Significant changes are expected for the upcoming 2010 proxy season. One certain change is the loss of broker discretionary votes in the election of directors. In July 2009, the Securities and Exchange Commission (SEC) approved the proposal of the New York Stock Exchange (NYSE) to eliminate broker discretionary voting in director elections. This change will impact not only companies with shares listed on the NYSE, but also companies listed on NASDAQ and the other national securities exchanges, since most major brokerage firms are NYSE members subject to the NYSE rules. The new rule will apply to nearly all shareholder meetings held on or after Jan. 1, 2010.

Background

NYSE Rule 452 currently permits brokers to vote on "routine" matters without having received instructions from the beneficial owners. The uncontested election of directors has been considered a "routine" matter, but the amended rule adds uncontested elections to the list of matters for which the broker is required to have specific voting instructions from the beneficial owner.

Consequences

Quorum

The elimination of broker discretionary voting may make it more difficult and expensive for companies to obtain a quorum. If no routine matters are on the agenda for a meeting, companies may wish to engage a proxy solicitor to make sure sufficient proxies are returned to constitute a quorum. A simpler solution is to have shareholders vote on at least one routine matter at a meeting, such as the ratification of accountants. The Indiana Business Corporation Law, like the corporation laws of many states, provides that once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting.

Majority Vote Standard

If your company still elects directors under a plurality vote standard, the elimination of broker discretionary voting should not affect uncontested elections of directors once you have taken steps to assure a quorum, since a single vote in an uncontested election is sufficient to ensure election of a nominee. However, if you have adopted a majority vote standard, the change in broker voting may make it more difficult to obtain sufficient votes and to overcome a "withhold" or "vote no" campaign by activist shareholders.

Shareholder Education

If your company has a significant percentage of its shares held in street name, consider additional steps to educate shareholders about the rule change and the importance of voting. Shareholder education is especially important for companies that have adopted a majority vote standard. You may wish to include information in your letter to shareholders and proxy statement about the rule change. You also may wish to distribute additional letters reminding shareholders with shares held in street name to provide their brokers with voting instructions (these letters would need to be filed with the SEC as additional soliciting materials).

Notice And Access

Many companies have voluntarily taken advantage of the SEC's recent "notice and access" rules, which allow proxy materials to be posted on the Internet rather than delivered in paper format. If you have adopted "notice and access" and have experienced a decline in the retail shareholder vote, you may wish to consider a return to the delivery of paper copies.

Influence Of Institutional Investors And Proxy Advisory Firms

A decline in retail shareholder voting is likely to increase the importance of voting by institutional investors and the influence of proxy advisory firms such as RiskMetrics and Glass, Lewis & Co. As a consequence, companies will need to pay more attention to the recommendations made by the proxy advisory firms and consider actions that would influence the recommendations.

Recommended Actions

To ensure that you have a quorum at your annual meeting and meaningful voting on the election of directors, we recommend that companies take the following actions:

  • Contact your transfer agent to determine how important broker voting has been in past proxy solicitations in obtaining a quorum or approval of items
  • Consider including a non-routine matter, such as the ratification of auditors, in the matters to be voted on by shareholders at each annual meeting
  • Consider making your proxy distribution materials available to shareholders earlier to allow more time for obtaining a quorum and votes
  • Consider engaging a proxy solicitor, especially if your company has adopted a majority vote standard
  • Consider additional communications with shareholders about the change in broker discretionary voting and the increased importance of voting at annual meetings
  • If you have adopted a majority vote standard for director elections, monitor your activist shareholders
  • Reconsider the use of "notice and access" delivery of proxy materials if you are concerned you will not obtain the requisite votes at the shareholder meeting
  • Monitor the recommendations proxy advisory firms such as RiskMetrics make about your company

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.