The Securities and Exchange Commission (SEC) recently approved a New York Stock Exchange (NYSE) proposal to eliminate broker discretionary voting for directors and a Chicago Board Options Exchange proposal related to stock options. The SEC has also proposed rules regarding shareholder and corporate governance matters and shareholder access to proxy statements.

Broker Discretionary Voting—Final Rule

The SEC voted to approve an NYSE proposal that would eliminate broker discretionary voting for all elections of directors, whether contested or not. Currently, NYSE Rule 452 and corresponding Listed Company Manual § 401.08 permit brokers to vote on behalf of their beneficial owner customers in uncontested elections of directors if the customers have not returned voting instructions. The new rule will affect NASDAQ-listed issuers as well as NYSE-listed issuers.

The NYSE’s proposal is designed to enhance corporate governance and accountability by helping ensure that investors with an economic interest in the company vote in the election of directors. It also would address concerns that broker discretionary voting for directors has affected director election results.

Specifically, the NYSE proposal would add “election of directors” to the list of enumerated items for which a member generally may not give a proxy to vote without instructions from the beneficial owner. The proposal contains a specific exception for companies registered under the Investment Company Act of 1940. In addition, the NYSE proposes to codify two previously published interpretations that do not permit broker discretionary voting for material amendments to investment advisory contracts with a registered investment company.

We recommend that public companies assess the impact of the proposed rules on their ability to obtain a quorum at their annual shareholders meeting and consider hiring a proxy solicitor if necessary.

Using Executive Stock Options as Collateral for Writing Covered Call Options—Final Rule

The SEC recently approved a proposed rule of the Chicago Board Options Exchange. The rule permits employees to use vested stock options as collateral for writing covered call options on the issuer’s underlying stock. Thus, executives with vested stock options may be able to generate income and liquidity by receiving call premiums by writing call options on stock underlying their stock options.

The rule provides that the issuer must consent to the executive writing a covered call and the issuer must enter into an agreement with the employee and the broker dealer effecting the transaction. Importantly, the issuer must agree to waive any forfeiture conditions with respect to the vested stock options, such as those that arise from termination of employment, as well as any transfer restrictions that would preclude a pledge of the vested stock options to a broker dealer. In addition, a legal opinion regarding the employee’s and the issuer’s right to enter into the transaction under the stock option plan must be delivered for the first year while the new rule is in place.

Issuers wishing to explore use of this new rule should consider:

  • Whether the transaction is permitted under their option plan.
  • Potential insider trading implications.
  • Interaction with the issuer’s stock ownership guidelines.
  • Reaction from investor and proxy advisory groups.

Compensation and Corporate Governance— Proposed Rule

The SEC proposed a set of rule revisions intended to improve the disclosure provided to shareholders of public companies regarding compensation and corporate governance matters when voting decisions are made. These new disclosures are designed to enhance the information included in proxy and information statements and would include information about:

  • The relationship of a company’s overall compensation policies to risk.
  • The qualifications of directors, executive officers and nominees.
  • Company leadership structure.
  • Potential conflicts of interests of compensation consultants.

In addition, the proposals are aimed to improve the reporting of annual stock and option awards to company executives and directors as well as to require quicker reporting of election results. The SEC also proposed amendments to the proxy rules intended to clarify how the rules operate.

Shareholder Access to Proxy Statements to Nominate Director—Proposed Rule

Under the proposed rule, certain shareholders would be able to include their nominees to the board of directors in the company’s proxy materials unless the shareholders are otherwise prohibited—either by applicable state law or by a company’s charter/bylaws—from nominating a candidate for election as a director.

The proposed rule would apply to all companies reporting under the Securities Exchange Act of 1934, including investment companies, other than companies that have only a class of debt securities registered under the Exchange Act. Shareholders would be eligible to have their nominee included in the proxy materials if:

  • They own at least 1% of the voting securities of a “large accelerated filer” (a company with a worldwide market value of $700 million or more) or of a registered investment company with net assets of $700 million or more.
  • They own at least 3% of the voting securities of an “accelerated filer” (a company with a worldwide market value of $75 million or more but less than $700 million), or of a registered investment company with net assets of $75 million or more but less than $700 million.
  • They own at least 5% of the voting securities of a non-accelerated filer (a company with a worldwide market value of less than $75 million), or of a registered investment company with net assets of less than $75 million.

The proposed rule limits the number of directors a shareholder may nominate and have elected to the board. No more than one shareholder nominee, or a number of nominees that represents up to 25% of the company’s board of directors, whichever is greater, may be nominated or hold board seats at any one time. For example, if the board is composed of three members, one shareholder nominee could be included in the proxy materials. If the board is composed of eight members, up to two shareholder nominees could be included in the proxy materials.

Other facets of the proposed rule include:

  • Groups of shareholders would be able to aggregate holdings to meet applicable thresholds.
  • Shareholders would be required to have held their shares for at least one year.
  • Shareholders would be required to sign a statement declaring their intent to continue to own their shares through the annual meeting at which directors are elected.
  • Shareholders would be required to certify that they are not holding their stock for the purpose of changing control of the company, or to gain more than minority representation on the board of directors.