The Continuing Problem of the Lack of Impartiality with Respect to the Disclosure of Preliminary Voting Tallies (Part 1)

Most shares of large public companies are held in street name accounts.  As a result, when these owners vote, they do so not by proxy (these are executed by record owners) but by executing voting instructions.  See generally The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?

Voting instructions legally must be sent back to the broker where the owner has an account.  As a practical matter, instructions are returned to Broadridge.  Broadridge acts as an agent for brokers and others in connection with the distribution of proxy materials to beneficial owners and the collection and tallying of voting instructions.  To the extent that proxy materials are distributed on an impartial basis and voting instructions are collected on an impartial basis, the actions by the broker (and by extension Broadridge) are exempt from the proxy rules, including the antifraud provisions.  See Rule 14a-2(a)(1).  

The voting instructions are eventually transferred to a proxy card (one for each broker) and submitted to the relevant company.  When the proxy card arrives (10 to 15 days before the meeting), the company is made aware of the voting results.  Learning how the results are trending before that date, however, can be valuable information. The information can be particularly important where shareholders are soliciting votes for or against a particular proposal. 

At one time, shareholders routinely received information on preliminary voting results from Broadridge.  Until 2013, a shareholder engaging in an exempt solicitation (a solicitation that did not require a separate proxy statement or card) could go to Broadridge and get preliminary results on the particular proposal subject to the solicitation.  Thus, issuers and shareholders were both in a position to make strategic decisions on the basis of the information.  In cases where the vote was close, for example, both sides might want to allocate additional resources to their efforts.  

In 2013, however, Broadridge stopped providing preliminary voting results to shareholders in exempt solicitations.  The decision was made during a battle over a shareholder proposal that sought the separation of chair and CEO at JP Morgan Chase.  Since that date, therefore, companies, but not shareholders, have been guaranteed access to this strategically important information. 

In October 2014, the SEC’s Investor Advisory Committee (IAC) adopted a recommendation asking the Commission to take action “to ensure that ensure that the exemption in Rule 14a-2(a)(1) is conditioned upon the broker (and any intermediary designated by the broker) acting in an impartial and ministerial fashion throughout the proxy process, including the disclosure of preliminary voting information.”  

The Commission has not, however, acted on the recommendation. As a result, an entire proxy season has taken place without exempt solicitors having a guaranteed right to preliminary voting information. 

In July 2015, the IAC scheduled a panel discussion on shareholder rights.  Mike Garland, Assistant Comptroller for Corporate Governance and Responsible Investment at the New York City Office of the Comptroller, spoke on the panel.   He provided an overview of his experience obtaining preliminary voting information in the absence of any requirement that Broadridge provide the information.  We'll examine his remarks in the next post but suffice it to say that results are not pretty.    

J Robert Brown Jr.