The Securities and Exchange Commission on Feb. 25 adopted new rules to facilitate the operation of electronic shareholder forums for publicly held companies. This development is just one of many changes the SEC has undertaken to conform its regulatory philosophy to the realities of a computer-based society.
What was the problem? Why couldn’t shareholders of publicly held companies “chat” with each other about company matters? Why couldn’t companies establish an electronic location (forum) in order to facilitate those discussions and communicate with its own shareholders?
The problem for shareholders was the carefully articulated definition of “solicitation” under the SEC’s proxy rules. Any formal solicitation of a proxy requires extensive filings with the SEC, and is subject to regulation. In order to avoid subtle forms of solicitation, the SEC rules cover not only the easily recognizable overt request that a shareholder execute a proxy, but also “furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” (See SEC Release 34-57172, emphasis added) The proxy rules applied to people “seeking to influence” the vote, even absent a formal solicitation of a proxy card and regardless of the form of communication.
These rules limited the manner by which shareholders could express their views on management, or on myriad other matters that directly or indirectly relate to issues presented for shareholder votes, including election of directors; authorization of additional securities or recapitalizations; sales or mergers of the business; or operational matters often proposed by shareholders for inclusion in shareholder meetings.
From the standpoint of the company establishing an electronic shareholder forum, there were a number of issues, including compliance with Regulation FD; the relationship of disclosures to then-pending formal proxy solicitations; the relationship of disclosures to then-pending securities transactions (issuances or redemptions); and the continued applicability of the’34 Act to the accuracy and completeness of any information it releases.
Also, what about the possible liability of the company for statements made by participants in the forum? A company can be liable for misstatements or omissions made by third parties, if the provision of that information is facilitated by or endorsed by the company itself.
What if some shareholder is off in fantasy land, providing factual information about the company that is untrue or misleading? Must the company instantly monitor and correct any misstatement, however subtly inaccurate or inconsistent with prior company disclosure? Is the company liable if someone, in reliance upon a shareholder’s erroneous posting in a company’s electronic forum, trades the company’s securities to his detriment?
Protecting the shareholder
New ’34 Act Rule 14a-2(b)(6) generally provides that the proxy rules (other than anti-fraud provisions) will not apply to solicitations made in a shareholder forum that occurs more than 60 days prior to the announced meeting date. (If the company announces a meeting on less than 60 days notice, the solicitation cannot occur more than two days following that announcement.)
The new rule takes the shareholder off the hook in a couple of ways. First, the shareholder need not worry that any expression of viewpoint will be interpreted as a “solicitation” because even if it is so interpreted, that solicitation is nonetheless exempt from required filings. More interestingly, if the posting in the electronic forum falls within the proper time frame, that posting can overtly solicit a particular vote at a particular meeting, and still not require that any filing be made.
Once a shareholder has solicited a proxy pursuant to the new exemption without any SEC filing, that shareholder is free to comply with the proxy rules and formally solicit votes once the 60 day non-exempt period prior to an upcoming meeting begins to run.
Protecting the company
New ’34 Act Rule 14a-17 protects the company from liability for statements made by other participants in a forum the company has established. A company that establishes the forum is placed on much the same footing as an Internet service provider – the entity that establishes the medium of communication is not legally responsible for the erroneous content provided by someone else. (Similar protections are afforded shareholders who set up their own forums.)
From the standpoint of general counsel acting in the best interest of a publicly held company, does it make any sense to foster an electronic shareholder forum?
A company still has to be careful about improper disclosure of material information in violation of Regulation FD, and the conformity of company-provided communications with prior disclosure. Certainly, another layer of company internal control is required, although these company forum obligations are not dissimilar to controls that should be exercised over a company website. Establishing an electronic shareholder forum will not affect the rights of a shareholder to submit to a company nonbinding proposals for inclusion in the company’s proxy materials.
It is not clear whether a shareholder forum will serve as a safety valve, providing outlet to such proposals and consequently reducing the number of proposals actually submitted, or, whether heightened communication among shareholders might have the opposite effect of increasing the frequency of such nonbinding proposals.
The SEC suggests that a forum is a less expensive method for fostering communication among shareholders and between the company and shareholders, and may have the ancillary benefit of providing more information to the marketplace. Shareholders would receive communications throughout the entire year, making available company information and providing a broader basis for market valuation.
The Commission also suggests that a company could take the pulse of its shareholders, and perhaps managers, either by reviewing periodically the content of the electronic forum, or by using the forum in order formally to survey shareholder interests.
Aside from the cost of establishing and monitoring the forum, there is concern that communications made during the exemption period under Rule 14-2(b)(6) may be deemed solicitations requiring compliance with the proxy rules at a later time.
In its release adopting these new rules, the SEC observed that earlier exempt company postings “remaining available to shareholders [once the 60 day period before the annual meeting begins to run] could be reasonably calculated to result in the procurement, withholding or revocation of a proxy.”
The company might choose to delete any statements of its own that might fall into that category, and might afford posting participants that opportunity. Could the company itself delete such shareholder posting? More likely, a company would have the forum “go dark” during a proxy solicitation period that does not enjoy the Rule 14a(b)(6) exemption.
Over the last year or two, the SEC has authorized the electronic delivery of IPO prospectuses and proxy materials, and embraced the proposition that access on the Internet is the equivalent of document delivery.
The SEC has abandoned its original fear that the investing public was technophobic. This is different from the expanding requirement that businesses make their filings electronically. The most recent of such edicts soon will require the electronic filing of Forms D under Regulation D. It is one thing for the SEC to ask publicly held businesses to communicate electronically to the Commission. It is quite another matter to in effect presume that the investing public is computer literate.
Last issue’s column in this space discussed the SEC’s push toward requiring certain public company disclosure to be in the XBRL format. XBRL further reflects the Commission’s view that investors are tech-savvy. XBRL assumes that investors are able to review, manipulate and compare extracted data in comparing companies for investment.
In light of all of these developments, and in light of SEC Chairman Cox’s clear commitment to an electronic world, it is not surprising the Commission has adopted rules facilitating electronic shareholder forums.
Stephen M. Honig is a member of Duane Morris’s corporate
department in the firm’s Boston office. You can reach him at email@example.com.