The SEC Catches Up On New Technology In Proxy Solicitations
A quick tutorial: Proxies are the means by which public shareholders vote. The Securities Exchange Act of 1934 governs the solicitation of those proxies. The act and the regulations adopted by the Securities and Exchange Commission under the act are designed to ensure a fair process with adequate disclosure to shareholders so they may make an informed voting decision in a timely manner.
In the past year, the SEC has adopted significant rules intended to simplify, clarify and modernize proxy solicitations by use of the Internet.
In July 2007, the SEC adopted amendments that modernize the proxy rules by requiring issuers and other soliciting persons to follow the “notice and access” model for proxy materials. Soliciting persons are now required to post a complete set of their proxy materials on an Internet site and furnish notice to shareholders of their electronic availability. The Internet site must be a site other than the EDGAR (Electronic Data Gathering, Analysis and Retrieval system) maintained by the SEC. The site must be publicly accessible, free of charge and maintain user confidentiality. In addition, the materials posted must be in a format convenient for printing and for reading online. Companies must provide paper or e-mail copies, as specified by the shareholder, within three business days of a shareholder’s request.
Notice to shareholders can be provided in one of two ways: the “notice-only” option, which is simply notice of electronic availability; or the “full-set delivery” option, which is a full set of paper proxy materials along with a notice of Internet availability. Under the “notice only” option, a notice must be sent at least 40 calendar days before the date that votes are counted. Under the “full-set delivery” option, notice need not be made separate and the 40-day period is not applicable, so the notice can be incorporated directly into the proxy materials.
Under both options, the notice must include certain specific information and must be filed with the SEC. The options are not mutually exclusive, so one option can be used to send notice to a particular class of shareholders, while the other option can be used to send notice to others. Intermediaries and other soliciting persons must also follow the “notice and access” model, with some exceptions. Specifically, intermediaries must tailor notice to beneficial owners, and soliciting persons other than the issuer need not solicit every shareholder. Most large public companies were required to follow the “notice and access” model for proxy materials as of Jan. 1, 2008. All others, including registered investment companies and soliciting persons other than an issuer, can voluntarily comply at any time, but must fully comply by Jan. 1, 2009.
Effective Feb. 25 of this year, the SEC adopted further amendments that encourage use of the Internet in the proxy solicitation process by facilitating the use of electronic shareholder forums. These amendments are intended to remove some of the legal ambiguity resulting from the use of electronic shareholder forums by clarifying that participation in an electronic shareholder forum is exempt from most of the proxy rules if specific conditions are met. The new rules also establish that shareholders, companies and other parties that establish, maintain or operate an electronic forum will not be liable under the federal securities laws for any statement or information provided by another person participating in the forum.
Specifically, any participant in an electronic shareholder forum is exempt from the proxy rules if the communication is made more than 60 days before the announced date of the company’s annual or special shareholder meeting, or if the meeting date was announced less than 60 days before it was scheduled to occur, within two days of the announcement, provided that the communicating party does not solicit proxy authority while relying on the exemption. Solicitations that fall outside these relevant dates continue to be subject to the proxy rules.
Further, if a solicitation was made within the relevant dates but remains electronically accessible thereafter, the solicitation could then become subject to the proxy rules. In this regard, the SEC suggests that forum operators give posting users a means of deleting their postings or having their postings “go dark” as of the applicable 60 day or two day cut off.
While the amendments exempt solicitations from the proxy rules, they do not exempt posting persons from liability for the content of their postings under traditional liability theories, including anti-fraud provisions that may require a participant to identify himself and which prohibit misstatements and omissions of material facts. Further, the amendments extend liability protection only to shareholders, companies and third parties who create, operate or maintain an electronic shareholder forum on behalf of a shareholder or company. These persons receive protection against liability for statements made or information provided by participants in the forum, so long as the forum complies with federal securities laws, relevant state law and the company’s charter and bylaws.
Karen C. McConnell is partner-in-charge of the mergers and acquisitions/private equity group; Adrienne W. Wilhoit is a partner; and Brooke T. Mickelson is an associate at Ballard Spahr Andrews & Ingersoll, www.ballardspahr.com.