December 18, 2006

The SEC’s E-Proxy Comes to Life!

Last week, at a loooong open Commission meeting, the SEC:

adopted e-Proxy

re-proposed foreign private issuer deregistration rules

proposed interpretive guidance for management reports that evaluate internal controls

proposed higher net worth threshold for “accredited investor” definition and antifraud rule for advisers to pooled investment vehicles

For me, the most surprises came in the e-Proxy initiative. It was no surprise that the earliest that companies and other persons can use e-Proxy is the compliance date of July 1, 2007 – but it was surprising that the SEC went on to propose that e-Proxy be mandatory. After speaking to a handful of companies about whether they would take advantage of e-Proxy, a few smart ones had calculated the thresholds for when its cheaper to continue to mail in paper (using bulk mail rates) rather than mail first class (to meet the “3 business day” requirement) to those that request paper (and incur the administrative headaches of maintaining a separate list for those shareholders who request paper). The thresholds were quite a bit lower than they had assumed before they went through this exercise. Companies should conduct their own calculations and see if it’s worth submitting a comment letter on this proposal.

Under the adopted e-Proxy framework, a company may deliver online to satisfy proxy material obligations if it:

– Posts its proxy materials on a website, and

– Provides a plain English notice at least 40 days before the shareholder meeting, which includes the URL of where the proxy materials are posted and a toll free number and email address to enable shareholders to request paper copies.

Brokers, banks and similar intermediaries can deliver proxy materials using e-Proxy, with the notice and paper delivery provided through them.

Here are a few changes from what the SEC had originally proposed:

– A proxy card may not accompany the notice – but a proxy card may be delivered 10 days after delivery of the notice if accompanied by a second copy of the notice

– Shareholders can request paper delivery just one-time that would apply to all future meetings; they don’t have to request it on a per-meeting basis

– Once a shareholder requests paper, the must send the proxy materials within 3 business days after receiving the request (the proposal had been 2 business days)

– Third-parties who use e-Proxy must send a notice by the later of 40 days before the meeting or 10 days after the company filed its proxy materials – and must honor shareholder requests for paper delivery

Commissioner Campos stated that he viewed e-Proxy as a first step toward shareholder access. Commissioner Nazareth stated that while she was supportive of e-Proxy, she wanted further study of its impact before moving to shareholder access. No one else commented on the interplay between e-Proxy and shareholder access.

Overall, e-Proxy is designed as an equal access (i.e. registrants and third parties) model and are inapposite to business combination (or “merger proxy”) solicitations – and should significantly reduce the costs and other administrative burdens associated with dissident election contests. When added to the growing “majority vote” and other shareholder-access movements, activist investors and corporate governance reformists now has a powerful new tool. Underperforming boards and management – beware!