On January 25, 2012, the New York Stock Exchange LLC and the NYSE Amex Equities LLC (collectively, the “Exchange”) published Information Memo 12-4, which guidance further restricts the ability of brokers to vote customer shares under NYSE Rule 452 without client instructions with respect to certain types of management-supported corporate governance proposals. These changes reflect congressional and public policy trends disfavoring broker voting of uninstructed shares.
BACKGROUND ON NYSE RULE
452 Rule 452 governs when Exchange member organizations may vote customer shares without specific client instructions. Rule 452 allows a broker to exercise discretionary voting on behalf of a beneficial owner on routine matters if the broker has not received voting instructions from its client. Typically, corporate governance proposals have been deemed routine or “Broker May Vote” matters, and brokers have been able to exercise discretionary authority in voting on these proposals. However, Rule 452 lists several items that are considered non-routine, on which member organizations may not vote without specific instructions from the beneficial owner, including contested matters, mergers, consolidations, or other matters which may affect substantially the rights or privileges of shareholders. In addition, a 2010 amendment to Rule 452 prohibits brokers from voting uninstructed shares on executive-compensation matters.
CHANGES TO THE APPLICATION OF NYSE RULE
452 Under the new interpretive guidance, certain corporate governance proposals will be considered “non-routine” matters, and brokers may not vote shares without instructions from the beneficial owner. The types of corporate governance proposals affected by the new Exchange position include proposals related to the following matters, among others:
- Destaggering or declassifying a company’s board of directors;
- Majority voting in the election of directors;
- Eliminating supermajority voting requirements;
- Providing for the taking of action by written consent of shareholders;
- Providing rights to call special meetings of shareholders; and
- Overriding certain types of antitakeover provisions.
The release of Information Memo 12-4 signals a significant new curtailment of the practice of broker discretionary voting. Because Rule 452 governs the voting rights of NYSE member brokers regardless of whether the issuer is listed on the NYSE, the changes in the application of Rule 452 affect all issuers, including NASDAQ-listed and other non-NYSE-listed companies, whose shares are held by an NYSE member broker.
SIGNIFICANCE
As a result of the Exchange’s new position, public companies may experience fewer shares’ being voted by proxy. If there are no routine matters on the ballot, it may be difficult to obtain a quorum because brokers will not be able to vote their shares to be deemed present at the meeting. Therefore, companies may wish to include a routine proposal on their ballots since broker discretionary votes can help to establish a quorum that is valid for an entire meeting, including one that addresses non-routine matters.
Proposals requiring the approval of a majority of the outstanding shares may be more difficult to obtain. Companies should consider additional proactive measures to obtain votes by communicating with shareholders. Any shareholder outreach efforts should include information about the changes in broker discretionary voting rules and the increased importance of receiving stockholders’ voting instructions.
In the wake of Information Memo 12-4, it remains unclear what matters remain routine and subject to broker discretionary voting under Rule 452. Any company that is including in its proxy statement a corporate governance proposal that is not covered by the above list should consult legal counsel regarding whether brokers will be able to vote uninstructed shares on such proposal.
COMPLIANCE / EFFECTIVE DATE
These changes to Rule 452 are effective immediately and will affect the upcoming 2012 proxy season.