On July 1, 2009, the
Securities and Exchange Commission (SEC) approved, by a 3-2
vote, an amendment to New York Stock Exchange, Inc. (NYSE) Rule 452 and
corresponding Listed Company Manual Section 402.08 to:
- eliminate broker discretionary voting in the election of directors for all
shareholder meetings held on or after January 1, 2010, except for companies
registered under the Investment Company Act of 1940; and
- codify two previously published interpretations that prohibit broker
discretionary voting for material amendments to investment advisory contracts.
The amendment of NYSE Rule 452 will affect virtually all public companies, not
just companies listed on the NYSE.
NYSE Rule 452 and the Proxy Voting Process.
Public company shareholders can hold shares directly, as record holders, or
indirectly, in “street name,” through a broker. Under NYSE and SEC rules, when a
company furnishes proxy materials to a shareholder who holds in “street name,” a
broker is required to deliver the proxy materials to that shareholder and
request that the shareholder return specific voting instructions for matters to
be considered at the shareholder meeting. If the broker does not receive voting
instructions from a shareholder by the 10th day preceding the date of the
meeting, NYSE Rule 452 (commonly known as the “Ten Day Rule”) permits the broker
to exercise discretionary voting authority with respect to matters deemed
“routine” by the NYSE. Brokers are not permitted to vote on matters deemed
“non-routine” by the NYSE, unless they receive voting instructions from the
shareholder, and, in such case, must vote as instructed.
Under current NYSE Rule 452, uncontested director elections are considered
“routine” matters for which brokers can cast discretionary votes. However, under
NYSE Rule 452, as amended, uncontested director elections will be “non-routine”
matters for which broker discretionary voting is not permitted. Accordingly,
NYSE Rule 452, as amended, prohibits broker discretionary voting in all director
elections, whether contested or uncontested.
The amendment to NYSE Rule 452 will apply to shareholder meetings held on or
after January 1, 2010, except for meetings properly adjourned before that date.
Why the Change?
Proponents of amended NYSE Rule 452 have long argued that director elections
represent the most direct way shareholders can hold a company’s board of
directors accountable and, accordingly, the right to vote should be limited to
parties having an economic interest in the company.
The growing proportion of public company shares that are held in “street name”
have increased the extent of broker discretionary voting in uncontested director
elections. Proponents of the change to NYSE Rule 452 have pointed to instances
in which the outcome of director elections has been determined by broker votes,
which are typically voted in accordance with management’s recommendation. Thus,
proponents of the amendment to NYSE Rule 452 argue that in some cases director
elections are being determined by parties who have no economic interest in the
company. In addition, concerns have been raised in recent years regarding the
NYSE’s position regarding what constitutes a “contested election.” The NYSE has
taken the position that a contested election is one in which the number of
nominees exceeds the number of directors to be elected. However, “vote no” and
“withhold vote” campaigns that target director elections have not been
considered “contested elections” and broker discretionary voting has been
permitted in those elections.
The NYSE, in an effort to address these concerns, and based on the
recommendation of its Proxy Working Group, filed the proposed amendment to NYSE
Rule 452 with the goal of enhancing the integrity and transparency of the proxy
voting process and thereby improving corporate and fiduciary accountability.
Concerns Regarding the Amendment
Opponents of the amendment to NYSE Rule 452, including SEC Commissioners
Kathleen L. Casey and Troy A. Paredes, have raised several concerns regarding
the change. In particular, the vast majority of parties who commented on the
proposed change urged that the SEC not consider broker discretionary voting in
isolation, but rather to consider this issue in the context of a comprehensive
review and assessment of the proxy voting process as a whole. Issues of
particular concern include:
- the need for more shareholder education regarding the proxy voting process;
- the costs and related benefits associated with the change, particularly the
impact on costs associated with the proxy solicitation process;
- the influence of proxy advisory firms and activist shareholders;
- the consequences for the increasing number of companies who have adopted
majority voting for directors; and
- the impact on establishing a quorum at shareholder meetings.
Shareholder Education. Both the SEC and NYSE have acknowledged that, unlike
institutional shareholders, many retail shareholders do not have a good
understanding of the proxy voting process and their role, and the role of their
broker, in that process. Accordingly, there is concern that the amendment to
NYSE Rule 452, without a significant undertaking to educate retail shareholders
about the practical implications of the amendment, will disenfranchise retail
shareholders and result in a decline in retail shareholder participation in
director elections similar to that experienced with the advent of the e-proxy
“notice and access” system.
Shareholder Communications. The change is expected to increase the cost and
effort required for a company to communicate with its “street name” shareholders
about uncontested director elections. The concern here is two-fold: (1) brokers,
not the companies, know the identity of the beneficial shareholders; and (2)
shareholders can object to being contacted by the companies whose shares they
hold. These factors can present a significant challenge, and result in
additional expense, for companies in communicating with their shareholders
regarding director elections. For some companies, these additional costs may
outweigh any benefits to the company’s shareholders.
Vote-No Campaigns/Proxy Advisory Firms. With the elimination of broker
discretionary voting, there is concern that “vote no” campaigns led by activist
shareholders may increase and have a greater influence on the outcome of
director elections. Similarly, the elimination of broker discretionary voting
also may increase the influence of voting recommendations made by proxy advisory
firms on the outcome of director elections. Opponents note that the amendment
may, in effect, actually increase the influence in director elections of parties
who have no, or a limited, economic interest in a company.
Majority Voting. In recent years, more and more companies have adopted majority
voting standards for director elections. The elimination of broker discretionary
voting may make it more difficult for director nominees to obtain the vote
required for election. As mentioned above, for companies with majority voting
for directors this change will significantly raise the stakes in “vote no”
Establishing a Quorum. For some companies, broker discretionary votes have
played an important role in establishing a quorum for shareholder meetings.
Typically, if a share is voted on one matter, including broker discretionary
votes, that share is considered present for the purposes of establishing a
quorum at the meeting. Eliminating broker discretionary voting in uncontested
director elections may make it harder for some companies, particularly smaller
to mid-sized companies, to establish a quorum if they do not have at least one
“routine” matter on the agenda. Companies may have to incur additional costs to
ensure a sufficient number of shares are represented at a meeting for purposes
of establishing a quorum.
Along these lines,
SEC Chairman Mary L
Schapiro stated at the SEC’s July 1 open
meeting that the Commission will be studying this year the related areas of
shareholder communication and voting.
Issues to Consider
In anticipation of the elimination of broker discretionary voting, effective
January 1, 2010, a public company needs to consider the implications of this
change, particularly in light of the composition of its shareholder base.
- A company whose shareholder base includes a significant number of “street
name” holders may need to take steps to ensure a quorum is present at its
meetings (e.g. by including at least one “routine” item on the meeting agenda).
- Companies who have a larger proportion of institutional shareholders need to
assess the impact this change will have in light of the voting patterns of those
shareholders, particularly the degree to which those shareholders follow the
recommendations of proxy advisory services.
- In all cases, public companies will need to assess how they communicate with
various shareholder constituencies. Companies who have not engaged a proxy
solicitor in the past may need to reassess that practice. Proponents and
opponents of eliminating broker discretionary voting both agree that there is a
need for more shareholder education regarding the proxy solicitation process and
that public companies should take an important role in that education process.