On July 1, 2009, the SEC adopted amendments to NYSE rules that will disallow discretionary voting of uninstructed shares by brokers in director elections. The amendments apply to proxy voting by brokers that are member organizations of the NYSE for shareholder meetings held on or after January 1, 2010.1 Because the amendments apply to all brokers registered with the NYSE, this change will affect all public companies whether the companies are listed on the NYSE or on another exchange. The amendments are widely expected to increase the expense and effort needed to get out the vote even in uncontested elections, particularly for companies with a large "retail" shareholder base. Moreover, the changes may make it easier to vote incumbent directors out of office at companies with majority voting requirements, while making it more difficult to obtain a quorum unless at least one other item on the agenda is a matter for which the NYSE permits discretionary voting. The NYSE originally proposed these amendments in October 2006, but the SEC did not take action on them during the Bush administration. However, the new leadership of the SEC has proven more receptive to the rule change as part of its emphasis on shareholders' rights issues.
Under current SEC proxy rules, brokers must deliver proxy materials to beneficial owners and request voting instructions. NYSE Rule 452 allows brokers to vote on "routine" proposals if the beneficial owner of the stock does not provide specific voting instructions to the broker at least 10 days before the scheduled meeting to which the proxy materials relate. An "uncontested" election for a company's board of directors was among the matters that the former NYSE Rule 452 treated as routine. NYSE Rule 452 defines a "contested" election as one that "is the subject of a counter-solicitation, or is part of a proposal made by a shareholder which is being opposed by management." Thus, a board election without shareholder candidates nominated to oppose management nominees was considered routine.
"Contested elections" as defined by the NYSE remain relatively rare. As a result, activist shareholders have questioned the definition of a contested election. For example, because "just vote no" campaigns often do not result in competing solicitations historically, these efforts have not been considered "contests" under NYSE Rule 452 and thus broker votes have been counted. Generally, brokers vote uninstructed shares in accordance with the incumbent board's recommendations.
This issue has gained added importance in recent years as many large U.S. companies have adopted provisions that require board nominees to receive a majority of votes cast in uncontested elections. The 2007 vote at CVS Caremark and the 2008 vote at Washington Mutual, Inc. are instances where management nominees would not have obtained majority support without broker votes cast for the management nominees.
Under the new rules, the election of directors is no longer deemed a "routine matter," thereby eliminating broker discretionary voting for the election of directors.2 This change could significantly impact the director election process. For example, the change is likely to increase the costs of uncontested elections, as issuers will have to spend more money and effort to reach shareholders who previously did not vote. These costs may increase most substantially for issuers that have adopted a majority vote standard for director elections, as such issuers may have to expend more resources to obtain votes from shareholders who may not realize that their failure to vote makes it possible for a fewer number of "no" votes to constitute a majority. The change also may increase the influence of special interest groups or other large shareholder groups with a particular agenda to challenge an incumbent board, at the expense of smaller shareholders. Companies with plurality vote standards may wish to consider this issue before adopting a majority vote standard.
Smaller issuers with a high percentage of shares held by retail investors also may face an increased cost in obtaining a quorum as a result of the changes to Rule 452. Statistics from the 2008 proxy season released by Broadridge Financial Solutions, Inc., an independent corporation that manages the administrative process of delivering proxy materials and tabulating votes, indicate that 16.5 percent of all Broadridge-managed proxies were voted with broker discretion in 2008. A significantly higher percentage of proxies, 25.5 percent, were voted with broker discretion at smaller issuers in 2008. If no routine matters are presented at a shareholder meeting, these uninstructed broker votes will not be counted toward establishing a quorum. Institutional investor advocates have suggested that persistent quorum concerns can be readily addressed by including broker votes for an auditor ratification resolution, which NYSE rules still consider routine. Many corporations already include such a resolution on their annual meeting agenda.
Footnotes
1 However, the amendments will not apply to a meeting that was originally scheduled to be held before January 1, 2010, but is properly adjourned to a date on or after January 1, 2010.
2 The new rules do not apply to registered investment companies, which have a very high percentage of retail investors.
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