SEC Updates Compliance and Disclosure Interpretations of Proxy Rules, Schedules 14A/14C

May 30, 2018

On May 11, 2018, the U.S. Securities and Exchange Commission’s Division of Corporation Finance issued a consolidated set of Compliance and Disclosure Interpretations (C&DIs) of the proxy rules and Schedules 14A/14C. The updated 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. The SEC identified:

  • six (C&DIs 124.01, 124.07, 126.02, 151.01, 161.03 and 163.01)  as reflecting substantive changes; and
  • four (C&DIs 126.04, 126.05, 158.01 and 158.03) as reflecting technical changes.

The C&DIs make clarifications and address a number of issues, 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.

Question 124.01

  • Question 124.01: 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.

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. Disclosure of this information only in the proxy statement is not sufficient under this revised interpretation.

Question 124.07:  

  • Question 124.07:  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 disclosed 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)?
  • Answer: No.

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 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 timely non-Rule 14a-8 proposals will have 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.

Question 126.02:

  • Question 126.02:  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 (Dec. 21, 1987), 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.

The previous interpretation addressed a name change to remove the surname of a long-dead founder. The updated C&DI makes it clear that no preliminary proxy is required for any corporate name change and is not limited to a name change to remove a founder’s surname.

Question 151.01

  • Question 151.01:  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.

Question 151.01 clarifies that a registrant does not have to include Regulation S-K Item 11, 13 and 14 financial disclosures in a proxy solicitation to authorize additional common stock for issuance in a public offering where the company has alternative means to fully pay for a recently announced acquisition (such as available credit under an executed credit agreement in the full amount of the acquisition consideration) and will not use the cash proceeds from the public offering to pay a material portion of the acquisition consideration. 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.

Question 161.03

  • 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 “0”?
  • Answer: Yes. Alternatively, the registrant can choose to identify any individual or group for which the award and benefit information to be reported is “0” through narrative disclosure that accompanies the New Plan Benefits Table.

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. 

Question 163.01

  • Question 163.01:  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.

Question 163.01 clarifies that a registrant is required to include the Regulation S-K Item 13 financial information (e.g., Management’s Discussion & Analysis, financial statements, qualitative and quantitative market risk disclosures, etc.) 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.

Technical changes were addressed in Questions & Answers 126.04, 126.05, 158.01 and 158.03, which are summarized as follows:

  • C&DI 126.04 — A Form S-4 filer must wait to send the proxy card until after the Form S-4 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. 
  • 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 C&DIs include other helpful (but not new) guidance, including clarifications about how to determine if a proponent’s notice of a non-Rule 14a-8 matter is timely, how to calculate the 10-calendar period between a preliminary proxy and the definitive proxy statement, how to meet disclosure requirements regarding compensation plans, and which types of transactions or proposals require Item 13 information in the proxy statement. 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. 

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