With the partial federal government shutdown likely to close the SEC for only a day or two – see this new set of Corp Fin FAQs on the impact of a shutdown, which is essentially the same as the guidance from the last shutdown; there’s a new FAQ #13 on Rule 462(b) about upsizing offerings – let’s focus on something more practical:
A preliminary proxy statement is a draft of the proxy that is filed with the SEC – in certain specified circumstances as required by an SEC rule – before the final, known as the “definitive” version, is filed. Here’s something that can be called a niche area that you’ll bump up against every so often if you deal with proxies regularly – the need to file a preliminary version of your proxy with the SEC before you can file the final definitive version and start delivering it. This is an important area to know because it can really screw up the timing of when you’re allowed to deliver your proxy to shareholders.
Rule 14a-6(a) is worded so that all proxies are required to be filed in preliminary form unless the matters on your ballot fall within the eight carve outs listed in the rule. As it happens, the carve outs include many of the items that typically are on a ballot – director elections, ratification or approval of auditors, shareholder proposals, say on pay and say on frequency, and approval of employee equity plans or amendments (except for specific awards).
Then, beyond these eight carve outs, the Corp Fin staff has issued a few interpretations to create carve outs beyond the rule. That said, there are plenty of circumstances that do trigger the need to file a proxy – charter amendments, an increase in authorized shares, specific awards under an equity plan, changing the company’s name and proxy contests.
Here are two mistakes related to preliminary proxy statements that are sometimes made (I will blog about three more next time):
1. Forgetting Corp Fin may delay a proxy for weeks
Rule 14a-6(a) states that a preliminary proxy statement must be filed at least 10 calendar days before the filing of the definitive proxy statement. The purpose of this 10-day period is to give the Corp Fin staff a chance to screen the preliminary proxy statement and determine if it will review the filing. If the filing is indeed pulled for review, the staff will likely issue written comments – in the form of a letter – that results in some back and forth. That takes time and can really screw up a tight timeline to get your proxies delivered timely before the annual shareholders meeting is held.
Not all preliminary proxies are selected for review – but they almost always are for proxy contests or a deal to go private. The date of filing the preliminary proxy with the SEC is considered day one if submitted on or before 5:30 pm ET. If the end of the 10-day review period ends on a weekend or a holiday, the company can file the definitive proxy as soon as EDGAR opens for the week. So, if you file on a Friday, two weekends will fall within your 10-day waiting period.
You can call the Corp Fin staff to request early termination of this 10-day period if you’re in a timing bind. Have your persuasive arguments ready – tight deadlines may be enough. The good news is, if you call and they tell you it won’t be reviewed, you’re good to go. You can file your definitive proxy and deliver.
If you file a preliminary proxy and you have not heard from the staff within 10 calendar days from the date of your filing, you are free to print and mail at that point. You don’t have to call the staff to confirm that you’re clear. It’s sort of a strange process – that you’re clear if you don’t hear anything from the staff.
Some people still call the staff, even though they don’t need to. Some folks just like to be sure. If you do call the SEC, instead of telling you they’re not going to review, they almost always say: “If you don’t hear from us in 10 days, you are free to print and mail.” So, you’re not likely to hear some golden words from an SEC staffer – even though the language in Rule 14(a)-6(a) states, “or such shorter period … upon a showing of good cause.”
Here’s the bummer. If your preliminary proxy is picked for review, your timeline for printing and mailing your proxy can be affected. A Corp Fin review can last anywhere from 10 days to several weeks. So, you need to assume it’s picked for review and build that into your T&R schedule. You may need to file a revised preliminary proxy to clear comments before you even file your definitive depending on the severity of the staff’s comments. The staff will guide you here; you don’t have to guess how severe their comments are. If you do file a revised proxy, provide a redlined version to the staff to facilitate their review and get clearance as soon as possible.
Although the proxy rules don’t require that the SEC officially “approve” or “clear” the preliminary proxy, you want to wait to file a definitive proxy until the staff has indicated that it has no more comments. Some staffers take it personally if a company files the definitive before the preliminary is cleared. I know I did the one time that happened to me when I was on the staff.
The upshot here is that if you know your ballot will include one or more items that trigger the need to file a preliminary proxy, you really do need to adjust your T&R so that you file this thing weeks before you intend to delivery your proxy to shareholders. Note 2 to Rule 14a-(6)(a) urges you to file the proxy on the “earliest practicable date.” This is easier said than done for sure because there often isn’t that type of wiggle room in your schedule. But you gotta do what you gotta do.
2. Filing a revised preliminary for immaterial changes
Note 1 to Rule 14a-6(a) requires companies filing a revised preliminary proxy retrigger the 10-day waiting period if the revised filing contains material revisions – or a material new proposal – that constitutes a “fundamental change.” These are terms for which there is not much SEC staff guidance; it’s a facts and circumstances determination. Calling the staff to ask if revisions are “material” or your new proposal is a “fundamental change” is a waste of time. They don’t weigh in on that – you know your circumstances better than they do.
If the revised preliminary proxy contains an additional proposal that would not, on its own, have required a preliminary filing – like an amendment to an equity compensation plan – there is a good argument that it’s not a fundamental change. Sometimes companies file a preliminary proxy due to “Proposal A,” but before the definitive proxy is filed, they decide to take action on a matter unrelated to Proposal A that results in changing the disclosure elsewhere in the proxy.
Some companies decide to do this update in the definitive proxy and don’t file revised preliminary materials. They want to avoid resetting the 10-day clock, and do so under the argument that the presence of the new information doesn’t trigger a requirement to file a preliminary proxy.
Since the Corp Fin staff has broad discretion to decide what it wants to review and comment upon about once you file a preliminary proxy, it can be dicey to think you can assume that the information you change or add isn’t going to be relevant to the staff just because that information doesn’t have anything to do with the proposal that triggered the preliminary filing in the first place.
But I do think this happens more often than not in practice because time is almost always tight and you don’t have an extra 10 days to spare.
Part 2 of this blog is coming soon…
Authored by
Broc Romanek