SEC Eliminates Broker Discretionary Voting In Director Elections, Proposes Changes To Disclosure & Other Requirements Regarding Corporate Governance & Compensation

The rule change limiting discretionary voting by brokers and the

anticipated adoption of other pending regulatory changes is

expected to significantly enhance the leverage of shareholder

rights activists and have significant impacts on the governance and

disclosure practices of public companies of all sizes.

Approval of Amendment to NYSE Rule 452

On July 1, 2009, the U.S. Securities and Exchange Commission

(SEC), by a 3 to 2 vote, approved an amendment to New York Stock

Exchange (NYSE) Rule 452 that will prohibit the exchange's

member brokers from providing a proxy to vote on behalf of a

beneficial owner holding voting shares in "street name"

on the election of directors unless the broker receives

instructions on the election proposal from the beneficial

holder.

This change eliminates "discretionary voting" for all

director elections. Broker discretion has typically been exercised

in favor of management's slate of directors in uncontested

director elections, although there has been a recent shift toward

proportional voting in which brokers exercise discretion on a

proportional basis consistent with directed votes. Contested

elections are already considered "non-routine" matters on

which discretionary voting is not allowed.

The change to Rule 452 applies to NYSE member brokers and,

accordingly, will affect meetings of shareholders of all operating

companies listed on all U.S. stock exchanges, including the NYSE,

the American Stock Exchange and the Nasdaq Stock Market. The

meetings of registered investment companies are exempted from the

rule change.

Implications of Change to Rule 452

Approval of the amendment of Rule 452 by the SEC will likely

have a substantial effect on corporate governance generally and

specific circumstances in which technically uncontested elections

are nonetheless the subject of shareholder activism. The amended

Rule 452 is applicable for shareholder meetings held after December

31, 2009.

Majority Voting

Director "vote-no" or "withhold" campaigns

have been an increasingly common means by which activist

shareholder groups, such as labor unions and pension funds, signal

disapproval of individual director nominees or board performance

generally or with respect to particular issues, such as a

company's executive compensation practices. Until recently,

plurality voting for directors, under which a director need receive

only one vote in an uncontested election to be elected, was the

nearly universal standard for director elections of public

companies in the United States. Majority voting policies or bylaw

provisions championed by shareholder activists have become

increasingly common. Under the majority voting standard, a director

in an uncontested election is required to offer his or her

resignation (which resignation, depending on the wording of the

policy or bylaw, may be "conditional" and subject to

board acceptance in the board's discretion) if he or she does

not receive a majority of "FOR" votes. In relatively few

cases where majority voting standards require not just a majority

of the votes cast, but that director nominees receive favorable

votes of 50 percent of the outstanding shares, the impact of the

rule change will be most significant.

Companies with large numbers of retail shareholders have relied

heavily on discretionary voting to re-elect directors in

uncontested elections. In a comment letter on the rule change

submitted to the SEC, the Society of Corporate Secretaries &

Governance Professionals noted that since the issuance of the

report and recommendations of the NYSE Proxy Working Group on June

5, 2006, at least 10 of the largest retail brokers have instituted

proportional discretionary voting policies, pursuant to which

discretionary votes are cast in proportion to instructed retail

votes. Broadridge Financial Services, Inc., (formerly, ADP)

estimates that in 2007, 98 percent of retail shareholder voters who

did provide voting instructions supported the board nominees in

director elections, and it has also been common for brokers who do

not observe proportional voting policies to vote with the

recommendations of the board. Because proportional voting is an

exercise of discretionary voting, the change to Rule 452 will end

these practices. Consequently, stripping brokers' ability to

increase the number of "FOR" votes for directors in the

name of retail shareholders could result in fewer votes for

director nominees in uncontested elections and more director

resignations, whether or not conditional, required by majority

voting policies and bylaw...