Does E-Proxy Work for Florida Corporations?
The SEC recently amended the proxy rules to permit electronic delivery of proxy materials.1 Under the new “e-proxy” rules,2 companies conducting proxy solicitations, other than solicitations involving business combinations, have a choice on how to provide proxy materials to shareholders. Under the notice and access option, companies can post their proxy materials, including the proxy statement, proxy card and annual report, on a publicly available Web site (other than the SEC’s EDGAR Web site) and send a notice of internet availability of proxy materials to shareholders informing them of the electronic availability of the materials. Alternatively, companies can continue to use the traditional method of delivering printed copies to shareholders. However, beginning January 1, 2008 for large accelerated filers and January 1, 2009 for all other companies, companies that wish to deliver proxy materials in paper will be required to:
- post those materials on a publicly available Web site; and
- include a notice of internet availability of proxy materials informing shareholders of the electronic availability of the materials or include the information in the proxy statement and proxy card.
Companies electing the notice and access option should be able to realize cost savings by printing and mailing fewer copies of the proxy materials. However, corporations incorporated in Florida may not be able to realize the full cost saving benefit of the SEC’s e-proxy rules since the Florida statutes have not been amended to provide for electronic access of annual financial statements.
Florida’s Requirement to Mail Annual Financial Statements
Under Section 607.1620(3) of the Florida Business Corporation Act (FBCA), a Florida corporation must “mail” its annual financial statements to each shareholder within 120 days after the close of its fiscal year, or as soon thereafter as reasonably necessary to enable the corporation to complete the preparation of the financial statements. Under Section 607.01401(17) of the FBCA, “mail” means “the United States mail, facsimile transmissions, and private mail carriers handling nationwide mail services.” “Mail” does not include posting on a Web site. The author commentary to Section 607.1620(3) of the 2007-2008 Florida Business Laws Annotated (the “Annotated Laws”) provides that the section “does not seem to permit electronic delivery, nor is there an indication that the articles might provide for an alternative delivery format. The mail requirement imposes substantial costs upon corporations with numerous shareholders. Consideration should be given to [the legislature] amending the mailing requirement in light of communication advances.”
Section 607.1620(1) of the FBCA provides that shareholders can waive the corporation’s obligation to provide annual financial statements by a resolution approved within 120 days of the close of the fiscal year. However, this resolution must be approved each year, and as indicated in the author commentary to Section 607.1620 of the Annotated Laws, “waiver cannot be accomplished through a standing provision in the articles or by-laws.” For a public company to obtain shareholder approval of the waiver, the company would need to comply with the filing and dissemination requirements of the federal proxy rules in connection with the solicitation of proxies to approve the waiver. This means that a public company would need to conduct two proxy solicitations each year – one for the solicitation of proxies to approve the resolution within 120 days after the end of the fiscal year, and a second solicitation for the annual meeting. Due to costs and timing issues, it would be cumbersome and impractical for public companies to conduct two proxy solicitations each year. Accordingly, there would be no cost savings by using the notice and access option for the annual meeting.
Limit Mailing of Annual Financial Statements to Record Holders
While Florida corporations cannot take full advantage of the SEC’s e-proxy rules, they may be able to take partial advantage of the e-proxy rules by mailing printed copies of the proxy materials only to record holders. While Florida law requires that the annual financial statements be mailed to each “shareholder,” Section 607.0140(24) defines a shareholder as a record holder and a beneficial holder, but only “to the extent of the rights granted by a nominee certificate on file with a corporation.” This definition of shareholder does not appear to include beneficial holders holding in street name, nor does it include the bank and broker participants in the Depository Trust Corporation (DTC) since such holders do not generally have nominee certificates on file with the corporation. Absent nominee certificates on file with the corporation, DTC and the other shareholders included on the transfer agent’s records would be the shareholders who are entitled to receive the annual financial statements under Section 607.1620. It does not appear that the Section 607.0140(24) definition of shareholder was meant to cover a beneficial shareholder who does not have a nominee certificate on file with the corporation, and thus would not include street name holders, because it is not drafted in the same way “shareholder” is drafted for purposes of the dissenters’ rights provisions in Section 607.1301(9). Under Section 607.1301(9), “shareholder” means “both a record shareholder and a beneficial shareholder.” Section 607.1301(2) defines “beneficial shareholder” as “a person who is the beneficial owner of shares held in a voting trust or by a nominee on the beneficial owner’s behalf.” “Record shareholder” under Section 607.1301(7) has the same meaning as “shareholder” under 607.0140(24).
Therefore, a corporation with a small number of record holders and a large number of beneficial holders holding in street name who do not have nominee certificates on file with the corporation, may be able to realize cost savings by mailing printed proxy materials only to record holders and using notice and access for delivery to beneficial holders. In the adopting release, the SEC noted that corporations are not limited to only one delivery method and may use notice and access to provide proxy materials to some shareholders and mail full sets of proxy materials to other shareholders.
E-Proxy Conflicts in Other States
Florida is not the only state whose corporations statutes have not been amended to conform to the SEC’s e-proxy rules. California has a similar requirement under Section 1501(b) of the California Corporations Code to send annual reports to shareholders within 120 days after the fiscal year end. To address the conflict with the e-proxy rules, on
February 21, 2008, a bill was introduced in the California legislature providing that the requirement to send the annual report will be satisfied if a corporation with securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, complies with the SEC’s e-proxy rules. The bill was introduced on a rush basis and if passed by a 2/3 vote, would take effect immediately. The California statute requiring the sending of annual reports may also apply to corporations that are not incorporated in California, but whose principal executive office is in California or whose board meetings are held in California.3
Under Delaware law, the potential conflict with the e-proxy rules arises in the context of the electronic transmission of the notice of the meeting. Under Section 232 of the Delaware General Corporation Law, notice of the annual meeting can be made by electronic transmission, but only if consented to by the stockholder. To avoid the consent requirement under Delaware law, Delaware corporations using the notice and access option should include in the notice of internet availability of proxy materials that is mailed to stockholders the information required to be included in a notice of meeting under Delaware law. Since the notice of annual meeting would not be made by electronic transmission, but would be included in the notice of internet availability of proxy materials, consent would not be required. Rule 14a-16(e)(2) specifically permits including state-mandated information in the notice of internet availability of proxy materials.
Federal Preemption Not AvailableFinally, the federal preemption provided by “The National Securities Markets Improvement Act of 1996” (NSMIA) does not resolve the issue. Section 18(a)(2)(B) of the Securities Act of 1933 (added by NSMIA), which provides that no state law can limit or impose conditions on proxy statements, reports to shareholders and other disclosure documents relating to a covered security or the issuer thereof, specifically does not apply to any laws of the issuer’s state of incorporation.
ConclusionWhile the Business Law Section of the Florida Bar is beginning to work on amending Section 607.1620 to make it consistent with the e-proxy rules, it is unlikely that it will be amended in time for the 2008 proxy season. Florida corporations weighing the costs and benefits of using the notice and access option under the e-proxy rules will need to consider the additional costs of mailing the annual reports to record holders.
1 Release 34-56135 (July 26, 2007), available at http://www.sec.gov/rules/final/2007/34-56135.pdf.
2 Rule 14a-16 under the Securities Exchange Act of 1934, as amended.
3 See Sections 1501(g) and 2115 of the California Corporations Code.