What Is a Proxy Statement?

Every year in connection with the annual shareholder meeting, and sometimes more often in the case of a special meeting, public companies must file a proxy statement. Proxy statements outline various plans for the company to shareholders, from the election of directors, to pay for executives, approval or amendment of equity plans, and even shareholder-sponsored proposals should any be received. The proxy is a requirement for any company with public securities and must be filed with the Securities and Exchange Commission as prescribed in SEC Form DEF 14A. Proxies offer several benefits to the company and shareholders, as well as meeting compliance requirements.

Key Elements of a Proxy Statement

As a rule, companies must include any information that requires a shareholder vote at the annual meeting in a proxy disclosure. Specifically, a proxy document should include the following elements:

• Board of Directors Elections: Members of the board of directors must be elected or re-elected each year. The statement provides background information about each candidate, as well as any conflicts of interest, so that shareholders can make a decision.
• Executive Compensation: Proxy reports define all executive compensation, including regular wages, bonuses, stock options, and other types of compensation. This report provides necessary transparency, and shareholders may be able to vote on proposed changes to compensation amounts or structures.
• Proposals and Recommendations: The report outlines any proposals in the operation of the company, such as a restructuring or a merger. The company may make recommendations about optimal votes. In some cases, shareholders can make their own proposals.
• Auditor Selection: At times, the company will identify a reason to change the independent auditor for the organization. The statement will outline candidates and explain the reasons for the change.
• Design and Presentation: Detailed information should come in a readable form that is easy to process. Presentation, including charts, graphs, and readable text, can help shareholders to understand the relevant details and make an informed vote.
• “Say on Pay” Provision: Public companies are required to provide shareholders with an advisory vote on compensation for their highest-earning executives. According to the SEC, these votes must be held at least once every three years.
• Related Party Transactions: Any dealings or financial arrangements between a company and insiders such as executives, directors, or major shareholders must be disclosed in the proxy statement to ensure transparency for shareholders.

Although companies must follow certain proxy statement requirements, they have significant flexibility in the way that they choose to present the information.

Importance of Proxy Statements for Shareholders

For any public company, transparency is key in every process. Potential investors look for businesses that maintain high levels of visibility, as a way of determining whether the organization will provide relevant information about its decision-making at appropriate times. Over time, corporate dedication to being fully transparent builds trust in the company, which can lead to greater investment and improved engagement with long-term shareholders.

Transparency is a step toward greater accountability, which any good business should strive to achieve for its shareholders. Shareholders make decisions about their investments based on the information they receive from the company. Changes to the running of the organization are often announced at annual or special meetings. A proxy statement outlines the changes or updates, so that shareholders can verify the information and see the company holding itself accountable for its decisions.

Shareholders hold an important role in the future success of the company, which requires access to information. Shareholders may vote on certain aspects of company function, such as the selection of auditors or the election of members to the board of directors. A proxy statement allows shareholders time they need to research and consider the options before them, so they can make an educated decision at vote time. Detailed reports give shareholders relevant data that they can use to assess the health of the company and the best choices for the future.

Regulatory Requirements for Proxy Statements

Publicly traded companies must meet certain requirements for reporting with the SEC. These reports are generally available to the public, so that current shareholders and prospective investors can examine the finances and other aspects of the company when making investment or voting decisions. These reports provide detailed information about the running of the company.

As part of being a public company, businesses must use a proxy filing in advance of their annual meetings. Although some reports have exceptions or rules governing which businesses must file, proxy statements are a requirement of all public companies. Under the Securities Exchange Act of 1934, companies must file the relevant paperwork with sufficient notice for shareholders to be able to decide in advance of the annual meeting. It is considered a mandatory filing, meaning that companies must file the report with the SEC and provide copies to shareholders.

Although the benefit of these reports comes primarily in the form of greater transparency for shareholders, the SEC also reviews reports and may choose to investigate when necessary. Proxy statements give relevant information that the SEC can verify to determine whether the business is following federal law in its organization or operation. In some cases, the SEC may levy penalties on businesses that do not file the reports, file incomplete or inaccurate reports, or commit other infractions.

Common Types of Proxy Statements

The SEC provides a couple of different forms that businesses can use when filing a proxy statement. The DEF 14A is a required document that companies file in advance of a meeting where shareholders will be expected to vote on certain aspects of the running of the organization, from executive compensation to decisions about mergers or acquisitions. Generally, the items up for vote come at the top of the document, so that shareholders can identify the relevant points from the outset. The company may also provide recommendations for the vote they would like to see, with the expectation that shareholders will perform their own research to determine how they will vote. The form provides information about the meeting where the votes will be collected, with options for shareholders to designate a proxy to vote on their behalf.

In some cases, companies may need to file a PRE 14A, which is a preliminary proxy statement. In short, this filing is a preliminary version of the DEF 14A, which is considered the definitive or final version of the statement. The business must file the preliminary statement at least 10 days prior to releasing the final statement for shareholders. Although companies may choose to file this preliminary report regardless, they are only required to do so by the SEC if the meeting requires a vote that is not tied to a contested matter.

Proxy Statement vs. Annual Report

Many people confuse proxy statements with Form 10-K or annual reports. However, even though they share some similarities the two documents differ in some crucial ways. While proxy statements are focused on shareholder voting and corporate governance matters, Form 10-K and annual report SEC filings are centered around disclosing business performance, financial statements, risk factors, and management discussion.

Proxy Statement Preparation Process

A typical process for preparing proxy statements includes these steps:

• Building the proxy calendar
• Gathering board and governance information
• Collecting compensation data
• Preparing proposal language
• Drafting shareholder meeting information
• Reviewing legal and SEC requirements
• Designing proxy summaries, charts and tables
• Coordinating board and committee review
• EDGAR filing
• Printing, mailing or digital delivery

Careful version control is crucial throughout the process because many sections involve disclosing sensitive governance, compensation, and shareholder proxy voting information. All proxy materials also must be clear and easy to navigate for shareholders. Check out our guide to effective proxies for more information.

Utilizing Experts for the Proxy Process

Preparing a shareholder-friendly proxy statement is a balance between compliance and engagement. Companies must meet regulatory standards when filing reports, but the report should also be a sleek document highlighting the best of the year from the company. Statements that are hard to navigate or read may lead to lower shareholder or proxy solicitor engagement and a loss of potential investment over time.

Utilizing expert proxy statement solutions is key for businesses that want to meet shareholder expectations and maintain an edge on the competition. DFIN specializes in compliance with SEC requirements. Our solutions can help companies determine how to follow each guideline, so that they maintain compliance with each step. DFIN also streamlines the process for document preparation and filing. Businesses can select a design that meets their aesthetic goals, while improving engagement with shareholders and protecting their data. Our comprehensive proxy guide provides real examples of proxy disclosures that distinguish each company.

For a business with public shares, transparency in reporting is vital for success. A definitive proxy statement is a key part of the process, by providing important details to shareholders in advance of an annual vote. Although companies must file these reports with the SEC, they gain advantages from consistent compliance. Businesses that file these statements regularly and on time demonstrate to their shareholders that they maintain a commitment to accountability, building trust in the shareholder community.