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Release No. 33-7760 Release PDF

Release No. 34-42055

Release No. IC-24107

Securities and Exchange Commission
 

Regulation of Takeovers and Security Holder Communications

Section II.C

Table of Contents

II. Discussion of New Regulatory Scheme

C. Communications Under the Proxy Rules

1. Rule 14a-12 Expanded

We are revising Rule 14a-12,68 substantially as proposed, to permit both written and oral communications before the filing of a proxy statement so long as all written communications related to the solicitation are filed on the date of first use.69 This is the same filing requirement adopted for the communications exemption under the Securities Act.70 This exemption is not limited to business combination transactions, but is available regardless of the subject matter of the solicitation. Oral communications do not need to be reduced to writing and filed. In revising Rule 14a-12, we retain substantially all the proposed conditions to reliance on the exemption. These conditions are that no form of proxy is furnished until a proxy statement is delivered, the obligation to disclose participant information, and the requirement to file all written communications with a prominent legend advising security holders to read the proxy statement.

As a result of these changes to Rule 14a-12, management can communicate more freely with security holders about significant corporate events, including a proposed merger or acquisition, or other significant corporate governance matters that may require a security holder vote. Likewise, security holders are able to communicate more freely with one another. The revised rule does not, however, expand a company's or security holder's ability to secure promises to vote a certain way before a proxy statement is provided.71 The expansion of Rule 14a-12 to non-contested matters is premised on the same rationale for increasing communications related to business combination transactions under the Securities Act. We recognize the many recent developments in technology that have enabled companies to communicate more frequently with security holders at a significantly reduced cost. In addition, security holders and the markets are demanding more information from public companies about new developments and proposed transactions. In light of the rapid pace of change in the securities markets and developments in technology, we believe the time has come to update the proxy rules to permit security holder communications to flow more freely and to facilitate a more informed security holder base.

We believe that the requirement to file all written communications, the condition that no proxy or form of proxy be furnished to security holders before a written proxy statement is delivered, and the requirement to include a legend on all written communications advising security holders to read the proxy statement and where to find participant information should be sufficient to protect against misleading solicitations. Together with the antifraud provisions of Rule 14a-9,72 these requirements should maintain the integrity of the solicitation process and adequacy of information disseminated to security holders.73 In addition to these safeguards, security holders will receive a complete proxy statement before they can vote.

In the Proposing Release we solicited comment on whether a federally mandated proxy solicitation period would be appropriate for mergers and similar transactions in light of the free communications permitted under the exemption. We noted that security holders may need a minimum amount of time (e.g., 20 business days), similar to that in tender offers, to digest the free communications together with the information in the proxy statement. Most commenters that responded to this question were opposed to a minimum solicitation period. Because this is an area that traditionally has been governed by state corporate law, and in light of the improved ability of security holders to access information though electronic means, we believe that the existing solicitation periods are adequate. We are not adopting a minimum solicitation period at this time.

We also asked whether the proxy rules should be amended to permit direct delivery of proxy statements and other soliciting materials to non-objecting beneficial owners to facilitate more timely and informed voting decisions. We were concerned that security holders holding securities in street name may not receive materials from banks, broker-dealers, or other nominees in a timely fashion. While we believe that direct delivery of proxy materials to non-objecting beneficial owners may have benefits for security holders, at this time we reserve this concept for a future rulemaking project.

a. The "As Soon as Practicable" Requirement

Many of the commenters urged us to revise the current and proposed condition in Rule 14a-12 that a written proxy statement meeting the requirements of Regulation 14A be sent or given to solicited security holders at the earliest practicable date. These commenters pointed out that, in practice, when the purpose of a solicitation becomes moot or the solicitation is otherwise discontinued, persons making pre-filing communications in reliance on the rule generally do not, and should not be required to, send security holders a written proxy statement. We recognize that literal adherence to the delivery requirement in Rule 14a-12 in circumstances where a solicitation is canceled prematurely may not provide a significant benefit to security holders, but could result in unnecessary costs to the soliciting parties and potentially mislead security holders into believing that the solicitation is ongoing.

In view of these concerns, current practice, and the overall approach to communications adopted today, we are eliminating the current "as soon as practicable" requirement. As revised, Rule 14a-12 requires that a definitive proxy statement be furnished to security holders when a form of proxy is either given to or requested from security holders.74 When proxies are first requested from security holders the mandated disclosure document must be delivered to them so they can make informed voting decisions. This approach is consistent with the delivery requirements adopted under the other regulatory schemes.75 As a result, parties relying on the rule are not obligated to furnish a written proxy statement if the solicitation is discontinued for any reason. If a solicitation is discontinued, we believe it would be appropriate for the soliciting persons to inform previously solicited security holders that the solicitation is over and provide a brief explanation of why it is being canceled.

b. Participant Information

We are modifying the current requirement to disclose participant information in proxy materials. Instead, the revised rule requires a prominent legend on written communications advising security holders where they can obtain a detailed list of the names, affiliations and interests of participants in the solicitation.76 Of course, the soliciting materials could include the participant information in full, as currently required, instead of a legend.

The legend may refer to either a previously filed communication that contains the participant information, or a separate statement that contains the participant information and is filed as Rule 14a-12 material.77 We are not eliminating the requirement to make participant information available to security holders. Rather, we are requiring disclosure of this information once instead of in every communication.

c."Test the Waters"

In addition to our proposal to expand Rule 14a-12, we solicited comment on adopting a broader "test the waters" approach to proxy solicitations. Under this approach, parties could engage in soliciting activities without filing proxy material so long as no form of proxy is requested or sent. Test the waters would permit both written and oral proxy solicitations before the filing of a proxy statement. Unlike the proposed expansion of Rule 14a-12, however, test the waters would not require written communications to be filed on first use.

Many commenters favored our concept of test the waters, but a few commenters expressed concern that it could result in unregulated and secret solicitations. At this time, we believe that our expansion of Rule 14a-12, as adopted, should provide sufficient flexibility to companies to communicate more frequently with security holders on a timely basis. After we gain some experience with communications under the expanded Rule 14a-12, depending on its effects, we may consider moving toward a test the waters approach in future rulemaking.

2. Limited Confidential Treatment of Merger Proxy Materials

Today, a proxy statement relating to a merger, consolidation, acquisition or similar matter may be filed confidentially with the Commission.78 If the staff decides to review the proxy statement it may issue comments to the filing parties. When all comments are resolved, a public filing is made _ either a definitive proxy statement or, if securities are being offered, a registration statement that wraps around the proxy statement. We proposed to eliminate the provision for confidential treatment. We note the practice of disclosing extensive deal-related information to the market before a registration statement or proxy statement is filed publicly. We do not believe that material public information regarding a merger should receive confidential treatment.

Many commenters opposed eliminating confidential treatment due to a concern for increased liability. These commenters pointed out that they may be required to make revisions to their proxy statement disclosure in response to staff comment that would be subject to unnecessary public scrutiny. It is not clear, however, why the proxy statement situation warrants different treatment from exchange offers and other public filings that are routinely amended in response to staff comment. One commenter suggested that we retain confidential treatment when the parties to a transaction do not publicly disclose information about the transaction outside the proxy statement.

We have decided to retain confidential treatment under limited circumstances. Where the parties to a merger or other business combination transaction limit their public communications to those specified in Rule 135,79 confidential treatment will continue to be available for the proxy materials. If, however, the parties elect to publicly disclose, either orally or in writing, information relating to the transaction that goes beyond Rule 135, confidential treatment will not be available.80

As a result, the parties to the transaction may choose either to forgo confidential treatment and communicate publicly about the deal in reliance on one of the new exemptions, or invoke confidential treatment and refrain from any publicity outside the proxy statement, except for the basic information permitted by Rule 135. We will use Rule 135 as a bright line in determining whether parties to a transaction have publicly disclosed sufficient information to the point that confidential treatment of the proxy materials is no longer warranted. This bright line will be applied whether or not the transaction is subject to the Securities Act and Rule 135. If a preliminary proxy statement is filed confidentially, but information beyond Rule 135 is subsequently disclosed, confidential treatment will no longer be available and all proxy materials related to the transaction must be filed publicly.

Two commenters recommended that we institute a procedure that would allow parties to seek an expedited, confidential pre-filing review of pro forma financial statements and other accounting matters if confidential treatment is eliminated. Currently, parties are permitted to, and frequently do, initiate pre-filing conferences with our accounting staff to resolve sensitive accounting issues before the filing a merger proxy statement. Our accounting staff will continue to be available for pre-filing conferences with filing parties.

Several commenters also indicated that if we decided to eliminate confidential treatment, we should not require that all exhibits be filed with the first public filing of the proxy statement. These commenters noted that in many cases some exhibits may not exist or are not in final form when the proxy statement is first filed. The limitation on confidential treatment adopted today would not require that all exhibits be filed with the initial filing of a proxy statement. As is the case today, a proxy statement may be filed first, without any exhibits. Schedule 14A does not have any exhibit requirements. Exhibits could be filed at a later date when the registration statement is wrapped around the proxy statement. If all exhibits are not final or complete at the time the registration statement is first filed, then those exhibits could be filed in an amendment to the combined proxy statement/registration statement.

3. Timing of Filings

Rule 14a-6(b) requires that definitive proxy materials be "filed with, or mailed for filing to, the Commission not later than the date such material is first sent or given to security holders."81 Similar language appears in several other proxy and information statement filing rules.82 The mailing alternative, however, is no longer an option because companies must file electronically.83 Therefore, we are amending the proxy and information statement filing rules as proposed to require filing no later than the date the materials are first sent or given to security holders.84 This change is consistent with the filing requirements imposed under the exemptions adopted today.

We continue to believe that definitive materials should be available to security holders, the market and the staff as promptly as possible. EDGAR and other electronic sources of information, including the Internet, increasingly are relied upon by the investment community for information regarding public companies. When there is a lag between the time information is first disseminated and the time it is filed, persons relying on our filings for information on public companies are placed at a disadvantage.

Footnotes

68 The expansion of Rule 14a-12 to cover all solicitations eliminates the need for many of the provisions in Rule 14a-11. As a result, we are rescinding Rule 14a-11 and moving paragraphs (d) and (f) of Rule 14a-11 to new Rule 14a-12. These two provisions apply if soliciting persons refer to information in annual reports or use reprints or reproductions of previously published materials in their soliciting materials. Revised Rule 14a-12 makes it clear that these provisions are limited to election contests.

69 Written communications by soliciting parties before a proxy statement is furnished to security holders must be filed on the date of first use and must provide information regarding the participants and their interests or include a legend advising security holders where they can obtain this information. See revised Rule 14a-12(a)(1). Once a proxy statement is furnished to security holders, any additional soliciting materials used must be filed on the date of first use but need not include participant information or a legend advising where to obtain that information. See revised Rule 14a-6(b).

70 Communications under revised Rule 14a-12 generally will be filed under cover of the proxy statement cover sheet, with the Rule 14a-12 box checked. If a transaction is subject to the Securities Act in addition to one or more of the other regulatory schemes (i.e., the proxy or tender offer rules), the written communications only need to be filed under Securities Act Rule 425. Although the materials are only filed under the Securities Act, they also would be deemed filed and take liability under the proxy or tender offer rules, as applicable.

71 Similarly, the revised rule does not change a security holder's obligation under Section 13(d) of the Exchange Act [15 U.S.C. 78m(d)] to file or amend a Schedule 13D [17 CFR 240.13d-101] when a voting arrangement, agreement or understanding is reached with respect to a company's securities.

72 17 CFR 240.14a-9.

73 We note that a communication relating to an investment company that is permitted by Rule 14a-12 generally would have omitted to state a fact necessary in order to make the statements in the communication not materially misleading unless the communication includes the information specified in Rule 34b-1 under the Investment Company Act of 1940.

74 Revised Rule 14a-12(a)(2).

75 For example, in Part II.D.1 below, we are revising the definition of commencement in the tender offer rules so that a complete tender offer statement need not be filed and disseminated until the means to tender are provided to security holders.

76 In response to our question asking whether to retain the requirement to disclose the names of all participants and their interests, several commenters expressed the view that the requirement has resulted in lengthy and boilerplate disclosure that can be costly for participants without providing any significant benefit for security holders.

77 The information must be filed under cover of Schedule 14A with the appropriate box on the cover page checked to designate that the material is filed under Rule 14a-12.

78 Rule 14a-6(e)(2) [17 CFR 240.14a-6(e)(2)].

79 Rule 135 generally exempts from the definition of "offer" any notice that states no more than specific limited information; see n.60 above. The Rule 135 limit on communications would apply to all parties to the transaction and anyone acting on their behalf in communicating to the public.

80 Revised Rules 14a-6(e)(2) and 14c-5(c)(2). Confidential treatment will continue to be unavailable for going-private or roll-up transactions.

81 17 CFR 240.14a-6(b).

82 See Rules 14a-4(f) [17 CFR 240.14a-4(f)], 14a-6(c) [17 CFR 240.14a-6(c)], 14a-11(c) [17 CFR 240.14a-11(c)], 14a-12(b) [17 CFR 240.14a-12(b)] and 14c-5(b) [17 CFR 240.14c-5(b)].

83 See Rule 101(a)(1)(iii) of Regulation S-T [17 CFR 232.101(a)(1)(iii)]. Paper filings are permitted only if a hardship exemption is available. Foreign private issuers that are not required to file electronically are exempt from the proxy and information statement requirements. Exchange Act Rule 3a-12-3 [17 CFR 240.3a-12-3].

84 We also are adopting the proposed clarification to Rule 13(d) of Regulation S-T. The revised rule makes it clear that if a communication takes place after our official business hours (i.e., 5:30 p.m. Eastern time) or on a non-business day, the communication must be filed electronically on EDGAR the following business day. This revision supersedes the interpretive position expressed by the Division of Corporation Finance in Henry Lesser, Esq. (November 28, 1995). This provision applies to all our rules that require filing on the same date that information is furnished, including the Securities Act, proxy and tender offer rules.

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