On July 1, 2009, the Securities and Exchange Commission (the "Commission") issued an order approving a New York Stock Exchange ("NYSE") proposed rule change to amend NYSE Rule 452 and the corresponding NYSE Listed Company Manual Section 402.8, to eliminate broker discretionary voting for uncontested election of directors except for registered investment companies. The amendments will be effective for all shareholder meetings held on or after January 1, 2010.

Previously, the NYSE's discretionary voting rules permitted brokers to vote on behalf of beneficial owners who had not provided voting instructions with respect to uncontested elections of directors. The amendments now specifically characterize the election of directors, whether contested or not, as a "non-routine" matter for which brokers are prohibited from exercising discretionary voting without instruction from the beneficial owner.  

In its order, located at http://www.sec.gov/rules/sro/nyse/2009/34-60215.pdf , the Commission supported its approval of the amendments by concluding that the effect of such amendments would be to assure that only those shareholders with an economic interest in the company may vote on the election of directors, thereby enhancing corporate governance and accountability to shareholders.

Potential Difficulty Achieving a Quorum

The amendments may affect the ability of some companies to achieve a meeting quorum, especially smaller issuers who may have higher percentages of shares held by retail investors, and may increase the costs to some companies to obtain a quorum by requiring them to incur additional proxy solicitation costs. The Commission, however, concluded that the amendments would not make obtaining a quorum materially more difficult. The Commission noted that most companies should not, as a practical matter, experience material additional difficulties in their ability to obtain a quorum if they have a large shareholder base or if they include another "routine" item on their ballot. A majority of companies (other than registered investment companies), although not required to by law, generally already include the ratification of independent auditors as a matter for shareholder approval. Although the Commission recognized that some companies may have increased proxy solicitation costs in order to obtain a quorum, the Commission stated such costs were justified because the amendments will enhance corporate governance and accountability.

Potential for Disenfranchised Retail Shareholders

The effect of eliminating broker discretionary voting in director elections may disenfranchise retail shareholders in favor of institutional investors and shift voting power toward small blocks of voters, special interest groups and the few shareholders who do vote. The Commission dismissed concerns about the shift in voting power as "not a basis for not approving the proposed rule change" and stated that the amendments will actually "better enfranchise shareholders by helping assure that votes on matters as critical as the election of directors are determined by those with an economic interest in the company, rather than the broker who has no such economic interest."

Potential Adverse Effect on Companies with Majority Vote Standards for Election of Directors

Majority vote standards typically require each director to receive a majority of the votes cast in order to be elected. Under the amendments, companies that have adopted majority vote standards may find that with the elimination of broker discretionary voting, it is more difficult to overcome "vote no" campaigns to obtain majority support for their director nominees. Increasingly, activist shareholders have used "vote no" or similar campaigns urging shareholders to withhold votes or vote against management's director nominees to express dissatisfaction with management's performance or the performance of the company. However, the Commission concluded that any effect the amendments may have on companies with majority vote standards is minimal and, again, was outweighed by the policy of enhancing corporate governance and accountability to shareholders.

Conclusion

In conjunction with the approval of the amendments, the Commission encouraged the NYSE and its member firms to implement investor education efforts regarding the changes and stated that shareholder education "could play a key role both in reducing any additional proxy solicitation costs incurred by companies, as well as achieving the policy goal of fostering investor participation in corporate governance."