2008 IPO Report - Initial Public Offerings

Recent Developments in the Proxy Environment19Following its IPO, a newly publiccompany becomes subject to theSEC’s proxy rules.In the 2008 proxy season, companiesand shareholders will likely experiencesome important changes in the waysthey communicate, influence and,on occasion, clash with one anotherdue to evolving modifications of theSEC’s proxy rules governing shareholdercommunications and proposals.But the dam will not burst this year,because changes in two criticallyimportant areas will not occur until2009 or later. Accordingly, 2008will be a transitional year in whichsome—but not all—of the emergingregulatory changes will take effect andwill interact with one another in waysthat are now difficult to predict.Regulatory DevelopmentsWhat follows is a brief summaryof some of the most important recentdevelopments that will affect the rightsand obligations of companies andshareholders in 2008 and subsequent years:■Rule 14a-8 Proposals Relating toShareholder Access: In late 2007 theSEC reaffirmed—for the 2008 proxyseason—its longstanding positionthat companies may exclude fromtheir proxy statements any Rule 14a-8proposals (whether binding or precatory)that relate to “shareholder access”procedures allowing shareholders toplace the names of their board nomineesdirectly on the company’s proxy card.■Broker Discretionary Voting: The SECappears likely to leave in abeyance until2009 the New York Stock Exchange’sproposal to prohibit the traditionalpractice of broker-dealers automaticallyvoting street name shares in favor ofcompanies’ slates of director nomineesin uncontested elections in the absenceof specific instructions from the beneficialowners of the shares. Although this isan NYSE proposal, it affects Nasdaqcompanies as well, since the current ruleapplies to voting by all brokers and dealersthat are members of the NYSE, regardlessof where the shares being voted are listed.■Public Statements Made on ElectronicForums: New Rules 14a-2(b)(6) and 14a-17exempt statements made by shareholderson electronic shareholder forums frommost requirements of the proxy rules. Inparticular, communications posted on anelectronic forum more than 60 days priorto an annual meeting will be deemedto constitute an exempt solicitationof proxies, even if the shareholdersubsequently commences a proxy contest.■Electronic Delivery of Proxy Statements:New Rule 14a-16 permits all publiccompanies to post their proxy materialson a website—and requires those that are“accelerated filers” to do so. The companymay elect to have this instantaneouselectronic access (“e-proxy”) constitutedelivery of its proxy materials if it notifiesshareholders in writing about the websiteand offers to send a hard copy by mailupon request. E-proxy delivery can alsobe elected by dissident shareholderswhen mounting a proxy contest.Practical ConsequencesEach of these developments is likelyto modify the cost/benefit analysisand probable outcomes of proxy contestsand withhold vote campaigns:■A shareholder access bylaw, if adopted,would typically require a companyto include on its own proxy card thenames of director candidates nominatedby shareholders who held at least aspecified threshold percentage of thecompany’s outstanding shares, togetherwith the same type of biographicaland other information as required forthe candidates recommended by thecompany’s nominating committeeand, typically, a short statement insupport of the candidates. Shareholderaccess would permit eligible dissidentshareholders to deliver their core messageto all shareholders, side by side with thecompany’s disclosures, at the company’sexpense, by whichever method of delivery(e-proxy or traditional) the companyelected to use for its proxy materials.■Broker discretionary voting hashistorically tended to automaticallydeliver large numbers of votes in favorof official slates of director nomineesin uncontested elections. Eliminating thispractice would require many companiesto extend the solicitation period runningup to their annual meeting and/orcause their proxy solicitors to be moreproactive, in order to ensure that aquorum is obtained, and make it harderfor companies that have implementeda majority voting requirement to obtainmajority support for their nominees.■The new exemption for public statementsmade on electronic forums more than60 days prior to an annual meetingwill encourage dissatisfied shareholdersto begin to make their case againstcurrent management and companypolicies—at zero out-of-pocket cost—well in advance of proxy season withoutworrying about compromising theirability to subsequently commencea proxy contest and without havingto make any SEC filings.■The ability to deliver proxy materialsby the e-proxy method may encouragefull-fledged proxy contests (as distinctfrom withhold vote campaigns) becauseit offers dissident shareholders thepossibility of reducing the printingand mailing costs involved in a fullfledgedproxy contest down to a levelnot greatly in excess of some withholdvote campaigns. Use of e-proxydelivery by companies and/or dissidentshareholders will also change thecustomary timeline for a proxy contestin ways that may benefit the dissidents.These developments will not affectall companies in the same manner.For example, the abolition of brokerdiscretionary voting will makeincumbents’ board seats more vulnerableto withhold vote campaigns at companiesthat have adopted majority voting, butwill not have binding effects at companiesthat have not adopted majority voting.On the other hand, the potentially lowercosts associated with e-proxy deliveryand a more flexible timeline for beginninga publicity campaign against incumbentmanagement on electronic forumsmay tend to encourage proxy contestsuniversally and thereby increase thenumber of successful proxy contests.