Stockholders in public companies often hold their shares in “street name,” meaning that they hold their shares in the public company through a broker, trustee or other nominee rather than in their own name. On July 1, 2009, the Securities and Exchange Commission approved an important amendment to New York Stock Exchange Rule 452 that prohibits brokers who hold shares in “street name” for their clients from voting in uncontested director elections on behalf of their clients when they have not received voting instructions from those clients.
The amendment was “designed to enhance corporate governance and accountability by helping assure that investors with an economic interest in the company vote on the election of directors.” The amended rule applies to stockholder meetings held on or after Jan. 1, 2010, and impacts not only New York Stock Exchange listed companies but all other public companies, whether or not listed.
Smart Business learned more from Jonathan Friedman, an associate with Stubbs, Alderton & Markiles, LLP, about how the elimination of discretionary voting in uncontested election of directors impacts public companies.
What does the new rule require of brokers?
New York Stock Exchange Rules and SEC rules mandate that brokers deliver proxy materials to stockholders who hold their shares in ‘street name’ and request instructions from each such stockholder as to how to vote their shares at a stockholder meeting. Prior to the adoption of the amendment, if a broker did not receive voting instructions from stockholders who hold their shares in ‘street name’ 10 days prior to the stockholder meeting, Rule 452 permitted the broker to vote such shares in uncontested director elections on behalf of his or her clients at the discretion of the broker.
What is the overall impact of the amendment?
Upon the effectiveness of the amendment, brokers will not be permitted to vote shares on behalf of their clients in uncontested director elections unless they have received specific voting instructions from their clients. Among others, the following are potential impacts of the rule change:
- Since individual investors (generally known as retail investors) who hold their shares in ‘street name’ typically do not provide voting instructions to their brokers and brokers have traditionally exercised their voting discretion in uncontested director elections by voting in favor of management’s director slate, the new rule may make it more difficult for a company to implement its desired director slate. This is especially true for companies that have adopted ‘majority’ voting in relation to the election of directors rather than ‘plurality’ voting (plurality voting means that directors with the most votes are elected, even if they receive less than a majority of the votes cast).
Majority voting provisions come in different flavors. Companies with a ‘majority’ voting provision that requires a majority of the outstanding shares to approve the election of a director stand to be most impacted by the rule amendment. Companies that have adopted a majority voting provision that requires a majority of votes cast ‘for’ a candidate to exceed votes cast ‘against’ a candidate in order to elect such candidate may also be impacted by the rule amendment but to a lesser extent.
- The elimination of broker discretionary voting may make it difficult for companies to achieve a quorum at their annual meetings, since brokers may not be allowed to submit proxies on behalf of their clients who fail to vote or provide their broker with voting instructions. Consequently, management and financial resources may need to be utilized to achieve a quorum, for instance, through the engagement of a proxy solicitor.
- The rule change is expected to strengthen the influence of institutional investors and activist shareholders (who typically provide voting instructions to brokers) at the expense of retail investors (who typically do not provide voting instructions to their brokers) in the election of directors.
What steps should companies take now?
Companies can mitigate the impact of the rule amendment on obtaining a quorum for an annual meeting by including at least one proposal for consideration at the annual meeting that is ‘routine’ under rule 452. If a company includes at least one ‘routine’ proposal, such as the ratification of the company’s auditors, brokers may vote the shares that they hold for their clients on such proposal without instructions from their clients, and such shares will be present for purposes of establishing a quorum at an annual meeting.
Business leaders should understand the mechanics and consequences of how directors are elected at their annual meeting. Has the company adopted ‘plurality’ voting or a ‘majority’ voting provision? If a company has adopted a majority voting provision, it should understand whether directors are elected by a majority of votes cast ‘for’ a candidate exceeding votes cast ‘against’ a candidate, or whether a majority of outstanding shares are required to elect each candidate.
Companies must also assess their voting constituency. Businesses with a large retail base may want to consider improving communications with such investors, for instance, by hiring a proxy solicitation firm in connection with its annual meeting to help secure the required vote on management proposals and to assure that a quorum is present at the meeting. If management believes the engagement of a proxy solicitation firm is necessary, they should budget for additional costs for this purpose.
Jonathan Friedman is an associate with Stubbs, Alderton & Markiles, LLP. Reach him at firstname.lastname@example.org or (818) 444-4500.