NYSE Eliminates Discretionary Broker Voting on Corporate Governance Proposals

1. ClientAlert
January 27, 2012
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NYSE Eliminates Discretionary Broker Voting on Corporate
Governance Proposals
Matthew S. GilMan | GilManM@pepperlaw.coM
On January 25, 2012, the New York Stock Exchange (NYSE)
notified its member organizations that brokers who do not
receive voting instructions from their customers (i.e., beneficial Public companies now may find it more
owners) with respect to certain types of management-supported
corporate governance proxy proposals for public companies difficult to obtain stockholder
will no longer have the discretionary authority to vote on those approval of corporate governance
proposals under NYSE rules. Because most brokerage firms are
NYSE member organizations, this change will affect companies proposals, and should consider the
listed on NYSE as well as Nasdaq and other national securities impact of these changes on their
exchanges.
upcoming proxy solicitations.
The types of corporate governance proposals affected by the new
NYSE position include proposals relating to the following mat-
ters, as well as other corporate governance matters:
• destaggering or declassifying a company’s board of directors
• majority voting in the election of directors often vote their shares on routine matters in the same manner
• eliminating supermajority voting requirements as recommended by management, making it more likely that
management-supported proposals are approved by stockholders.
• providing for the taking of action by written consents of
With the change in the NYSE’s position, effective immedi-
stockholders
ately, management-supported corporate governance proposals
• providing for the right to call a special meeting of stock- will be considered “non-routine” matters under NYSE rules,
holders, and and brokers may not vote shares without instructions from the
beneficial owner.
• overriding certain types of anti-takeover provisions.
The reversal of the NYSE’s position reflects the congressional
NYSE rules allow brokers to exercise discretionary voting on
and public policy trends in recent years that disfavor broker
behalf of a beneficial owner on all “routine” matters if the broker
voting of uninstructed shares. Specifically, effective in 2010, the
has not received voting instructions from the beneficial owner.
SEC approved an amendment to the NYSE rules to provide
Under the rules previously in effect, management-supported
that uncontested elections of directors (other than directors of
corporate governance proposals were deemed routine matters
registered investment companies) will be considered non-routine
under the NYSE rules, and brokers were able to exercise their
matters, and brokers were prohibited from voting on those mat-
discretionary authority in voting on those proposals. Brokers
ters without specific instructions from the beneficial owners of
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The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that
time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of
it does not constitute, a lawyer-client relationship. Please send address corrections to phinfo@pepperlaw.com. © 2012 Pepper Hamilton LLP. All Rights Reserved.

2. the shares. Similarly, under the Dodd-Frank Act, brokers may • Increased proxy solicitation efforts. Proposals requiring the ap-
not vote uninstructed shares on executive compensation matters. proval of a majority of the outstanding shares may be more
difficult to obtain, so companies should consider additional
As a result of the change, public companies may find it more
proactive measures to obtain votes, such as engaging a proxy
difficult to obtain stockholder approval of corporate governance
solicitation firm to communicate with shareholders or dis-
proposals. For example, when the voting requirement for ap-
tributing additional proxy materials. These additional efforts
proval of a corporate governance proposal is a majority of the
could extend the timeframe of the proxy solicitation and
outstanding shares, such as an amendment to a certificate of
result in increased costs.
incorporation to declassify a board of directors, brokers may not
vote on the proposal if the beneficial owner does not provide • Reconsideration of the use of the notice-only option under
instructions on how to vote on the proposal (i.e., broker non- e-proxy rules. The electronic delivery of proxy materials has
votes). In such cases, broker non-votes will have the effect of be- resulted in declining voting instructions by retail investors.
ing cast against the proposal, making stockholder approval more The inability of brokers to vote on non-routine corporate
difficult to achieve. governance proposals makes active retail participation that
much more important. Therefore, companies may want to
Companies should immediately consider the impact that these
reconsider whether to rely solely on electronic delivery of
changes may have on their upcoming proxy solicitations, such as:
proxy materials, and may be inclined to retain or return to
• Increased difficulty in obtaining a quorum for the meeting. The the traditional paper mailings of proxy materials (i.e., the
elimination of broker discretionary authority in corporate “full set delivery” option).
governance proposals, as has been the case with director
Now is a good time for public companies to communicate with
elections, will likely result in a reduced number of shares
their stockholders about the changes in the broker discretionary
voted by proxy. If there are no routine matters on the ballot,
voting rules and the increased importance of receiving the stock-
it may be difficult to obtain a quorum because brokers will
holders’ voting instructions. Public companies should understand
not be able to vote their shares to be deemed present at the
how the new rule changes can impact their ability to obtain
meeting. Therefore, companies would be well advised to
stockholder approval of certain corporate governance proposals
include a routine proposal, such as the ratification of the ap-
and should factor in the impact of these changes when planning
pointment of its independent auditors. Broker discretionary
their proxy solicitation.
votes on routine matters can establish a quorum that is valid
for the entire meeting, including for non-routine matters. If you would like more information on the recent changes to
the NYSE’s discretionary broker voting rules, please contact the
author, or your Pepper Hamilton contact.
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