July 29, 2009

Musings: SEC’s Proposal to Report Voting Results

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For those that regularly read this blog, you know I was happy to see the SEC propose a requirement that would force companies to disclose the voting totals from their shareholder meetings more timely. It has always amazed me that some companies stonewall on the vote results – it’s a poor PR move as it riles shareholders (see this example) and they have to disclose it eventually. But I imagine they do this in the hope that shareholders – and the financial press – will lose
interest in the story.

The SEC proposes that disclosure be made within four business days after the end of a shareholder meeting (on a Form 8-K or a periodic report). For a contested director election, the 8-K would be due within 4 business days
after the preliminary voting results are determined.  The proposal begs the question as to when “preliminary voting
results are ‘determined'” (i.e. trigger date). Maybe I’m missing it, but there doesn’t seem
to be any exception for other types of contested matters?
Anyways, if it’s a contested director election, there could be two Form 8-Ks – one within four business days after the meeting’s end based on a preliminary vote and another one within four business days of the final vote being certified.

Importance of Tabulation Process

On page 44 of the SEC’s proposing release, the SEC provides its discussion of this proposal – and a cost analysis is on page 96. Understandably, there is not a detailed discussion of the tabulation process and what’s involved. But as I wrote about in the Fall ’08 issue of – in my interview with Carl Hagberg (whose upcoming issue of the Shareholder Service Optimizer will provide pointers on the inspection process) – the time is now for companies to rethink how they process their votes as well as who they hire to do it.

For starters, you probably want to hire only those inspectors that have a well-defined process about how they inspect – and you probably should hire only those inspectors whom you feel comfortable would pass muster under the pressures of litigation (eg. an entity that is independent – perhaps one is not your transfer agent). With the loss of broker nonvotes, we can expect closer elections and more litigation over voting results. You need to protect yourself and not rely on procedures that historically have been pretty loose.

Is Four Days Enough?

I expect that we will see quite a few comment letters from companies that express concerns that a 4-day filing requirement is unrealistic for some meetings – particularly getting a preliminary vote for a contested election in that time period. In my opinion, companies should be able to meet a fairly short deadline (5 business days?) if there isn’t a close call since most votes typically come from “street-name holders” – where
virtually all the tabulation has been finished by Broadridge before the polls
close. And remember that the voting instruction forms
received from street-name holders aren’t even subject to
examination by the Inspector of Election – or by anyone else – unless the
Inspectors’ Report has been released and the results have been officially
challenged in court.

But I do agree that a reasonable exception needs to be carved out – not just for director  election contests,
but for any meeting where the preliminary results on one or more
proposals are “too close to be completely comfortable with” – to allow for more time (and of course, a true proxy contest – where both sides have the
right to examine the proxies and challenge their validity – is another matter
altogether). In fact, maybe there shouldn’t be a trigger for preliminary results – so these type of results are never required to be filed – because of their “preliminary” nature. Maybe the SEC’s rule should just focus on final results.

The trick here is to figure out how to properly define “too close” so that companies don’t regularly lean on this exception whenever they don’t like the voting results. Perhaps a specified voting percentage is the way to go (eg. 48/52% or closer)? 

If companies invoke this type of exception, I imagine investors may not be excited about a lack of a cap regarding how long a company can go without sharing a final result. Maybe a compromise is a filing standard that would require with
certification of final results – maybe within 10 business days from the date of the meeting?

What Next for Regulators?

since the
SEC is looking to adopt requirements related to the process by which votes
are inspected and reported, it seems like a prime opportunity to tackle
overvoting.  My sense is different tabulators use different methodologies
to resolve overvotes. A closer look at this process has been long overdue to
ensure that practices are fairly uniform.

By the way, one beef that investors have had is that some companies have presented the percentage of votes in favor of shareholder proposals as
a proportion of all votes cast, rather than as the standard RiskMetrics’ pro
forma calculation that excludes abstentions from the
total. The SEC should clarify what they want companies to disclose.

Announcing Voting Results: California Style

From Keith Bishop: Apropos to the SEC’s recent proposal concerning timely announcement of voting results – California law already requires that for a period of 60 days following a shareholders’ meeting, the corporation must upon the written request of a shareholder “forthwith” inform the shareholder of the result of any particular vote.  Cal. Corp. Code Sec. 1509.  This applies to annual and special meetings.  The corporation must disclose the number of shares voting for, the number of shares voting against, and the number of shares abstaining or withheld from voting.  

In the case of election of directors, the corporation is required to report the number of shares (or votes in the case of cumulative voting) cast for each nominee.  Now you may be saying, well that is good for California corporations, but what about foreign corporations?  Foreign corporations that are qualified to transact intrastate business in California are required to provide this information at the request of a shareholder resident in California.  Cal. Corp. Code Sec. 1510(a).  

In addition to natural persons residing in California, a shareholder will be considered resident in California if it is a state bank, national bank headquartered in California or any retirement fund for public employees established or authorized by California law (think, CalPERS and CalSTRS). Cal. Corp. Code Sec. 1510(b).   Even if the foreign corporation is not qualified to transact business in California, it can be subject to the disclosure requirement if it has one or more subsidiaries that are domestic corporations or foreign corporations qualified to transact intrastate business in California.  Finally, California has expansive provisions for determining who is a shareholder for purposes of this requirement.  Cal. Corp. Code Sec. 1512.

Broc’s note: I wonder whether there is any “internal
affairs doctrine” applicability and case law on the subject? Anyone?

Poll: Can Four Business Days for Disclosing Preliminary Voting Results Be Done?

Here is an anonymous poll to see how you feel about the SEC’s proposal for reporting preliminary voting results of contested director elections:

Online Surveys & Market Research

– Broc Romanek