NYSE files proposal with SEC to eliminate discretionary broker votes for director

By Cydney Posner

Today, the NYSE filed with the SEC a proposal to amend NYSE Rule 452 and NYSE Listed Company Manual Section 402.08 to eliminate discretionary broker votes for director.  If approved by the SEC, the proposal would be effective for all shareholder meetings beginning in 2008 (unless the meeting were originally scheduled to be held in 2007 but adjourned to 2008). Note that this rule would apply to NYSE member brokers and, therefore, would generally affect all issuers, no matter where listed.

Rule 452 allows a broker to vote in his discretion on "routine" proposals if the beneficial owner of the shares has not provided specific voting instructions to the broker at least 10 days before a scheduled meeting. Brokers may not vote without instruction on matters determined to be non-routine. "Non-routine" matters are generally those involving a contest or a matter that may substantially affect the rights or privileges of shareholders, such as mergers or shareholder proposals. (In material supplementary to the Rule, the NYSE identifies matters that are generally viewed to be non-routine. In addition, the NYSE publishes a list of meetings of shareholders in a Weekly Bulletin in which it designates whether, for each meeting, (a) members may vote a proxy without instructions of beneficial owners, (b) members may not vote specific matters on the proxy or (c) members may not vote the entire proxy.) Among the matters defined as "routine" under the current Rule is an "uncontested" election for a company's board of directors.

Recently, as part of the "majority vote" movement, the notion of what constitutes a "contested election" has come under increased scrutiny. For example, a number of shareholder activists have conducted "just vote no" campaigns, which technically do not involve competing solicitations and, therefore, have not been viewed by the NYSE as election "contests" for purposes of Rule 452. This position has led to much consternation among shareholder activists because brokers typically vote in accordance with the board's recommendations and, as a result, they regularly vote in favor of routine proposals and director candidates.

As discussed in the emails below, in June 2006, the NYSE Proxy Working Group recommended, among other things, that the election of directors no longer be viewed as routine under Rule 452, which would preclude brokers from casting discretionary votes in the election of directors. The Working Group recognized that, if adopted, this proposal would likely result in a number problems, including the increased cost associated with communicating with shareholders who previously did not vote, a cost that would fall disproportionately on smaller issuers with fewer institutional investors. This challenge would be compounded in the event that a company adopted majority voting for directors. In addition, the proposal would increase significantly the influence of shareholder activists and other special interests seeking to impose their own agendas. Nevertheless, the Working Group contended that these challenges were outweighed by the need for better corporate governance and transparency in the election process. The NYSE's proposal is the result of those recommendations.

Uninstructed or discretionary votes are especially important in establishing a quorum at shareholder meetings. If the proposal is approved by the SEC, a company that did not submit to its shareholders a proposal to ratify its auditors (which would still be considered "routine") may have difficulty achieving a quorum for its annual meeting. In addition, companies that have adopted "majority vote" policies or bylaws will undoubtedly find it more of a challenge to elect its directors, especially those that have in the past received significant "withhold" votes. Significant withhold votes have become increasingly common as shareholder activists seek to hold boards more accountable (or create disorder, depending upon your point of view.)

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