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Are the New E-Proxy Rules in the United States Really More Effective?

Joris M. Hogan of Torys LLP


At the start of 2009, all issuers and others that file proxy statements with the Securities and Exchange Commission became subject to the SEC's electronic proxy delivery rules (the "e-proxy rules"). Previously, since adoption of the e-proxy rules in 2007, only Large Accelerated Filers were required to comply with the e-proxy rules.

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A Large Accelerated Filer is an issuer that (1) had an aggregate worldwide market value of the voting and nonvoting common equity held by its non-affiliates of $700 million or more, as of the last business day of its most recently completed second fiscal quarter; (2) has been required to file periodic reports for at least 12 months; and (3) has filed at least one Form 10-K. Under the e-proxy rules, issuers and other persons soliciting proxies may choose to conduct their solicitation using one of two methods, the "notice-only option" or the "full-set-delivery option."

Under the notice-only option, issuers are not required to mail a paper copy of their proxy statement and annual report to shareholders. Instead, issuers may post these proxy materials on an Internet website and send a notice of availability of proxy materials to shareholders at least 40 calendar days before the annual meeting, informing them of the availability of the proxy materials on the website. This website must be publicly available and free to access, and may not be the SEC's website or a link to the SEC's website. The website may not track identified users, including through the use of "cookies." Generally, the notice of availability of proxy materials must (1) identify the specific website where proxy materials are posted; (2) provide specified information about the upcoming shareholder meeting (including identification of the matters to be acted on at the meeting); and (3) include a list of the proxy materials available on the website and instructions on how to obtain or access the proxy card (including any control/identification numbers that the shareholder needs to do so). Rule 14a-16 under the Securities Exchange Act of 1934, as amended, sets forth these requirements in detail.

Under the full-set-delivery option, issuers generally follow the traditional method for mailing a copy of the proxy statement and annual report to shareholders. Issuers are not required to mail a notice of availability of proxy materials to shareholders in addition to the mailing of proxy materials. Under the eproxy rules, a few changes were made to the traditional proxy statement preparation and mailing process. The proxy statement must include much of the same information that is required to be included in the notice of availability of proxy materials. The issuer also is required on the date of mailing to post the proxy statement and annual report on a website that conforms to the requirements of the website used to post proxy materials under the notice-only option. Since it is not necessary for the issuer to give shareholders sufficient time to access the proxy materials online or to request a paper copy, the 40-day deadline for mailing the notice of availability of proxy materials and website posting of proxy materials does not apply to the mailing of proxy materials under the full-set-delivery option.

If the notice-only option is used, the notice of availability of proxy materials must be mailed no later than 40 calendar days before the date of the meeting, and the proxy materials must be posted on the website on this date. However, brokers generally request to receive the notice approximately seven days prior to the mailing date. Under the traditional full-set-delivery option, proxy materials are generally not mailed until approximately 20 business days prior to the meeting date.

Broadridge, Inc. reported in its study published in 2008 that the percentage of total retail shares that voted dropped to 16.57% in 2008, from 34.28% in 2007, for companies that used the notice-only option for the first time in 2008. This remarkable decline in retail voting associated with the notice-only option seems inadvertently to have increased the relative power of institutional and activist shareholders with respect to determining shareholder proposals. Many institutional shareholders have a fiduciary duty to vote their shares (emphasized by the Department of Labor and the Commission) and activists are, by definition, proactive in exercising their voting rights. The average quorum size and retail shareholder voting response rates also declined for companies that used the notice-only option.

Issuers should therefore consider their shareholder base and the proposals that will appear on the ballot at the annual meeting when deciding whether to use the notice-only option. Because brokers cannot vote on "nonroutine" matters, if the approval of an equity compensation plan or another nonroutine matter is going to appear on the ballot, issuers should consider whether the loss of retail shareholder votes could jeopardize approval of the proposal.

With the institution of recent amendments to NYSE Rule 452, which apply to the upcoming proxy season, a lack of retail shareholder votes could be quite problematic. Under the amendments, Rule 452 prohibits brokers from voting "undirected" shares in uncontested director elections by adding director elections to the list of "non-routine" matters. Although this change is on its face not a big deal, if there are no "routine" matters for brokers to cast "undirected votes" on, a company might be unable to reach a quorum, and the ability to hold a shareholder meeting could, at least in theory, be frustrated. As long as companies continue to routinely ask shareholders to approve outside auditors, however, this dire outcome seems unlikely. But the possibility does exist that the combination of e-proxy's retail vote retarding tendencies and Rule 452 broker voting prohibitions could make it even more difficult for companies to reach a quorum.

On February 28, 2010, the SEC adopted amendments to the e-proxy rules to remove regulatory impediments that it believes may be reducing shareholder response rates to e-proxy solicitations. The proposed amendments permit issuers and other soliciting persons to more effectively use the notice and access model by providing additional flexibility to give shareholders a more effective explanation of the importance and effect of the notice and access alternative and the reasons for its use. Specifically, the amendments permit the issuer or other soliciting persons more latitude regarding the form and content of the notice, including the use of explanatory materials regarding the reasons for the use of the notice and access rules and the process of receiving and reviewing proxy materials. It will be interesting to see whether the amendments are effective in restoring retail share voting to the 2007 level.


Joris M. Hogan, Partner jhogan@torys.com

Joris Hogan, a member of the firm's Executive Committee, practices corporate and securities law. His practice focuses on advising principals, private equity firms and investment banks in domestic and cross-border M&A transactions involving public and private companies. He also represents issuers, underwriters and purchasers in public and private financings, and on corporate governance and other complex corporate matters.

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