What companies can learn from new SEC proxy guidance
For more than 10 years, the SEC has been updating its informal telephone interpretations manual with compliance and disclosure interpretations (C&DIs), offering important insight to general counsel. As part of that process, the SEC’s Division of Corporation Finance on May 11 issued a consolidated set of C&Ds on how companies can comply with the proxy rules and Schedules 14A/14C.
In addition, the SEC has said it plans to update other interpretations, so more consolidated and helpful guidance will be on the way and posted on its website.
The new proxy C&DIs include 45 questions and answers that replace the interpretations published in the proxy rules and Schedule 14A manual of publicly available telephone interpretations and the March 1999 supplement to that manual. These include six C&DIs reflecting substantive changes, and four reflecting technical changes.
The proxy C&DIs include other helpful – but not new – guidance, including proxy disclosures needed to allow proxy holders to exercise their discretionary authority, matters requiring filing of a preliminary proxy statement or disclosure of financial information and disclosures in the new plan benefits table and about incumbent directors.
In-house counsel should include a review of these updated and consolidated proxy C&DIs along with Schedule 14A and Regulation S-K when conducting a standard rules check on their proxy disclosures.
Question: Rule 14a-4(b)(1) states that a proxy may confer discretionary authority with respect to matters as to which a choice has not been specified by the security holder, so long as the form of proxy states in boldfaced type how the proxy holder will vote where no choice is specified. If action is to be taken with respect to the election of directors and the persons solicited have cumulative voting rights, can a soliciting party cumulate votes among director nominees by simply indicating this in boldfaced type on the proxy card?
Answer: Yes, as long as state law grants the proxy holder the authority to exercise discretion to cumulate votes and does not require separate security holder approval with respect to cumulative voting.
What this means: Question 124.01 clarifies that a soliciting party can exercise discretion to cumulate votes among director nominees by indicating, in boldface type on the proxy card, how the proxy holder will vote if no choice is specified – as long as state law grants the proxy holder the authority to exercise discretion to cumulate votes and does not require separate security holder approval with respect to cumulative voting.
The change in this interpretation is that the proxy card itself must indicate (in boldface type) how the proxy holder will vote where no choice is specified. The previous interpretation did not require the proxy card to include that disclosure in boldface type. Under the revised proxy C&DIs, disclosure of this information only in the proxy statement is not sufficient.
In the unusual circumstance that a company’s shareholders have the right to cumulate votes for directors, the company’s counsel should:
- Confirm whether state law grants the proxy holder the authority to exercise discretion to cumulate votes and does not require separate security holder approval with respect to cumulative voting
- If state law so permits, confirm that the company’s proxy card states in boldface type how the proxy holder will vote if the shareholder fails to specify its choice.
Question: The division has permitted registrants to avoid filing proxy materials in preliminary form despite receipt of adequate advance notification of a non-Rule 14a-8 matter as long as the registrant discloses in its proxy statement the nature of the matter and how the registrant intends to exercise discretionary authority if the matter is actually presented for a vote at the meeting. See Section IV.D of Release No. 34-40018 (May 21, 1998). Can a registrant rely on this position if it cannot properly exercise discretionary authority on the matter in accordance with Rule 14a-4(c)(2)?
What this means: Question 124.07 clarifies that a registrant must file a preliminary proxy when it receives adequate and timely advance notification of a non-rule 14a-8 matter. The registrant will have adequate and timely advance notice (and therefore will not have discretionary authority on the matter) if the proponent meets the three notice requirements under Rule 14a-4(c)(2).
Companies receiving such non-Rule 14a-8 proposals will need to file a preliminary proxy statement and to account for the extra time for filing a preliminary proxy statement (at least 10 calendar days) in their annual meeting and proxy solicitation timelines.
Counsel receiving a non-Rule 14a-8 proposal should:
• Confirm whether the proponent met the three notice requirements under rule 14a-4(c)(2) required to eliminate the proxy holder’s discretionary authority. This includes, mostly importantly, that the company received the proponent’s non-Rule 14a-8 proposal before by the deadline specified in the company’s advance notice articles or bylaws or, if it does not have such advance notice provisions, 45 days before the date on which the prior year’s annual meeting proxy materials were first mailed. If the deadline falls on a weekend or holiday, then the proposal must be received the immediately previous business day, per Question 124.03
• If the proponent met that deadline, counsel should make sure the company has allotted enough time to file both a preliminary and a definitive proxy statement and to conduct an effective solicitation campaign that will result in shareholder voting as management recommends on the proposal. The 10-day period between the preliminary and definitive proxy statements is calculated with the date of filing as day one so that, for example, if the preliminary proxy statement is filed on January 6, then January 15 would be day 10
• If the proponent met the deadline but did not meet any of the other two requirements of Rule 14a-4(c)(2), the company may be able to exercise discretionary authority conditioned on including in its proxy statement advice on the nature of the matter and how the registrant intends to exercise its discretion to vote on that matter. See Question 124.08.
Question: Is a registrant required to file a preliminary proxy statement in connection with a proposed corporate name change to be submitted for security holder approval at the annual meeting?
Answer: No. As set forth in release No. 34-25217, the underlying purpose of the exclusions from the preliminary proxy filing requirement is ‘to relieve registrants and the commission of unnecessary administrative burdens and preparation and processing costs associated with the filing and processing of proxy material that is currently subject to selective review procedures, but ordinarily is not selected for review in preliminary form.’ Consistent with this purpose, a change in the registrant’s name, by itself, does not require the filing of a preliminary proxy statement.
What this means: The previous interpretation addressed a name change to delete the surname of a long-dead founder. The updated proxy C&DIs make it clear that no preliminary proxy is required for any corporate name change regardless of the reason for the change.
It is also helpful with reiterating the principle at issue when a preliminary proxy filing requirement is eliminated – which is to save companies and the SEC the burden of filing a preliminary proxy when the SEC agency would ordinarily not select it for review.
Question: A registrant solicits its security holders to approve the authorization of additional common stock for issuance in a public offering. While the registrant could use the cash proceeds from the public offering as consideration for a recently announced acquisition of another company, it has alternative means for fully financing the acquisition (such as available credit under an executed credit agreement in the full amount of the acquisition consideration) and may choose to use those alternative financing means instead. Would the proposal to authorize additional common stock ‘involve’ the acquisition for purposes of note A of Schedule 14A?
Answer: No. Raising proceeds through a sale of common stock is not an integral part of the acquisition transaction because at the time the acquisition consideration is payable, the registrant has other means of fully financing the acquisition. The proposal would therefore not involve the acquisition and note A would not apply. By contrast, if the cash proceeds from the public offering are expected to be used to pay any material portion of the consideration for the acquisition, then note A would apply.
What this means: If note A applies, then the proxy disclosures must include Item 11 (description of securities), 13 (financial statements, management’s discussion and analysis, and so on) and 14 (including certain information about the negotiation history, pro forma financial information and the target). Compiling pro forma financial statements, the description of negotiation history and the other disclosures can be quite time-consuming and expensive. Under the CD&I, if the company has alternative means for financing the acquisition price and is not expecting to use the proceeds from the securities offering to pay any material portion of the consideration for a recently-announced acquisition, the acquirer and target could avoid the disclosure burdens under Items 11, 13 and 14.
The previous interpretation provided less guidance on this question because it stated only that Item 11, 13 and 14 disclosures should be provided when the additional securities were to be used to acquire the target.
The guidance applies even if the securities authorized and issued by the acquirer may ultimately be used to pay some of the purchase price. Counsel should note this guidance to the finance and other teams involved in acquisitions to consider whether the company’s existing credit lines and other sources of funds are sufficient to fully cover acquisitions since it could affect the work imposed on management, outside and in-house counsel, the board and independent accountants to prepare these additional disclosures.
Question: If a registrant is required to disclose the new plan benefits table called for under Item 10(a)(2) of Schedule 14A, should it list in the table all of the individuals and groups for which award and benefit information is required, even if the amount to be reported is zero?
Answer: Yes. Alternatively, the registrant can choose to identify any individual or group for which the award and benefit information to be reported is zero through narrative disclosure that accompanies the new plan benefits table.
What this means: Question 161.03 clarifies that in the new plan benefits table under Item 10 of Schedule 14A, the registrant should list in the table all individuals and groups for which awards and benefits information is required, even if the amount is zero. Alternatively, if the amount is zero for any person or group, the information could be reported in the table’s accompanying narrative disclosure. The previous interpretation did not allow the narrative disclosure of groups or individuals whose benefits were zero.
Counsel should consider whether narrative disclosure or line item disclosure in the table is a better way to communicate the information when preparing the new plan benefit table, which is either required in the proxy statement or the Form 10-K.
Question: Does a proxy statement seeking security holder approval for the elimination of pre-emptive rights from a security involve a modification of that security for purposes of Item 12 of Schedule 14A?
Answer: Yes. Accordingly, financial and other information would be required in the proxy statement to the extent required by Item 13 of Schedule 14A.
What this means: Question 163.01 clarifies that a registrant is required to include the Regulation S-K Item 13 financial information – such as management’s discussion and analysis, financial statements, qualitative and quantitative market risk disclosures – when seeking shareholder approval to eliminate a security’s pre-emptive rights. The previous interpretation was less clear that elimination of pre-emptive rights is a modification of a security that requires the Item 13 financial disclosures.
• C&DI 126.04: A Form S-4 filer must wait to send the proxy card until after the form is declared effective.
• C&DI 126.05: Any additional communication to security holders after the Form S-4 is declared effective should be filed as additional soliciting material under Rule 14a-6(b).
• C&DI 158.01: Item 7 and 8 information about incumbent directors who were recently elected at the annual meeting must be disclosed in the proxy statement for a special meeting to elect one person as a new director. So even if the special election is held just a few weeks or months after the annual meeting, the Item 7 and 8 information about incumbent directors must be included in the proxy materials for the special meeting to elect the new director.
• C&DI 158.03: Item 7 and 8 information about directors of a target company must be included in the acquiring company’s Form S-4 that includes the target’s proxy statement.
The proxy C&DIs include other helpful – but not new – guidance, including clarifications about how to determine whether a proponent’s notice of a non-Rule 14a-8 matter is timely, how to meet disclosure requirements regarding compensation plans and which types of transactions or proposals require Item 13 information in the proxy statement.
The proxy C&DIs provide guidance on a number of questions that arise in connection with proxy statements preparation and annual meeting planning. Here are some steps for general counsel to take:
- Add the link to the proxy C&DIs to your proxy statement reference materials
- Verify that your annual meeting checklist has the right deadline for shareholders’ non-Rule 14a-8 proposals – either the date set in your company’s advance notice provision or, if your company does not have an advance notice provision, 45 days before the date of the previous year’s proxy materials for the annual shareholder meeting
- Build in time for filing preliminary proxy materials if required under the SEC rules, after considering the updated guidance in these proxy C&DIs
- Consider whether the updated proxy C&DIs affect the contents of the proxy card
- Consider when making acquisitions and initiating a securities offering whether the company has alternative sources to fully pay for the acquisition and would not expect to use the securities offering proceeds as acquisition consideration, in which case Item 11, 13 and 14 disclosures could be omitted from the securities offerings filings
- Check the guidance in the proxy C&DIs if filing a Form S-4. For instance, do not mail the proxy cards for the matters covered in the Form S-4 registration statement and associated prospectus until the Form S-4 is declared effective, and file any additional communications to shareholders as additional soliciting materials
- Whenever the company is seeking approval of a new or amended compensation plan or approval or ratification of compensation awards, consult the questions 161 series in the proxy C&DIs for additional guidance
- Having these interpretations of the proxy rules and Schedule 14A and 14C in one place with recently updated guidance will be helpful to practitioners and the companies they represent.
Lisa Taylor is a partner in the Jacksonville, Florida, office of McGuireWoods