On July 1, 2009, the Securities and Exchange Commission (SEC) approved an amendment to New York Stock Exchange (NYSE) Rule 452 prohibiting discretionary voting by brokers in “uncontested” director elections. The amended NYSE Rule 452 will impact not only companies listed on the NYSE, but also companies listed on other exchanges, because NYSE Rule 452 applies to all major brokerage houses.¹
The amended rule will apply to proxy voting for shareholder meetings held on or after January 1, 2010.
Amended NYSE Rule 452 and NYSE Listed Company Manual Section 402.08
Under NYSE and SEC rules, brokers must deliver proxy materials to beneficial owners in advance of a shareholder meeting and must request instructions from each beneficial owner regarding how to vote the owner’s shares. Brokers may exercise discretionary voting authority with respect to shares for which voting instructions are not received (often called “uninstructed shares”) for matters that the NYSE considers “routine.” Brokers may not vote on “non-routine” matters without receiving instructions from the beneficial owners.
Before the amendment to NYSE Rule 452, an “uncontested” election of a company’s directors was considered “routine.” The amendment adds an “uncontested” election of a company’s directors to the list of “non-routine” items, thereby eliminating broker discretionary voting for the election of directors.
Consequences of the Amendment
Historically, brokers with discretionary voting power have voted as recommended by management on “routine” matters, including the election of directors. In addition, only a small percentage of retail shareholders vote their shares. Therefore, we expect that the rule amendment will have the following consequences:
Empowerment of Institutional and Activist Shareholders
The amendment to NYSE Rule 452 is likely to significantly increase the power of institutional and activist shareholders, who typically vote their shares, further constraining boards of directors from exercising independent business judgment on behalf of all shareholders. If retail shareholders continue to not vote their shares at historical rates, under the amended rule, brokers will not have the ability to vote those shares. This effectively shifts power to institutional and activist shareholders who do vote their shares and enhances the influence of these shareholders on any matters to be decided by majority vote.
Problems Achieving Quorums and Increased Proxy Solicitation
The revised rule may make it more difficult to achieve a quorum for shareholder meetings that do not have at least one “routine” item on the ballot. Uninstructed shares that are not voted by brokers for “non-routine” items cannot count towards a quorum. Therefore, in the cases where there are no “routine” items on the ballot, companies may have to bear additional costs to ensure that a quorum is present. This may be particularly difficult in light of the SEC’s new “e-proxy” rules, since companies that have utilized “e-proxy” have seen a drop in voting by retail shareholders.
Risk with Majority Vote Standards
Many companies have recently adopted a majority vote standard in director elections. Majority vote standards require a director nominee to receive at least a majority of the votes cast with respect to that director’s election in order to be elected to the board of directors. Achieving this threshold will be more difficult when brokers are unable to vote shares for which they have received no voting instructions. Other than increased difficulty in achieving a quorum, as discussed above, companies with a plurality vote standard in director elections should not experience a change in results due to this amendment.
Public companies should take the following actions in light of this recent development:
- Analyze the company’s relationship with its institutional or activist shareholders.
- Consider implementing an investor education initiative in connection with the 2010 proxy solicitation since many shareholders may continue to believe that, if they do not provide voting instructions, their brokers will vote on their behalf.
- Determine whether to include at least one “routine” item, such as ratification of the selection of the company’s independent auditor, on the ballot so that uninstructed shares will count towards achieving a quorum for the meeting.
- Consider how the amendment to NYSE Rule 452 will impact current or proposed corporate governance provisions, such as majority voting for directors.
Contact Information: If you have questions or need additional information please contact:
R. Douglas Harmon
John C. Jaye
Charles Anderson, Jr.
J. Carlton Fleming, Jr.
¹ Companies registered under the Investment Company Act of 1940 are excepted from the amendment.