SEC approves NYSE Rule change regarding Broker Non-Votes - 15 July 2009

The Securities and Exchange Commission (SEC) recently approved a New
York Stock Exchange (NYSE) proposed amendment to NYSE Rule 452 to
prohibit broker's from exercising "discretionary voting" in all
director elections. The amendment will apply to shareholder meetings
held on or after January 1, 2010. Importantly, the NYSE Rules apply
to NYSE member brokers in all of their discretionary voting activities,
including voting for publicly –traded companies whose shares are not
listed on NYSE. The amendment does not apply to companies that are
registered under the Investment Act of 1940.

NYSE Rule 452



NYSE Rule 452 authorizes NYSE member brokers to cast votes in the
broker's discretion for certain "routine" matters on behalf of "street
name" shareholders who do not return the proxy card to the broker
within 10 days prior to the shareholders meeting. Routine matters
according to Rule 452 include any matter where the action to be taken
is (i) adequately disclosed to the shareholders and (ii) does not
include authorization for a merger, consolidation or any other matter
which may affect substantially the rights or privileges of the
stock. Under the existing Rule 452, brokers have been permitted to
exercise their discretion to vote the shares of retail shareholders in
an uncontested director election if the retail shareholder did not
provide any instruction to the broker about how to vote. The amendment
to NYSE Rule 452 prohibits brokers from voting the shares of retail
shareholders in either contested or uncontested director elections
unless the broker has instructions from the retail shareholder about
how to vote.



Historically, the broker discretionary votes authorized by NYSE Rule
452 have amounted to a significant percentage of votes cast. According
to RiskMetrics Group, approximately 80 percent of investors own their
shares through brokers, and only one-third of retail voters vote their
shares. Broker discretionary votes in uncontested director elections
were generally voted in favor of the management slate.



Practical considerations



The amendment has several practical implications:

• Eliminating broker discretion to vote in director
  elections will make it easier for activists to unseat sitting board
  members by reducing the number of votes cast in favor of
  directors. Rather than propose a competing slate of directors, in
  companies with majority vote requirements, shareholder activists will
  have the option of unseating a director with a "just vote no" campaign.
  
  
   


• Companies that have adopted a majority vote
  threshold for the election of each director will be impacted by the
  amendment to NYSE Rule 452 as it will be more difficult for companies
  to secure the required majority vote. The amendment may make necessary
  increased proxy solicitation activity and expense to ensure that
  sufficient votes are cast by the street name holders to effect the
  election of directors. Companies that have not adopted a majority vote
  threshold for directors may want to delay to consider the practical
  implications of the Rule 452 amendment on their corporate governance
  activities.
  
   


• The inability of brokers to cast
  discretionary votes may impact a company's ability to establish a
  quorum for a shareholders meeting. If there are no "routine" matters to
  be voted upon, brokers may not submit the proxies and companies may
  have difficulty establishing a quorum. Companies may want to add
  "routine" matters to their proxy statements in order to establish the
  presence of enough shares to meet its quorum requirement.
  
   


• Companies
  that have a high percentage of their shares held in "street name" may
  need to take additional steps to educate their street name holders
  concerning their right to vote their shares. Appropriate steps may
  include: paying for telephone or additional solicitation services,
  evaluating options to simplify the voting procedure, providing for more
  time between proxy mailing and the meeting date, revising proxy
  disclosure to emphasize the importance of "street name" votes,
  simplifying the proxy disclosure to facilitate review, providing
  additional soliciting materials to encourage increased voting. 

Other limitations on Broker Discretionary Votes 



In addition to the amendment prohibiting broker discretionary voting in
director elections, the supplementary notes to NYSE Rule 452 set out a
non-exclusive list of 18 types of proposals that a NYSE member broker
is prohibited from voting in the absence of the retail shareholder
providing instructions about how to vote. Those are:

1.  Proposals which are not
submitted to stockholders by means of a proxy statement comparable to
that specified in Schedule 14-A of the Securities and Exchange
Commission;

2.  Proposals that subject of a
counter-solicitation, or are part of a proposal made by a stockholder
which is being opposed by management;

3.  Proposals that relate to a
merger or consolidation (except when the company's proposal is to merge
with its own wholly owned subsidiary, provided its shareholders
dissenting thereto do not have rights of appraisal);

4.  Proposals that involve appraisal rights;

5.  Proposals that authorize the mortgage of property;

6.  Proposals that authorize or create indebtedness or increase the authorized amount of indebtedness;

7.  Proposals that authorize or create a preferred stock or increase the authorized amount of an existing preferred stock;

8.  Proposals that alter the terms or conditions of existing stock or indebtedness;

9.  Proposals that involve waiver or modification of preemptive rights;

10.  Proposals that change existing quorum requirements with respect to stockholder meetings;

11.  Proposals alter voting
provisions or the proportionate voting power of a stock, or the number
of its votes per share (except where cumulative voting provisions
govern the number of votes per share for election of directors and the
company's proposal involves a change in the number of its directors by
not more than 10% or not more than one);

12.  Proposals that authorize the
implementation of any equity compensation plan, or any material
revision to the terms of any existing equity compensation plan;

13.  Proposals that authorize (i)
a new profit-sharing or special remuneration plan, or a new retirement
plan, the annual cost of which will amount to more than 10% of average
annual income before taxes for the preceding five years, or (ii) the
amendment of an existing plan which would bring its cost above 10% of
such average annual income before taxes;

14.  Proposals that change the
purposes or powers of a company to an extent which would permit it to
change to a materially different line of business and it is the
company's stated intention to make such a change;

15.  Proposals that authorize the
acquisition of property, assets, or a company, where the consideration
to be given has a fair value approximating 20% or more of the market
value of the previously outstanding shares;

16.  Proposals that authorize the
sale or other disposition of assets or earning power approximating 20%
or more of those existing prior to the transaction;

17.  Proposals that authorizes a
transaction not in the ordinary course of business in which an officer,
director or substantial security holder has a direct or indirect
interest; or

18.  Proposals that reduces earned
surplus by 51% or more, or reduces earned surplus to an amount less
than the aggregate of three years' common stock dividends computed at
the current dividend rate.

If you have any questions regarding this information, please contact Jamie Mercer at (858) 720-7469 or Adam Shipley at (858) 720-7472.