The SEC has adopted a new rule, called “Internet Availability of Proxy Materials,” which is effective as of March 30, 2007. This rule is contained within Sections 240, 249, and 274 of the Securities Exchange Act of 1934 (as amended by the rule). The SEC refers to this rule as the “notice and access model.” Key introductory extracts from the rule are as follows:
We are adopting amendments to the proxy rules under the Securities and Exchange Act of 1934 that provide an alternative method for issuers… to furnish proxy materials to stockholders by posting them on an Internet web site and providing stockholders with notice of the availability of the proxy materials… Issuers that rely on the amendments may significantly lower the costs of their proxy solicitations that ultimately are borne by stockholders.
The notice and access model that we are adopting provides an alternative means for an issuer to furnish proxy materials to its stockholders. The proxy materials include (1) notices of stockholder meetings; (2) Schedule 14A proxy statements and consent solicitation forms; (3) Forms of proxy (i.e., proxy cards); (4) Schedule 14C information statements; (5) Annual reports to security holders; (6) Additional soliciting materials, and; (7) any amendments to such materials that are required to be furnished to stockholders. The new rules permit any issuer to use the notice and access model to disseminate its proxy materials to all types of stockholders, whether registered or beneficial owners, and with respect to any solicitation except those related to business combination transactions.
The rule states that a company must send a notice 40 calendar days or more in advance of a stockholder meeting date, telling them of the availability of the proxy materials on a web site. The notice must include a prominent legend in bold-face type that states:
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be Held on [insert date].
- This communication presents only an overview of the more complete proxy materials that are available to you on the Internet. We encourage you to access and review all of the important information contained in the proxy materials before voting.
- The [proxy statement] [information statement] [annual report to security holders] [is/are] available at [insert web site address].
- If you want to receive a paper or e-mail copy of these documents, you must request one. There is no charge to you for requesting a copy. Please make your request for a copy as instructed below on or before [Insert a date] to facilitate timely delivery.
In addition, the notice must state the following:
- The date, time, and location of the meeting
- A clear identification of each separate matter to be acted on and the company’s recommendations regarding those matters
- A list of the materials being made available at the specified web site
- A toll-free telephone number, an e-mail address, and a web site address where stockholders can request a copy of the proxy materials
- Any control or identification numbers that the stockholder needs to access his or her proxy card
- Instructions on how to access the proxy card
- Information on how to obtain directions to attend the meeting and vote in person
What does the revised proxy solicitation process look like? The company lists a unique control number and a web site address on a label that it attaches to a proxy notification, which it mails to stockholders of record. The stockholders then use the control number to gain access to a web site, where they can access the proxy materials and enter their ballots. The web site automatically tabulates all votes, which one can access online, both at a detail and summary level.
The SEC has a few additional requirements for this process, which are noted below:
- Companies are not allowed to furnish the proxy card together with the initial notice for a solicitation. Instead, the company must post the proxy card on the web site with the proxy statement and any annual report.
- There is a chance that stockholders may be tricked into disclosing personal information to individuals purporting to represent the company. To avoid this problem, the SEC encourages companies to include a statement in their proxy notices that stockholders are not required to provide any personal information.
- The SEC estimates that 19% of all stockholders will continue to request paper copies, so there will still be an ongoing need for the traditional proxy materials distribution and vote tallying procedures. In particular, the new rule allows companies to send a paper proxy card at least 10 calendar days after sending the electronic notice. This later mailing can include a copy of the proxy statement and annual report.
- The SEC requires that the proxy materials posted on the stockholder-accessible web site be posted in two formats. One must be in a format substantially identical to the paper version of the materials (such as a PDF document). The second version must be available in a readily searchable format, such as HTML, which may also incorporate hyperlinks between various parts of the document.
- Some stockholders are beneficial owners, which means that their stock is held by an intermediary. In such cases, the company has no identification information regarding the beneficial owners, and only has an obligation to provide notice to the intermediary. Thus, the intermediary must prepare its own notice and distribute it to those beneficial stockholders registered with it. The intermediary can request paper proxy documents from the company on behalf of its beneficial stockholders.
There is a risk that companies could underestimate the number of stockholders whom they expect to request paper proxy documents, requiring an additional (and expensive) print run of those documents. Thus, it is advisable to significantly overestimate the number of stockholders requesting the printed version during the first year of implementing this program, in order to ensure that the demand for printed documents can be fulfilled with a single printing. Once a company develops a history of the proportion of stockholders requesting paper documents, it will then have greater assurance in budgeting for the correct number of paper documents.
Though on-line voting certainly presents the opportunity for cost savings, an even greater benefit is the massive increase in the feedback loop from investors to management. The investor relations officer can monitor the on-line voting in real time, and reasonably expect to see the bulk of the voting completed within a few days of the initial notice being delivered to stockholders. This is a vast improvement over the traditional model, where results trickle in for weeks after the initial mailing of proxy materials, and require constant recompiling of the vote results in order to identify voting trends.