SEC Approves Elimination of Broker Discretionary Voting in Director Elections
New York Stock Exchange Rule 452 (Rule 452) permits brokers to vote on “routine” proposals when the beneficial owner of stock fails to provide specific voting instructions at least ten days before a scheduled meeting. Historically, an uncontested election of members of the board of directors had been considered a routine matter under Rule 452. On July 1, 2009, by a 3 to 2 vote, the Securities and Exchange Commission approved an amendment to Rule 452 proposed by the New York Stock Exchange to end the voting for directors by brokers who have not received specific instructions to vote. The amendment, which will apply to shareholder meetings held on or after January 1, 2010, makes uncontested director elections (except those at registered investment companies) non-routine matters under Rule 452. As a result brokers will no longer be able to vote shares in connection with director elections without instructions from their customers. Because Rule 452 applies to all brokers registered with the New York Stock Exchange, it will impact all publicly traded companies without regard to the exchange on which their shares are listed.
The practical effect of eliminating broker discretionary voting in the election of directors will be that it may be more difficult to obtain a quorum, and if the company has adopted majority voting for directors (as opposed to plurality voting), it may also be more difficult to achieve such vote because unvoted shares will effectively be treated as “no” votes. These problems will be particularly acute in companies with significant retail brokerage stock ownership. Companies that do not generally include ratification of the appointment of their independent auditing firm in their proxy materials (which remains a “routine” proposal on which brokers may vote without instruction) may consider doing so in order to more easily obtain a quorum. The problem of obtaining the requisite votes may well be exacerbated in companies utilizing notice-and-access electronic delivery of proxy materials because such companies have generally experienced a reduction in retail voting responses in comparison to responses to traditional mailing of proxy materials. Finally, it will be necessary to notify shareholders that, contrary to prior practice, failing to submit a properly completed and executed proxy to the broker with whom the shareholder holds stock in street name will result in the broker not voting those shares. This is a significant change from historical practice as it is likely that many holders of shares in brokerage accounts did not submit their proxies knowing that the broker would vote their shares in favor of management or, in some cases, in the same proportion as they were directed to vote shares by shareholders providing instructions. The effects of amended Rule 452 may very well be that institutional investors and hedge funds (because they usually do vote) will cast a disproportionately higher share of the votes compared to holders of stock in street name, and that institutional investors, hedge funds and proxy advisory firms will have greater influence on the voting process.
We believe that it is incumbent on public companies to begin evaluating their response to amended Rule 452 as soon as practical and not wait until the traditional time for preparing their proxy materials.