SEC Considers Proxy Rule Changes To Allow Web Delivery

A proposal under consideration by the Securities and Exchange Commission could save public companies millions of dollars in printing and mailing costs by enabling issuers to post annual proxy statements on their Web sites instead of mailing hard copies to shareholders.

Brighton

The proposal would make it “easier, cheaper and quicker for companies to provide proxy solicitation information to shareholders,” notes Robert Brighton Jr., partner and head of the securities law practice group at Ruden McClosky in Fort Lauderdale.

The move also advances the “access-equals-delivery” concept promulgated by the SEC’s Securities Act reform, which is effective Dec. 1.

At an open meeting today, the Commission will consider whether to propose amendments to the proxy rules that would provide an alternative model by which companies conducting proxy solicitations could satisfy a requirement to furnish proxy materials by posting those materials on a Web site and providing shareholders with notice of their Internet availability. According to the SEC, “other soliciting persons also would be permitted to follow the proposed alternative model.”

Cook

Rowland Cook, managing shareholder for the Austin office of Jenkens & Gilchrist, who headed the SEC's Disclosure Policy Office from 1976 to 1979, called the proposal a “very welcome step” that helps assure that the rules keep up with technology. “For years there has been a rule that prospectuses may be delivered via constructive delivery of copies to a stock exchange,” said Cook. “But this action goes much further.”

Access Equals Delivery

The SEC in June adopted an “access equals delivery” model in its Securities Act reform, which means that issuers that file and make available electronically a final prospectus don’t have to print and actually physically deliver it to investors.

“This proposal is the next natural extension of that,” says Gordon S. Kaiser Jr., a partner in the Cleveland office of Squire Sanders & Dempsey and head of the firm’s corporate practice. “If it’s good enough to buy the security, it’s good enough to vote the security in an annual shareholder meeting.”

Along those same lines, the New York Stock Exchange in September moved to jettison a requirement that its listed companies deliver paper copies of their annual reports. If approved, the NYSE rule proposal filed with the SEC on Sept. 30 would eliminate a requirement that listed companies physically distribute annual reports to shareholders if companies make their annual financial statements available on their Web sites. At press time, the SEC had not yet published the NYSE proposal in the Federal Register.

The NYSE said Rule 14a-3 of the Securities Exchange Act of 1934 made its annual report requirement redundant for most NYSE-listed U.S. companies, since the SEC rule requires companies subject to the proxy rules to distribute annual audited financials to shareholders with or prior to the distribution of the annual meeting proxy statement.

In its proposed rule, the NYSE cited a Nielsen/Net Ratings study that showed that 75 percent of Americans have access to the Internet in their homes. It also cited a statement made by the SEC in proposing changes in its Securities Offering Reform Act filing, in which the SEC said, “We believe Internet usage has increased sufficiently to allow us to propose a prospectus delivery model for issuers and their intermediaries that relies on timely access to filed information and documents.”

Adoption, Resistance, And Savings

If the SEC rules are changed to permit other soliciting persons to distribute solicitation materials using the Internet, Ruden McClosky’s Brighton says, “it will advance the cause of shareholder democracy” in the takeover arena, as well as in other contexts, such as shareholder proposals to limit executive compensation. For instance, he notes, the change would benefit insurgents looking to overcome takeover defense such as a poison pill or a state takeover statute.

“The fact that other people would be able to use this model as their main way of delivering information to shareholders is a radical innovation,” says Brighton. “For insurgents trying to takeover a board, the fight to get a list of shareholders from the company is always a long, expensive battle. If adopted, this would also make it easier, quicker and cheaper for insurgent to reach out to other shareholders.”

MEETING AGENDA

SEC Open Meeting

Tuesday, Nov. 29, 2005

10 a.m. EST

"The Commission will consider whether to propose amendments to the proxy rules

under Section 14 of the Securities Exchange Act of 1934. The proposed amendments

would provide an alternative model by which companies conducting proxy

solicitations could satisfy the Rule 14a-3 requirement to furnish proxy materials by

posting those proxy materials on an Internet website and providing shareholders with

notice of the Internet availability of the materials. Other soliciting persons also would

be permitted to follow the proposed alternative model."

However, Brighton says, “I’m not sure that that provision will be adopted. I would expect that to be resisted.”

Experts also note that the potential cost savings for public companies is huge.

Kaiser

“From an issuer standpoint, this provides significant cost savings,” says Kaiser. “The printing and mailing of tens of thousands of proxy statements on an annual basis is an extremely expensive way of disseminating this information.”

Kaiser and others say the resulting savings would benefit investors. “We’re talking about a fairly substantial savings at point where many companies are looking for cost savings in order to increase earnings. This is a painless way to do that,” says Kaiser. “The bottom line is, earnings will go up.”

“The Internet is how a growing number of investors get all types of financial information these days, and it only makes sense that companies should be able to deliver required documents to their shareholders in this same manner,” adds Cook. “Not only is it more convenient for the shareholder, but it is much easier and cheaper for the company—cost savings which will inure indirectly to the benefit of all of the shareholders.”

“This could save companies tremendously on printing costs,” agrees Brighton. “It’s wonderful, particularly for small issuers, since that’s probably one of their largest costs.”

Kaiser says there could be some backlash from portions of the investor community, as there was when the SEC proposed electronic access for satisfying the prospectus delivery obligation in the Securities Act Reform. “There was some concern when this was proposed in the ‘33 Act in the context of prospectus delivery that older investors, in particular, tended to have less access to the Internet and in that sense, that it might be discriminatory,” says Kaiser. “But the SEC got beyond that in that context and I expect they will in this as well. There are readily available means of public access to the Internet available to most people.”

Observers say that financial printing companies, such as Bowne and R.R. Donnelly, which print proxy materials, may not be as happy about the proposed changes. “For the financial printing companies, this could tremendously cut into their revenues,” notes Brighton.

“This action may adversely impact the financial printing companies, who will not be called upon to print and mail as many documents as before,” Cook agrees. However, he says, “There may be other ways in which they can offer services to facilitate the constructive delivery of documents."

“It’s got to be something they’re not looking forward to, but I have to believe they’ve been anticipating it,” says Kaiser.