Originally published July 1, 2009
Keywords: Rule 452, NYSE, proxy, director elections, broker discretionary voting, shareholder nominee
On July 1, 2009, the US Securities and Exchange Commission approved the New York Stock Exchange's amendment to Rule 452, eliminating the ability of brokers to vote in their discretion with respect to elections of directors.
Rule 452, titled "Giving Proxies by Member Organizations," allows brokers to vote on "routine" proposals if the beneficial owner of the stock has not provided specific voting instructions to the broker at least 10 days before a scheduled meeting. Under the amendment, director elections will no longer be considered routine, even when the elections are uncontested. As a result, shares held in street name will not be voted in an election of directors unless the holders specifically instruct their brokers on how to vote. This amendment to Rule 452 has potentially far-reaching consequences for annual shareholder meetings because, historically, broker votes in director elections have represented a significant percentage of the total vote.
The amendment to Rule 452 will be applicable to proxy voting for shareholder meetings held on or after January 1, 2010. The amended rules will not apply to a meeting that was originally scheduled to be held in 2009 if that meeting is properly adjourned to a date on or after January 1, 2010.
Practical Considerations
Because this rule applies to brokers who are registered with the NYSE, it will have an impact on all publicly traded companies no matter what exchange their shares are listed on.
As a result of the amendment to Rule 452, companies may need to increase their solicitation efforts, especially if they have a large percentage of retail investors or have majority voting provisions. Before next proxy season begins, companies should start planning their approaches. Additional solicitation activities will likely raise the costs for most director elections, and these costs should be taken into account when planning the budget for next year's annual meeting.
Companies, particularly companies that have a large retail shareholder base, will need to educate their shareholders as to this rule change. In the past, shareholders could rely on their brokers to vote for directors on their behalf. Shareholders must be made to understand that failure to instruct their brokers to vote in elections of directors for companies with a majority voting standard will be equivalent to voting against those directors. Therefore, companies may want to devise ways of communicating to their shareholders the increased importance of voting at annual meetings. This shareholder education may take the form of additional language in shareholder letters or proxy statements. Companies may also choose to prepare separate documents to be filed as additional soliciting materials, emphasizing the need for beneficial owners of shares to instruct their brokers on voting for directors. Such an education campaign could also be conducted through telephone calls to investors, but that may not be a practical solution for the target audience of retail investors.
Brokers, rather than issuers, maintain the lists of street-name holders. Companies are only able to directly communicate with "Non-Objecting Beneficial Owners," i.e., beneficial owners of a company's stock that have not objected to such contact. Therefore, in planning any educational or solicitation campaign with respect to director elections, companies will need to rely on the brokerage community to reach "Objecting Beneficial Owners."
Broker votes of uninstructed shares can be very useful in establishing a quorum at shareholder meetings. If discretionary broker votes are not permitted for a meeting because there are no routine matters, there may be issues in achieving a quorum. Or, a quorum may not be attained until closer in time to the meeting. Companies therefore may find it useful to include a matter that remains "routine" under amended Rule 452 (such as ratification of independent accountants) in the agenda for their annual meetings in order to ensure that the necessary quorum is obtained.
Elimination of broker voting for directors might lower the voting returns for retail investors. This could have the effect of increasing the influence of proxy advisory services such as RiskMetrics Group, Inc., Glass Lewis & Co. and Proxy Governance, Inc. Therefore, companies should carefully review the policies that could lead to withhold recommendations from these services (such as director meeting attendance, compensation decisions, or adoption of a rights plan) to consider their potential impact on upcoming elections and to determine if they wish to include any additional explanations in their proxy statements to address such concerns in an effort to counteract negative recommendations.
If the SEC adopts a final rule requiring companies to include shareholder nominees for director in company proxy statements, the impact of lowered retail vote returns may be coupled with a large shareholder or shareholder group supporting its own nominee. This could significantly impact director elections.
The amendment to Rule 452 might also increase the impact of "vote no" campaigns against directors. To the extent that the total vote count for director elections diminishes once brokers can no longer vote when uninstructed, there may be fewer "for" votes to offset the "no" votes generated by a shareholder activist campaign. Companies should recognize this possibility and plan strategies to obtain favorable voting for directors in advance, if possible, or at least at the very outset of a "vote no" campaign.
Learn more about our Corporate & Securities practice.
Visit us at www.mayerbrown.com.
Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.
Copyright 2008. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.