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Say on Pay and Broker Non-Votes

By | August 10, 2010

The Dodd-Frank Act expands the areas in which brokers are prohibited from voting unless they have received specific client instructions.  Section 957 of the Act amends the Securities Exchange Act of 1934 to prohibit brokers from voting uninstructed shares on issues related to executive compensation (including the new “say on pay” votes), director elections and certain other matters as determined by the Securities and Exchange Commission (SEC).  The Act requires all national securities exchanges to adopt rules to implement these provisions. 

 Section 957 of the Act is meant to codify and expand the scope of NYSE Rule 452.  Under the current version of Rule 452, brokers are prohibited from voting uninstructed shares in “non-routine” matters, such as approval of equity plans and the election of directors.  The NYSE has already announced that it will file an amendment to NYSE Rule 452 with the SEC.  The new Rule 452 will apply to shareholder meetings occurring after July 21, 2010 and will cover all types of executive compensation plans, including “say on pay” votes.

 For public companies, the Dodd-Frank Act changes the calculus of proxy voting.  In matters related to executive compensation, board selection and other matters to be determined by the SEC, companies will no longer be able to count the votes of uninstructed shares. 

 Close examination of corporate charter documents (Articles or Certificates of Incorporation and By-laws) and state law will be required to determine whether broker non-votes, which may now constitute a substantial part of the “participants” at a shareholder meeting, will count for quorum purposes.  In addition, the effect of non-votes will have to be considered in determining whether a particular measure has garnered enough affirmative votes to pass.

The author wishes to thank Evan Berquist, who contributed to this post.

Contact Mark Weitz for more information.