SEC Adopts "Shareholder Choice" Rule on Proxy Delivery

08.03.2007

In our recent Client Update, we reported that the SEC was adopting electronic proxy delivery on a voluntary basis beginning July 1, 200. We also noted that the SEC was considering proposed rules that would require all public companies to post their proxy materials on the Internet and to provide notice of the Internet availability of their proxy materials. On July 26, 2007, the SEC posted final rules on electronic proxy delivery, called "Shareholder Choice Regarding Proxy Materials," adopting the proposed changes.

Under the new rules, beginning January 1, 2008, companies can choose to deliver their annual meeting materials by one of two means:

• The "notice only" option, which would require the company to follow the notice and access model for electronic delivery in the rules adopted earlier this year. Using this option, the company would post its proxy material online at least 40 days in advance of the meeting, and mail a Notice to its shareholders advising them of the online availability. The Notice must provide a means for stockholders to request paper delivery of the proxy materials, or to elect permanent paper or electronic delivery.
• The "full set delivery" option, allows a company to make a traditional paper delivery of all proxy materials, as long as it also makes the materials available on the Internet.

The specific rules for the "notice only" electronic delivery option, including the required content of the Notice, are described more fully in the June 18 Client Update, which is attached below. Companies choosing the "notice only" option should note that, although the SEC rules require proxy statements to be posted 40 days in advance, the rules require that the intermediaries representing "street name" holders send their own notice to the beneficial owners. These intermediaries estimate they will need approximately 5 days to prepare this notice. Therefore, as a practical matter the proxy materials must be available about 45 days before the meeting date to use the "notice only" electronic delivery option.

As noted above, the new rules contain two important new requirements, which are effective January 1, 2008, for companies that meet the definition of "large accelerated filer" (companies with a public float of $700 million or more), and January 1, 2009, for all other public companies. As of the applicable effective date:

• Companies will be required to make their proxy materials available online, even if they are doing a "full set delivery" paper mailing.
• If the company chooses the "full set delivery" option, the mailing must either include a separate Notice about the online availability of proxy materials, or incorporate the same information in its proxy statement.

Many companies already post their proxy materials online. Note, however, that under the new rules, proxy materials must be posted in a format convenient both for reading online and for printing (which may mean two formats). In addition, certain privacy features must be implemented to protect the confidentiality of shareholders accessing the documents online -- the company must refrain from installing cookies and other tracking features on the website location used for the proxy materials. These website requirements apply even to companies using the "full set delivery" option, and may require website changes even for companies already posting their materials online.

In order to take advantage of the new electronic delivery option, companies must plan to have their proxy materials available significantly in advance of the meeting date. Companies using electronic delivery will also have to keep track of stockholders who have made a permanent election to receive paper documents. Despite these administrative requirements, the use of electronic delivery can result in significant cost savings for companies, particularly after the first year if the company's shareholders are amenable to electronic delivery.

Here is a link to our earlier Client Update summarizing the electronic delivery rules.

Click here for a printable version