Corporate Governance

Broker Non-Voting and the SEC: The Rationale

By J. Robert Brown

We are discussing the SEC's decision (by a 3-2 vote) to approve amendments to NYSE Rule 452 that prohibited brokers from voting uninstructed shares held by beneficial owners in uncontested elections for the board of directors.

Was there any good reason for opposing the amendment to Rule 452?  The only potential issue was, that by depriving brokers of the right to vote in uncontested elections, the shares would not be present at the meeting, making it harder to obtain a quorum.  In fact, however, this seemed like a relatively minor point.

Most states (if not all) presumptively provide that a quorum will be a majority of the outstanding shares.  They typically allow, however, the percentage to be lowered to as low as one-third, something probably almost universal among public companies.  As a result, even were the 19% of the uninstructed shares not present at the meeting, the relatively low percentage needed for a quorum would not seem to be a particularly difficult threshold.

More importantly, the problem could be eliminated by finding another reason why the 19% of the shares could still be voted at the meeting and counted for quorum purposes.  This would require the agenda to include a routine matter that was not in the prohibited categories listed in Rule 452.  The most obvious, least important routine matter?  Approving the outside accounting firm.  As the Commission noted:  "NYSE Rule 452 would continue to allow the broker to vote on other routine matters, such as the ratification of independent auditors, which will help companies meet quorum requirements, and therefore alleviate the efficiency concerns raised by commenters."  Exchange Act Release No. 60215 n. 34 (July 1, 2009).  Most companies do this but if they don't and they have quorum concerns, its easy enough to add to the agenda.

Full post as published by The Race to the Bottom on July 24, 2009 (boomark / email).