NYSE Proposes to Eliminate Discretionary Broker Voting for Director Elections
The NYSE has proposed a rule change to the SEC to eliminate broker discretionary voting for board of director elections. The proposal follows recommendations of the roxy Working Group (PWG), which was created in April 2005 by the NYSE to review the proxy voting process. The proposed amendment would apply to shareholder meetings held on or after January 1, 2008, except to the extent that a meeting was originally scheduled to be held in 2007 but was adjourned to 2008.
Under the current NYSE and SEC proxy rules, brokers must deliver proxy materials to beneficial owners and request voting instructions from shareholders. If voting instructions have not been received by the tenth day preceding the shareholder meeting date, NYSE Rule 452 provides that brokers may vote on certain matters eemed “routine” by the NYSE, including an “uncontested” election of a company’s board of directors. A significant effect of the proposed rule change is that broker votes of uninstructed shares for elections of directors would no longer be permitted to be used in establishing a quorum at shareholder meetings.
In June 2006, the PWG prepared a draft report and a series of recommendations relating to its findings. In this report, the PWG stated that the election of directors should no longer be viewed as routine under NYSE Rule 452 and thus brokers should no longer be permitted to cast uninstructed shares for the election of directors. The PWG report notes that this proposed change could significantly affect the director election process. For example, the report states that it 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. The report further notes that these costs may increase substantially with the rise of majority voting for directors, as issuers have to obtain the votes from shareholders who may not realize that their failure to vote constitutes a “no” vote. Such a change may also increase the influence of special interest groups or others with a particular agenda to challenge an incumbent board, at the expense of smaller shareholders. Moreover, the report notes that these consequences could fall most dramatically on smaller issuers who have a smaller proportion of institutional investors and/or have greater difficulty in contacting shareholders and convincing them to vote in uncontested elections.
Securities Industry FYI is a service of the Broker-Dealer and Investment Management Practices of Morgan Lewis. If you have any questions concerning these important legal developments, please contact the following Morgan Lewis attorney:
Theodore R. Lazo
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue,
NWWashington, D.C. 20004
Phone: 202.739.5250
Fax: 202.739.3001
Email:tlazo@morganlewis.com