Over the next few months, investors can expect to receive proxy materials for annual shareholder meetings or a related notice advising shareholders how they can access these materials. Shareholder voting typically takes place at the annual shareholder meeting, which most U.S. public companies hold each year between March and June.
There are three new or continuing developments this year:
Typically, the board of directors nominates board candidates, whose names appear in the company’s proxy materials for director elections. Shareholders do not have an automatic right to have their own director nominees included in these proxy materials. Where shareholders do have this ability, the names of director candidates nominated by qualified shareholders appear in the proxy materials alongside the names of the candidates nominated by the board of directors. This process gives shareholders direct access to the proxy materials for nominating directors and is often called “proxy access.”
This year, as a result of amendments to the shareholder proposal rule, eligible shareholders have the right to have proposals that call for the adoption of proxy access procedures included in company proxy materials. (Note that the right to submit shareholder proposals about proxy access procedures is different from the right to nominate director candidates.)Shareholder resolutions on proxy access may either be advisory or binding, and investors have filed both kinds this year. An advisory resolution approved by shareholders leaves the final decision to the company’s board of directors on whether to adopt a proxy access procedure. A binding resolution takes effect once it is approved by shareholders. (Depending on the company, approval may require more than a simple majority of votes.)
Court Decision on Proxy Access Rule
In August 2010, the SEC adopted a new rule that would have required companies to include eligible shareholders’ director nominees in company proxy materials in certain circumstances. The rule was contested in court, however, and in July 2011, the U.S. Court of Appeals for the D.C. Circuit struck down this rule.
The New York Stock Exchange (NYSE) allows brokers to vote on certain items on behalf of their clients, if the broker has received no voting instructions from those clients within 10 days of the annual meeting. These votes are called uninstructed or discretionary broker votes. Brokers are only allowed to cast uninstructed broker votes on “routine” items, and the scope of routine items has narrowed over the years. This year, the NYSE announced that brokers may no longer cast uninstructed votes on certain corporate governance proposals. These include proposals to de-stagger the board of directors (so that all directors are elected annually), adopt majority voting in the election of directors, eliminate supermajority voting requirements, provide for the use of consents, provide rights to call a special meeting, and override certain types of anti-takeover provisions. Previously, the NYSE had permitted a broker to cast uninstructed votes on these proposals if they had the support of the company’s management.
Two other important restrictions on discretionary broker voting have been in effect since 2010. First, brokers can no longer cast uninstructed votes in the election of directors (except for certain mutual funds). Second, brokers are prohibited from voting uninstructed shares on executive compensation matters, including say-on-pay votes.
As the ability of brokers to vote uninstructed shares shrinks, the importance of shareholder voting grows. If shareholders do not vote, they cannot expect their broker to vote for them on an increasing range of issues.
The say-on-pay rules took effect last year for most companies with two exceptions. First, smaller reporting companies have until 2013 to comply. The second exception concerns companies that borrowed money under the Troubled Asset Relief Program (TARP) and have not yet paid it back. TARP companies are required to hold annual say-on-pay votes until they pay back all the money they borrowed from the government, at which time they will become subject to the say-on-pay rules applicable to other companies.
The rules require three non-binding votes on executive compensation:
Investor Bulletin: Say on Pay and Golden Parachute Votes
Shareholder Voting on Investor.gov
Spotlight on Proxy Matters
Using Edgar - Researching Public Companies provides information on how to search for company documents, such as Forms 8-K, in the SEC’s EDGAR database.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.