The SEC and Corporate Governance: The Limits of Disclosure (Exchange Act Release No. 61175) (Disclosure and Transparency in the Voting Tabulation Process)

We are discussing the SEC's latest corporate governance disclosure requirements adopted in Exchange Act Release No. 61175 (Dec. 16, 2009) and the use of disclosure to influence corporate governance. 

One of the interesting changes in Exchange Act Release No. 61175 has been to the requirement that companies report the results of any matter voted upon by shareholders.  The disclosure requirements were initially intended to fill a gap in state law.  More recently, however, they became requirements designed to affect the tabulation process. 

State law does not require companies to reveal the voting results of these meetings.  See Exchange Act Release No. 4686 (March 17, 1952)(noting that shareholders “usually are not otherwise fully informed as to the results of security holders' meetings.”).   Nor is there any guarantee that the information would be available through an exercise of inspection rights given the excessive pleading standards imposed by Delaware courts. 

As early as 1952, the Commission stepped in and filled the void by requiring companies to disclose the results of these meetings in a current report on Form 8-K and, later, in a quarterly or annual report.  See Item 4 of Part II to Exchange Act Forms 10-Q and 10-QSB, adopted in Exchange Act Release No. 17524 (Feb. 9, 1981).  See also Item 4 of Part I to Exchange Act Forms 10-K and 10-KSB, adopted in Exchange Act Release No. 18524 (March 3, 1982).

Over time, the Commission increased the amount of information that had to be disclosed about voting results.  Initially, companies only had to include the totals for directors involved in a contest.  With respect to other proposals, only the votes for and withheld needed to be disclosed.  The reporting obligations were substantially strengthened in 1992, with companies required to disclose voting results for all nominees and to disclose the number of abstentions and broker non-votes.  See Exchange Act Release No. 31326 (Oct. 16, 1992).  Non-votes are shares present at the meeting that do not vote on the matter.  See Exchange Act Release No. 30849 n. 67 (June 24, 1992)(“In two instances, a shareholder will be deemed present at the meeting for quorum purposes, but will be deemed not to have voted on a particular matter. First, the shareholder may specifically abstain from the vote by registering an abstention vote. Second, a nominee holding shares for beneficial owners may have voted on certain matters at the meeting pursuant to discretionary authority or instructions from the beneficial owners, but with respect to other matters may not have received instructions from the beneficial owner and may not exercise discretionary voting power. Such unvoted shares are termed ‘non-votes.’").  

While the requirements largely assured shareholders of complete disclosure of voting results, an important piece of information, they still permitted considerable delay.  The need for shareholders to have precise totals more contemporaneously with the vote, however, was unclear.  To the extent shareholders knew the actual results, the precise totals would generally not be material.  In some cases, the closeness of the vote could invite challenge to the results.  Yet it is likely that shareholders will already know the vote was close, with the precise total only adding marginally to the total mix of information.

On the other hand, delay did have one significant substantive affect.  It allowed management to delay releasing the results, usually by claiming that the tabulation process was still underway.  This permitted management to avoid the consequences of an adverse vote and to consider ways of challenging the tabulation to ensure a more favorable result.  All of this could be done in an entirely non-transparent fashion, with management merely having to disclose the final outcome once the next quarterly report had to be filed. 

The amendments to the shareholder voting requirements have made this much more difficult.  The Commission dropped the requirement from the quarterly/annual reports and adopted Item 5.07 of Regulation 8-K.  The results had to be disclosed within four business days of the shareholder meeting.  To the extent not finalized, the company still had to disclose preliminary results within that time period and the final results when available.  See Item 5.07 of Form 8-K, adopted in Exchange Act Release No. 61175 (Dec. 16, 2009).

The rapid disclosure will likely result in increased transparency in the tabulation process and alter the substantive behavior of management.   By forcing rapid disclosure, the Commission has effectively taken away from the company large swathes of time to tabulate the votes.  Companies could, in the past, take their time and change the totals with little transparency.  By having to quickly report the preliminary totals, companies will communicate to investors the initial totals.  More importantly, disclosure of the final numbers will, to the extent significantly different, almost certainly need to be accompanied by an explanation as to why they were made (in order to make the disclosure accurate and complete).  The disclosure will, therefore, provide shareholders in at least some instances with a basis for challenging the changes.  

It is a level of transparency that currently does not exist in connection with the tabulation process.  For more on the SEC and its use of disclosure to affect the corporate governance process, see Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure.