Proxies appear poised to join the ranks of all things “e,” making the process of preparing for an annual meeting cheaper, faster and easier for companies in the near future.
At a Nov. 29 open meeting, the Securities and Exchange Commission voted to put out for public comment rules that would allow issuers to put proxy materials online. The SEC estimates the move would save companies more than $500 million annually on printing and mailing costs.
Mueller
The proposal “has significant immediate and possible long-term effects,” notes Ronald Mueller, a partner at Gibson, Dunn & Crutcher.
The rule proposal had not yet been posted to the SEC Web site at press time. However, most observers who spoke to Compliance Week hailed it as a positive step.
"The SEC has taken a logical next step in entering the ‘information age,’” says Michael McCoy, an attorney with Bryan Cave and a former attorney in the SEC's Division of Corporation Finance.
Notice And Access
Cox
As Compliance Week reported previously, the proposal would advance the “access-equals-delivery” concept adopted in the Securities Act reform, which allows issuers to deliver a final prospectus electronically. In remarks during the open meeting, SEC Chairman Chris Cox noted that the proxy rules are “the last remaining area where paper delivery is still the norm rather than exception.”
Under the current rules, companies must deliver a proxy statement and annual report in paper form or electronically with affirmative shareholder consent. However, the SEC noted that the electronic delivery option is currently used “only on a limited basis.” Indeed, a related article in Compliance Week from September, 2004, noted that companies were slow to delivery compliance documents electronically (see related coverage above, right).
Cox said another potential benefit of using the Internet as a delivery platform is that, “investors would cast more informed votes,” since they might be more likely to read proxy materials if they can easily access them online. Still, Cox said he had “no doubt that not every investor will prefer Internet access,” which is the reason shareholders will still be able to request a paper proxy free of charge.
“I don’t foresee ever eliminating the requirement of providing a paper copy for any investor who wants it,” Cox said. Issuers would have to respond to requests for paper copies within two business days.
NOTICE AND ACCESS
Use Of The Proposed Model
The company could satisfy its obligation to furnish proxy materials to shareholders through a “notice and access” model. The company would post its proxy materials on an Internet Web site (other than EDGAR) and would send a “Notice of Electronic Proxy Materials” (the Notice) at least 30 days before the date of meeting.
The Notice would have to contain the following information:
a prominent legend in bold-face type that advises shareholders of: (1) the date, time, and location of the meeting; (2) the electronic availability of the proxy materials at a specified Web site address; and (3) a toll-free phone number and e-mail address that shareholders may use to request copies of the proxy materials; and
a clear and impartial description of the matters to be considered at the meeting along with the company’s recommendation regarding those matters.
The Notice would have to be written in plain English and could not include any additional information.
The following procedural requirements also would apply.
The proxy card would have to be accompanied by, and delivered through the same medium (paper or electronic) as, either the Notice or the proxy statement.
If a shareholder requested a copy of the materials identified in the Notice, the company would be obligated to send the materials within two business days.
Additional soliciting materials that are distributed after the Notice is sent would have to be posted on the Web site specified in the Notice.
For shareholders holding their shares through brokers, banks, or other intermediaries, the Notice and voting instruction form would be delivered through the intermediary. Those shareholders could request copies through either the company or the intermediary.
The proposed rules would have no impact on any state law obligation regarding soliciting proxies or holding annual meetings. Further, the proposed rules would not apply to business combination transactions.
Source:
SEC Votes To Propose Rule To Provide Investors With Internet Availability Of Proxy Materials (Nov. 29, 2005)
Under the SEC proposal, a company could satisfy its proxy delivery obligation through a “notice and access” model, whereby the company could post its proxy materials on a Web site (other than EDGAR) and then send shareholders a “Notice of Electronic Proxy Materials” at least 30 days before the meeting date. For details on the information companies would have to include in the notice, see box at left.
The SEC said persons other than the company who are soliciting proxies would be able to rely on the proposed model in substantially the same manner, with the appropriate changes in the notice information required. The notice would have to be provided to shareholders by the later of 30 days before the meeting or 10 days after the company filed its proxy materials.
Real Concerns
McCoy
"Companies will realize significant savings by mailing a postcard size notice versus a 30 or 40 page proxy,” says McCoy, who notes that, even for some smaller companies, “the printing and mailing savings can be pretty significant.”
If adopted, observers say the proposal would have impact far beyond the cost savings for companies, because it would extend beyond issuers to enable others to post proxy materials online, making it easier for dissident shareholders to wage proxy solicitations. Non-issuers conducting proxy solicitations could limit their solicitation to certain shareholders, and wouldn’t have to deliver paper or e-mail copies of the proxy materials to anyone.
Anderson
“This would provide activist shareholders with a less costly, more effective and almost immediate method of waging a proxy contest,” says Will Anderson, a partner at Bracewell & Giuliani. “I suspect some issuers may have real concerns about this proposal leveling the field between companies and activist shareholders.”
“This could really achieve many of the goals a lot of groups, such as institutional shareholders, have been looking for to make it easier to communicate with shareholders, and it could bring new players in,” adds Mueller of Gibson Dunn & Crutcher. For example, he says, “Hedge funds could become more active in participating in or leading proxy contests.”
Observers were mixed on the impact of the proposed changes on proxy fights.
Bracewell & Guiliani’s Anderson says he expects that contested proxy contests are likely to increase if the proposal is adopted, since it “significantly lowers the barrier to waging a successful proxy solicitation.”
However, Bryan Cave’s McCoy disagrees. "I don't think this will impact the number of proxy fights,” he says. “It may lower one barrier to entry, but I don't think proxy fights will become more common. There are a lot of other considerations besides printing costs in waging a proxy fight” (see related sidebar at right).
PROXY CONTESTS
More Or Fewer Proxy Fights?
By Stephen Taub
Experts are split on whether the SEC’s proposed rule permitting the electronic distribution of proxies will lead to more proxy contests and encourage more frivolous fights because they will save the activists a lot of money.
“It’s possible,” asserts Richard Grubaugh, senior vice president and head of the extraordinary events group at proxy solicitor D.F. King. “This will make companies more susceptible to governance proxy fights. There is no question there could be the potential for an increase in activism.”
Littenberg
“We will see an increase in the number of proxy fights,” concurs Michael Littenberg, partner with Schulte Roth & Zabel. “They will be cheaper to launch.” That's because dissidents will not shell out nearly as much on printing and mailing proxies, which could cost upwards of $200,000, depending upon the target, say experts.
Annex
Others don’t expect the proxy delivery proposal will make much of a difference. “The cost of physically printing and mailing a proxy is insignificant when you look at the total cost of waging a proxy fight,” asserts Alan Annex, head of the corporate group for Greenberg Traurig in New York, N.Y.
“The difference is a rounding error.”
Even Grubaugh at D.F. King agrees to a large extent, asserting, “Real activists don’t put their head in the sand due to the costs.”
In addition, the printing and mailing costs pale in comparison to other costs associated with proxy fights—particularly the legal and drafting fees, and costs associated with proxy solicitation firms and investment bankers.
Garris
And even if an activist waging a proxy fight could save a fair amount of money by posting documents on the Internet, some say it wouldn’t make sense to do so. Alston & Bird partner Dennis Garris says that physically reaching the right audience is critical to the success of a campaign. “If they don’t get enough attention, they risk not getting out the story,” says Garris.
That's why dissidents typically send multiple mailings during intense proxy contests. “You have to get something under shareholders’ nose given the attention span [of investors] in the information age,” Garris adds.
Mueller says he expects the proposed model to be used in conjunction with the traditional paper mailing. “I think there will be plenty of proxy fights maintained in the traditional way because people want to know the materials were delivered and read,” he says, noting, “It will be a much quicker form of communication during proxy fights.”
Important Details
Beller
Division of Corporation Finance Director Alan Beller said the rules aren’t expected to be in place for the upcoming 2006 proxy season, due to the length of the comment period—60 days following publication in the Federal Register—and the time needed to process the comments and develop a final rule. “As practical matter, the rules would operate in 2007,” Beller said.
While most observers hailed the move as positive, they note that several issues need to be dealt with in the final rule.
“There will be details that need to be worked out on how the voting process operates,” says Gibson Dunn's Ron Mueller. “The notice and comment period will be important to help flesh out those types of issues.”
McCoy agrees. "I think this is a great move by the SEC and investors will benefit. The main issue is determining how the voting mechanisms will work,” he says.
SEC commissioners raised similar concerns during the meeting. To that end, the SEC plans to include in the proposal questions related to voting mechanics to gather input on issues such as whether proxy cards should be sent with the shareholder notice and whether other methods of voting should be put in place. The current proposal would allow issuers to include a conventional paper proxy card with the notice that shareholders could return by mail.
“It also makes sense to… enable some sort of Web-based voting by shareholders,” says Anderson. “I suspect that is where we will eventually end up for many companies.
Printing Companies Impacted?
The Business Roundtable, an association of chief executive officers, called the proposal a positive step forward for companies and shareholders. “It will modernize the antiquated proxy voting process, saving companies billions of dollars each year—which is ultimately a savings for shareholders,” said Business Roundtable President John Castellani. While Castellini noted that the group “would like to see more comprehensive changes to the shareholder communications process,” he said the plan “is a positive step in that direction.”
The corporate and securities committee of the Association of Corporate Counsel welcomed the rule proposal, saying, “We look forward to commenting on the rule proposal when it is publicly available.”
Financial printers, meanwhile, are awaiting the rule proposal to assess its impact on their business.
Copenhafer
“We've obviously been following this closely,” David Copenhafer, director of EDGAR Services at financial printer Bowne & Co., and a former SEC staffer, told Compliance Week. “We are still trying to absorb what will be proposed, what the underlying arguments are, what the likely comment will be, how the SEC will respond, and how the market will ultimately respond in the event something like the proposed rule is adopted.”
Financial printer RR Donnelley, and ADP, which distributes proxy materials, did not respond to requests for comment.
Under the proposed rules, Mueller says, “there will continue to be role for companies like ADP to serve as the intermediary between the company and shareholders for communications and voting.”
He adds that, “While the proposed rule is significant, there lot of other aspects under the current ownership structure that this will not address, such as the NOBO/OBO [non-objecting and objecting beneficial owners] system,” which protects the identity of shareholders who don’t want the company to know who they are.
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