Back in fourth quarter 2023, the SEC published several new compliance and disclosure interpretations on various topics including cyber incident disclosure, proxy and information statements, the inclusion of securities in the filing fee exhibit, and Inline XBRL. As my blog topic list tends to be very long, I am finally getting to this and will cover the various new C&DI topics over the next few weeks.
Proxy Rules
The federal proxy rules can be found in Section 14 of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules promulgated thereunder. The rules apply to any company which has securities registered under Section 12 of the Act. Section 14 of the Exchange Act and its rules govern the timing and content of information provided to shareholders in connection with annual and special meetings with a goal of providing shareholders meaningful information to make informed decisions, and a valuable method to allow them to participate in the shareholder voting process without the necessity of being physically present. As with all disclosure documents, and especially those with the purpose of evoking a particular active response, such as buying stock or returning proxy cards, the SEC has established robust rules governing the procedure for, and form and content of, the disclosures.
The SEC has revised one and issued 5 new C&DI on the proxy rules (Schedule 14A).
The SEC has revised Question 126.03 explaining how the counting of the 10 calendar day period between filing the preliminary proxy and the definitive proxy. In particular:
Question 126.03 – How are “days” counted for purposes of the “10 calendar day” period in Rule 14a-6?
Answer – For purposes of calculating the “10 calendar day” period in Rule 14a-6, the date of filing is day one pursuant to Rule 14a-6(k). For example, if the preliminary proxy statement is filed on Friday, October 20, 2023, then Sunday, October 29, 2023, would be day ten for purposes of Rule 14a-6. The registrant may send the definitive proxy statement to security holders starting at 12:01 a.m. on October 30, 2023. The foregoing assumes that the preliminary proxy statement is submitted on or before 5:30 p.m. Eastern Time on October 20, 2023. If the filing is submitted after 5:30 p.m., the 10-day period does not start until the next business day, which would be Monday, October 23, 2023. See Rule 13(a)(2) of Regulation S-T.
Four of the new C&DI address solicitation. As I’ve written about a few times, in July 2020 the SEC adopted amendments to change the definition of “solicitation” in Exchange Act Rule 14a-1(l) to specifically include proxy advice subject to certain exceptions, provide additional examples for compliance with the anti-fraud provisions in Rule 14a-9, and amended Rule 14a-2(b) to specifically exempt proxy voting advice businesses from the filing and information requirements of the federal proxy rules. On the same day, the SEC issued updated guidance on the new rules. See HERE for a discussion on the those rules and related guidance.
The amended rules were never implemented and on June 1, 2021, the SEC Division of Corporation Finance issued a public statement that it would not recommend enforcement action based on the 2020 Rule Amendments and guidance during the period in which the SEC is considering further regulatory action in this area (see HERE).
Then in July 13, 2022, the SEC adopted amendments to the rules governing proxy voting advice, in essence undoing material provisions in the new rules that had been adopted in July 2020 – see – HERE.
Related to solicitation the new C&DI provides:
Question 132.03 – Rule 14a-12 permits solicitations before the furnishing of a proxy statement, provided that, among other things, written soliciting material includes the required participant information or a prominent legend advising shareholders where they can find that information. See Rule 14a-12(a)(1)(i). Can a soliciting party satisfy Rule 14a-12(a)(1)(i) through a legend that only includes a general reference to filings made by the soliciting party or the participants (e.g., a legend that refers shareholders to the prior year annual report on Form 10-K and proxy statement for participant information)?
Answer – No. Rule 14a-12(a)(1)(i) requires a soliciting party to disclose the “identity of the participants in the solicitation…and a description of their direct or indirect interests, by security holdings or otherwise, or a prominent legend in clear, plain language advising security holders where they can obtain that information.” The availability of participant information allows shareholders evaluating soliciting materials to understand the interests of those soliciting the shareholders at the time when the solicitations occur, including before the shareholders receive a proxy statement. When the Commission amended Rule 14a-12 to expand the ability to solicit before furnishing a proxy statement, the Commission cited the legend information as one of the safeguards to protect against misleading solicitations and maintain the integrity of the solicitation process. See Section II.C.1. in Release No. 34-42055 (Oct. 22, 1999). General references in the legend to filings made or to be made by the soliciting party or participants do not sufficiently advise shareholders where they can obtain the required participant information. Instead, the legend should:
- clearly identify the specific filing(s) where participant information appears (including by filing date);
- clearly describe the specific locations of the participant information in such filings, whether by reference to the relevant section headings, captions or otherwise; and
- include active hyperlinks to the referenced filings, when possible.
Soliciting parties also are reminded that participants’ direct and indirect interests in the solicitation are not limited to such participants’ security holdings.
Question 139.07 – Rule 14a-19(e) mandates that each soliciting party in a non-exempt director election contest include all director nominees of all soliciting parties on each universal proxy card. As a result, in a contested director election, each soliciting party’s universal proxy card will include more nominees than director seats up for election. Rule 14a-19(e)(6) mandates that a universal proxy card prominently disclose the maximum number of director nominees for whom a shareholder may grant authority to vote. Rule 14a-19(e)(7) requires that a universal proxy card prominently disclose the treatment and effect of a proxy executed in a manner that grants authority to vote “for” the election of more nominees than the number of director seats up for election (an “overvoted proxy card”) or fewer nominees than the number of director seats up for election (an “undervoted proxy card”). Can a soliciting party use discretionary authority to vote the shares represented by overvoted proxy cards in accordance with that party’s voting recommendation for the director election?
Answer – No. Rule 14a-4(e) provides that where a person solicited specifies on a proxy card “a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the specifications so made.” When a shareholder has specified its choice(s) for the election of directors with an overvoted proxy card, the shares represented by an overvoted proxy card cannot as a practical matter be voted in accordance with the shareholder’s specifications. Because the shareholder has specified its choice(s) for the election of directors with an overvoted proxy card, a soliciting party cannot rely on discretionary authority pursuant to Rule 14a-4(b)(1) to vote the shares represented by an overvoted proxy card on the election of directors. Although the shares represented by an overvoted proxy card cannot be voted on the election of directors, such shares can be voted on other matters included on the proxy card for which there is no overvote and can be counted for purposes of determining a quorum. The treatment and effect of the corresponding voting instruction form (“VIF”) should be the same as that disclosed on a universal proxy card pursuant to Rule 14a-19(e)(7). The staff understands that some intermediaries will contact shareholders or beneficial owners to seek a correction of an overvoted proxy card or VIF before the meeting date. The interpretive position described in this CDI does not prohibit this helpful practice.
Question 139.08 – Can a soliciting party use discretionary authority to vote the shares represented by undervoted proxy cards for the remaining director seats up for election in accordance with that party’s voting recommendation?
Answer – No. A shareholder has specified its choice(s) for the election of directors with an undervoted proxy card, and the shares represented by an undervoted proxy card can be voted in accordance with the shareholder’s specifications. See Rule 14a-4(e). Because the shareholder has specified its choice(s) for the election of directors with an undervoted proxy card, a soliciting party cannot rely on discretionary authority pursuant to Rule 14a-4(b)(1) to vote the shares represented by an undervoted proxy card for the remaining director seats up for election. The treatment and effect of the corresponding VIF should be the same as that disclosed on a universal proxy card pursuant to Rule 14a-19(e)(7).
Question 139.09 – Can a soliciting party use discretionary authority to vote the shares represented by a signed but unmarked proxy card in accordance with that party’s voting recommendations?
Answer – Yes. Because the shareholder has not specified any choices, the soliciting party can use discretionary authority in this manner and as permitted by Rule 14a-4(b)(1). Rule 14a-4(b)(1) states that “[a] proxy may confer discretionary authority with respect to matters as to which a choice is not specified by the security holder,” so long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified. Note that Rule 14a-19(e)(7) requires that a universal proxy card prominently disclose the treatment and effect of a proxy executed in a manner that does not grant authority to vote with respect to any nominees. The treatment and effect of the corresponding VIF should be the same as that disclosed on a universal proxy card pursuant to Rule 14a-19(e)(7).
The final new C&DI relates to voting matters that may involve an acquisition, even when the acquisition itself did not require shareholder approval. In particular:
Question 151.02 – A registrant closes the acquisition of another company in a transaction in which security holder approval is not required. A portion of the consideration paid in the acquisition consists of convertible securities that, at the holder’s option, can be converted into shares of the registrant’s common stock or, at the registrant’s option, cash. Following the acquisition, the registrant files a proxy statement to solicit security holder approval for the authorization of additional shares of common stock that it could issue upon the conversion of the securities issued in connection with the acquisition. Would the solicitation of security holder approval for the authorization of the additional shares of common stock “involve” the acquisition for purposes of Note A of Schedule 14A?
Answer – A proposal “involves” another matter within the meaning of Note A when information about the other matter that is called for by Schedule 14A is material to a security holder’s voting decision on the proposal presented. The determination as to whether there is a substantial likelihood that a reasonable security holder would consider the information important in making a voting decision on a proposal ultimately depends on all the relevant facts and circumstances.
The authorization of additional shares of common stock is an integral part of the acquisition because it is necessary for the registrant to meet its obligation under the convertible securities issued as consideration for the acquisition. Therefore, the proposal to authorize additional shares of common stock “involves” the acquisition. In such circumstances, the registrant would have to include in the proxy statement information about the acquisition called for by Schedule 14A, unless such information has already been disclosed or sufficient time has passed so that the registrant’s historical filings fully reflect the acquisition.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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