The DR Proxy Process Best Practice Review

Transcription

1 The DR Proxy Process Best Practice Review February 2009 J.P. Morgan DR Group

2 The benefits of a sponsored depositary receipt (DR) program are numerous. 1 However, a DR program can add to the inherent complexity of the proxy voting process associated with shareholders meetings. In addition to satisfying the logistical and regulatory challenges of its home market, a DR issuer must take into account the relevant proxy requirements of the stock exchange where the DRs are listed or the markets in which they trade. By working closely with its depositary bank to plan and coordinate the DR proxy process, an issuer can maximize DR holder participation in a shareholders meeting and may attract corporate governance-conscious investors to the facility. The participation of DR investors in a shareholders meeting is influenced by a number of factors, which include the company s home-market requirements, time available for DR holder s to vote, various proxy mechanisms and regulations, the type of DR program in place, and the deposit agreement governing the DR facility. For example, the distribution of proxy voting materials to a holder of a London Exchange-listed Global Depositary Receipt (GDR) will differ from the process applicable to a New York Stock Exchange-listed American Depositary Receipt (ADR) holder. Finally, voting rights detailed in the deposit agreement governing the DR facility may differ from one issuer program to another, even among DRs with otherwise similar characteristics. To assist issuers in their efforts to encourage participation by DR holders in the voting process, J.P. Morgan s Depositary Receipts Group has compiled some insights into best practices for annual as well as extraordinary shareholders meetings. We hope these will help issuers successfully plan, coordinate and execute the dissemination of proxy materials to, and subsequently collect voting instructions from DR holders. Planning the DR proxy process To ensure successful DR proxy voting for the shareholders meeting, early planning is essential. Accordingly, J.P. Morgan recommends beginning the preparations for the following year s shareholders meeting by identifying possible enhancements shortly after the conclusion of the current year s meeting. Voting results, the meeting timeline and DR holder participation in particular should all be reviewed to identify where and how the shareholders meeting process might be improved with respect to DR holders. The Client Services and Transaction Advisory teams of J.P. Morgan s Depositary Receipts Group can assist an issuer with developing and implementing an evaluation process that can help pinpoint which DR proxy processes most warrant reassessment. For example, if DR voter participation was lower than anticipated, the retention of a proxy solicitor or an earlier mailing date are two solutions that might be worth considering. J.P. Morgan also recommends that its DR issuers provide their Depositary bank with the shareholders meeting dates and the agenda items even if on a confidential basis as early as possible, ideally at least six weeks prior to a meeting. In our experience, this should provide the Depositary bank with enough time to prepare the voting instruction card and distribute proxy materials while allowing DR holders sufficient time to make a voting decision and return their voting instructions before the voting deadline. 1 For more information about depositary receipts, please refer to J.P. Morgan s reference guides, which can be found on Page 2 J.P. Morgan DR Group

3 For those issuers with an ADR program who plan to distribute printed proxy materials to ADR holders, J.P. Morgan recommends conducting a preliminary broker search at least three months in advance of an expected meeting date. J.P. Morgan can arrange such a search through Broadridge Financial Solutions ( Broadridge ), a financial services vendor that facilitates the distribution of proxy materials for most bank and broker nominees in the United States. The number of beneficial holders revealed as a result of a preliminary search can help the issuer and its Depositary bank more accurately estimate printing requirements and costs and determine whether a proxy solicitor would be needed. Common proxy materials distributed or made available to DR holders: Voting Card Notice of Meeting and Agenda Annual Report (hard copy or internet) Financial Statement (hard copy or internet) Meeting announcement and timeline Once a meeting date has been decided, J.P. Morgan and the issuer establishes a DR holders meeting timeline, to include a record date, a distribution date for proxy materials, and a voting deadline. DR issuers must follow the rules of the market on which their DRs are listed when planning their meeting dates. Printing and shipping schedules, the types of materials to be disseminated to DR holders, the distribution method employed and local market voting deadlines all have a bearing on a meeting timeline. Once these dates have been confirmed, the issuer and Depositary bank must notify the relevant exchange and market participants as required. The DR voting record date determines which DR holders will be entitled to vote. Where possible, J.P. Morgan will arrange for it to coincide with the voting record date in the issuer s home market. In cases where the home market record and meeting dates are in close proximity, J.P. Morgan will establish the DR record date in advance of that in the home market. Mailing and voting deadlines established by J.P. Morgan will be set to allow DR holders sufficient time to receive proxy materials and submit their votes. J.P. Morgan will also allow sufficient time to tabulate and provide the voting results to the issuer, directly and/or via the custodian holding the shares that underlie the DRs. Typically it is recommended that an issuer aim to mail DR holders meeting information about four weeks prior to the DR voting deadline. J.P. Morgan DR Group Page 3

4 Recommended shareholders meeting timeline for DR issuers Timeline (days) Initiate broker search for certain DR issuers DR Record Date AGM -90 (days prior to AGM) /3-1/2 + 1 Issuer announces date of AGM/EGM Issuer provides Depositary bank with meeting agenda and proxy materials; if applicable, exchange is notified Mailing of proxy materials Registered¹ and Beneficial² holders return votes ADR voting deadline Local voting deadline Depositary bank tabulates DR votes and gives results to custodian and/or Issuer Review process to consider future improvements to DR proxy process ¹ Registered holders: DR holders owning DRs in their own name and appearing on the DR share register maintained by the Depositary ² Beneficial holders: DR holders who actually receive the benefits of owning a particular share (dividends, voting rights, share price increase). These shares are held in street name by banks and brokers via The Depository Trust Company (DTCC), the world s largest securities depository. Record dates Below are the record date requirements for the major markets on which DRs trade: NYSE-listed ADRs 1 Section of the Listed Companies Manual states that the NYSE must be given a minimum notice period of 10 days prior to a meeting record date or prior to a change in a record date. ( NASDAQ-listed ADRs 1 NASDAQ does not require notification of a shareholders meeting record date. OTC traded ADRs 1 There are no preannouncement requirements imposed on ADRs trading in the U.S. over-the-counter (OTC) markets. NASDAQ s PORTAL market (for 144A ADRs) 1 No meeting notification requirements. 1 In instances where beneficial owners with DRs held in street name are to receive materials, Broadridge (which mails to beneficial holders on behalf of financial institutions in the US) must be notified three days in advance of a record date in order to execute a broker search. Page 4 J.P. Morgan DR Group

5 London Stock Exchange-listed GDRs The London Stock Exchange does not require prenotification of a shareholders meeting record date. Luxembourg-listed GDRs In instances where DR holders are afforded the opportunity to vote pursuant to the terms of a deposit agreement, shareholder meeting notices must be submitted by the issuer for posting on the LuxSE s Web site or be published in a local Luxembourg newspaper. The voting instruction card Based on resolutions detailed in the agenda for the shareholders meeting, the Depositary bank will draft a DR proxy voting card for the issuer s review and approval. Once finalized, this voting card, which includes voting options and instructions, will be distributed to DR holders, along with the meeting agenda and any additional proxy materials that the issuer wishes to distribute, such as an annual report or financial statement. Distribution of proxy materials If printed proxy materials are to be distributed to DR holders in addition to a voting instruction card, J.P. Morgan will confirm with the issuer the number of sets required as well as shipping instructions. As a best practice, such materials should be provided in English. Alternatively, issuers may choose to make their proxy materials available through a Web site, the URL of which J.P. Morgan would include on the DR voting instruction card. Companies with an ADR program may wish to take advantage of relatively new U.S. Securities and Exchange (SEC) rules pertaining to electronic delivery of proxy materials. With the implementation of these mandatory proxy distribution rules, U.S. companies as well as foreign issuers can potentially benefit from reduced material delivery times and postage costs by utilizing the electronic distribution of proxy materials. While U.S. proxy rules do not apply to foreign private issuers, electronic distribution following a notice only method (commonly known as the notice and access method) may allow DR issuers with a significant registered shareholder base, a less expensive and environmentally-friendly alternative to providing DR holders with printed proxy materials. Some details on U.S. proxy distribution rules and the potential application of the notice-only method for ADR programs are provided beginning on page 7. Registered DR holders those investors whose names appear on the register maintained by J.P. Morgan are sent a voting card and, if made available, printed proxy materials. To vote, holders complete, sign and mail the voting card. J.P. Morgan-sponsored DR programs with 100 or more registered holders are also given the option to vote by telephone or via the Internet. Registered holders who have agreed to receive proxy materials electronically will receive an announcement of the meeting as well as instructions on where related documents can be viewed and how voting instructions can be submitted. Most U.S. investors hold their securities through a bank or broker participant of the Depository Trust Company, or DTC, the world s largest central securities depository. Most U.S. institutions safekeep, trade and settle their securities through DTC. In excess of 95% of these financial intermediaries currently retain Broadridge to distribute proxy materials to their beneficial owner clients. In instances where their votes are solicited, beneficial DR owners, including major institutional holders, can manage and vote their proxies through Broadridge via the Internet, by telephone or by signing and returning a proxy card to this intermediary. J.P. Morgan DR Group Page 5

6 With respect to GDR programs, information regarding shareholder meetings is disseminated though Euroclear and Clearstream, the two main European clearing houses. In these instances, and if stated in the relevant deposit agreement, J.P. Morgan provides proxy materials and a voting instruction card via to Euroclear and Clearstream. In turn, they will make this information available electronically to their participant financial institutions (i.e., banks and brokers). Beneficial holders are notified by and vote through these participants which then remit the instructions to J.P. Morgan through Euroclear and Clearstream. Voting by DR investors Having distributed the voting cards to DR holders, what level of participation can an issuer expect? Several factors influence the percentage of votes cast by DR holders: Timely distribution of proxy materials As previously mentioned, since most DR investors hold their shares through financial intermediaries, they do not receive proxy materials directly from a Depositary bank. Brokers, or Broadridge acting on their behalf, have up to five business days to forward materials to beneficial owners once they have received them from the Depositary bank. In the case of GDRs, the voting instructions are cast through Euroclear and Clearstream by the financial intermediary of the investor or their agent. Logically, the sooner proxy materials are distributed, the more time DR holders have to review the resolutions and cast their vote. Proxy solicitation A third-party proxy solicitor may be retained to contact investors directly to inform them of the shareholders meeting (it is not unusual for investors to be unaware of an upcoming meeting) and if necessary, assist them with the voting process. The solicitor s role is typically to create awareness of the meeting, but these firms also provide advisory services to issuers, related to planning, logistics and meeting presentations. A solicitor might be particularly useful to an issuer that recently launched a DR program or one that requires a significant percentage of DR holder participation to achieve the required meeting quorum. Issuers should endeavor to ensure these solicitors have sufficient time to perform these and other functions. Restricted free float Where a single or small number of shareholders own a large percentage of outstanding shares, minority investors may be discouraged from participating as their vote will be unlikely to influence the outcome. The meeting agenda Shareholders are more likely to vote when a corporate resolution is contentious or a major corporate action, such as an acquisition or divestment, is to be decided. In these circumstances, proxy solicitors are often appointed to achieve the vote outcomes that management and the Board of Directors desire. Available and accessible information To encourage shareholder response to a proxy vote, companies should have information that is easily accessible on their Web site or distributed in a timely way if the proxy materials are paper-based. Each resolution should be stated clearly and succinctly to ensure that it is understood by shareholders. Tabulation of DR votes A Depositary bank tabulates the proxy votes it receives from registered DR holders and combines that tally with the votes it has received from Broadridge and/or from Euroclear and Clearstream on behalf of beneficial DR holders. Page 6 J.P. Morgan DR Group

7 Subsequently, J.P. Morgan instructs its local-market custodian or, in some cases, the issuer directly, to vote the underlying shares accordingly, pursuant to the terms of the relevant deposit agreement. To summarize our suggested approach to the DR proxy process, we recommend that DR issuers: Build a financial calendar with enough time for DR holders to receive proxy materials and submit proxy votes; Provide meeting information to the Depositary bank as soon as possible to allow sufficient time for planning the DR proxy process, and allow at least four weeks for DR holders to review proxy materials and vote; Utilize electronic distribution of proxy materials for a shareholders meeting, where possible and if permissible by securities regulations. Including a Web site address on the DR voting card where proxy materials can be reviewed in lieu of distributing hard copies of these materials may speed the delivery to DR investors and reduce costs; Allocate sufficient time for the preparation and translation (if necessary) of proxy materials for DR holders, especially when paper-based versions will be mailed; Allow additional time for planning when the meeting agenda contains more than 15 resolutions, to allow the related logistical challenges to be adequately addressed. Overview of notice and access Under the SEC s final rules for proxy distribution, U.S. issuers are required to post their proxy materials on an Internet Web site. However, these issuers can choose between two alternative methods of distributing proxy materials: a notice-only option or a full-set-delivery option (which still requires an Internet posting) for issuers who are unable to meet the timing requirements of the other option alone, or who prefer not to use it. 1 Under the notice-only or notice-and-access, method of distribution, issuers are required to send to shareholders, at least 40 calendar days before the date of a shareholders meeting a notice advising them of the availability of proxy materials on an Internet Web site. ADR issuers with over 4,000 beneficial holders may want to use the notice-only method to distribute proxy materials to their ADR holders, as this can reduce printing and mailing costs (particularly if the company normally sends large documents, such as an annual report, along with other proxy materials). As foreign issuers are not subject to the SEC s proxy distribution rules, they may be able to utilize the procedures outlined under the noticeonly method without necessarily following all the specific requirements of the U.S. rules, provided other securities regulations are not violated in the process. While some form of the notice-only method may be available to ADR issuers, proxy-related costs are not entirely eliminated. Processing fees are still assessed by Broadridge for notice and access processing applicable to the accounts of its nominee clients (further information can be found on their website: 1 For more information regarding the SEC s rules on mandatory Internet distribution of proxy materials, please refer to J.P. Morgan s August 2007, paper or the SEC s final rule release, which can be found on or sec.gov, respectively. J.P. Morgan DR Group Page 7

8 The Client Services and Transaction Advisory teams of J.P. Morgan s Depositary Receipts Group can work with client issuers to develop the most cost-effective and efficient method of proxy material distribution based on the type of DR program, the relevant regulatory requirements applicable to the DRs and in the issuer s home market, and on the voting provisions outlined in the deposit agreement. Corporate governance advisory firms Institutional investors often rely on the recommendations provided by corporate governance advisory firms, such as ISS Governance Services (a unit of the Riskmetrics Group), Glass Lewis & Co., Egan Jones, Manifest and Proxy Governance, for proxy voting guidance. Some of these firms also advise issuers on corporate governance matters. ISS is the largest and most influential of these advisory firms. For additional information, discussion and resources on corporate governance matters, please note the following sources: International Corporate Governance Network ( ICGN ) [icgn.org] ICGN aims to improve corporate governance globally by facilitating dialogue. The group comprises mainly of international pension funds and institutional investors such as CalPERS, Fidelity, Association Francaise de la Gestion Financiere and Barclays Global Investors. ICGN membership includes institutions from all over the world, including Russia, Bangladesh, the United States, United Kingdom, Sweden, the Netherlands and South Africa, whose combined assets total more than $10 trillion. Corporate Governance Encyclopedia ( Encygogov ) [encycogov.org] Encycogov aims to provide a Web-based resource about topics that are relevant for the understanding of issues in corporate governance. European Corporate Governance Institute ( ECGI ) [ecgi.com] ECGI is an international, nonprofit association that provides a forum for debate and dialogue between academics, legislators and practitioners, focusing on major corporate governance issues and thereby promoting best practice and aims to undertake, commission and disseminate research on corporate governance. Global Corporate Governance Forum ( GCGF ) [gcgf.org] GCGF was founded by the World Bank and the Organization for Economic Cooperation and Development in 1999 and provides assistance to emerging markets and developing countries on corporate governance. The Asian Corporate Governance Association ( ACGA ) [acga-asia.org] Founded in 1999, ACGA is an independent, nonprofit membership organization dedicated to working with investors, companies and regulators in the implementation of effective corporate governance practices throughout Asia. National Investor Relations Institute ( NIRI ) [niri.org] NIRI s membership includes 4,400 professionals responsible for communication among corporate management, the investing public and the financial community. NIRI seeks to to advance the practice of investor relations and meet the growing professional development needs of those engaged in the field. Page 8 J.P. Morgan DR Group

9 For more information, please contact: Joseph Dooley Global Advisory Services Head William Kirst Latin America Regional DR Head Alex Hickson EMEA Regional DR Head Kenneth Tse APAC Regional DR Head We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Neither JPMorgan Chase Bank, N.A. nor any of its affiliated companies shall be liable for any loss or damage of any kind arising out of the use of the information contained herein, or any errors or omissions in its content. This material does not constitute an offer or solicitation for the purchase or sale of any financial instrument. JPMSI or its brokerdealer affiliates may hold a position, trade on a principal basis or act as market maker in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer. In the United Kingdom (U.K.) and European Economic Area: Issued and approved for distribution in the U.K. and the European Economic Area by J.P. Morgan Europe Limited (JPMEL). In the U.K., JPMorgan Chase Bank, London Branch and J.P. Morgan Europe Limited are authorised and regulated by the Financial Services Authority. Additional information is available upon request. Copyright 2009 JPMorgan Chase & Co. All rights reserved. J.P. Morgan DR Group Page 9