Ready or not, here it comes: the online proxy statement.
Despite pleas for delay, the Securities and Exchange Commission is moving forward with its plan to require issuers and other soliciting persons to make proxy materials available online and in print and let shareholders choose how they get them.
As part of a larger effort to modernize shareholder communications, the SEC on June 20 approved its universal e-proxy rule. It requires large accelerated filers to post proxy materials online and provide notice to shareholders at least 40 days prior to their annual meetings, beginning next year. All other issuers, registered investment companies, and other soliciting persons will have to comply starting in 2009. The rules don’t apply to business combination transactions.
Cox
Touting the move as an “effort to improve communications between companies and shareholders,” SEC Chairman Christopher Cox said advances in technology “are making possible significant advances in disclosure to investors.”
White
One benefit of accessing proxy materials electronically is the ability for investors to manipulate data, according to John White, director of the SEC’s Division of Corporation Finance. That ability “will grow as we move further into an XBRL world,” he said, referring to the data-tagging language the SEC wants financial reports to use.
The new rule shifts the choice of paper or electronic delivery of proxy statements from issuers to shareholders. Currently, issuers can—but don’t have to—make proxy materials available electronically to shareholders who opt to get them that way.
The final text of the adopting release has yet to be published, so its precise details are still unknown. But the universal access rule builds on the SEC’s voluntary notice-and-access model, which took effect July 1. While companies must post their proxy materials on the Web and provide notice to shareholders under the mandatory rule, under a “full set” delivery option, they can also continue to provide paper copies to some or all of their shareholders as they choose. Shareholders can also make a one-time or permanent request for paper copies.
For beneficial owners who have declined to be contacted directly by issuers, intermediaries who hold their shares will be responsible for providing notice and fulfilling requests for paper proxies.
The SEC says it expects compliance costs to be minimal, since many companies already post their proxies on the Web. A staff study of a random sample of 150 large filers found that more than three-quarters post their proxy materials on the Web. Most of the rest link to the SEC’s EDGAR database, and fewer than five don’t have a Web site. Moreover, the SEC has argued that the electronic delivery of proxy materials could save issuers on printing and mailing costs.
Still, as Compliance Week previously reported, several commenters felt that the proposed Jan. 1, 2008, effective date for large accelerated filers comes too quickly to assess the effect of the rule based on filers’ experience with the voluntary model.
That concern was acknowledged by the commissioners last week. But in approving the rule, they said its features and staged implementation will provide time to assess and address any issues that arise before all companies comply in 2009.
Since only large accelerated filers have to comply next proxy season, “If there are untended negative consequences, we have time to modify the rules accordingly,” Commissioner Roel Campos said. He contended that concerns about negative consequences “were adequately dealt with” by requiring that the notice be sent separately from the proxy card and that the proxy card and materials remain together, and by allowing shareholders to make one-time permanent or a single-meeting request for paper.
Casey
Commissioner Kathleen Casey said her “first instinct” would have been to postpone adoption for a year, but agreed the rule’s staged implementation gives the SEC an opportunity to assess its effectiveness. “It’s important before we proceed, that we have better grasp of the costs, responsibilities, and challenges” associated with the rule, she said.
Fears For Smaller Companies
Even some observers who had recommended postponing implementation believe compliance should be possible for large accelerated filers.
Conn
“With proper planning this should not be a difficult thing for large filers,” says Paul Conn, president of the global capital markets group at Computershare. “While we haven’t yet seen the final rule, based on the comments at the meeting, it seems this will have a smaller impact than the voluntary model,” where paper materials are only provided on request.
That said, Conn stresses that time is of the essence, at least for large companies. “They should start planning now and make sure, at a minimum, that they can comply with the mandatory aspects of the rule,” by meeting with their transfer agents and other advisers, Conn says.
He says companies should at least consider the notice-only model, since it has the potential to provide large cost savings for some companies. “There’s a business case issue to consider, not just a compliance issue,” he said.
“We had hoped for more time to evaluate the pilot program; to the extent we didn’t get it, we’re disappointed.”
— John Endean,
President,
American Business Conference
Indeed, Claudia Holcombe, Computershare’s director of client and industry initiatives, says an analysis of some of its clients found that companies using the notice-only model with 5 to 30 percent of shareholders requesting paper can save 30 to 70 percent of their costs, respectively. Shareholder demand for paper copies is expected to be 15 percent at most, and even less for most companies, Holcombe says.
Holcombe says factors to consider when weighing whether to adopt the notice-only model include the makeup of the shareholder base, whether any controversial items are on the ballot, and past voter turnout experience.
“If half of a company’s shares are held by institutions and there are no contentious items on the ballot, I’d say they’re a prime candidate for the notice-only model,” she says. On the other hand, she says, a company with a controversial item on its proxy may want to use the full paper set option.
While he is disappointed the SEC didn’t delay implementation, John Endean, president of the American Business Conference, says he’s not surprised.
“We had hoped for more time to evaluate the pilot program; to the extent we didn’t get it, we’re disappointed,” he tells Compliance Week. “But overall, we felt it was inevitable they were going to approve it.”
“We don’t have a problem with the concept of trying to better use electronic delivery and the Internet,” Endean says. “We had hoped they would recognize that this is a big change for some companies and provide more time.”
Endean says the rule may have greater implications for smaller issues. “While this may be a baby step for big companies because they typically already have Web sites and have people who can handle this kind of mandate relatively easily, for smaller companies with fewer resources, it’s that much harder and proportionately more expensive,” he said.
Endean and others also raised concerns that the move could affect individual shareholder participation, which already is typically low. “We don’t want to see [participation by] people—who in many cases already don’t use the materials and don’t vote—now get worse,” he says.
Nazareth
That concern was echoed by Commissioner Annette Nazareth, who noted that it’s “incumbent on the Commission to study the effect of the rules.”
The staff had not planned a formal study of the consequences, White said, but added that, “We have time to conclude whether that would make sense.”
“I envision we will revisit this at the staff level this time next year to see how it worked and whether there are changes we’ll be recommending,” he said.
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