Interent Availibility of Proxy Materials

The SEC recently posted a proposing release entitled “Internet Availability of Proxy Materials” (click here for the release).  The release proposes amendments to the proxy rules to allow issuers and others to furnish proxy materials to shareholders by posting them on the Web and notifying shareholders of their availability.  The SEC refers to this as the “notice and access” model and provides several justifications for it, including lowering the cost of proxy solicitation by issuers and those engaging in proxy fights.  As I blogged earlier here, a similar "access equals delivery" model for the delivery of final prospectuses the ’33 Act went into effect this month, so this proposal was expected.

The release includes various statistics on costs and shareholder voting including the following:

During the 2005 proxy season, only 44% of accounts were voted by beneficial owners [i.e., shares held in street name].  Thus, 56%, or 84.8 million accounts, did not return requests for voting instructions.  However, shareholders not voting represented a disproportionately low percentage (31.5%) of shares held beneficially.  These accounts represent a cost of approximately $504.6 million in postage and printing costs.

I decided to write a comment letter to the SEC on two issues concerning the proposal:  shareholder opt-out of the “notice and access” model and the model’s inapplicability to business combination transactions.  A draft of my letter is below the fold.

On another note, this may be my last post during my guest stint here at Ideoblog.  I'm leaving for Florida on Saturday and will be relegated to dial-up access.  Look for me on Truth on the Market blog which will go live next month.  Happy Holidays!

[Body of draft comment letter to SEC re:  E-Proxy Proposal]

Rule changes to allow issuers to furnish proxy materials by posting them on the Web are long overdue, and requiring shareholders to opt-out of your “notice and access” model is the right approach.  It should lead to lower proxy solicitation costs as presumably a large percentage of the millions of shareholders who do not vote will not opt-out. Hence, an issuer will avoid the printing and mailing costs with respect to these non-voting shareholders.  Further, if one assumes that non-voting shareholders will consciously or unconsciously find it unnecessary to print out the posted materials (which is a safe assumption) printing costs will not be shifted to these shareholders. Thus, the issuer and all of its shareholders will benefit from the cost savings.

With that said, many shareholders will continue to want hard copies of proxy materials, and rightly so.  A computer screen is a poor substitute for a paper copy, and some shareholders will not have computers, or will not have web access, or will not have printers, or will not want to absorb the cost of printing the materials themselves. Additionally, while the opt-out structure is an efficient way to weed out shareholders who have no need or desire for hard copies, the structure is not perfect.  It will result in cutting off some non-voting shareholders who actually want the materials.  With these considerations in mind, your proposal should be revised to make it easier for shareholders to opt-out of the “notice and access” model/opt-in to paper delivery.  Specifically, your proposal appears to require continuous opting-in for paper delivery, i.e., a shareholder who wants the traditional hard copy proxy materials would have to submit a request prior to each shareholders meeting.  The rules should provide a means by which a shareholder could permanently designate her desire to receive hard copies, subject to her later revocation, instead of requiring repeated requests.

On another note, I do not agree with you that the “notice and access” model should be inapplicable to proxy materials related to a business combination transaction.  You offer three reasons for your position: business combination transactions 1. are highly extraordinary events for some companies;  2. often involve registered securities triggering prospectus delivery requirements; and 3. typically involve long and complex proxy statements. 

Reason 1. is curious given your proposal allows the use of the “notice and access” model for proxy fights, which are more extraordinary than business combination transactions.  Reason 3. is also curious considering a major objective of your proposal is to enable issuers to reduce proxy material printing and mailing costs.  In that light, it makes little sense to assert that the “notice and access” model should not to apply to long and complex documents.  The longer the document, the more expensive the printing and mailing.  If page length is truly a concern, a better approach would be to set a page maximum for which the model can be used as opposed to a blanket exclusion of all business combination transactions.  Reason 2. does make sense, although, requiring hard copy delivery of proxy materials when a proxy must be delivered really goes without saying given that the proxy statement and prospectus are typically combined in one document.  And, like reason 3., reason 2. does not support a blanket exclusion of all business combination transactions from use of the model.  A better approach would be to allow use of the model for business combination transactions that do not require delivery of a prospectus.

On a final note, for long releases such as this one, it would be helpful if the table of contents of the release included page numbers. Additionally, given the length and complexity of many of your releases, in the future please send me hard copies.