On July 1, 2009, the Securities and Exchange Commission approved an amendment to New York Stock Exchange (NYSE) Rule 452 that eliminates broker discretionary voting in uncontested director elections. The amendment was approved by a 3-2 vote of the SEC Commissioners and, particularly when combined with other shareholder-rights initiatives, such as majority voting, could affect the election of public company directors. The SEC's approval of the amendment to NYSE Rule 452 is one of a series of actions the SEC has taken, or is contemplating, related to the proxy and shareholder voting process.
Brokers holding shares in street name for their clients must furnish those clients with all proxy materials distributed with respect to the shares and allow the clients to direct the broker on how to vote those shares. Currently, if a broker does not receive voting instructions from its client by the 10th day before the date of the shareholder meeting, NYSE Rule 452 allows the broker to exercise its voting discretion with respect to matters deemed "routine" by the NYSE. Brokers may not exercise discretion to vote on matters deemed "non-routine" by the NYSE, which currently include contested director elections. The amendment to Rule 452 provides that all director elections, whether contested or not, will be considered "non-routine."
The amendment will not apply to director elections for companies registered under the Investment Company Act of 1940. The amendment is effective for shareholder meetings held on or after January 1, 2010, except for meetings originally scheduled to be held before January 1, 2010 and then adjourned to a later date.
Implications of the Amendment:
- The amendment to NYSE Rule 452 will impact almost all public companies, even those that are not listed on the NYSE. Most brokerage firms are members of the NYSE and subject to NYSE rules. Therefore, the elimination of broker discretionary voting will affect companies listed on NASDAQ and other securities exchanges to the extent that clients of NYSE-member firms beneficially own stock of non-NYSE listed companies.
- Companies that have adopted majority voting standards for the election of directors may have difficulty achieving such a majority without broker discretionary votes.
- Some companies may have more difficulty in achieving a quorum for shareholder meetings because they can no longer rely on a large number of broker discretionary votes on director elections, which have the effect of increasing the quorum count. Proposals to ratify the selection of the company's auditors remain "routine" matters under the amended NYSE rules, which means brokers can vote on such proposals in their discretion if the brokers' clients did not provide voting instructions on such proposals. Although companies are not required to submit the selection of auditors to shareholders for ratification, most companies do so. Companies that have not submitted the selection of auditors for shareholder ratification in the past should consider whether the inclusion of such a "routine" matter may be beneficial in achieving a quorum at annual meetings.
- Companies may also want to consider engaging a proxy solicitor or conducting shareholder education campaigns in order to increase retail voting. In addition, companies that intend to use notice and access proxy delivery, which has resulted in lower retail voter turnout for some companies, may need to make supplemental mailings of proxy cards to increase the participation of retail shareholders.
- The elimination of broker discretionary voting may effectively disenfranchise retail holders and increase the voting power of institutional shareholders. This may also have the effect of increasing the influence of recommendations made by proxy advisory firms, whose recommendations are widely followed by institutional investors.
In approving the amendment to NYSE Rule 452, the SEC indicated that it plans to evaluate other "plumbing" elements of the proxy voting process, such as "empty voting" (voting by shareholders as of the record date who no longer hold shares as of the meeting date) and the treatment of "objecting beneficial owners" (retail shareholders who object to the disclosure of their contact information to the corporation in which they own shares).
The amendment to NYSE Rule 452, as well as other SEC initiatives related to the role of shareholders in other corporate governance matters, such as proposed rules regarding director nominations by shareholders and consideration of various say-on-pay proposals, have the potential to significantly change the election of directors and the role of shareholders in the corporate governance of public companies.