SEC APPROVES ELIMINATION OF BROKER VOTING ON DIRECTOR ELECTIONS - 7 July 2009

If you are having trouble viewing this email click here.	July 7, 2009

SEC APPROVES ELIMINATION OF BROKER VOTING ON DIRECTOR ELECTIONS

On July 1, 2009, the SEC voted to amend NYSE Rule 452 to eliminate broker discretionary voting for the election of directors. 

The Commission also released two proposals for public comment which
we will discuss in more detail in our weekly Governance & Proxy
Review e-newsletter.  The first regarding "say on pay" votes for TARP
recipients, and the second to enhance corporate disclosures and to
change several other proxy rules.  Lastly, Commission Chairman Mary
Schapiro stated that the Commission would undertake a review of the
proxy "plumbing" issues during the balance of this year. 

Amendments to Rule 452 
The Commission
voted 3-2 in favor of approving the NYSE proposal. Commissioners Casey
and Paredes dissented from the majority on the NYSE proposal. Both held
the view that the Rule 452 issue should be examined within the context
of the broader proxy voting and shareholder communications system. 

The New Rule 452 and Potential Impact on Issuers

Effective Date:
The amendment applies to proxy voting for stockholder meetings held on January 1, 2010 and after.

Which Companies Are Affected?
All NYSE,
NASDAQ, and AMEX companies with the exception of companies registered
under the Investment Company Act of 1940 will be affected by the
removal of the discretionary vote on director elections.  NYSE Rule 452
(Ten Day Rule) impacts brokerage firms that are members of the NYSE and
their ability to vote on behalf of their customers, rather than
applying to issuers listed on that exchange.

Potential Negative Impact Expected:
A
review of the historical voting patterns of retail holders indicates
that the loss of the discretionary vote will have a significant
negative impact on companies with considerable retail brokerage stock
ownership. A minimum of two-thirds and perhaps a much larger percentage
of all retail brokerage shares do not typically vote unless being
prompted to do so by proactive solicitation efforts.  With the loss of
the broker discretionary vote many companies will face serious
challenges.  We expect:

•          Companies that do not generally ask shareholders to ratify
  their audit firm or have some other “routine” proposal on the agenda
  may not receive the necessary vote requirement to achieve quorum at
  annual meetings.


•          With “Notice & Access”, which refers to the
  electronic delivery of proxy material, the retail voting responses will
  drop significantly compared to the traditional mailing of proxy
  material.  


•          The increasing movement of director elections to a
  majority vote requirement along with the loss of the broker
  discretionary vote will raise the bar for directors to be successfully
  elected.


•          The continued inability to communicate directly
  with Objecting Beneficial Owners (OBO’s) of stock will continue to
  hinder solicitation efforts for stockholder approval on agenda items


•          “Vote No Campaigns” and other shareholder activism
  against boards and individual directors is likely to increase and have
  greater impact as activists seize the opportunity to pressure companies
  with low vote response rates because of the loss of the broker
  discretionary vote on election of directors.


•          Greater influence on director elections by
  institutional shareholders, hedge funds and proxy advisory firms on the
  voting process.

Elimination of Rule 452 will make director elections and annual
meetings in 2010 more difficult for issuers. With the significant drop
in retail voting at companies that use “notice & access”, majority
voting for director elections becoming the norm and the greater chance
for vote no campaigns by activists, the elimination of Rule 452 with
regard to director elections has sealed the fate of the “routine”
election of directors at many companies. 

Issuers with sizeable retail holdings will need to thoughtfully
analyze the impact of this change well in advance of their annual
meetings and have a plan in place to ensure an uneventful re-election
process.

If you have any questions regarding the amended Rule 452, please feel free to contact Kenneth L. Altman or Paul Schulman.