NYSE Rule 452 and the Problems of Uninstructed Shares (Part 2)
Rule 452 sets out the standards for voting shares by brokers. It starts with the presumption that they can vote uninstructed shares then includes a list of matters that are excluded.
The Rule has been at the center of controversy. Most recently, the NYSE amended the Rule to prohibit brokers from voting in uncontested elections to the board of directors. With majority vote provisions and "just say no" campaigns, votes by brokers in uncontested elections could carry dispositive weight. In the "just say no" campaign against directors at Disney, some of the candidates apparently received a majority only because of the uninistructed shares voted by brokers. Congress also stepped in by essentially requiring this result in Dodd-Frank.
Most recently, the NYSE issued an Information Memo essentially containing further limits on the right of brokers to vote uninstructed shares. The Memo noted that "[i]n the past, the Exchange has ruled certain corporate governance proposals as 'Broker May Vote' matters for uninstructed customer shares when the proposal in question is supported by company management." Not any more. Pointing out the "public policy trends disfavoring broker voting of uninstructed shares", the NYSE determined:
that it will no longer continue its previous approach under Rule 452 of allowing member organizations to vote on such proposals without specific client instructions. Accordingly, proposals that the Exchange previously ruled as “Broker May Vote” including, for example, proposals to de-stagger the board of directors, majority voting in the election of directors, eliminating supermajority voting requirements, providing for the use of consents, providing rights to call a special meeting, and certain types of anti-takeover provision overrides, that are included on proxy statements going forward will be treated as “Broker May Not Vote” matters.
As a result, brokers will cease to have a role in the approval of certain types of corporate governance proposals. We will discuss the implications of this proposal in the final post.