Shareholder Communications and the Problem of Beneficial Ownership (Part 2)

How do street name owners participate in the governance process?  Not easily is the short answer. For a history of how the system of regulation in this area developed, go to the Shareholder Communication Rules, at 698. 

It starts with the depository, the record owner of most street name shares under state law.  The list of record owners tells the company the number of shares held by the depository, and little else.  As a result, the company must first send an inquiry to the depository to learn the identity of the participants.  These are the brokers and banks that deposit shares with DTC. Once an answer is received, the company must communicate with each broker and bank to learn the number of beneficial owners. As a practical matter, most brokers have assigned the authority to Broadridge, the successor to ADP.

Once the company learns the number of beneficial owners, it is obligated to send enough copies of the proxy materials to each broker for forwarding.  Materials must be sent to the broker and then passed along to the beneficial owners.  In other words, they can't be sent directly.  The system is expensive, with the company paying the costs associated with the forwarding process.

It is also circuitous and time consuming, with communications particularly more difficult the closer it gets to the meeting date.  Unsurprisingly, the materials sometimes arrive after the meeting.  See Marcel Kahan & Edward B. Rock, The Hanging Chads of Corporate Voting, August 13, 2007, at 17 (“Given this complexity, there will be numerous cases in which the proxy materials and requests for voting instructions simply do not make it to the beneficial owner in time for the beneficial owner to vote.”).  

In sending the materials to street name owners, brokers have a choice of forwarding a proxy card (which go directly to the company) or voting instructions (which are returned to the broker, collectively tabulated, and transferred to a proxy card).  Brokers almost universally use voting instructions, creating problems when the voting instructions differ in language from the proxy card and when instructions are provided late in the voting process.  

The system is laden with problems, including those associated with accurately tabulating votes in such a complex system (particularly the problem of over voting) and those associated with changes in beneficial ownership around the period of the record date, particularly through the borrowing of shares.  Finally, the system is made needlessly more complex by the absence of a reasonable system of direct communication (rather than the system of forwarding) between a company and the street name owners (more on that later in the series).  All of these topics will be addressed in subsequent posts. 

For more on this topic, take a look at "The Shareholder Communications Rules: An Exercise in Regulatory Utility or Futility?"