The Securities and Exchange Commission has published for comment a proposed rule change by the New York Stock Exchange that could make it more difficult for companies to satisfy quorum requirements at annual meetings. The NYSE's proposed changes to NYSE Rule 452 would reclassify uncontested director elections from "routine" matters on which brokers and banks have had the right to vote all "unvoted" shares held in brokerage accounts, to now be deemed a "non-routine" matter. This change would require brokers and banks to obtain voting instructions from beneficial owners to vote shares for the election of directors. NYSE Rule 452, titled "Giving Proxies by Member Organizations," permits brokers to vote on "routine" proposals if the beneficial owner of the stock has not provided specific voting instructions to the broker at least 10 days before a scheduled meeting. An uncontested election of a company's board of directors has been considered to be among such routine matters on which brokers may vote unvoted shares.
If approved by the SEC, the rule change would be in effect for shareholder meetings held after January 1, 2010 - in other words, next year's proxy season. If the proposed rule change is not approved by the SEC until after August 31, 2009, the effective date will be delayed to a date at least four months after the approval date, but would not become effective in the first half of a calendar year.
For companies with a large retail shareholder base, this change may make satisfying quorum requirements difficult without paying for proxy solicitors. An alternative to using a proxy solicitor would be to include shareholder approval of the company's auditor as a proxy item. Because auditor approval would continue to be a routine matter, broker non-votes would continue to be counted toward quorum requirements.
As noted above, shares held on behalf of retail shareholders for which voting instructions are not received may be voted by brokers, and tend to be voted by management. Consequently, companies with a large retail base may find that fewer shares are voted in favor of the management slate of directors under the proposed rule change. When coupled with the rise of majority voting for directors in uncontested elections, the need to obtain proxies from retail shareholders becomes more important. A company facing these issues may want to retain a proxy solicitor to ensure better voting turnouts for management.
This rule change was first introduced in October 2006 and has been amended three times: in May 2007 to provide that the proposed amendment is not applicable to registered investment companies under the Investment Company Act of 1940, and in June 2007 to add another item to the list of non-routine items listed in NYSE Rule 452.11 relating to amendments to investment contracts and currently to update the effective date and reflect minor SEC staff comments.