SEC Implements Electronic Proxy Delivery Rules (E-Proxy)

06.18.2007

Earlier this year, the SEC adopted new electronic delivery rules for proxy statements, sometimes referred to as the "e-proxy rules." Companies may adopt the new "notice and access" model on a voluntary basis beginning July 1, 2007, for meetings occurring on or after August 10, 2007. Companies holding annual meetings later this year may want to consider taking advantage of the new procedures.

The new rules are intended to reduce the current costs of printing and mailing thousands of annual meeting proxy statements. If a significant number of stockholders consent to future electronic delivery, the new rules could lead to significant cost savings, particularly after the first year. However, the ability of each company to realize major cost reductions will depend on how many of its investors are amenable to electronic delivery.

Although the SEC refers to its new system as "electronic delivery," the new rules still require at least one mailing. The company must mail a Notice advising its holders of record that its proxy materials are available online and asking for consent to future electronic delivery. Since most stock of US public companies is held in street name, the record owner (usually a brokerage firm) must then prepare its own Notice and forward it to the beneficial owners.

The Notice may provide instructions as to how to vote online, but may not include a proxy card. If the company does not receive enough proxies electronically to reach a quorum, it may have to mail proxy cards to those who haven't yet voted, or hire a proxy solicitor to increase turnout. In addition, under the new rules companies must still provide paper copies of the proxy materials to any holder who requests them. Finally, use of the electronic delivery model requires that proxy materials be available at least 40 days prior to the meeting.

In anticipation of e-proxy, the NYSE recently eliminated its independent requirement that its listed companies mail annual reports to stockholders. As of this writing, Nasdaq has not yet eliminated its comparable annual report mailing rule. This could be an important consideration for Nasdaq-listed companies who might want to use the e-proxy rules for meetings to be held later in 2007.

For these reasons, some companies may decide on a cost-benefit basis to stick with the existing system, at least for now. As noted below, the SEC is considering a switch from the "opt-in" model of these rules to an "opt-out" model, beginning in 2008 for larger companies.

Summary of New Rules on Electronic Proxy Delivery

Current Rules
Under current rules, the company must mail paper copies of proxy materials (including a proxy statement, a proxy card and an annual report for annual meetings) to all stockholders, except stockholders who have affirmatively consented to receive these materials electronically. The company is allowed to infer consent to electronic delivery in a limited number of situations (e.g., employees who regularly access the Internet at work). However, many companies still print and mail proxy materials to thousands of holders each year.

Company Requirements under New Rules
Under new Rule 14a-16, a company may make its proxy materials available over the internet in lieu of mailing them. To do so, it must follow these steps:

• The company must mail a Notice to stockholders, at least 40 days in advance of the meeting, that its proxy materials are available online.
• The notice must include (i) a specified legend; (ii) the date, time and place of the meeting; (iii) a list of proposals and Board recommendations (without supporting statements); (iv) instructions for consenting to electronic delivery or requesting paper copies for both the current meeting and for future meetings; (v) proxy access and voting instructions, including any control or ID numbers needed and (vi) instructions for attending the meeting and voting in person.
• The initial Notice may not include the proxy card, and may not include any other information other than as may be required by applicable state law.
• The company must use a publicly accessible website other than the SEC EDGAR site as the location of its proxy materials. The website location must be a direct link to the proxy materials, rather than a link to the home page of a service provider that the holder would have to search to find the company's materials.
• The proxy materials referenced in the Notice must be available at the time the Notice is sent, and must remain online through the date of the meeting. If additional soliciting materials are prepared, they must appear on the site no later than the date they are first mailed or made public. The materials must be presented in a format, or formats, convenient for both viewing and printing (which may mean two formats).
• The Notice may be "householded" (only one copy sent to members of the same family sharing an address), as under the current rules, but the online proxy materials must provide a separate control number or other means to allow each holder to vote separately.
• The website may include instructions for paper, telephone or Internet voting. However, voting must be set up in such a way that stockholders who have not been sent a paper copy of the proxy materials may not vote unless they have demonstrated access to the online proxy materials.
• A person who votes online is presumed to have access to online proxy materials, but a person who votes by telephone may not have such access. Therefore, the initial Notice may not include instructions on voting by telephone. A stockholder without Internet access will therefore have to request paper copies of the proxy materials before being able to vote.
• Ten calendar days or more after the initial mailing, the company may do a second mailing, consisting of the proxy card accompanied by either (i) a second copy of the Notice or (ii) paper copies of the proxy materials. Although this second mailing is optional, the company may need to do it if it does not get enough proxies returned electronically to provide a quorum.
• The company must provide proxy materials by regular mail or e-mail, without charge, to any holder upon request, within three business days of receiving the request. Holders must be permitted to make a "permanent" election to receive paper copies, instead of having to request them each year. The company must maintain records of holders who have specifically requested electronic delivery or paper delivery for future solicitations.

The Role of an Intermediary
Many people own stock in public companies in "street name," under which an intermediary (typically a brokerage firm) is the "record owner" of the shares, and the investor who actually purchased the shares is the "beneficial owner." The corporate law of most states merely requires the company to send proxy materials to record owners. However, in recantation of street name ownership, the proxy rules have long required the record owners to forward proxy materials to the beneficial owners, and to collect and tabulate votes from their beneficial owners.

The intermediary may follow the new model, and if the company so requests, it must follow it. If both the company and the intermediary are following the new model, the company must provide the Notice of proxy materials to the intermediary in sufficient time to allow the intermediary to prepare and send its own Notice to the beneficial owners at least 40 days in advance of the meeting (which means that the company materials will have to be available a few days earlier). The intermediary may not simply forward the company's Notice, but must prepare its own Notice, although it will generally include the same information as the company's Notice.

Third-Party Solicitations
Third parties other than the company may also use the Notice and Access model to delivery proxy materials. A third party solicitation might occur, for example, in a proxy contest or in connection with a controversial stockholder proposal. Third parties may do targeted solicitations (i.e., solicitations to less than all stockholders), although they must still provide paper copies of solicitation materials to stockholders who request them. Companies in situations in which a third party solicitation is likely should be aware of the availability of these rules to dissidents or shareholder proponents.

Compliance Dates
The new model is voluntary, but may not be used until July 1, 2007. Since the new rules require an initial mailing 40 days in advance of the meeting date, this means they effectively cannot be used for meetings held earlier than August 10, 2007.

Proposed Rules on "Universal Access"

The SEC has issued proposed rules that would make the notice and access model the default system (i.e., an "opt-out" model) for all large accelerated filers as of January 1, 2008, and for all other companies as of January 1, 2009. Companies could still comply with the current rules (paper mailing of proxy materials), for example if they were unable to meet the 40 day advance notice requirement.

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