SEC Approves Elimination of Discretionary Voting by Brokers
July 13, 2009
On July 1, 2009, the SEC approved a change to NYSE Rule 452 that will prohibit broker discretionary voting for all elections of directors, whether contested or not. The elimination of broker discretionary voting will apply to shareholder meetings held on or after January 1, 2010. Since Rule 452 applies to brokers that are members of the NYSE rather than companies, the amendment will affect all public companies, not just those listed on the NYSE. The amendment does not, however, apply to investment companies registered under the Investment Company Act of 1940.
Rule 452 currently provides that unless shareholders who hold their shares in “street name” tell their brokers how to vote at least 10 days before the meeting, brokers can vote the shares at their discretion on uncontested items that do not authorize a merger, consolidation or substantially affect the rights or privileges of the stock. Rule 452 currently lists 18 specific matters that cannot be voted by the broker without instructions and are referred to as “non-routine” matters. As amended, the list of “non-routine” items for which brokers may not vote uninstructed shares will include the election of directors, whether contested or not.
The elimination of broker discretionary voting on the election of directors may have a significant impact on annual meetings, particularly for companies with a large retail shareholder base, including the following:
- There are potential increased costs due to the need to educate retail shareholders regarding the importance of their voting and the need to hire proxy solicitation firms.
- Quorums will be difficult to obtain unless companies include a routine matter on the ballot, such as the ratification of auditors.
- Companies with a majority voting standard for the election of directors may have difficulty in obtaining the requisite shareholder approval for their nominees.
- Campaigns to “just vote no” or “withhold” may become more prevalent since in the past, the broker discretionary vote for management allowed directors subject to these campaigns to be elected.
- Without the broker discretionary vote, the drop in retail voting when the “notice and access” method of disseminating proxy materials is used may be even greater.
- Institutional shareholders and proxy advisory firms may have more influence on the election of directors unless companies are able to get retail shareholders to submit voting instructions to their brokers.
http://www.sec.gov/rules/sro/nyse/2009/34-60215.pdf
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