SEC Approves Amendments to NYSE Rule 452 Eliminating Discretionary Voting by Brokers in Uncontested Director ElectionsAugust 2009 – Newsletters Small Business Securities Newsletter
Published by the Securities Practice Group to provide timely and useful information for CEOs, CFOs and General Counsel
On July 1, 2009, the Securities and Exchange Commission (SEC) approved an amendment to New York Stock Exchange (NYSE) Rule 452 that eliminates discretionary voting by brokers in uncontested director elections. The amendment makes uncontested director elections (i.e., elections where no other party proposes nominees in opposition to the management nominees) “non-routine” matters. As a result, brokers will be prohibited from casting votes without instructions from beneficial owners. The rule change will be effective for shareholder meetings held on or after January 1, 2010.
Because NYSE Rule 452 applies to all brokers that are members of the NYSE, this change will affect virtually all public companies, not just NYSE-listed companies. The implications and potential impact of this amendment, discussed below, will be significant, particularly for companies that have a large number of retail shareholders (i.e., individual investors).
Rule 452 allows brokers to vote on “routine” items if the beneficial owner of the shares has not provided specific voting instructions to the broker at least 10 days before a scheduled meeting. The Rule prohibits brokers from exercising discretionary voting power in matters that are considered “non-routine” - generally, contested matters and matters that may substantially affect the rights and privileges of shareholders.
Before the amendment, uncontested director elections had been considered “routine” matters, and brokers could exercise their discretion to vote uninstructed shares in such elections, which they typically did in favor of the management nominees. Beginning in 2010, uncontested director elections will be considered “non-routine” matters (except in the case of investment companies registered under the Investment Company 1940 Act that were specifically excluded by the amendments), and brokers will be prohibited from voting uninstructed shares.
Impact of the Revised Rule
Amended Rule 452 is expected to have a material impact on all public companies, including the following:
Majority Voting Standard. Companies that have adopted or are considering the adoption of a majority voting standard in director elections should consider the potential impact of the amended NYSE Rule 452. The inability of brokers to vote uninstructed shares will likely result in fewer shareholder votes in uncontested elections. Because fewer votes will be cast, companies could find it more difficult to achieve the affirmative vote required for the election of management nominees.
Establishing a Quorum. The amendment may also make it more difficult to establish a quorum for the conduct of business at annual meetings. Historically, brokers have helped companies to achieve a quorum because broker votes are counted for quorum purposes even with respect to “non-routine” matters on which they are not entitled to vote so long as there is at least one routine item to be voted upon at the meeting. As a result, issuers may face problems achieving a quorum at meetings at which only the election of directors and other non-routine items are on the agenda. This could be particularly troublesome for issuers with a large number of retail shareholders. Companies may want to consider, if appropriate, including in the agenda for their annual meetings a matter that remains “routine” under amended Rule 452 (such as ratification of independent accountants) in order to ensure that the necessary quorum is obtained.
Increased Influence of Institutional Shareholders, Proxy Advisory Firms, and Activist Shareholders. Available data suggests that most uninstructed shares are held by retail shareholders who do not provide voting instructions to their brokers. One effect of amended Rule 452 may be to decrease the number of votes by retail shareholders and proportionally increase the number of votes by institutional shareholders, giving institutional shareholders more influence over the election of directors. This potential increase in institutional shareholder voting power could increase the effectiveness of “withhold the vote” or “vote no” campaigns against directors by shareholder activists and proxy advisory firms.
Consideration of E-Proxy Rules. The SEC’s e-proxy rules permit companies to provide shareholders access to proxy materials online rather than by printing and delivering hard copies. Companies using this “notice-only” option have experienced a significant drop in participation by retail shareholders. The elimination of discretionary broker voting in uncontested director elections could accelerate this decreased participation by retail shareholders as they are less likely to provide voting instructions to their brokers than institutional shareholders. Companies with a high proportion of retail shareholders should, therefore, consider whether it makes sense to adopt or continue to use the “notice-only” option of the SEC’s e-proxy rules, especially if the participation of retail shareholders is important to the election.
Increased Costs. As a result of the forgoing, amended Rule 452 may force companies to incur additional costs to solicit shareholder votes in order to establish a quorum, achieve a majority vote, defend against “vote no” campaigns, and to print and distribute proxy materials. Issuers may also need to spend additional time and resources to educate retail shareholders regarding the procedure and importance of directing their brokers to vote their shares.