May 30, 2007

Recent Developments: The NYSE’s “Broker Vote” Rulemaking

Recently there has been some movement in the NYSE’s rulemaking to amend Rule 452 to eliminate broker non-votes in the director election context. First, there was some discussion on the topic during last week’s proxy process roundtable at the SEC. Jim McRitchie does a good job of summarizing what the roundtable participants’ positions have been, noting on that the recommendations on broker voting appear to have broken into three categories:

– Stick with NYSE’s proposal to eliminate broker voting for directors – One variation would only eliminate it where there is an active no-vote campaign.

– Proportional voting – Where the broker uses voting instructions given by other retail investors to determine how to vote uninstructed shares. There were several variations on this theme.

– Client-directed voting – Under this framework from American Express’s Stephen Norman, retail investors would give general voting instructions to their broker when signing brokerage account agreements.

Second, as noted in this WSJ article, the mutual-fund industry got its wish and the NYSE has amended its proposal so that mutual funds would be excluded from any change in its rules (according to the article, after reviewing information supplied by the fund industry, the NYSE said its advisory panel concluded that mutual funds are different enough “that it was appropriate to treat such companies differently”).

Finally, some investors are demanding that this rulemaking go forward. Below is an excerpt from the ISS “Corporate Governance Blog” on this topic:

A close director vote at CVS/Caremark is fueling investor demands for the Securities and Exchange Commission to approve a New York Stock Exchange rule change to bar brokers from casting uninstructed investor votes in board elections.

“I think this vote will be Exhibit A in the deliberations of the NYSE and the SEC in the coming weeks,” said William Patterson, executive director of the CtW Investment Group, which has urged CVS/Caremark to request the resignation of director Roger Headrick. The Council of Institutional Investors (CII) plans to hold a conference call on May 29 to address the issue, Patterson said.

Headrick received 606.585 million “for” votes and 453.175 million “against” votes at company’s May 9 meeting, CVS/Caremark said in a regulatory filing. Based on those numbers, Headrick received a 42.7 percent negative vote. However, the vote results for five other proxy items reveal that 264.762 million “broker non-votes” were cast. If those broker votes are subtracted from Headrick’s “for” total, then the “against” votes would amount to 57 percent of the remaining votes.

The stakes are higher at CVS/Caremark, because the company, like scores of other large firms, now requires that board nominees receive a majority of votes cast in uncontested elections to be elected. “Before this proxy season, all of this was theoretical,” Patterson told Governance Weekly. At CVS/Caremark, “the broker votes were decisive and that’s clear.”

CtW, which manages funds for the Change to Win labor federation, targeted Headrick and a second former Caremark Rx board member over their handling of the pharmacy benefits company’s recent sale to CVS, the largest U.S. drug-store chain. In its regulatory filing, CVS/Caremark said “votes ‘against’ a director’s election count as a vote cast, but ‘abstentions’ and ‘broker non-votes’ do not count as a vote cast with respect to that director’s election.”

However, the vote results suggest that some of those broker votes were counted in Headrick’s election. The company’s filing indicates that a total of 1,059.76 million shares were cast either “for” or “against” Headrick. CVS/Caremark also reported that the total votes cast at the meeting were 1,091.671 million, or 31.91 million more. The vote results for five other proxy items indicate that there were 264.762 million broker votes, so it appears that 232.852 million broker votes were counted in Headrick’s election for his vote total to reach 1,059.76 million. Those 232.852 million votes exceed the 153.41 million difference between the “for” and “against” votes that the company reported that Headrick received.

Company spokeswoman Carolyn Castel told Dow Jones Newswires that the “broker votes were spread among the votes cast for and against the directors.” However, Patterson and other investor advocates contend that broker votes are routinely cast in favor of management nominees in uncontested elections. The Council of Institutional Investors has said these votes “taint the integrity of the proxy voting process by stuffing ballot boxes for management.”

Goldman Launches an Unregistered Stock Trading System

As noted in this recent WSJ article, Goldman Sachs has joined the ranks of those launching an unregistered securities trading exchange with its “GS TRue” platform. Here are one blogger’s thoughts on this development – and here are two excerpts from the WSJ article:

“Goldman Sachs Group Inc. ranks as the most profitable securities firm on Wall Street — reflecting its mastery of trading on the world’s public markets. Now Goldman is turning that franchise on its head, creating its own private system to trade the stocks of companies that don’t want the scrutiny and regulatory burdens of going public.

The new system, GS TRuE — short for Goldman Sachs Tradable Unregistered Equity — was announced two weeks ago and made its debut on Monday with an $880 million sale of a 15% stake in Oaktree Capital Management LLC, an alternative-investment manager. It is the first of several new, private exchanges like these being considered by Wall Street firms and others. Nasdaq is also planning its own new market for smaller, unregistered securities.

These markets will generally be closed to individual investors. For instance, Goldman’s market is open only to large institutional investors with assets of more than $100 million. That is because the stocks traded on GS TRuE aren’t registered with the Securities and Exchange Commission and issuers aren’t subject to SEC regulations designed to protect individual investors.

It represents the latest step in the creeping exclusion of individual investors from a growing proportion of financial-market activity. For instance, giant private-equity firms are busy buying public companies and delisting them from stock exchanges. The growing importance of hedge funds — which are generally limited to wealthy investors, institutions and endowments — also excludes individuals.”

“Bankers at rival firms — many of which are developing similar systems — predict that there will be consolidation among the different platforms. “History in other markets would indicate that this will converge into a single platform,” said Daniel Simkowitz, a managing director in capital markets at Morgan Stanley, which advised Oaktree on the issue.

Indeed, Nasdaq Stock Market Inc. is in the home stretch of getting approval for a similar unregistered trading facility for smaller companies called Portal. Another securities firm, Friedman, Billings, Ramsey Group Inc., has sold unregistered stock for numerous companies in real estate, energy and lodging.

Goldman executives said one reason they launched their own system solo, without asking other rival securities firms to participate, was to insure control over the number of investors in any particular security. That is crucial, they said, because any company that goes over 499 investors must register as a public company.

That 499-investor limit, said one executive of a top private-equity firm, is one reason why such buyout firms aren’t likely to rush pell-mell into this type of new issue for their portfolio companies. The buyout firms want to attract far more investors to make sure they get the best prices for their stock, he explained.”

A Philosophy for Drafting Agreements

In our “Carl’s Corner”, we have posted the latest from Carl Schnider on “A Philosophy for Drafting Agreements.” Great practical stuff from Carl!