companies, to the non-management directors as a group).

Director Compensation. Finally, a company must disclose in a specified tabular format all compensation that it has paid to directors or that they have earned in the most recently completed fiscal year, and provide narrative disclosure of any material factors necessary to understand the information in the table.

Audit Committee Report & Auditor Fees

The Audit Committee publishes its own report in the proxy statement. This report includes disclosure that the Committee reviewed and discussed with management the audited financial statements, reviewed and discussed with the independent auditors written disclosures regarding the auditors’ independence, and other matters required by applicable auditing standards. At the heart of this report is the Committee’s recommendation to the Board to include the audited financial statements in the company’s annual report. A company must also disclose in detail in its proxy statement and Form 10-K the fees paid to the independent auditors and a description of any preapproval policies and procedures.

A company also discloses in the proxy statement whether representatives of the auditors will attend the annual meeting and whether they will have the opportunity to make a statement or respond to questions.

Filing and Distributing Proxy Materials

E-Proxy Rules: No Cookies!

The SEC’s e-proxy rules require each public company to post proxy materials on a publicly available “cookie-free” website. The posted materials include the proxy statement, proxy card, annual report to shareholders, notice of shareholders’ meeting, other soliciting materials and any amendments to these materials.

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There are two alternatives available to companies to satisfy additional e-proxy requirements related to distribution of proxy materials:

  • Notice-Only Method. In lieu of mailing full sets of printed materials to shareholders, the notice-only option allows companies to post their proxy materials online and mail shareholders a “Notice of Internet Availability” at least 40 days before the shareholders’ meeting informing them of the availability of such materials and how to access the materials. Companies are only required to mail or e-mail full sets of the printed materials upon the request of a shareholder.
  • Full-Set Delivery Method. This traditional method requires mailing the paper proxy and annual report materials to Companies still need to post such materials online.

Companies use a variety of ways to satisfy this mandate, many distributing proxy materials using a stratified or bifurcated approach, employing different methods for different shareholder groups based on status as a retail versus institutional holder or registered versus street name holder.

Filing the Notice of Internet Availability

Companies that use the notice-only method of distribution file a form of the Notice of Internet Availability on EDGAR as additional soliciting materials no later than the date the company first sends the notice to its shareholders. 

Filing Preliminary Proxy Statements

Most annual meeting proxy materials relate only to routine matters such as the election of directors, say-on-pay and say-on-frequency proposals, approval of an equity compensation plan or ratification of the independent auditor. A company may file a routine proxy statement with the SEC in final form either prior to or concurrently with distributing the proxy materials to shareholders.

When the proxy materials relate to nonroutine matters (such as authorizing additional shares or otherwise materially amending the charter or approving a merger), a company must file them in preliminary form at least ten days prior to distributing them to shareholders. These preliminary proxy materials are subject to review and comment by the SEC. The SEC will promptly advise a company if it intends to review the preliminary proxy materials. If the SEC advises that it will not review the materials, the company may distribute the definitive proxy materials to its shareholders and concurrently file them with the SEC. If the SEC comments on the preliminary proxy materials, the company needs to file amended proxy materials for SEC review.

Distributing the Proxy Statement to Shareholders

State corporate law in the company’s jurisdiction of incorporation and a company’s governing documents establish the time period for delivery of notice of an annual or special shareholders’ meeting under most state laws. The notice period is generally no less than ten days (20 days for business combinations) and no more than 60 days prior to the shareholders’ meeting date. The notice is usually included as part of a company’s proxy statement. In practice, well-organized companies distribute proxy materials as far in advance of the shareholders’ meeting as permitted by applicable notice requirements. Early distribution allows sufficient time for proxy materials to reach beneficial owners, helps ensure the presence of a quorum at the meeting and gives the company time to follow up with shareholders regarding voting.

With the implementation of the e-proxy rules, a company is required to post its proxy materials on the e-proxy website no later than the date the company first sends the Notice of Internet Availability to shareholders. As a result, any website hosting company or other service provider involved in implementing the e-proxy website will need to receive finalized proxy materials in sufficient time to have the e-proxy website operational prior to that date. In addition, if companies utilize the notice-only method of distribution, the Notice of Internet Availability must be sent to shareholders at least 40 days before the shareholders’ meeting. This means that companies must actually finalize proxy materials prior to the 40-day deadline and coordinate with various intermediaries to ensure timely mailing. With the full-set delivery method, this 40-day deadline does not apply.

The Proxy Card

A shareholder can appoint a proxy by completing the proxy card that accompanies the proxy statement. Rule 14a-4 under the 1934 Act sets forth the specific form and content requirements for the proxy card.

If a company uses the notice-only method, it will need to hold off on mailing the proxy card until at least ten calendar days after mailing the Notice of Internet Availability to shareholders. This gives the shareholders time to access and review the proxy statement. Alternatively, rather than waiting ten days, the company could mail the proxy card if accompanied or preceded by a copy of the proxy statement and annual report.

Trap for the Unwary: Remember Your Optionees and 401(k) Plan Participants

Option Holders and 401(k) Plan Participants. Although the primary purpose of a proxy statement is to solicit votes from shareholders, you will also need to get your proxy statement and annual report, as well as other communications distributed to shareholders generally, to holders of stock options and some participants in 401(k) plans with employer stock funds. Hidden in Rule 428(b) under the 1933 Act is an easy-to-overlook requirement identifying the information you need to deliver to optionees and other employee benefit plan participants, which includes delivery of proxy materials no later than when the materials are sent to the company’s shareholders.

Electronic Delivery. If you adopt the notice-only option or use a stratified approach, pay special attention to ERISA plans with individual accounts invested in your company’s stock, such as 401(k) plans and employee stock ownership plans. Rules adopted by the Department of Labor in May 2020 create a notice and access safe harbor for electronic delivery of proxy materials. To rely on the safe harbor, companies must first provide participants an initial notice of availability in paper form tailored to provide the participant’s electronic address and stating that the proxy materials will be provided electronically unless the participant opts to receive only paper versions. The rules then provide detailed instructions about the content and manner of delivery of the electronic documents for individuals who have not opted out of electronic delivery.

We suggest approaching electronic delivery involving participants in equity and ERISA plans with extra care to address compliance with both SEC and ERISA rules.

Shareholder Proposals Submitted for Inclusion in Proxy Materials

Under certain conditions described in Rule 14a-8 under the 1934 Act, a public company must include in its proxy materials a qualifying proposal from a shareholder at no expense to that shareholder. These rules provide a means for shareholders to seek shareholder consideration of actions not otherwise proposed by the Board. If the proposal does not meet the procedural and substantive requirements outlined in Rule 14a-8, the company may exclude the proposal from its proxy materials. If the Board does not favor a qualifying proposal, the company may include a statement in opposition to the proposal.

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Breaking News: SEC Adopts Amendments to Modernize Shareholder Proposal Rules

In September 2020 the SEC adopted amendments to Rule 14a-8 increasing and tightening eligibility requirements for submitting and resubmitting shareholder proposals. The amendments will first apply to any shareholder proposal submitted for an annual or special meeting held on or after January 1, 2022.

Prior to the amendments, to be eligible to have a proposal included in a company’s proxy statement, a shareholder proponent was required to have held at least

$2,000 of a company’s securities continuously for at least one year. The amendments eliminated the alternative 1% threshold and adopted a tiered approach based on a combination of the amount of securities a shareholder proponent holds and the length of time the securities have been held. Under the amended rules, shareholder proponents must satisfy one of three alternative tests:

  • Continuous ownership of at least $2,000 of the company’s securities for at least three years;
  • Continuous ownership of at least $15,000 of the company’s securities for at least two years; or
  • Continuous ownership of at least $25,000 of the company’s securities for at least one year.

Under a temporary phase-in period, a shareholder that has continuously held at least $2,000 of a company’s securities for at least one year as of the effective date, and continuously maintains at least $2,000 of such securities through the date it submits a proposal, will be eligible to submit a proposal without satisfying the new ownership thresholds for an annual or special meeting to be held prior to January 1, 2023.

The amended rules also raise the threshold levels of shareholder support a proposal must receive to be eligible for resubmission at future shareholders’ meetings. Previously, shareholder proposals could be excluded if they addressed substantially the same subject matter as a proposal or proposals formerly included in the company’s proxy materials within the past five years if the most recent vote occurred within the preceding three years and the resulting vote in favor of the proposal was below 3% if submitted once, 6% if submitted twice and 10% if submitted three times. The new thresholds under the amended rules are 5%, 15% and 25%, respectively.

The new rules also require specified documentation when a proposal is submitted by a representative on behalf of a shareholder proponent and require shareholder proponents to identify specific dates and times they can be available to engage with the company to discuss the proposal.

Procedural Requirements

A shareholder must satisfy four procedural steps to be eligible to include a proposal in a company’s proxy materials:

  • Stock Ownership. The shareholder must meet the new ownership requirements described above and must continue to hold the securities through the date of the shareholders’ meeting.
  • One-Proposal Limit. Each shareholder is limited to one proposal for a specific shareholders’ The SEC interprets this to prohibit the submission of a proposal with numerous unrelated subproposals. The new rules prohibit a person acting as a representative from submitting more than one proposal for the same shareholders’ meeting.
  • 500-Word Limit. The shareholder’s proposal and accompanying supporting statement cannot exceed 500 words.
  • Notice. The shareholder’s proposal must be delivered to the company’s principal executive offices not later than 120 days prior to the anniversary of the date on which the company first distributed its proxy statement for the prior year’s shareholders’ meeting. Companies generally publish this deadline in the prior year’s proxy statement.

If a shareholder fails to satisfy any of these requirements, the company may exclude the proposal on procedural grounds – but only if it notifies the shareholder of any defects within 14 calendar days of receiving the proposal and permits the shareholder an opportunity to cure the defects. The company need not provide a shareholder notice of a defect if the defect cannot be remedied, such as if the shareholder failed to submit a proposal by the company’s properly determined deadline.

If the shareholder, or a representative of the shareholder, does not personally appear at the meeting to present the proposal, the company may exclude any proposals submitted by that shareholder from its proxy materials for the following two years unless the shareholder can demonstrate good cause for failing to attend.

Substantive Requirements

Rule 14a-8 also includes several substantive bases on which a company may seek to exclude a shareholder proposal:

  • Improper Under State Law. The proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company’s organization.
  • Violation of Law. The proposal would, if implemented, cause the company to violate any state, federal or foreign law to which it is subject.
  • Violation of the Proxy Rules, Including False or Misleading Statements. The proposal or supporting statement is contrary to any of the SEC’s proxy rules, including Rule 14a-9 under the 1934 Act, which prohibits materially false or misleading statements in proxy-soliciting materials. The SEC has generally denied most no-action requests for exclusion or modification of shareholder proposals on the grounds that they were either vague or contained false and misleading statements. The effect of this has been that companies that are unsuccessful in negotiating with proponents to exclude offending language will address it either with a disclaimer or in the company’s opposition statement included in the proxy statement.
  • Personal Grievance; Special Interest. The proposal relates to the redress of a personal claim or grievance against the company or any other person, or is designed to result in a benefit to the shareholder proponent not shared by the other shareholders at large.
  • Ordinary Business/Relevance. The proposal relates to operations that account for less than 5% of the company’s total assets at the end of its most recent fiscal year and for less than 5% of its net earnings and gross sales for its most recent fiscal year, and it is not otherwise significantly related to the company’s business.
  • Absence of Power or Authority. The company would lack the power or authority to implement the proposal.
  • Management Functions. The proposal deals with a matter relating to the company’s ordinary business operations (excluding matters of significant social policy, g., senior executive compensation).
  • Election of Directors. The proposal affects the election of a member to the Board at the shareholders’ meeting. SEC rules do, however, allow shareholder proposals on this topic if they relate to “proxy access” (discussed later in this chapter).
  • Conflicts with Company’s Proposal. The proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same shareholders’ meeting.
  • Substantial Implementation. The company has already substantially implemented the proposal.
  • Duplication. The proposal substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company’s proxy materials for the same shareholders’ meeting.
  • Resubmissions. The proposal was previously rejected by a specific percentage of The percentage is determined by the number of times the proposal has been submitted.
  • Dividends. The proposal relates to specific amounts of cash or stock dividends.

No-Action Letter Requests

If a company intends to exclude a shareholder proposal from its proxy materials on procedural or substantive grounds, it generally must submit its reasons for doing so to the SEC, with a copy sent simultaneously to the shareholder proponent. This submission is referred to as a no-action letter request and must be submitted to the SEC no later than 80 calendar days prior to filing the company’s definitive proxy statement. Whether the company is ultimately able to exclude the proposal from its proxy statement will depend on the SEC’s response to the no-action letter request. The SEC now accepts no-action letter requests and correspondence related to Rule 14a-8 shareholder proposals via e-mail at

The SEC staff may respond to no-action requests informally instead of by letter on well-settled matters. These responses are posted on the SEC website in a chart tracking the staff’s no-action positions. The chart lists the company name, the proponent, date of the company’s initial submission, bases asserted by the company for exclusion, whether the staff granted, denied or declined to state a view – and provides the basis for a decision granting no-action relief.

Statement in Opposition to Qualifying Proposal

If a company intends to make a statement in the proxy statement in opposition to a shareholder proposal, the company must provide a copy of the statement to the proponent at least 30 days before filing the definitive proxy statement. If the SEC’s no-action letter request response requires the shareholder proponent to revise a proposal, the company must provide a copy of the statement in opposition no later than five calendar days after the company receives a copy of the revised proposal.

Identification of Proponent

The proxy statement must either include the shareholder proponent’s name, address and share ownership or indicate that the company will provide this information upon request. Although in the past most companies did not identify shareholder proponents, many companies now include this identifying information in their proxy statements.

Shareholder Proposals Not Submitted for Inclusion in Proxy Materials

Under certain conditions a shareholder may submit a proposal for consideration at a shareholders’ meeting even though the proposal does not meet the procedural requirements for inclusion in the company’s proxy statement. The requirements for such submissions are described in the company’s bylaws or, in the absence of applicable bylaw provisions, in Rule 14a-4(c). Companies should be aware of the deadlines for these types of shareholder proposals, which are usually provided for in the company’s advance notice bylaw provisions, and the applicable deadlines should be disclosed in the company’s proxy statement. In addition, a company can generally retain discretion to vote proxies it has received on this type of shareholder proposal if it includes in its proxy statement advice on the nature of the proposal and how it intends to exercise its voting discretion.

The Proxy Contest: Election Contests and Takeover Transactions; Proxy Access

As with shareholder proposals, there are various ways that management may appropriately anticipate and manage proxy contests with shareholder groups. A proxy contest typically involves a challenge to existing management by a third-party acquirer or shareholder group seeking control of the company or by a shareholder activist seeking to influence the direction of the company. Often, the challenger has obtained a significant ownership position in the company and seeks to either control the company through the election of a majority of the directors or propose a merger or tender offer for shares. (Although a detailed discussion of takeover transactions and defenses is beyond the scope of this Handbook, we summarize corporate structural defenses in Chapter 11.)

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Proxy access is a method for shareholders to gain representation on the Boards of public companies. Unlike waging a proxy contest, utilizing proxy access does not require shareholders to bear the cost of preparing and distributing their own proxy materials. Market standard terms for proxy access have developed over the past several years, to require the nominating shareholder (or a group of up to 20 shareholders) to hold at least 3% of the company’s shares for at least three years to nominate up to 20% of the Board or at least two directors, with a nominating group size of 20 shareholders. While proxy access bylaws now have been adopted by over 70% of S&P 500 companies and over half of the companies in the Russell 1000, as of the date of this Handbook, proxy access has been used only once to include a director nominee in the proxy materials of a company pursuant to a proxy access right.

Directors’ and Officers’ (D&O) Questionnaire

A company’s proxy statement, Form 10-K and annual report to shareholders provides a variety of detailed information about its directors and officers, including employment history, compensation, security ownership in the company, related transactions with the company and Section 16 reporting compliance history. Even if a company believes it already knows all the relevant information, the company should ask its directors and officers each year to complete a D&O questionnaire to elicit or confirm the required information. Companies will want to review and update their D&O questionnaires annually (as necessary) to incorporate changes to applicable SEC requirements and NYSE and Nasdaq rules. Companies should provide the D&O questionnaires to directors and officers sufficiently in advance to allow adequate time for responses to be incorporated into the proxy statement, Form 10-K and annual report. A helpful approach is to include a copy of relevant portions of the prior year’s proxy statement, Form 10-K or annual report with the D&O questionnaire and request that the directors and officers update and edit the information as needed.

Annual Report to Shareholders

In the annual report to shareholders, senior executives have an opportunity to communicate directly with the company’s shareholders. Unlike the corporate governance focus of the annual proxy statement, the annual report conveys information regarding the company’s business, management and operational and financial status.

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Content Requirements of the Annual Report to Shareholders

The “glossy” annual report to shareholders has similar content requirements to Form 10-K, but serves a different purpose designed to communicate directly with shareholders. Rules 14a-3 and 14c-3 under the 1934 Act specify the minimum content requirements for an annual report. These include:

  • Financial Information. Audited balance sheets for the two most recent fiscal years, audited statements of income and cash flows for the three most recent fiscal years, other selected and supplemental financial data, a discussion of material uncertainties and disagreements with accountants on accounting and financial disclosure, MD&A detailing financial condition and results of operations, and disclosures about market risk.
  • Stock and Dividend Information. Identification of the principal markets in which the company’s shares are traded, quarterly highs and lows in stock price, number of common shareholders, and frequency and amount of cash dividends declared over the previous two fiscal years.
  • Stock Performance. A performance graph comparing the change in total shareholder return on common stock with an equity market index and the cumulative total return of a published industry index or peer issuers (and disclosing the basis for its selection) for the last five fiscal If you do a Form 10-K “wrap,” as discussed later in this chapter, the performance graph instead may be included in the Form 10-K.
  • Operation and Industry Segment Information. A description of the company’s principal products produced or services rendered, accompanying markets and distribution methods, foreign and domestic operations, export sales, industry segments and classes of similar products or services.
  • Director and Officer Information. Identification of the company’s directors and executive officers along with their principal occupations, including the names of their employers. 

Companies are free to include information in the annual report that goes beyond the minimum content requirements. Companies generally include a letter from the president or chair of the Board summarizing the company’s operations, strategy, projected performance, key personnel changes and other highlights for the year. Because the annual report is furnished to the SEC and generally made publicly available, any information included in the annual report, even if not required, may be the source of legal liability if found to be materially misleading.

Format Requirements of the Annual Report to Shareholders

Format requirements for the annual report are minimal. The SEC permits virtually any format, but innovative presentation, including the use of tables, graphs, charts, schedules and other illustrations, can be useful in presenting operational and financial information in an easily understandable manner. Some of the financial information included in the body of the annual report must be presented in tabular form.

Practical Tip: It’s a Wrap! Consider Doing a Form 10-K “Wrap”
Companies are increasingly using a Form 10-K wrap annual report to shareholders. This consists of up to a few pages of company message materials, usually including a president’s or chair’s letter, that simply wrap around the Form 10-K. This avoids duplication between the annual report and the Form 10-K, while reducing costs and environmental impact. A similar cost-saving approach is to send shareholders a combined document that includes both the proxy statement and the annual report.

Timing of the Annual Report to Shareholders

The SEC requires an annual report to shareholders to accompany or precede a company’s proxy statement for any annual meeting at which shareholders will elect directors. Unlike the other proxy materials, a company’s annual report to shareholders need not be filed with the SEC on EDGAR.