The 2014 proxy season is fast approaching. Based on our prior experience reviewing proxy statements for Maryland public companies, we would like to call your attention to certain matters of Maryland law about which we often receive questions. As in the past, we are available to review draft proxy statements for Maryland law compliance. Because the same principles generally apply to both corporations formed under the Maryland General Corporation Law (the "MGCL") and to real estate investment trusts formed under the Maryland REIT Law (the "MRL"), we generally refer hereafter only to corporations.
Internet Availability of Proxy Materials
Pursuant to Regulation 14A (the "Proxy Rules"), all filers are required to post their proxy materials on a publicly accessible internet website (other than EDGAR) and may choose to (a) utilize the "notice and access" model for furnishing proxy materials to shareholders by sending a notice of internet availability complying with the Proxy Rules (the "Proxy Rule Notice") or (b) deliver a full set of paper copies of the proxy materials, including the Proxy Rule Notice. A Maryland corporation may combine the notice of a meeting of stockholders that is required by the MGCL with the Proxy Rule Notice.
Householding
Rule 14a-3(e) of the Proxy Rules provides that an annual report, proxy statement or Proxy Rule Notice, as applicable, will be considered to have been delivered to all shareholders of record who share an address so long as one annual report, proxy statement or Proxy Rule Notice, as applicable, is delivered to the shared address, and is addressed to the shareholders as a group, to each of the shareholders individually or to the shareholders in a form to which each of them has consented in writing. The Proxy Rules also require compliance with certain other conditions, including obtaining the affirmative written consent of the shareholders or following the procedures and meeting the requirements by which the shareholders are deemed to have impliedly consented.
Although the MGCL does not address the manner of delivery of annual reports or proxy statements, it does address the manner in which a corporation may give notice of a meeting of stockholders by providing for four types of notice: personal delivery, leaving the notice at the stockholder's residence or place of business, mailing to the stockholder at the stockholder's address as shown on the records of the corporation and electronic transmission.
Under the MGCL, a single notice is effective as to all stockholders who share an address unless the corporation receives a written or electronic request from a stockholder at such address that a single notice not be given. In lieu of householding, we believe that the only means of delivery permissible under the MGCL is addressing the material to each stockholder "individually" at the shared physical or electronic address. The company may deliver these materials in one package if it lists the name of each stockholder-recipient on the label containing the shared address. Additionally, the company must include a separate proxy card for each individual stockholder at the shared address.
Advisory Vote on Executive Compensation
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and rules adopted by the United States Securities and Exchange Commission (the "SEC"), an issuer for which the SEC requires compensation disclosure under the Proxy Rules and Item 402 of Regulation S-K is generally required to include a shareholder advisory vote on executive compensation ("say on pay") in the annual meeting proxy statement at least every three years.1 Additionally, at least every six years, shareholders must be given the opportunity to hold an advisory vote on the frequency of the executive compensation advisory vote, selecting among choices of every one, two or three years or abstain. Almost all public companies are now submitting say-on-pay votes to their shareholders each year.
It is important to emphasize that the executive compensation provisions of Dodd- Frank and the Proxy Rules and the results of the advisory votes have no effect on a director's or trustee's duties under Maryland law with respect to compensation decisions. Section 14A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), provides that shareholder advisory votes are not binding on the issuer and, among other things, may not be construed "[t]o create or imply any change to the fiduciary duties of such issuer or board of directors [or] . . . to create or imply any additional fiduciary duties for such issuer or board of directors."2
Shareholder Proxy Access for Director Elections
Rule 14a-8 of the Proxy Rules requires a company to include in its proxy materials, under certain circumstances, shareholder proposals to establish a procedure in the company's governing documents for including shareholder nominees for director in the company's proxy materials.
Under the MGCL, the board may be given exclusive power over amendments to the bylaws and the bylaws of most of our Maryland public company clients so provide. Thus, stockholders of these companies are not able to amend the bylaws directly for any purpose and so any stockholder proposal to change the bylaws of a Maryland corporation with exclusive board power over amendments could only be precatory. We continue to reiterate our advice of many years that Maryland law specifically recognizes the right of directors to refuse to take any action recommended by the stockholders, even if recommended by the holders of a substantial majority of the shares.
Ratification of Auditors
Ratification of the board's appointment of auditors is, of course, generally not required by either federal or Maryland law. We believe that the reasons usually given for submitting this matter to the stockholders – e.g., getting their views, good investor relations – will in most cases support the reasonableness of a director's belief that submitting the matter to stockholders is in the corporation's best interests, as required by the MGCL.
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