NYSE Rule 452 and Voting Uninstructed Shares (Part 3)

The position set out in the NYSE Information Memorandum clarified that brokers will not be allowed to vote uninstructed shares for certain types of corporate governance proposals that are supported by management.  This recognizes that management support for a particular proposal is not always in the best interests of shareholders.  By eliminating the right of brokers to vote uninstructed shares in these circumstances, proposals approved by management will likely lose the automatic support that came from at least some of the brokers voting uninstructed shares. 

At the same time, this puts the NYSE in the middle of a potential quagmire.  Presumably the NYSE will have to define the particular proposals that fall within the definition of corporate governance.  This will no doubt entail an annual analysis.

The NYSE shift raises once again the question of whether Rule 452 ought to simply bar brokers from voting uninstructed shares.  The main advantage seems to be the need to have the shares present at the meeting for quorum purposes.  But this justification seems doubtful.  In some states, the quorum can be set at almost any percentage.  It is not uncommon for companies to have quorum percentages of one third.  See Del. Code § 216 ("in no event shall a quorum consist of less than 1/3 of the shares entitled to vote at the meeting"). 

Any company depending upon uninstructed shares to meet a quorum requirement of 33% has not done a particularly good job at getting shareholders to attend the meeting (by proxy or otherwise).   Moreover, the uninstructed shares could represent a sizable percentage of the 33% that are present at the meeting.  Because they cannot vote on many matters (corporate governance proposals, uncontested elections for the board, etc) the company is effectively deciding these issues through the vote of a very small percentage of the remaining shares.  It is not at all clear that a meeting should be held under these circumstances. 

At a minimum, the NYSE should conduct an empirical study to determine how often uninstructed shares are needed to ensure the presence of a quorum.  The data may suggest that they are not necessary.  To the extent, however, that they are, a second best alternative would be to allow shareholders to vote only on one matter, the outside accounting firm.  Most companies (but not all) submit the auditor to shareholders for approval.  The vote is never controversial and auditors are routinely approved with percentages above 95%.   For a more detailed discussion of shareholder approval of the auditor, see Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors.

J Robert Brown Jr.