Despite rule changes aimed at facilitating online communication between companies and their shareholders, it seems electronic shareholder forums are an idea whose time hasn’t come, just yet.
The Securities and Exchange Commission adopted amendments to the federal proxy rules last November to facilitate the use of electronic shareholder forums. So far, however, companies have showed little interest in sponsoring such forums.
The SEC adopted new Rule 14a-17 and amended Rule 14a-2 under the Securities Exchange Act of 1934 to remove what it says were two major obstacles to the use of electronic shareholder forums: Concern that statements made by participants in such forums would be construed as a “solicitation” under the proxy rules, and a concern that someone who establishes, maintains, or operates an e-shareholder forum would be liable under federal securities laws for statements made by participants. Those rules took effect in February.
Jeffrey Morgan, president and chief executive of the National Investor Relations Institute, says that while more companies are using the Web to communicate with investors, “From an (investor relations) standpoint, we haven’t seen much demand for company-sponsored shareholder forums.”
Part of the reason, says Latham & Watkins Partner Nicholas O’Keefe, is that most companies don’t see anything blocking their communications with shareholders. “The SEC’s e-shareholder forum idea was trying to make a seismic change in the way companies interface with shareholders in a way that there really isn’t a need for,” he says.
While facilitating broad-based communication between companies and shareholders “sounds like a good thing,” says O’Keefe, “high-quality communication isn’t going to take place in that broad fishbowl sort of setting.”
Instead, he says, most companies will speak with their biggest shareholders one-on-one, such as during road shows, through in-person meetings, calls, and written communications, and “not in a massive electronic forum open to everyone.”
“If a company is forward thinking, not afraid to embrace new technologies, and looking to proactively communicate with shareholders, then it’s an excellent candidate for an electronic shareholder forum.”
— Michael O’Brien,
Shareholders, on the other hand, view forums in a different light, says Michael O’Brien, co-founder and vice president of sales of iMiners, which offers an eShareholderForum solution for companies. Since the investor relations team and/or management participate, shareholders are more likely to use a company-sponsored forum than a third-party message board, he says.
O’Brien also says a forum can create “goodwill among a company’s shareholder base” by demonstrating that the company is “interested in what shareholders think and is willing to engage in a dialogue.”
Brendan Radigan, a partner in the law firm Edwards, Angell Palmer & Dodge, says another benefit to implementing these forums is that, under certain circumstances, they “might provide positive niche advantages.” For example, smaller-cap companies seeking to attract increased investor interest or companies in high-tech markets seeking to distinguish their brand from others may use such forums as a means for publicity.
Such is the case for Oxygen Biotherapeutics, an early stage biotech company listed on the OTC Bulletin Board, which plans to launch an electronic shareholder forum on Oct. 1 using iMiners’ eShareholderForum solution. Oxygen saw the eShareholderForum as a good fit, since it does not yet have a product on the market or any institutional shareholder or analyst coverage.
According to Abe Wischnia, an investor relations consultant for the Costa Mesa, Calif.-based company, Oxygen CEO Chris Stern—who was appointed in March—was looking for a way to communicate with shareholders. Says Wischnia, “This gives him and other corporate officers a way to talk to shareholders and answer questions in a controlled way.”
e-Forum Fallacies, Fears
O’Brien says the biggest misperception about e-shareholder forums is that they’re similar to third-party message boards like Yahoo Finance, “where anyone can participate and post whatever they want.”
Shareholders don’t necessarily have that same luxury on a company-sponsored forum, where companies have the ability to control those who can post and which posts show up in the forum.
The following excerpt from Latham & Watkins discusses the impact of the amendments to e-forums on companies and their shareholders.
The SEC recently adopted amendments to the proxy rules designed to encourage the use
of electronic shareholder forums.
The stated purpose of the amendments was to make communications among
shareholders, and between shareholders and their companies, more effective and less
expensive. The amendments do not prescribe any particular format, although Web sites
that permit online exchanges of information, such as Q&A discussions and/or online
polling, seem to be the type of format that the SEC envisioned.
For a lot of companies, e-forums may not be of much value, given the relative ease with
which companies can now communicate with their shareholders. One possible exception
is companies receiving Rule 14a-8 proposals, or which are otherwise targeted by
institutional shareholders, may benefit from using e-forums as a channel for
communicating with investors and diffusing the situation. Another possible exception is
that e-forums may have some investor relations value, particularly for companies that are
under increased scrutiny from investors and public interest groups. For companies that
decide to organize e-forums, the design will have to be carefully thought through if the e-forums are to be effective.
Companies should be aware of two potential risks the amendments create. First, badly
constructed e-forums may be hijacked by vocal individuals and turned into platforms for
launching anti-management tirades. Perhaps even more troubling, e-forums will improve
the ability of hedge funds and other activist investors to mobilize against companies.
E-forums do not replace Rule 14a-8 precatory proposals. Shareholders will therefore have
the best of both worlds and be able to direct their efforts through whichever of the two
communications channels they think most effective.
E-forums will not have any ISS implications, at least initially. That could change if, for
example, ISS were to start viewing e-forums as a sign of good corporate governance and
factoring them into its “CGQ” ratings, or were to start treating online polls conducted
through e-forums similarly to Rule 14a-8 proposals for purposes of making withhold
recommendations based on company failures to implement straw poll recommendations.
Latham & Watkins Commentary (January 2008).
This option is particularly important during times when shareholders are riled over a particular issue, notes Dominic Jones, principal of IRWebReport.com. That doesn’t mean boards shouldn’t have some mechanism to open channels of communication with all shareholders, but Jones cautions the initiative “has to be led by the board.”
“Nothing will be gained by slapping up a forum and saying, ‘there, now play nicely, kids,’” says Jones. He suggests boards introduce a post-and-comment mechanism like the ones used by the SEC and other regulators for their rule proposals.
And there are other risks to consider, as well. “Companies seeking to implement a shareholders forum should consult with securities counsel regarding design and implementation, because securities laws issues still exist notwithstanding the SEC rules,” says Radigan.
In addition, O’Keefe notes, there are costs involved. “It requires a lot of resources to manage them, and that’s not a skill that companies really have.”
While observers say demand for such forums at the moment is slow, they admit that may change. “Over time shareholders may increasingly come to see this as a preferred means of interacting with companies as interactive social networking becomes more widely available as a means of communicating, and this shareholder demand may eventually push for wider acceptance,” says Radigan.
iMiners’ O’Brien adds that interest in the eShareholderForum, which launched in June, has been “strong,” with companies listed on the Amex, Nasdaq, and NYSE.
Meanwhile, Broadridge Financial Solutions plans to offer its own twist on e-shareholder forums with a new offering in the works, dubbed the Investor Network. The service is in the “early stage of development,” notes Senior Vice President Chuck Callan adding, it “is envisioned as an online social network that facilitates shareowner/shareowner and company/shareowner communication—a place where serious people could have serious conversations.” Callan said users will be validated as actual shareowners, the service will be provided to a “broad a range of participants, consistent with SEC rules for e-forums,” and it will be available through broker-dealers.
Says O’Brien: “If a company is forward thinking, not afraid to embrace new technologies, and looking to proactively communicate with shareholders, then it’s an excellent candidate for an electronic shareholder forum.”