Final Rules Encourage New Mode of Shareholder Communication
In an effort to promote electronic shareholder forums as a convenient and effective means of communication between shareholders and companies, the Securities and Exchange Commission (SEC) recently adopted amendments to the proxy rules under the Securities Exchange Act of 1934.1
Under the new rules, statements made in an electronic shareholder forum may be exempt from most of the proxy rules. Additionally, the new rules provide liability protection for operators of the electronic forums. The SEC wants these forums used as an additional mode of communication. The forums are a supplement to, not a substitute for, the current shareholder proposal process under Rule 14a-8.
Exemption from Proxy Rules
One of the new amendments exempts from most of the proxy rules any communication made in an electronic forum by or on behalf of any person (1) who does not seek, directly or indirectly, the power to act as proxy for a shareholder and (2) who does not furnish or otherwise request a form of revocation, abstention, consent or authorization.2 A shareholder or company which intends to act as proxy at a later shareholder meeting may participate in the forum as long as its communications are unrelated to its role as proxy.
Any communications on the forum must be made more than 60 days before the announced date of the company’s next annual or special meeting. If a company announces the date of a shareholder meeting less than 60 days before the meeting, the forum communication must be made within two days after the announcement to be exempt. Any communications that do not satisfy the timing requirements may need to be filed with the SEC as soliciting materials.
Communications that constitute a solicitation and remain available on the forum after the 60-day cut-off must comply with the proxy rules. The SEC has recommended that companies either delete certain postings or have the forum “go dark” during the 60-day period before meetings.
The SEC noted that forum communications relating to acquiring, holding, voting or disposing of equity securities may result in the formation of a group under Regulation 13D and may impact Schedule 13G eligibility.
Protection from Liability
The new rules provide liability protection to any shareholder, company or third party acting on behalf of a shareholder or company that establishes, maintains or operates an electronic shareholder forum.3 Pursuant to the new rules, these parties will not be held liable under federal securities laws for statements or information made by a forum participant. Only the forum operator receives this protection. Parties posting information on the forum remain liable for their communications.
Flexibility in Design
The SEC has not defined the term “electronic shareholder forum” in the final rules. Companies that elect to participate in, or sponsor, an electronic shareholder forum have the opportunity to be creative in their design. Companies could use the forum in many ways, including:
- as a symposium or “town hall” for shareholders and management to exchange questions and answers regarding the company’s policies
- as a message board for shareholders to voice their concerns
- as an online polling site for the company to gauge reaction to a new proposal
- as a blog for management to announce new initiatives and developments.
The SEC has not provided guidance on the technical aspects of the forums, which allows companies to develop their own standards for participant eligibility, identification and accountability.
For additional information, please contact the author or any member of Pepper Hamilton’s Corporate and Securities Practice Group.
Endnotes
1 Electronic Shareholder Forums, SEC Release No. 34-57172, http://www.sec.gov/rules/final/2008/34-57172.pdf (Jan. 18, 2008).
2 See Exchange Act Rule 14a-(2)(b)(6). Such communications are not exempt from the proxy rules regarding shareholder list or antifraud provisions found in Rule 14a-7 and 14a-9, respectively.
3 See Exchange Act Rule 14a-17. The forum must be compliant with the applicable federal and state securities laws and the company’s bylaws.
Andrew J. Siegel
